Only about 20% of the school districts in Illinois are operating this year on a balanced budget, and District 65 is one of those, District 65 Business Manager Kathy Zalewski said at the Feb. 8 Finance Committee meeting. In anticipation of the upcoming budget process, the business office and the District’s financial advisor, PMA, prepared financial projections for fiscal years 2017-21. The outlook is grim, even more so than shown in the projections presented just a few months ago, in the fall of 2015.

Even if threats from the State in the form of pension shifts, cuts in grants for special education, reallocation of available state funding and a property tax freeze do not materialize, the projections show an operating deficit of $11 million in fiscal year ending June 30, 2021 (FY’21). If the threats from Springfield all materialize, District 65 projects the operating deficit could be as high as $23.1 million in FY’21.

Revenue Assumptions

Revenues from property taxes account for about 77% of the District’s operating revenues. District 65, like many other school districts in the State, is subject to property tax caps, which limit the amount by which it may increase property taxes to 5% or the consumer price index (CPI), whichever is lower. The CPI last year was 0.8% and this year is 0.7%, so PMA and the District used those numbers in their projections and assumed that the CPI will be 1.5% after the 2017-18 school year. This 1.5% rate is based on the most recent five-year CPI average, Ms. Zalewski said.

In the assumptions, General State Aid is assumed to decline by 6% for FY’17, and then be relatively constant in subsequent years. Categorical State Aid is projected to increase by 7% in FY’17 and then increase by 1.5% in subsequent years. State funding constitutes about 14% of the District’s operating revenues.

Expenditure Assumptions

Salaries and benefits account for more than 80% of the operating costs of the District. Increases for FY’17-21 will have to be negotiated with employee bargaining units, as contracts expire at the end of June of this year.

Salaries: The projections assume a 3% increase in salaries in FY’17 and, subsequently, a 4% increase through FY’21.

Benefits: Benefits include those provided by the District, such as health, dental and liability insurance and certain pension payments. Medical insurance premiums are projected to increase by 5% in FY’17 and 5% in FY’18 and beyond; costs of the other benefits are projected to increase by 3%.

Deficit Projections

The low CPIs in 2014 and 2015 not only has an impact on the tax levies for 2015 and 2016, but they have a cumulative effect in all subsequent years, Ms. Zalewski said in a Feb. 8 memo. This is because they limit the base amount used in computing permissible increases for each subsequent year.

Operating deficits projected previously for FY’18 and beyond “will almost double” due to the low CPIs and the assumed increase in salaries and benefits, Ms. Zalewski said. Property taxes are projected to increase at a lower rate than the assumed rate of increase in salaries and benefits, a phenomenon that has been repeatedly described as the District’s “structural deficit.”

The projected operating deficits will also have a negative effect on the District’s fund balances, which are currently at about 20% of total operating expenses. They need to be in the range of 25-40% in order for the District to have a good bond rating, she said.

In addition to the low CPI, legislation is pending in Springfield which, if enacted, would significantly impact District 65’s finances. In a memo to the Board, Ms. Zalewski said, “Due to the potential for a dire financial situation at the State level and the devastating impact of these threats on the District’s finances, we are including them in the alternative version of the projections. Moreover, it is likely than these or similar measures may be passed in the near future.”

The table below shows in Column 1 the District’s projections of operating deficits assuming there is no adverse legislation adopted in Springfield. Column 2 shows the operating deficits, assuming that legislators shifted pension costs to school districts, cut back on special education funding, revamped the way the State allocates state funding to school districts, and imposed a two-year freeze on property taxes.

Comments/Next Steps

The District has implemented many cost-reducing strategies over the past few years, and will continue to implement them. These include reducing costs through attrition, retirement incentives, prepayments and other expenditure reductions. The District has also put together an ad hoc committee composed of community members with financial expertise to provide suggestions. Ms. Zalewski said the District will also continue to “monitor the changing economic conditions” that affect the projections.

The dire outlook gave rise to talk of the possibility of referenda. “I think, given the dire nature of these projections … we need to explore referenda,” said Finance Committee Chair Candance Chow.

A few sentences in the Board and Finance Committee packets over the past several months contained information about dates for possible referenda. At the Feb. 8 Finance Committee meeting, Committee Chair Candance Chow opened a discussion by saying she and Board President Tracy Quattrocki had approached former Board member Katie Bailey to discuss how a referendum might be brought to the public.

“I think, given the dire nature of the impending projections, we need to explore referenda,” Ms. Chow said, indicating that she meant both an operating and a capital referenda.

Committee member Richard Rykhus asked about the timing.

“I don’t know,” said Ms. Chow, “but there are two opportunities forthcoming.”

A memo from Mary Brown, assistant superintendent for business services, outlined four possible dates for referenda to appear on the ballot, as well as timelines for Board approval and when an increase in operating funds would become available if voters approved an operating referendum and when funds would become available for capital projects if voters approved a capital referendum.

If approved, an operating referendum would allow the District to increase its tax levy above the state-imposed tax cap. The tax cap is the lesser of 5% or the most recent consumer price index (CPI). The extremely low CPI – 0.8% last year and an even lower 0.7% this year – has severely limited the District’s ability to increase revenues through property taxes, and the increases permitted are lower than needed to keep pace with the rate of increase in salaries. Yet property taxes are the principal source of revenue for both School Districts in Evanston and many across the state.

According to Dr. Brown’s memo, there are two types of operating referendum questions that can be placed on a ballot: “One form focuses on a limiting rate increase, and the other focuses on an increase higher than the consumer price index. Operating fund property tax increases approved through a referendum are cumulative,” thus allowing the increase to carry through to subsequent years. If an operating referendum is approved, the increase would be effective in the following school year. That is, if an operating referendum were approved on the November 2016 ballot, the increase would become available in school year 2017-18, according to Dr. Brown’s memo.

A capital referendum question “asks for approval for the issuance of general obligation (GO) bonds or for an increase in the existing debt service extension base (DSEB) to cover capital projects,” according to Dr. Brown’s memo. Referendum-approved extensions to the DSEB are not cumulative.

There could be one combined referendum question – requesting capital funds and an increase in the levy – or the two questions could be separate, offering voters a choice to approve one, none or both.

The two nearest dates are Nov. 8 of this year and April 4, 2017. To have a referendum on the Nov. 8 ballot, the Board would have to approve the question by mid-August; the deadline for Board approval for the April 4, 2017, election is mid-January of next year. The two dates after that are March 20, 2018, and Nov. 6, 2018.

Mr. Rykhus said that, since the Board would wish to engage the community in discussions about referenda, he feels the November date is too early, and the April 4 date would be better.

Ms. Chow said, “The reality is there is going to be a combination of levers.” She said she did not feel that one lever by itself, whether it is reductions in expenses or referenda, would suffice to address the District’s looming financial deficits.

District 65 Superintendent Paul Goren, noting that several cuts had been made at the Central office by this and previous administrations, said, “From where I sit, I think we want to consider both dates and all levers and just stare at the bottom line.”

The committee made no decision on the matter, and the subject is likely to resume at one or more upcoming Board or Finance Committee meetings.