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Revised financial projections and the broad parameters of a plan to balance School District 65’s projected deficits were presented to the School Board’s Finance Committee on Feb. 8. The revised projections forecast a deficit of $1.9 million for FY’22, growing to $15 million in FY’26 – if action is not taken to increase revenues or reduce expenditures.
Kathy Zalewski, Business Manager and Treasurer, said the changes in the projections look more dire now than in September because the pandemic is impacting the District’s revenues more than anticipated a few months ago.
The plan to address the projected deficits is for now more in the nature of a process plan, with some big goals and major changes in mind. No specific cuts to any program or service were presented, although the plan is to reduce expenditures substantially through major revisions in the educational model and a reduction in the District’s “footprint.” Closing “underutilized buildings” and changing school attendance areas are in the offing.
Closing an existing school is a possibility because student enrollment is declining, and a plan was announced Monday evening to establish a new school in the Fifth Ward.
The plan to address the projected deficits was laid out in a slide presentation by School Board President Anya Tanyavutti and Finance Committee Chair Joey Hailpern at a Community Café on Jan. 27. The plan presented in the slides had not previously been reviewed or approved by the School Board or Finance Committee in an open meeting. But the plan was presented by the President of the School Board and the Chair of the Finance Committee.
In a Jan. 26 response to a Freedom of Information Act Request submitted by the RoundTable, the District’s FOIA Officer said there were possibly 500 email communications between members of the School Board and the Superintendent, an Assistant Superintendent or the Chief Financial and Operations Officer, that refer or relate to the District’s projected deficits, budgets or finances between Nov. 15 and Jan. 11.
These communications have had in private.
The Revised Projections and Some Background
In financial projections dated Sept. 21, 2020, the District projected it would operate at a surplus of $67,000 for the school year 2021-2022 (FY’22). Now it is projecting it will operate at a deficit of about $1.9 million in FY’22, unless expenses are cut or new revenues obtained.
The main changes in the projections for FY’22 are due to a reduction in the revenues the District is estimating it will receive from these sources: the Corporate Replacement Property Tax (a reduction of $357,000); other local revenue (a reduction of $713,000); State funding under the Evidence Based Formula (a reduction of $1.2 million); and other State revenue (a reduction of $84,000).
Ms. Zalewski said the COVID-19 pandemic has had an impact on the District’s finances, and it is expected to have an impact longer than the District anticipated when she prepared the projections in September. “Unfortunately, the COVID-19 pandemic, school closures, and ultimately the related economic fallout have reshaped the financial reality and reduced or even eliminated certain revenues.
“Just in FY‘21, due to the pandemic and school closure, the District lost $3.4 million, most permanently, and some of the losses will carry into the future.”
Ms. Zalewski added, “Overall, we are planning that we will spend approximately $4.6 million in COVID related remote learning expenses. So, if you add those two together, that’s an $8 million swing. That’s something that we did not anticipate last February. Even when we updated financial projections this September, it did not look that bleak.
“In addition, the outlook for State and local revenues became challenged, forcing us to revise the earlier estimates. As a result, the District struggled to balance the FY’21 budget and will have to make cuts to balance the FY’22 budget,” Ms. Zalewski said.
In addition to revising the projections for FY’22, the District is now projecting it will operate at deficits of $5.6 million in FY’23, $8.9 million in FY’24, $12 million in FY’25, and $15 million in FY’ 26. These are all higher than the deficits projected in late September.
A chart showing the projected deficits, as revised, is below.
The 2017 Referendum and Some Background
The budget numbers need to be considered in the context of the Referendum approved by voters in April 2017. The Referendum provided an additional $14.5 million in funding for District 65 in year one, and slightly higher amounts in each subsequent year.
Under the Referendum Plan, there was a sufficient increase in property tax revenues to balance the budgets in FY’18 though FY’21 and to generate surpluses totaling about $31 million. The plan was to put the surpluses in a Referendum Reserve, and to use those amounts to cover projected operating deficits totaling about $31 million in FY’22 to FY’25.
The commitment made during the months preceding the Referendum was to balance the District’s budgets for at least eight years, through FY’25.
In accordance with that plan, the District has been setting aside surpluses that were generated in FY’18 through FY’20 and it plans to deposit another $200,000 this year that will bring the total in the Referendum Reserve to $30.1 million at June 30, 2021.
“We kept our promise to the community about building up referendum reserves,” said Ms. Zalewski. “As of as of June 30 of last year, we have approximately $30 million in our reserves.
The Referendum Fund would be sufficient to cover the District’s projected deficits through FY’25, but at June 30, 2015 there would only be $1.7 million to apply to a projected deficit of $15 million in FY’26.
The chart below illustrates how the Referendum Funds would be depleted by FY’26, and how a significant deficit would be looming in FY’27 if no action is taken.
Ms. Zalewski said, “You can see these deficits are growing again, but we won’t let that happen, obviously, because by law, we have to have a balanced budget, and we don’t want our referendum reserves to be eaten by these deficits.”
Raphael Obafemi, the District’s Chief Financial and Operations Officer, said, “I know people ask us all the time, ‘Why do we need to make budget reductions if we have the reserves?” But, good business practice tells us that there are so many unpredictable issues that happen in finance, the economy, the pandemic that we dealt with, and other things may come up that we don’t know about. So it’s always good practice to put a certain amount of money away for a rainy day. So, I just wanted to say that it’s not good practice to get into reserves.”
