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On Dec. 5, Paul Goren, Superintendent of School District 65, told members of the Board’s Finance Committee, that he was recommending that the Board place a $13.5 million operating referendum on the ballot for the April 4, 2017 election.

If approved, the referendum would provide an additional $13.5 million in funding on an annual basis for education, including classroom instruction, support services, and operations. The infusion of funding is necessary to sustain the District for the next eight years, said Dr. Goren.

“We do fantastic things here in the District,” said Dr. Goren. “There are exciting things going on in District 65 that we can all celebrate. We can see it in our new literacy program, in the work we’re doing on social and emotional learning, in the advances in mathematics, in all the supports we do for kids so they have opportunities in and out of their school day.

“This is about the quality of schools in Evanston. It’s about the quality of life in Evanston.”

If the District does not receive the funding, it will need to make drastic cuts totaling $8.8 million to balance the budgets in the next two school years, followed by steep cuts in subsequent years, he said.

A referendum “would give the community the option to vote to increase funding before drastic cuts would need to be made,” said a planning memo.

Updated Projections

On Dec. 5, District 65 presented updated financial projections. The projections incorporate the salaries agreed upon in the new three-year contract with the District Educators Council (DEC, the teachers union) and the cost for 19 additional teachers required under the new contract. On a net basis, the District was able to reduce its projected salary expenses by about $2.6 million during the three years covered by the contract. But the District is still projecting significant deficits going forward.

The projections show that the District’s operating deficits will grow from $5.1 million in FY’18 (the fiscal year ending June 30, 2018) to $24.4 million in FY’ 25.  The cumulative deficits during the eight-year period are $114.4 million, said Dr. Goren.

In addition to projecting the District’s operating revenues and expenses on a traditional basis, the projections include two items. First, the projections include an expense of $1.9 million per year for technology. This expense was historically paid through the District’s capital budget. The rationale for the shift is that the expenses are for technology that has a short life span and are more appropriately treated as operating expenses than longer-term capital expenses, said Dr. Goren.

Second, the projections assume that the State will shift a portion of the cost to fund teacher pensions from the State to school districts, and the projections include an amount assuming the shift will be phased in starting at $700,000 in FY’19 and grow to $1.7 million in FY’24 to cover that possibility.

Dr. Goren said administrators extended the projections out for eight years “to get a better sense of how stable we will be how challenged we will be over time.”

The chart belwo shows the projections on a year by year basis. 

A $13.5 Million Referendum

Dr. Goren said the District has made significant reductions in the last six years to address projected deficits, including $4.5 million in instructional costs, and $5.7 million in non-instructional costs.

“The history of cost reductions leaves us with few options and few options that won’t cause us pain, given that 77% of our budget is made up of salaries and benefits,” said Dr. Goren.

One option to address the projected deficits is to seek approval of a referendum to provide significant new funds to manage the projected deficits. A second option, Plan B, is to make huge cuts in programs and services. 

Basics on the Referendum. Dr. Goren said an operating referendum of $13.5 million would generate a total of $113 million over the next eight years, and enable the District to address the total projected deficit of $114.4 million through FY’25. 

He also recommended that the District cut $1.5 million in expenses in FY’18, which would carry through to subsequent years. These cuts, he said, would allow the District to put $1 million a year into the working cash fund balance, which is low by most standards, and $500,000 toward capital improvements.

Dr. Goren said the referendum would enable the District to continue to strengthen its core curriculum; continue its ongoing work to promote equity; maintain small average class sizes; support and maintain top talent and make sure the District reflects diversity in its staff; make sure teachers’ working conditions and planning time are improved; provide intensive supports for striving students; continue efforts to improve social and emotional learning and school climate, which Dr. Goren said “are really outstanding”; and maintain full-day kindergarten.

Dr. Goren said he considered recommending a $10 million referendum but decided not to do so because it would only sustain the District for two years, and then the District would be faced with more cuts or another referendum. He said a $13.5 million referendum would sustain the District’s programs and services for eight years.

