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At the April 9 meeting of School District 65’s Finance Committee, Kathy Zalewski, Business Manager, and Raphael Obafemi, Chief Financial and Operations Officer, provided an update on the preparation of the District’s 2018-19 (FY’19) budget. A budget document was not presented to the Committee, but Ms. Zalewski said the District’s latest projections provided a guide for budget development.
The District is currently projecting that it will operate at a surplus of about $6.2 million for FY’19. In accordance with the Referendum Plan, $1 million of that surplus will be used to increase the fund balance, and $5 million will be set aside in reserve to manage future operating deficits.
Under the Referendum Plan, the District plans to set aside surpluses generated in FY’18 through FY’21, and to use the amounts set aside to balance projected operating deficits in FY’22 to FY’25. The commitment made during the months preceding the Referendum was to balance the District’s budgets for eight years, through FY’25.
Some Basics for FY’19
Ms. Zalewski said some major assumptions used to build the budget for FY’19 are already known.
First, she said the increase in property taxes, which account for about 80% of the District’s operating revenues, is limited by the Consumer Price Index for 2017, which is 2.1%.
Second, the salaries of teachers and many other staff are governed by collective bargaining agreements that are in place for all employee groups for FY’19. Significantly, the three-year agreement entered into with teachers in 2016 will expire toward the end of FY’19.
Third, Ms. Zalewski said the cost of the District’s health insurance premium will go down 4% in FY’19, resulting in savings of about $300,000.
“There is still a lot of unknown information, especially related to the State’s and federal revenues,” she said.
Under the new funding model adopted by the State last year, the District should receive the same amount of State aid in FY’19 as last year. But, Ms. Zalewski said, it is unclear whether the State will shift the cost of funding teacher pensions to school districts (and, if so, how much of the cost) or if it will freeze property taxes (and, if so, for how long).
The District has been including an amount in its budget for a potential pension shift.
On the federal side, Ms. Zalewski said the Trump administration is proposing to eliminate Title II, which would result in the District losing $100,000 per year. She added that the legislation may not materialize next year.
Cutting Non-Personnel Costs
Ms. Zalewski said she and Mr. Obafemi are in the process of meeting cabinet members, program directors, and budget directors as part of the budget process. “We are implementing again a version of zero-based budgeting for non-personnel expenditures.”
She said they are reviewing all of the District’s contracts, looking for cost efficiencies.
She said they are also working with a consultant to see where they might be able to shift revenues from one program to another. She said the Board would probably not see significant budget reductions as a result of this process in FY’19, but the plan is to analyze if “we can reallocate or shift over time our funding to the most important spending priorities, and this is just the beginning,” she said.
Mr. Obafemi said, “One thing that I want to point out is we have met with a few departments already, and we are scheduled to meet with the rest of the departments by the end of this week. We’re actually going line by line, trying to have conversations and identifying efficiencies, while not reducing the level of services we are providing.
“Every line item must be justified,” he said. “We are asking … Is this the best way to do this? Can we do it differently? Can we look at a different way without its costing the same amount of money?”
Everybody has to “justify” or “prove the expenditures are essential,” said Ms. Zalewski.
Dr. Goren said after Mr. Obafemi and Ms. Zalewski complete their work, they will share it with him. He said he will look closely at the strategic plan to ensure they are preserving the District’s highest priorities, which are to improve student performance and outcomes, to continue to focus on strengthening the curriculum and the instructional core, to increase the focus on equity, and to continue the District’s work on school climate and cultures.
He emphasized that the Board will not see any “dramatic changes” next year, but “we will look forward over the next six or seven years.”
“We’re going to have to make some changes over time, as we have a new bargaining session, as we have new expenditures, so that we don’t reach a point seven years from now, where we were a year ago or two years ago, having expenditures far outweighing costs.”
Addressing Board Questions
Board members wanted assurances that proposed cuts would be as far away from the classroom as possible.
Mr. Obafemi said they have been looking at reducing costs that “don’t hit the classroom.” As examples, Mr. Obafemi said they have gained reductions in health care costs after they “shopped” a proposal; they are attempting to reduce the cost of supplies by considering other suppliers and reviewing every contract; they are looking at ways to reduce energy costs, which he said were already “at an all-time low, but we can try to get some savings on that.”
Dr. Goren said that these non-personnel costs are somewhat “on the margin to the whole enterprise, because the enterprise is 80% people.” He said the District will have to pay attention to personnel costs in the negotiating sessions next year.
Dr. Goren added that between 10 and 12 teachers are planning to retire next year. He said the retiring teachers are at the high end of the pay scale, and if they are replaced with teachers at a salary a little lower than the average, the District will have cost savings. He added, though, that the District wanted to ensure that it had a high-quality teaching force.
Board member Anya Tanyavutti asked if additional teachers are hired, if additional administrative support would also be added. Dr. Goren replied, “We should probably increase the administrative support to do the type of rich work that needs to be done.” But he said that adding administrative support has a financial impact.
Dr. Goren said, “One of the driving conceptual frameworks, as we are committed to equity, as we are committed to improving the outcomes and opportunities for kids who came from families that have been historically marginalized and who live in Evanston, is how can we move resources forward. That’s part of the line-by-line analysis that’s also part of looking at the whole budget.”
Ms. Zalewski said a draft tentative budget will be provided to the Finance Committee in June and the tentative budget will be presented to the Board in August. A final budget must be approved by the Board by Sept. 30.
What Happens After FY’25?
The District is depending on the Referendum set-asides to balance projected operating deficits of $1.6 million in FY’22; $4.1 million in FY’23; $7.1 million in FY’24; and $10.2 million in FY’25.
One key issue is what happens in FY’26. In that and subsequent years, the District will still be receiving $14.5 million each year due to the April 2017 Referendum. But by that time the Referendum funds set aside in reserve to balance future operating deficits will be exhausted, except for an estimated $2.6 million.
The District has not yet issued projections for FY’26, but if the trend continues, the operating deficit in FY’26 could be about $13.2 million, and there would only be about $2.6 million left from the Referendum set asides to go toward balancing that deficit. See chart below.
The above chart shows the operating deficits (in $ millions) projected by School District 65 for fiscal years 2022 through 2025. Under the Referendum Plan, these operating deficits will be covered by operating surpluses set aside in reserve in fiscal years 2018 through 2021. The District has not yet projected the operating deficit of fiscal year 2026, but if the trend continues it would be about $13.2 million; and at that time the Referendum set-asides will amount to only about $2.6 million