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On Aug. 20, the District 65 School Board approved a tentative budget for the 2018-2019 school year (FY’19), with operating expenses of almost $130 million. Kathy Zalewski, Business Manager, presented the tentative budget, as well as unaudited results for the year ending June 30, 2018 (FY’18) to the Board on Aug. 20. She made a similar presentation at the Board’s Finance Committee meeting on Aug. 13.
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.
Ms. Zalewski said the District is on target to meet the commitment. She said, though, that a structural deficit remains, which needs to be addressed.
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 $19.9 million in FY’18, or about $5.3 million more than budgeted for that year.
She said the additional surplus is primarily due to several factors. On the revenue side, she said, the District received five categorical payments from the State, rather than four that were budgeted. This increased revenues in FY’18 by about $2 million, she said. The District also earned more in interest on its fund balances than was budgeted.
On the expense side, Ms. Zalewski said that salary expenses were 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. Expenses for supplies came in about $800,000 less than budgeted.
Finally, Ms. Zalewski said the cost of certain capital improvements to be paid out of operating funds was 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.
The $19.9 million surplus will enable the District to place $1 million into the District’s cash fund balance, and set aside $18.5 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 for FY’19 pegs operating revenues at $133.8 million, operating expenses at $129.5 million, and projects that the District will operate at a surplus of about $4.3 million. Of that amount, the District plans to allocate $1 million to increase the cash fund balance, and to set aside $3.0 million into the Referendum Reserve to help balance future projected operating deficits.
Ms. Zalewski said the District prepared the budget using a version of 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 66 students.
FY’19 Revenues – $133.8 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. This will not result in lowering property tax bills for residents of the District.
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 $5.9 million, or about $2.6 million less than last year. The main reason for the decrease is the District is budgeting to receive four categorical payments which is typical; last year the District received five, one of which was a make-up payment. The categorical payments include funding for orphanage, an early childhood grant, and transportation. State funding accounts for about 10% of the District’s total operating revenues.
The District is budgeting $8.7 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.
FY’19 Expenses – $129.5 Million
Operating expenses are budgeted to increase by 7%. About 2 percentage points of this increase is due to shifting $1 million in capital expenditures from FY’18 to FY’19.
Board member Candance Chow added that comparing this coming year’s salary expenses to last year’s is “deceptive” because the District went without certain staff for a significant amount of time last year, and it looks like “you’re ballooning now, and it’s really a timing issue.” She said the District made commitments to increase staff positions last year that it could not fulfill on a timely basis, and that it is fulfilling those commitments now.
Salaries, which account for 68% of the District’s expenses, are budgeted to increase from $83.3 million to $87.7 million, or by 5%. Ms. Zalewski said the increase is due to contractual increases with employee unions, plus adding 19.5 new positons, 5 of which are said to be revenue neutral. Ms. Zalewski grouped the new positions in three categories
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 program
• 0.5 Special Education Resource teacher
• 1 teacher assistant at Dr. Bessie Rhodes Magnet School
• 1 Bilingual special education teacher assistant
• 0.5 therapeutic placement coordinator
Positions added to support the District’s strategic priorities:
• 1 Executive Director of Black student success
• 1 equity coach
• 1 literacy coach
Positions added due to efficiencies:
• 1 EvanSTEM grant coordinator, funded by grants
• 4 custodians to increase efficiencies/cleanliness. (The District says the cost of these positions is budget neutral due to elimination of overtime.)
• 1 HR Specialist
Ms. Zalewski said the budget also includes some 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 as high as $40,000 to $50,000 per teacher, depending on the years of experience of the replacement.
Employee benefits are budgeted at $14.6 million, or 11% of the operating budget. Even though health insurance premiums are expected to decline by 4%, Ms. Zalewski said the overall cost of benefits is projected to increase by 1%. The cost includes the amounts required to be paid to the Illinois Municipal Retirement Fund and the Teachers Retirement System.
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 that 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 7%, and supplies and materials are going up by 21%. The expenses for supplies include $430,000 for a text book adoption, and $375,000 for instructional technology.
FY’19 Budget Efficiencies
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, she said.
Ms. Zalewski summarized the savings as follows:
• Savings in rubbish removal, custodial supplies, security system, pest removal, elevator and inventory systems – $265,081
• Savings in custodial overtime through schedule revisions and new hires – $60,000
• Reduction of medical insurance premium by 4% due to price negotiations – $360,000
FY’19 Non-Operating Budget
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 using 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.
The Referendum provides the District with $1.025 million per year to pay for capital projects through operating funds. Ms. Zalewski said, though, the District’s ability to borrow additional funds for capital projects is limited. Ms. Zalewski said they will present a schedule for future capital projects in the fall.
Balancing Budgets Through FY’25
The District is projecting that it will set aside the following amounts in a Referendum Reserve for the years indicated: $18.5 million in FY’18; $3.0 million in FY’19; $6.0 million in FY’20; and $1.6 million in FY’ 21, for a total of $29.1 million.
The District then plans to use the amounts held in the Referendum Reserve to balance projected operating deficits of $1.4 million in FY’22; $4.3 million in FY’23; $7.4 million in FY’24; and $10.5 million in FY’25, or a total of $23.6 million.
