At the Nov. 19 meeting, the District 65 Finance Committee kicked off its discussion about how to resolve the District’s structural deficit and how to truly balance the District’s operating revenues and its operating expenses without dipping into reserves, including the Referendum Reserve.
To achieve this goal would likely require major cuts in programs and staff, or revamping future compensation packages. The projected deficits become so large over time that making cuts in purchased services and supplies will not be enough.
The District has studied this issue on at least three occasions in the past, including with the assistance of committees that included members of the community with expertise in financial matters. No one has found a silver bullet after extensive analyses.
The financial picture may become more challenging because Board members are floating the idea of building a new school and resurrecting a list of capital projects the cost of which exceeds $100 million. One thing listed in the recent Miracles Framework for Continuous Improvement is a capital referendum.
The District has set up a 2-by-2 structure under which two Board members can ask detailed questions to two administrators and do their “due diligence” in these private meetings out of the public eye. Finance Committee Chair Joey Hailpern says these private meetings are “not meant to subvert the public conversation in this process.”
The Projected Deficits, Sept. 21
The District’s latest financial projections were presented to the School Board by Kathy Zalewski, Business Manager and Treasurer, on Sept. 21. The District is projecting that it will operate at a surplus of $67,243 in its fiscal year ending June 30, 2022 (FY’22), and then operate at deficits of $3.4 million in FY’23; $6.6 million in FY’24; $9.6 million in FY’ 25; and $12.4 million in FY’26.
In accordance with a plan presented to the community before the February 2017 Referendum, the District has been setting aside surpluses in a Referendum Fund that now totals about $31 million. The plan was that these funds would be used to cover projected operating deficits in FY’23 to FY’25.
The latest financial projections estimate that the District will have sufficient amounts in the Referendum Fund to cover the deficits through FY’25 and have about $10.5 million to apply toward the projected $12.4 million operating deficit in FY’26.
There would be no amounts, however, left in the Referendum Fund to cover any subsequent deficits. If the trend continues, the deficit would be more than $15 million in FY’27. See above chart.
Other Potential Financial Threats
On Nov. 19, Raphael Obafemi, Chief Financial and Operating Officer, laid out some other issues that could adversely impact the District’s financial position going forward.
First, he pointed out that the referendum to approve a progressive income tax at the State level failed in the Nov. 3 election. He said the State was planning to obtain an additional $3.6 billion in revenues through a progressive income tax, and that leaves a shortfall in the State’s budget. The Governor has talked about addressing that shortfall by cutting expenses by 15% across the board or by raising income taxes, or a combination of both.
Mr. Obafemi said if State funding were cut by 15% across the Board, the District would lose about $1.2 million in State funding. Whether this would be a one-time loss or an ongoing one is unknown.
Second, the State legislature may freeze property taxes, said Mr. Obafemi. If this were done, the State would lose its ability to raise property taxes by an amount equal to the Consumer Price Index (which is assumed in the financial projections).The adverse impact would be “huge,” he said.
Third, Mr. Obafemi said the legislature may shift the cost of funding teacher pensions from the State to school districts. If the State’s portion of funding teacher pension costs were shifted to school districts, Mr. Obafemi said it “will have a catastrophic impact on the District’s finances.”
Fourth, inflation has been low and the CPI has been lower due the pandemic, said Mr. Obafemi. This means that even if property taxes are not frozen, property taxes will be lower than assumed in the projections.
Mr. Obafemi also discussed the impact of the pandemic. He said the District incurred $1.5 million in added expenses, including for technology and preparing the schools for in-person learning, which has been incorporated into this year’s budget. He added that the District is anticipating that it will lose revenues of about $3.4 million, mostly due to an assumption that the collection rate of property taxes will be lower than usual. This too has been built into this year’s budget.
Mr. Obafemi said the District has been awarded $800,000 from the federal government to go toward COVID related expenses, but it is required to share a portion of that with private schools in the area.
Mr. Obafemi said, “No one knows the long term economic impact of the pandemic. But we know it’s not going to be good. It’s going to be challenging for us financially.”
Introduction to the Budget Reduction Process on Nov. 19
Finance Committee Chair Joey Hailpern led off the discussion on Nov. 19. He said, “It is impossible for us to have this conversation without talking about some really big issues, big issues that have been hanging over this District for a long time, for generations.
