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At the Nov. 6 Finance Committee meeting, District 65 Superintendent Paul Goren reviewed the past budgets and looked at future projections to give context to the District’s current financial situation. The Board was familiar with all or most of the material, as the mounting deficits and threats from the State have been topics of discussion at Finance Committee meetings for several years.
Several factors contribute to a structural deficit at the District, in which expenditures continually outpace revenues. These factors include State-imposed tax caps that are tied to the consumer price index (CPI), the frozen State budget, increases in student enrollment, teachers’ salaries increasing at a pace faster than the growth of the CPI, and increased demands placed upon school districts.
The District’s budget for fiscal year 2017 is balanced by less than $100,000, and projections show a $10.7 million deficit at best in fiscal year 2021. At their most dire – assuming threats of reapportioned State funding, a property tax freeze, and a shift of pension costs to local school districts – the projections show a deficit of $26 million in fiscal year 2021.
The District has balanced its budgets over the last 10 years, Dr. Goren said, “but we are running out of budget-management options.”
Stagnant Revenues, at Best
Most of the District’s operating revenues (75%) come from property taxes. The District may increase its annual property tax levy only by the lesser of the CPI or 5%, and the CPI is hovering below 1% and is expected to remain there. Thus school districts are often unable to increase their property tax levies to meet expenses incurred, for example, by increased enrollment or increases in teachers’ salaries.
The District attempted to increase its revenue through a variety of means, such as increasing student activity/technology fees and childcare fees. It has received a Head Start grant, and it has seen an increase in State and federal revenues. It has also received private grants for STEM (science, technology, engineering and mathematics) and has leveraged resources from partnerships, such as the McGaw Y and Y.O.U., Dr. Goren said.
Expenditures ‘Pared to the Bone’
Measures taken over the past five years to reduce costs have nearly exhausted options for the present Board to reduce expenditures further. Dr. Goren outlined some of the non-instructional measures – such as deferring maintenance to facilities as well as capital projects, cutting supplies, reducing central office and other building administrative positions – that were made to keep the costs as far away from the classrooms as possible.
During that time, the District has eliminated 15 teaching positions and two clinical positions, made reductions in special services, reading specialists, and substitute teachers. Some savings were garnered from early-retirement incentives. Nonetheless, salary expenses are projected to increase by 3% to 3.8% each year in the next five years. The exact number is not yet known, as the District is still negotiating with several unions, including the teachers’ union, which has authorized a strike.
Over the past 10 years, the District’s enrollment has increased by 1,420 students. “We spend $14,000 per student,” said Board President Candance Chow. “We’ve had $17.4 million in increased expenditures from that over the past 10 years [only some of which can be recouped from property taxes or state or federal reimbursement or grants]. We’re fortunate to have the students, but we don’t have the revenues.”
Technology Switch, Reserves, and Threats from the State
Internal challenges and the legislative threats from Springfield also add to the financial dilemma.
An internal decision to treat certain technology expenses as operating rather than capital expenses will add about $1.9 million per year to operations. It did not seem reasonable to continue to pay for equipment that lasts only about six years with 20-year bonds, Dr. Goren said.
Further, the District has not been sufficiently able to build up its reserves for several years. The reserve fund balance, which is recommended to be between 25% and 40% of the operating budget, now stands at 20%. The low reserve balance affects the bond rating and the cost of issuing bonds. A top-rated bond issuance would save the District $55,000 per year over the life of the bonds, Dr. Goren said.
Under the guise of “education reform,” State legislators have proposed to reapportion the funds they contribute toward education rather than to increase that amount. Under the most recent proposal, District 65 would lose about $6.7 million each year, once the measure is phased in.
Exacerbating that sting, State legislators are also considering a proposal to freeze property taxes, making it thus virtually impossible for District 65 to make up for any loss in State funding through an increased tax levy. At the same time, a property tax freeze would cost the District $2.1 million in 2018-19, $3.4 million in 2019-20, and about $3.4 million each year after that. If enacted, District 65 would be precluded from raising taxes even to keep up with inflation.
A third threat – and one that is likely to be realized first – is to shift the “normal cost” of funding teacher pensions from the State to the local school districts. The pension shift would likely be phased in, so the initial cost to the District would be about $334,000, building to about $1.5 million when the phase-in is complete.
Several proposals to reduce the State’s obligation to pay teacher pensions have been tested in the courts and found unconstitutional. This proposal, to shift part of the pension costs to school districts, has not been challenged in court. If enacted, the initial phase could come as early as the spring, said Business Manager Kathy Zalewski and Assistant Superintendent of Business Services Mary Brown.
“The State could act rather quickly on these threats,” Dr. Goren said.
The table below summarizes the projected operating deficits, and also shows how the deficits would increase if certain technology spending is treated as an operating expense and if the State shifts pension costs to school districts and/or reforms how it allocates state funding and freezes property taxes.
“Cuts in supplies are cuts to the classroom,” said Board member Suni Kartha. She also asked whether the District was confident about its enrollment projections.
“My experience is that they are accurate,” Dr. Goren said.
Ms. Zalewski said this year’s budget allowed $200,000 to be added to the reserves.
Board member Tracy Quattrocki also said, “I am finding there’s an underlying assumption that we should spend less money on pre-K to grade 8 education than on high school education. I think this is faulty logic – that we should do less, earlier. Compounding the problem is that, not only is it not cheaper to educate young children, we also have 16 buildings to maintain.”
Board member Richard Rykhus said, “We have trimmed so much over the last 12 years that there is less and less to cut.” He also emphasized that the deficits facing the District are real and dire. “Information may have been disseminated in different ways in the past,” he said, “that the deficits will disappear with a tweak here, a tweak there. Nothing is going to disappear.”
As has happened at a few recent Finance Committee meetings, the word “referendum” slipped into the conversation. The Board will vote at its Jan. 10 meeting on whether to pursue an operating referendum on the April 4, 2017, ballot. The District has not passed an operating referendum since before the tax caps were enacted in 1994, Dr. Goren said.