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District 65 administrators presented financial projections at the Board’s Finance Committee on May 8, laying out the District’s financial outlook for the next eight years. The projections take into account the additional funding that will become available through the $14.5 million operating referendum approved by voters in the April 4 election.
Absent the referendum, the District was projecting that it would operate at deficits growing from $5.1 million in fiscal year ending June 30, 2018 (FY’18) to $24.4 million in FY’25. With the approval of the referendum, the new projections show the budgets will be balanced through FY’25.
The Referendum Plan
Under the referendum, the District will receive an additional $14.5 million as part of its 2016 tax levy, which will be paid entirely as part of the second installment of property taxes in 2017. The District will then recieve $14.5 million, plus an inflation factor, in each subsequent tax levy year (the “Referendum Funds”).
Under the referendum plan, the District will use a portion of the Referendum Funds to balance the budgets in the first four years (FY’18-FY’21), and it will set aside surplus amounts in reserve to help cover projected operating deficits in the next four years (FY’22-FY’25).
Under the referendum plan, the District will also use a portion of the Referendum Funds collected each year for the following:
• It will contribute $1 million each year to the District’s fund balance to keep the fund balance at about 20% of expenses (best practice recommends between 25% and 40%);
• It will use $1.9 million each year to fund capital expenses for technology, which were previously financed by long-term debt.
• It will use $500,000 each year for scheduled capital expenses, and an additional $525,000 each year for non-recurring capital building expenses.
• It will hire additional reading specialists and maintain and expand 1:1 technology at the middle schools to increase innovation and differentiation, at a cost of about $1,025,000 annually.
The projections spell out for the first time the portion of the Referendum Funds that will be set aside in each of the early years to cover mounting deficits in the later years. The projections also spell out the total fund balances needed on a year-by-year basis to meet the plan.
The Amount and Uses of Set-Asides
Starting in FY’18, the District’s projected property tax revenues will include additional amounts due to the successful referendum.
Because of the way property tax installments are calculated and because the first and second installments due for a levy year are received by the District in different fiscal years, the District will receive approximately $22 million in Referendum Funds in FY’18. It will receive approximately $14.5 plus an inflation factor in each subsequent fiscal year.
In the first four years, FY’18 – FY’21, the District plans to use a portion of the Referendum Funds to balance its operating budgets. In addition, in each of the first four fiscal years, the District plans to set aside a portion of the Referendum Funds to manage future deficits. It plans to set aside $14.4 million in FY’18; $4.2 million in FY’19; $5 million in FY’20; and $1.1 million in FY’21.
In the next four years, FY’22 – FY’25, after the entire amount of the annual Referendum Funds (the $14.5 million, plus an inflation factor), are applied toward the operating budgets, the District is projected to operate at deficits as follows: $1.4 million in FY’22; $3.7 million in FY’23; $6.5 million in FY’24; and $9.5 million in FY’25.
The District plans to use the portions of the Referendum Funds that were set aside in reserve in FY’18 – FY’21 to balance the projected operating deficits in FY’22 – FY’25. The portion of the Referendum Funds that will be left remaining at June 30, 2025 will be about $3.5 million.
The green bars in the accompanying chart No. 1 show the amount of Referendum Funds that will be set aside in reserve in FY’18, FY’19, FY’20 and FY’21, and the red bars show the amount of the set-asides that will be applied to balance operating deficits in FY’22, FY’23, FY’24, and FY’25.
The portions of the Referendum Funds that are set aside to be used to balance future deficits will be held in the District’s operating funds. The blue bars in the accompanying chart No. 2 show the starting balance in the operating funds, plus the growth of that fund from year to year due to planned contributions of $1 million per year to build up the fund – but without including the Referendum Fund set-asides. The green bars show the cumalative total of the Referendum Fund set-asides on a year-by-year basis.
These charts can provide a baseline against which to measure whether the District’s application of Referendum Funds is going according to plan.
The District plans to report on an annual basis the amount of Referendum Fund set-asides and to present financial projections through at least FY’25.
The financial projections are based on many assumptions. Several key assumptions relate to property tax revenues, which account for 77% of the District’s operating revenues, and salary and benefit costs, which make up 83% of the District’s operating expenses.
The District’s ability to increase property taxes, absent a referendum, is subject to property tax caps. The District may increase property taxes by the lessor of the Consumer Price Index (CPI) or 5%. The projections are based on the actual CPIs for FY’18 and FY’19, and they assume the CPI will be 1.5% for subsequent years.
The projected salary expenditures reflect increases agreed to in the latest contracts with employee unions. For FY’18, the increase in the total cost of salaries is projected at 4.5% and is due to increases provided for under the contracts, plus the cost of adding a total of 22 teachers, 19 of whom are necessary to provide additional planning time for teachers (agreed to in the latest contract with the District Educators Council). The total cost of salaries in subsequent years is estimated to increase by approximately 3.5% per year.
Health insurance premiums are projected to increase by 1% for FY’18 and 5% in subsequent years. The remaining benefits are estimated to increase by approximately 3% per year.
Variances in these assumptions may either improve or negatively impact the District’s projected financial position. The Board has discussed adopting a policy statement governing how it will deal with significant surpluses or shortages due to the CPI or salaries or benefits coming in lower or higher than initially assumed.
Another major unknown is what will happen with State and federal funding. The District’s projections build in an expense, growing to $1.5 million per year, in anticipation that the State may shift the cost of funding teacher pensions from the State to school districts. The projections, however, do not build in anything for potential cuts in State funding or for property tax freezes. Together these two possibilities could cost the District $30 million over a four-year period, said Kathy Zalewski, the District’s Treasurer.
Administrators are also concerned about the potential loss or reduction of federal funds.