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At the June 4 meeting of School District 65’s Finance Committee, Kathy Zalewski, Business Manager, presented a draft tentative budget for 2018-19 (FY’19), as well as an estimate of how the District will do financially for the year ending June 30, 2018 (FY’18).
The budget numbers need to be considered in the context of the Referendum approved by voters in April 2017. 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.
Closing Out FY’18
Last fall, the District projected it would operate at a surplus of about $14.6 million for FY’18. Under the Referendum Plan, the District planned on placing $1 million of that surplus into the District’s cash fund balance, and to set aside $13.4 million in a Referendum Reserve to help balance projected operating deficits in FY’22 to FY’25.
Ms. Zalewski said the District is now estimating that it will operate at a surplus of about $17.4 million in FY’18, or about $2.8 million more than budgeted.
She said the surplus is primarily due to three factors. First she said salary expenses are expected to be about $1.5 million lower than budgeted as a result of not filling some positions (the FY’ 18 budget contemplated 31.6 new positions); the actual costs of several new positions were lower than budgeted; and expenses for retaining substitute teachers and teacher assistants were lower than budgeted.
Second, Ms. Zalewski said the cost of certain capital improvements to be paid out of operating funds will be about $1 million lower than budgeted because the projects will be completed and paid for in FY’19, rather than FY’18. The $1 million in costs will be rolled into FY’ 19, she said.
Third, the expense for purchased services will be about $250,000 lower than budgeted.
The $17.4 million surplus will enable the District to roll over $1 million for capital costs into FY’19, place $1 million into the District’s cash fund balance, and set aside $15.1 million in the Referendum Reserve to address future operating deficits, rather than the $13.4 million initially planned.
Tentative Budget for FY’19
The tentative budget pegs operating revenues at $134.3 million, operating expenses at $129.4 million, and projects that the District will operate at a surplus of about $4.9 million. Of that amount, the District plans to allocate $1 million to increase the cash fund balance, and to set aside $3.6 million into the Referendum Reserve to help balance future projected operating deficits.
Ms. Zalewski said the District prepared the budget using a version of a zero-based budgeting methodology, and staff has aligned spending priorities with strategic initiatives such as improving literacy, strengthening multi-tiered system of support programs and culturally relevant pedagogy, and recruiting and retaining skilled teachers.
The District is projecting that student enrollment will increase by 64 students.
Revenues – $134.3 Million
On the revenue side, the increase in property taxes for FY’19, which account for 78% of the District’s operating revenues, is limited by the Consumer Price Index for 2017, which is 2.1%.
The District is budgeting a 4% decrease in property taxes in FY’19. Ms. Zalewski said the decrease is due to the way the referendum property taxes were distributed by the County in FY’18.
The District is estimating that General State Aid will be about $7.9 million, or roughly the same as last year. General State Aid is paid under a new “Evidence Based Funding” formula, which contains a provision that school districts will not receive less under the formula than they did in FY’ 18. State Aid Categoricals are budgeted to be about $5.4 million, or about $900,000 less than last year. The categorical payments include funding for orphanages, an early childhood grant and transportation.
Overall, State funding, which accounts for 10% of the District’s operating revenues is expected to decline by 7%
The District is budgeting $9.3 million in federal funds, which constitute 7% of the District’s funding. Ms. Zalewski said federal funding is projected to continue at “stable levels.”
In a prior meeting Ms. Zalewski said the Trump administration is proposing to eliminate Title II, which would result in the District losing $100,000 per year. She said the budget assumes that Title II funding will continue next year.
Expenses – $129.4 Million
Salaries, which account for 68% of the District’s expenses, are budgeted to increase by 5%. Ms. Zalewski said the increase is due to contractual increases with employee unions, plus adding 16.5 new positons, four of which are said to be revenue neutral. Ms. Zalewski grouped the new positions in three categories
1. Positions added due to enrollment/programmatic changes:
• 3.5 FTEs (full-time equivalent) middle school teachers due to scheduling issues
• 2 ELL teachers due to increases in ELL (English Language Learning) students
• 2 instructional coaches to assist with the implementation of the 1:1 student technology progam
• 1 teacher assistant at Dr. Bessie Rhodes Magnet School
2. Positions added to support the District’s strategic priorities:
• 1 Executive Director of Black student success
• 1 equity coach
• 1 literacy coach
3. Positions add due to efficiencies:
• 1 EvanSTEM grant coordinator. The function was managed by a consultant and paid for by a grant from the Royce Foundation
• 4 custodians to increase efficiencies/cleanliness. (The District says the cost of these positions is budget neutral due to elimination of overtime.)
Ms. Zalewski said the budget also includes the savings due to 21 teachers and staff retiring in FY’18, but she added that the full savings would be realized in FY’20 and in subsequent years. Generally, the District may replace a retiring teacher with a less experienced teacher at a lower salary. The cost differential may be $40,000 to $50,000 per teacher, depending on the years of experience of the replacement.
Employee benefits are budgeted at $15.3 million, or 12% of the operating budget. Ms. Zalewski said the cost of benefits is projected to increase by 4%, even though health insurance is expected to decline by 4%. The cost includes the amounts required to be paid to the Illinois Municipal Retirement Fund and the Teachers Retirement System. In addition, Ms. Zalewski said the budgeted cost includes $350,000, to cover the cost of a potential pension cost shift. At this time the State has not passed legislation to shift the cost of funding teacher pensions to school districts.