At the end of FY’25, there will be about $5.5 million available to cover an operating deficit in FY’26.
The District has not yet issued projections for FY’26, but if the trend continues, the operating deficit in FY’26 would be about $13.5 million, and there would only be about $5.5 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 below.
There are several key assumptions that shape the projections. The CPI limits the amount the District may increase property taxes, which account for 78% of the District’s revenues. The projections assume that the CPI will be 1.5% in 2018 and in subsequent years.
Board member Lindsay Cohen asked if that was “conservative” in light of current market conditions. Ms. Zalewski said it was the average for the last five and for the last 10 years. Mr. Obefemi said, “When you do revenue projections, you want to be very conservative.”
If the CPI was 1% higher than assumed (i.e., 2.5% rather than 1.5%) it would increase property tax revenues by about $800,000, said Ms. Zalewski. Because of the way property tax caps work, it would increase property tax revenues by not only $800,000 in the year in question, but each subsequent year.
Another key assumption relates to total salary increases, which account for 68% of total operating expenses. The projections assume that total salary expenses will increase 3% each year. The District’s budget message says, “In order to ensure the rate of growth in operating expenditures matches the rate of growth in revenues, the District must achieve savings in renegotiating the employee contracts in FY’19 and FY’20. The Board’s contract with the District Educators Council (DEC, the teachers union) expires in August 2019 and will be renegotiated during the coming school year.
Board member and Finance Committee Chair Candance Chow noted that this school year the increase in teachers’ base salary is tied to the increase in the CPI. If that type of provision is kept in the renegotiated teachers’ contract, it might assist in reducing the structural deficit, but the base salary is only one component used in figuring teachers’ salaries. Two other components are track increases (essentially, a bump in salary based on years of experience) and step increases (which are given if a teacher gets a masters degree, serves in a leadership position at a school, etc. High performance evaluations are no longer a requirement for a track increase).
Another expense item which is taking on increased significance is employee benefits, which account for 11% of total operating expenses. The projections assume that benefits will increase by 7% in each of the next three years, and then 6%, 4% and 4%. By FY’25, employee benefits are projected to account for 13% of total operating expenses.
The projections take into account a possible shift of a portion of teacher pension costs to school districts, but do not take into account a potential property tax freeze, said Ms. Zalewski.
The Structural Deficit
Ms. Zalewski said once again that District 65 is facing a “structural deficit,” where expenses are projected to increase at a faster rate than revenues. The projected deficits begin in FY’22 and grow between then and FY’ 25. While there are referendum reserves to cover the shortfalls through FY’ 25, the reserves are projected to run out in FY’26.
Ms. Zalewski said one thing the District is planning to do to bring expenses in line with revenues is to “develop new budget policies that will scrutinize new positions and programs for their instructional value.”
Board member Joey Hailpern asked when the educational team will have recommendations for the Board on the best way to move forward using this approach. He said, “It’s a great goal, but that’s going to be a pretty heavy conversation.”
Dr. Goren responded, “We actually have not done a deep dive on how to do this. I think step one is to faithfully negotiate on contracts and make sure we do that well, and then two, it’s a several year process. I think the real clarion call is in seven years. But if I follow my colleagues’ push it’s in the 2021-2022 school year where our revenues are less than expenditures. In the next two years we have to start to build a process that will start to have us thinking about how we value the programing and budgeting, what we’re doing, and where we might want to trade off, reduce, invest more.”
Dr. Goren added, “In the 2020-2021 year we need to be well on the way, and the 2021-2022 and the 2022-2023 years are the really vital years to make important decisions on investments, and important decisions on trade-offs and important decisions on reductions.”
Board member Lindsay Cohen urged, “I would push that it be done as soon as possible.” She added that she thought the discussion would help clarify the contract negotiations with DEC. “If you have a good faith conversation with the unions on how to approach this it could be a win/win, instead of it being a sticking point.”
Board member Rebeca Mendoza said she thought the conversations needed to start as early as possible and the community should be part of the conversations.
DEC President Meg Krulle said it was essential to reach a shared understanding on what “instructional value” means, and it was important to get input from all stakeholders on that issue.
Dr. Goren agreed, but added, “We want all of our children to perform at the highest levels and we want to actually be very focused on the opportunity gaps we have so we can accelerate the learning of those who are striving to achieve, while maintaining the levels of those who are right now high achievers. That’s become our equity agenda as well.”
Dr. Goren said some issues may relate to how people value small class sizes, pre-K learning, and literacy.
Mr. Obafemi said the solution to the structural deficit is to make sure the District has a budget where revenues match expenditures, starting in FY’22.
Board member Anya Tanyavutti said determining what constitutes instructional value should be looked at with an equity lens. She added that representations made to the community during the referendum should be taken into account.
The District plans to present the tentative budget to the community and obtain input on Sept. 4 at Chute Middle School, Sept. 5 at Haven Middle School, and Sept. 6 at Fleetwood Joirdain Community Center. All of the forums will be from 6:30 p.m. to 8 p.m.
Dr. Goren said he envisions that negotiations with DEC will begin in late October or early November and that DEC is willing to use an “interest-based bargaining” approach.