“When we talk about our fiscal sustainability going forward, we can’t ignore the fact that by closing down the Fifth Ward school, we committed to decades of transportation costs that are continuing to hang on to us and ask our Black and Brown students to carry the burden of diversity in our schools. We cannot ignore the fact that our buildings are old, many of them, and that as a Board, we will have to undertake some education to know what the value of our buildings are, what the lifespans that they have left are, and what it will take to make them palaces that our children deserve to learn. We also can’t ignore the fact that as we talk about righting the ship, we have to look at our educational investments.”
Mr. Hailpern said 80% of the District’s expenditures are for people. As the Board considers what provides educational attainment and opportunities, he said, “We can’t ignore the fact that we’re going to have to talk about programs and talk about the staff that we care deeply about. And during this global pandemic, that is just a tougher conversation to have.”
He said the Board would engage with teachers at the appropriate time, and to reach out to the community “to hear your thoughts and to hear your concerns as it relates to our financial planning and our financial future and get input along the way in this process.
“Our agenda for today is to talk first about the structural deficit as it relates to staffing, how we staff to meet our educational needs, and have some Board ideation on what ideas exist that can be planned and executed for us to reduce our spending.
“We’re also going to talk about what our non-negotiables are,” including what the administration thinks they cannot live without, and what the Board thinks are an absolute imperative as it relates to our equity agenda.”
Balancing the Budget Without Dipping into Referendum Reserves
Administrators said they planned to balance the operating budget going forward without dipping into Referendum Reserves. They made clear, though, that to do so would require taking a look at staff.
District 65 Superintendent Devon Horton said the most recent financial forecast projects an operating deficit starting in FY’23. He said, though, “If the current economic situation continues to deteriorate, the District may experience a deficit year earlier than FY’23.”
Dr. Horton said it was not good practice “to balance our budget using referendum reserves. Reserves are for rainy days.”
While the financial situation created by COVID might qualify as a “rainy day,” he said, “We would like to get out in front of that, as far as we can and keep our reserves in place. That is a top priority for me as Superintendent and the School Board, as well as our finance team, led by Raphael. Reserves should only be used in extenuating circumstances.
“We know this is this is one of them. But we also see that there are other ways that we can do this to keep our reserves in a really good position. It is not a best practice for us to pull from our reserves to balance our budget. Current expenditures must be covered with current revenues.”
Ms. Zalewski said, “We’ve been talking about our structural deficit for years now,” expenses are growing at a faster rate than revenues.
She said the District has little control over revenues because about 80% of its revenues are from property tax revenues which are subject to tax caps, and about 17% are from State and Federal grants.
On the expense side, 80% of the District’s expenditures is for salaries and benefits, and another 3% is for special education tuition.
“So it leaves us with 17% of non-personnel expenditures, most of which is spent on utilities, transportation costs, and other contractual things, like the insurance premiums.”
To address the structural deficit, Ms. Zalewski said, “Unfortunately, we have to look into our staff.”
On June 10, 2019, the District entered into five year contracts with the District Educators Council (DEC, the teachers union) and the Evanston Teachers Assistant Association. The compensation of the two largest employee unions is thus locked in through the summer of 2024.
At the time these contracts were entered into, Raphael Obafemi, District 65’s Chief Financial Officer, said they would not reduce the structural deficit.
At an earlier meeting this fall, Mr. Obafemi said, “Even though the financials look bad, the plan of the administration is not for this to come to pass. We are going to change trajectory. We’re going to look at our cost options, things we can do to lower expenditures to make sure that the deficit shown in the projections never comes to pass.”
“This administration’s commitment is to budget in a fiscally responsible way whereby our revenue’s match up with our expenditures,” Mr. Obafemi said. “I know we have reserves to help us during rainy days. But our plan is we do not anticipate nor do we plan to rely on reserves to be able to carry the day. What we are planning on doing going forward is to make sure whatever we budget matches up to the revenues that we get that year. That’s a truly balanced budget, and that’s the goal of this administration to balance the budget. Revenue matches up with expenditure. Only in a rare case and an emergency will we consider using reserves to balance our day to day budget.”
Dr. Horton summed up the administrators’ presentation saying the goal is to deliver a balanced budget, while preserving referendum funds. The District will seek to move forward with “equitable budget reductions, which protect the District’s educational model and instructional priorities.”
He said they will use an equity tool and come up with a “budget reduction process for the District, and we will come up with a five-year layout of how we will like to move forward with that.”