“We’re recommending that we stick to that level [$13.5 million] referendum,” he said.

Board member Suni Kartha asked if the $13.5 million referendum would enable the Board to bring back some positions, such as reading specialists, that were the subject of prior cuts.

Dr. Goren said “The $13.5 million would maintain the level of service that we have now, not necessarily what we had before.” 

Board member Claudia Garrison suggested it would be helpful to the community to explain “in a more specific way” the programs and services that the additional funding would sustain and how the District would use it to do so. 

 Capital Projects. Ms. Chow asked about capital projects. Dr. Goren said his recommendation to make $1.5 million in cuts would increase the amount available for capital projects by allocating $500,000 to capital projects each year. He said, though, the funding would still be limited and could be used for emergencies, such as leaking roofs or masonry repairs. The Board would have to prioritize other projects on the list of capital projects.

If the CPI goes up more than assumed in the projections and the District collects more in property tax revenues, the additional funds could go into a fund balance or toward capital projects, he said.

Ms. Chow summarized, “This gives a little added flex, but there’s no capital projects included in the $13.5 million.”

Richard Rykhus, Chair of the Finance Committee, asked if shifting $1.9 million in technology costs each year to the operating budget would open up more capital funding.

Dr. Mark Brown, Assistant Superintendent, said the referendum would provide a source of funding to pay for technology, which is not now secure. She said shifting the $1.9 million technology cost to the operating funds “may relieve stress on the OSEA [Debt Service Extension Base]” that has been used to fund capital projects for the last 10 years, but it would not create a dollar-for-dollar benefit for other capital projects, because the funding for capital projects would still be limited by the DSEB.

The District’s eight-year plan for capital projects is a bare-bones plan based on what the District can afford under its DSEB. The plan allocates about $1.2 million per year for capital projects. The District has listed many projects whose cost far exceeds the funding available. The Board has been prioritizing projects for the past several years.

Managing the Referendum Funds. In the initial years, the referendum will generate a budget surplus, which will, under the plan, be used to manage the projected deficits in the later years. For example, for FY’18, the projected deficit is $5.1 million and the referendum funds would be $13.5 million. The surplus generated would be used to help manage the projected deficit of $24.4 million for FY’25.

Dr. Goren told the RoundTable that the surplus funds will be posted to the District’s operating funds. “The District will monitor projected surplus and deficit amounts to ensure that funds are not used for other purposes,” he said.

Impact on Property Owners. Dr. Goren presented a table showing the impact of the referendum on a property owner. He said a property owner who paid the average property tax bill of $8,076 in 2016 would see an increase of about $438 in property taxes, or 5.4%, per year if a $13.5 million referendum were approved.

A property owner who paid $4,000 in property taxes would see an increase of $217, a property owner who paid $12,000 would see an increase of $650. The increases are about 5.4% across the board, according to the table.

Dr. Goren said, “We don’t take any of this lightly.” He said it was important to acknowledge that it would likely have an impact on renters, if the increase was passed on to them.

Push Back on Proposed Cuts of $1.5 million

As part of the proposal, Dr. Goren recommended making $1.5 million in cuts for FY’18, the 2017-18 school year, and putting $1 million a year into the working cash fund balance, and $500,000 toward capital projects. He said he planned to recommend specific cuts by late January or early February, 2017.

Ms. Garrison said, “One question is if we need money, then why aren’t we asking for more money in our referendum. I think you have some good answers for that, but I think we need to bring this out a little more.” She said she would like the proposed list of cuts to provide options for the Board to consider.

“One of the many answers to ‘Why there is not a greater referendum?’ is I worry about the burden on taxpayers,” said Dr. Goren, “and worry again about not being able to sustain the programs we have.”

Tracy Quattrocki, Board member, said she wanted to know what programs or services would be cut to achieve the $1.5 million in cuts.  She added it would make no sense to ask for money in a referendum and at the same time cut things that were vital, such as reading specialists “if with a little more money we could have prevented that.”