Capital expenses paid out of operating funds are projected to be about $2.6 million, about $1 million of which is work being done this summer and includes secure entrances at King Arts and Washington schools, asbestos and tile work at Haven, King Arts, Walker and Washington schools, and a cut-out for buses at Willard school.
Purchased services are going up by 6%, and supplies and materials are going up by 4%.
As part of the budget process, Ms. Zalewski said she and Raphael Obafemi, Chief Financial Officer, reviewed all of the District’s contracts, looking for cost efficiencies. As a result of that process, the District is projected to save $685,081 next year, with a total of about $2.8 million in savings over the next five years.
Ms. Zalewski summarized the savings as follows:
• Savings in rubbish removal, custodial supplies, security system, pest removal, elevator and inventory systems – $262,081
• Savings in custodial overtime through schedule revisions and new hires – $60,000
• Reduction of medical insurance premiums by 4% due to price negotiations – $360,000
The amount of debt, including principal and interest, that is scheduled to be paid in FY’19 is $5.7 million.
This summer, the District is planning to use capital funds to reconfigure office space in the Joseph E. Hill building to create a parent welcoming center and additional office spaces. The plan is to complete these renovations by September 2018.
Ms. Zalewski said the District has limited sources of funds for future capital projects. The Referendum was designed to provide $1.025 million per year to be paid through operating funds, but the District’s ability to borrow additional funds is limited. Ms. Zalewski said they will present a schedule for future capital projects in the fall.
Threats from Springfield
With the passage of a new Evidence Based Funding formula in 2017, the District has “received some peace of mind,” said Ms. Zalewski. She added, though, that in addition to a potential shift in pension costs, the legislature is considering freezing property taxes. The budget does not provide for that risk.
What Happens After FY’25?
While the numbers are changing, the District is projecting that it will set aside the following amounts in a Referendum Reserve for the years indicated: $15.1million in FY’18; $3.6 million in FY’19; $6.3 million in FY’20; and $2 million in FY’ 21, for a total of $27 million.
The District then plans to use the amounts held in the Referendum Reserve to balance projected operating deficits of $1 million in FY’22; $3.5 million in FY’23; $6.5 million in FY’24; and $9.6 million in FY’25, or a total of $20.6 million.
At the end of FY’25, there will be about $6.4 million available to cover an operating deficit in FY’26.
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 FY’26, the Referendum Reserve will only have an estimated $6.4 million.
The District has not yet issued projections for FY’26, but if the trend continues, the operating deficit in FY’26 would be about $12.5 million, and there would only be about $6.4 million left in the Referendum Reserve to go toward balancing that deficit. There would be nothing left to cover operating deficits in subsequent years. See chart on page 26.
Board member Joey Hailpern said, “I would urge my Board colleagues and the leadership group to look at some point in the relatively near future on the calendar to have a workshop where we can look and see where do we spend our money, how do we spend our money, and if we were to change our behavior,” how it would impact students and their experiences and the functioning of the District.
Mr. Hailpern said this should be done “so we’re as educated as we can be before it’s an emergency conversation because those numbers go from being in the red $1 million to being in the red $10 million pretty quick.”
Mr. Obafemi said, “I thank you for bringing that up. From where we sit, the best way to do a budget is for revenues to equal expenditures. That is a balanced budget. With some of the projections we have right now, we’re relying on reserves to balance the budget, so realistically speaking that budget is not balanced if you’re using reserves to balance it. What we should be doing going forward is making sure revenues and expenditures balance year after year without having to call on reserves to make up the difference.”
Superintendent Paul Goren said, “Having that conversation as a Board and an administration would be fabulous because it can help us in thinking about budgets in the years to come and how we prioritize.”
The District has had a structural deficit where expenses have been growing at a faster pace than revenues. About 80% of the District’s revenues are from property taxes, which are subject to property tax caps, which limit the increase to the lesser of the increase in the CPI or 5%. In its projections, the District is assuming the CPI will be 1.5%.
If the CPI is higher than 1.5% going forward and the Board raised taxes the maximum amount, it would help reduce the projected deficits.
Between FY’19 and FY’26, using the 1.5% assumption, operating revenues from property taxes are projected to increase from $104.9 million to $118.7 million, or by $13.8 million.
About 80% of the District’s operating expenses are salaries and benefits, which for the most part are governed by contracts with employee unions. The District’s contract with the District Educators Council (DEC, the teachers union) expires in August 2019. A new contract will be negotiated next year.
Between FY’19 and FY’26, salaries and benefits are projected to increase from $102.8 million to $126.7 million, or by $23.9 million.
The plan is that the Board will approve a tentative budget on Aug. 13. The budget will then be presented to the community in the week of Sept. 3. The Board will adopt a budget on Sept. 24.
The above chart shows the operating deficits (in $ millions) projected by School District 65 for fiscal years FY’22 through FY’25. Under the Referendum Plan, these operating deficits will be covered by operating surpluses set aside in reserve in fiscal years FY’18 through FY’21. The District has not yet projected the operating deficit for FY’26, but if the trend continues it would be about $12.5 million; and at that time the Referendum set-asides will amount to only about $6.4 million.