He added that the District planned to gather input from the community and from the School Board.
Board Members’ Comments – Some Things to Consider
Mr. Hailpern said, “We need some of our operating expense numbers to be more transparently shared with the community as we think about the cost of valuing and investing in the TWI program. And if we’re going to look at efficiencies within a program like that, we need to know how much it costs now and how much it’s going to cost to do it differently if that is a recommendation that would have come up.”
He added he would like to know if the TWI program was operating as efficiently as it can be, if single TWI strands were isolating communities, and where the District could have people more closely attending schools near their homes.
He said the Board should determine upfront what are non-negotiables, such as, “Is TWI nonnegotiable?” Non-negotiables could be taken of the table from further analysis.
Mr. Hailpern said Board members generally know what a class size increase would do – it would put more kids into a classroom and could reduce the number of teachers needed in the schools.
The District, in the past, has done extensive analyses of how much the District would save by increasing class sizes by various numbers of students. The analysis requires a school by school, class by class assessment to see where a teaching position could be eliminated by increasing class sizes.
”One of my questions is, do we have the space in all of our school sites to operate with one less building? I’m not saying consolidate buildings,” said Mr. Hailpern. “But what if we had enough space to operate with one or two less? How much does it cost to operate one?”
Mr. Hailpern also asked at what point does it become more economical to build a new building rather than putting money and repairs into an old building.
“We might have to spend some money to get the information we need to make decisions, for example, an architecture engineering study or an appraisal study of our buildings,” he said.
Board member Suni Kartha said the District has a master plan of capital needs for each building, but she was not sure when it was last updated. “But I think we need to take a look at that again, and have an honest look. We know that we have some very, very old buildings that have very, very significant needs.”
She also said the Board needed to take a look at which buildings are “too old” to continue investing in.
Ms. Kartha also asked about attendance-area boundary lines and asked if the boundaries were changed if that could reduce busing costs.
Board member Rebeca Mendoza said, “One other thing that I think is really important is keeping in mind the broader experience that children are having both academically and socially and emotionally. … We’re investing resources into having teams of folks who can have meaningful relationships with families, and make families feel a sense of belonging, and a sense of care, and that commitment from our District goes a really long way for kids and families in our community. And that is an important value.”
Board member Soo La Kim said that in one of the budget presentations made by Ms. Zalewski and Mr. Obafemi a few months ago, there was a recommendation about “a culture of fiscal conservatism.” She asked what does that mean “in putting together budgets and negotiating contracts?” She said the Board should examine and question “what is assumed to be automatic.” She added, “I think we really need to look at long-term, ongoing process and practice, about what’s good and what’s not.”
She added that the Board should consider integrating some of the new technology used in remote learning into the curriculum. Ms. Mendoza said the District should consider partnering with the City and other organizations to ensure that WiFi was available to all households in Evanston.
The Need for Community Input
Many Board members and administrators said it was important to obtain community input about any proposed budget cuts, and they suggested ways this could be done. Ms. Mendoza suggested holding focus groups at each school to ensure everyone’s voice is heard.
She also said, “I think the community needs to understand what the choices are. … I think it’s really important for people to have more concrete numbers … and to have them be able to give us concrete input as to what they think the priority should be.”
Ms. Kartha said it was important to have community input about budget cuts and to “make sure that we in particular include members of historically marginalized groups to make sure that we’re prioritizing their needs.”
Board President Anya Tanyavutti said stakeholders’ voices were important because they might present different ideas on how to make a program more effective, and provide information that would help avoid unintended consequences.
She asked how the District could make the materials available in Spanish.
The Two-by-Two Meetings
The District has set up a structure of holding “2 by 2” meetings. Apparently the meetings would be held between two Board members and two administrators to gather information, and be held in private.
Mr. Hailpern said the two-by-two meetings were a format for Board members to get educated on certain things and to ask detailed questions and “do our due diligence.” He said, “And it’s not meant to subvert the public conversation in this process.”
He said the two-by-two meetings would be held between the Nov. 19 meeting and the next meeting scheduled for Dec. 9.
The RoundTable has submitted an FOIA request for public records relating to the 2 x 2 meetings.
“One of my end goals for Dec. 9 is for us to know, what is our action plan post Dec. 9, for us as an administrative team, but also as a Board team, to engage with stakeholders, and ask them what they think about this problem and give us advice, and consent or not, around what it is that they value as community members who experience these programs.”