Meg Krulee, DEC’s representative to the Finance Committee, said she hoped the District would avoid making cuts that would adversely impact the work being done on the strategic plan and the equity work to address the achievement gaps.

Dr. Goren said, “I agree with you, absolutely. That’s the lens we want to be committed to.” He added, though, if the District does not receive referendum funding, it will need to make significant cuts under Plan B which “may have an impact on some of the programs we’re doing from an equity perspective.”

Board member Anya Tanyavutti said, “I think we all agree that it’s important to think about folks who are really appreciative of the growth that we’ve made in considering the achievement and the opportunity gaps and the steps we’ve taken.” She said it was important to keep them in the conversation and assure them that “their perspective and needs are going to be incorporated, regardless of what happens.”

Mr. Rykhus suggested the Board not make “any reductions that aren’t simply operational efficiencies.” He asked how much the Board would need to add to the $13.5 million figure to avoid making the $1.5 million in cuts. 

Ms. Chow said, “I don’t think that cuts should reduce the educational experience or jeopardize our strategic plan.

“Generally, what we’re talking about here,” she said, “is fulfilling our promise that we have made through this strategic plan and the goals. Really, that’s what I believe generally is the message about what the referendum will enable us to do.”

Dr. Goren said he would look at whether the District could make cuts to improve operating efficiencies and also present what a $14.5 million referendum would look like at the Dec. 19 meeting.

Plan ‘B’ Requires Significant Cuts

Dr. Goren said the District will have to move ahead with a “Plan B” if the Board decides not to go forward with a referendum or if voters reject a referendum.

The first step, he said, would be to make $5.1 million of reductions in FY’18, followed by at least $3.7 million of reductions in FY’19, or a total of $8.8 million for the two years. More cuts would follow.

Administrators will recommend deficit reduction strategies in January and February. Dr. Goren said the reductions will need to be decided in February or March, so the District would be in a position to implement the reductions in the 2017-18 school year if the referendum fails. 

Dr. Goren said, “There’s really no choice.” Under Plan B, the District would need to do all the following:

• Increase class size, class size limits, and changes to enrollment policies

• Eliminate programs, student activities, and student supports

• Reduce instructional technology, curriculum materials, and facilities maintenance 

• Reduce services to families and community partners

• Cut jobs across all position categories  

 Dr. Goren added that some of the following might also be needed:

• Close a school or schools

• Combine schools to serve fewer grade levels per building

• Create multi-grade classrooms to maximize class sizes

• Eliminate or charge households who do not qualify for free lunch status from the second half of the kindergarten day 

Ms. Quattrocki said, “I think we need to know the price tag of some of these options.” For example, she asked, “When you talk about increasing class sizes, are you talking California class sizes or are you talking about 24 students?”

Dr. Goren responded, “California,” indicating larger class sizes.

Ms. Quattrocki said “We need a little more specificity on both what we’re going to pay for and what we’re going to reduce.”

Going Forward

Ms. Tanyavutti said, “It seems to me that everyone around the table is understanding the dire need for this [referendum] to pass. I feel like the question at hand is, “What is the best way to have that discussion with the community at large so everyone feels they have the information they need to move on this?’”

Ms. Chow said, “We have to be very careful about how much we ask,” noting that 30% of the referenda in the State failed in the last election. She noted that one factor is was how much the District needs to sustain its programs, and another is how much the community will be willing to approve. “We do need this infusion so direly that we need to ask for an amount that we believe will be successful. We don’t know what the inflection point is. We don’t know what the magic number is.”

Mr. Rykhus said, “The two things I’m hearing are, ‘Let’s make sure it’s a responsible ask both in terms of what we need to support our programs and what the community has an appetite for, also taking into account some of the social, psychological – what’s going to get people excited about this.”

On Dec. 19, the Board’s Finance Committee is scheduled to make a recommendation to the Board about whether to proceed with an operating referendum, and if so, in what amount. On Jan. 10, the School Board is scheduled to decide whether to place an operating referendum on the April 4 ballot. 

