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At the School District 65 Finance Committee meeting on Feb. 11, Kathy Zalewski, Business Manager, presented financial projections for the District’s next six school years. While the projections rest on many assumptions, they show the District is on track to balancing its budget through the next six school years ending June 30, 2025 (FY’25), and to have a surplus at the end of that year which can go toward reducing a potential deficit in FY’26.

The projections 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.

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; $3.1 million in FY’19; $6.1 million in FY’20; and $2.3 million in FY’ 21, for a total of $30.0 million.

The District then plans to use the amounts held in the Referendum Reserve to balance projected operating deficits of $434,101 in FY’22; $3.7 million in FY’23; $6.7 million in FY’24; and $9.8 million in FY’25, or a total of about $20.6 million.

At the end of FY’25, there will be about $9.4 million available to cover a possible 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 $12.7 million, and there would be about $9.4 million left in the Referendum Reserve to go toward balancing that deficit. There would be nothing left to cover operating deficits in subsequent years.

Shortly after the Referendum, the District projected it would have about $3.6 million left in the Referendum Reserve at the end of FY’26. The District is now projecting that the surplus amount will be about $5.8 million more.

 Assumptions Used in the Projections 

There are several key assumptions that shape the projections. The CPI limits the amount the District may increase property taxes, which account for 79% of the District’s revenues. The projections assume that the CPI will be 1.5% in 2019 and in subsequent years. 

If the CPI is 0.5% higher than assumed (i.e., 2.0% rather than 1.5%) it would increase property tax revenues by about $400,000. Because of the way property tax caps work, it would increase property tax revenues by not only $400,000 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 3.0% in FY’ 20 and 3.5% in each subsequent year.

The Board’s contract with the District Educators Council (DEC, the teachers union) expires in August 2019, so the actual increase in salary expenses is unknown for FY’20 and beyond.

Another expense item which is taking on increased significance is employee benefits, which account for 12% of total operating expenses. The projections assume that benefits will increase by about 40% in the next six years.

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 outlined some steps the District is taking to contain costs, which include zero-based budgeting for non-personnel expenditures, renegotiating vendor contracts, beginning to implement a priority/equity budgeting model, and offering retirement incentives.