Projections deal with future events and are based on assumptions. Two key assumptions are the amount of the Consumer Price Index (CPI) and the amount of salary increases. There is an added element of uncertainty because the State legislature is considering legislation that may impact District 65, as well as other school districts.

First, property tax revenues, which make up about 75% of the District’s operating revenues, are limited by State tax caps, which limit the increase to the lessor of the CPI or 5%.  The CPI governing this fiscal year is 0.7% and the CPI governing the next fiscal year is 0.8%, said Dr. Goren. After that the District assumes the CPI will be 1.5% and that the increase in property tax revenues, with some exceptions, will be capped at 1.5%. 

Ms. Chow noted that the CPI is “trending up a little bit now,” and asked how much that might impact the projections. Mary Brown, Assistant Superintendent of Business Services, said an increase of 0.5% in the CPI would enable the District to increase property tax revenues by approximately $400,000. Because of the way tax caps operate, an increase of $400,000 in one fiscal year would allow the District to increase property tax revenues by a like amount in every subsequent year.

Second, Dr. Goren said the projections are based on the salaries agreed to in the three-year contract with the District Education Council DEC (which expires at the end of FY’19) and the four-year contract with the maintenance staff (which expires at the end of FY’20). After those contracts expire, the projections assume that total salary expense will increase by 4% each year, said Dr. Goren. After the contracts expire, salaries will be subject to negotiation, and may be either higher or lower than projected.

Ms. Chow told the RoundTable the 4% assumption was based on an estimated salary increase for teachers (including estimated cost of living, step and track increases) and then making an adjustment that takes into account the difference between salaries of teachers likely to leave the District and those likely to be hired.

Third, the projections include an estimated amount for a potential shift of pension costs from the State to District 65. It is currently unknown whether the State legislature will shift pension costs to school districts, or how much the shift will be. In addition, the legislature is considering other legislation that could have a significant impact on District 65, including a change in the way the State funds education and a property tax freeze.

“If we add the other State threats, the potential for a reduction in State funding, and a property tax freeze, that could add another $30 million over the next four years,” said Dr. Goren. He said the District did not include an amount for these threats in its projections or in the referendum because, “This is too large an amount to ask the Evanston taxpayers to hedge against.”

Fourth, with a new administration coming in at the federal level, there is uncertainty about federal funding.

The Impact of Low CPIs

District 65’s ability to increase property taxes, which account for 75% of its operating revenues, are limited by tax caps, which generally limit the increase to the lesser of 5% or the Consumer Price Index (CPI).

During the last eight years, since the Great Recession, the CPI has been relatively low: 0.1% (2008), 2.7% (2009), 1.5% (2010), 3.0% (2011), 1.7% (2012), 1.5% (2013), .08% (2014), and 0.7% (2015).

During the eight-year period, the average CPI has been 1.5%. Meanwhile the District’s total salary expense has gone up an average of about 3.6% between FY’08 and FY’16.

The low CPIs have put a significant strain on the District’s financial position, and contributed to a structural deficit, because 75% of the District’s revenues comes from property taxes.Growth in Student Enrollment Paul Goren and Candance Chow both made the point that the District’s enrollment has grown significantly in the last 10 years and that has been a factor in the projected deficits. Ms. Chow said the enrollment increased from 6,474 students in FY’07 to 7,894 in FY‘16, or by 1,420 students. While that growth was occurring, the District was subject to tax caps, which allow school districts to increase property taxes to account for the rise in inflation as measured by the Consumer Price Index, but do not allow school districts to increase property taxes to educate an increased number of students – except perhaps to the extent that new property is added to the tax rolls.Ms. Chow said the added cost to educate an additional 1,420 students is approximately $20 million per year, yet the additional revenue the District receives due to new property being added to the tax rolls since FY’07 is only about $3.5 million per year. “I think it’s important that folks understand this is part of the structural deficit because in our District where 75% of our revenue is from local property taxes, by design increases in enrollment aren’t matched with commensurate increases in revenue,” said Ms. Chow. “The assumption is the population growth correlates with bringing new property onto the tax rolls and in Evanston that’s just not the case.”