The Structural Deficit
There are two main drivers of the structural deficit: a) property tax caps and b) the increases in salaries and benefits.
Property tax revenues account for about 80% of the District’s revenues, and they are limited by tax caps to the lesser of the CPI or 5%.
Salaries and benefits account for about 80% of the District’s operating expenses. These expenses are determined in part by the contracts entered into by the School Board with the District Educators Council (DEC, the teachers union) and other employee unions.
In June 2019, the School Board approved a five-year contract with DEC, which set the compensation package for teachers through June 2014.
Ms. Zalewski explained that the 10-year average of the CPI has been 1.7% which has limited revenue growth. Meanwhile the growth in expenditures has grown by about 3.3%.
The graph below, contained in a Jan. 30 memo prepared by Ms. Zalewski, illustrates the difference in the rate of increase in expenditures vs. revenues that has occurred or that is projected for FY’20-FY’26.
Ms. Zalewski said the task is to bring the increase in expenditures in line with the increase in revenues.
In the Jan. 30 memo, Ms. Zalewski says, “Going forward, especially considering decreasing enrollments and a new financial reality, the District will try to eliminate the structural deficit by reducing its footprint and substantially reduce operating expenditures. By undertaking this restructure, the District is hoping to achieve long-term financial sustainability. Unfortunately, before this financial stability is achieved, difficult conversations with the community and difficult decisions will have to take place.”
The Plan to Address the Projected Deficits
Ms. Tanyavutti and Mr. Hailpern summarized a “Long-Term Plan to Eliminate Structural Deficit” at a Board Café on Jan. 27. One slide in their presentation is reproduced below.
The slide reflects that the “Annual Reductions Needed to Eliminate Structural Deficit” are:
- $2,052,117 in FY’22
- $3,390,844 in FY’23
- $5,000,000 in FY’24
- $4,000,000 in FY’25
It appears that the reductions called for in FY’23, FY’24, and FY’25, are part of a “Phase 3 ‘Footprint Reduction.’”
The stated goals of the plan are:
- Keeping budget cuts as far from instruction as possible
- Reducing structural deficit and promoting sustainable spending
- Strengthening equity throughout the District’s buildings
- Preserving referendum reserves
- Creating a robust educational model that cultivates growth for all District 65 students and protects its instructional and social/emotional investments
- Dramatically reducing or eliminating a structural deficit that has been plaguing the District for decades due to redesigned model
The slides presented by Ms. Tanyavuttin and Mr. Hailpern say, “The District will engage in a series of audits and reviews to redesign its educational model, so it meets the District’s needs, instructional priorities and is sustainable over time.” They say, “This process is estimated to be completed by FY’23 and will result in long-term financial sustainability.”
The process is divided into three phases.
Phase 1 (Adopt in FY’21 to be implemented in FY’22)
Ms. Zalewski said the goal of Phase 1 is to balance the budget for FY’22 through “efficiencies and reductions,” and to make sure that some of the “micro shifts” are taking place, and to map out the task for Phase 2.
Ms. Zalewski said administrators will present a list of budget reductions totaling about $2 million to balance the budget for FY’22 to the Finance Committee at its next meeting.
Two additional tasks mentioned in the Board Café slides include, “The District will reduce student services, such as transportation and interventionist services, without affecting instruction,” and, “The District will evaluate programs for their effectiveness and alignment with the District’s instructional/strategic goals.”
Phase 2 (Plan in FY’22 to be Implemented in FY22-FY23
Phase two “will be a series of reviews and audits, curriculum audit for example, as well as we will be designing master plans, a Student Assignment Master Plan, a Facility Master Plan,” said Ms. Zalewski. “We will also engage in a demographic study. We will be implementing our new finance in HR software which should result in several efficiencies.”
A Board Café slide describes some of the reviews and audits in a little more detail:
- A curriculum audit will evaluate: a) the quality and extent of coverage of the District’s curriculum, programs, and services; b) the appropriateness and effectiveness of the curriculum; c) the organizational structure for administration; and d) a master schedule for middle school design.
- A Student Assignments Master Plan will involve a “transparent, collaborative, efficient and equitable process to establish a new attendance area for the District.”
- A Facilities Master Plan will “assess existing capital needs and conditions of existing buildings; and help prioritize capital expenditures.”
- A Demographic Study will provide “accurate enrollment projections for effective long-term planning, and ensure that the demographic study uses integrated data from multiple sources.”
- A new ERP – Finance/HR system will result in financial and operational efficiencies and a better position control tool.
- A Staffing Review “will strive to retain teachers, leaders, and staff to ensure that our schools continue to perform well.” The District will establish “a partnership with Golden Apple for teacher recruitment and development.”
Phase 3 (Implemented in FY’23 – FY’25)
“Then finally, phase three will be the phase when these recommendations are implemented,” said Ms. Zalewski. “And the main goal is not only to reduce our budget, but do something very different.”
She said the “District is committed to do something a little bit different, make sure that we change our operations and reduce our operations so we don’t have to engage in the budget cutting every three or four years.”
One Café slide says that findings from the audits and review will be evaluated and “help guide the District to design the best solutions, which will redesign student services and the educational model while reducing a structural deficit.”
Some of the things mentioned in the Café slide presentation include:
● Close severely underutilized buildings
- Reduction of in school-based staff: administrative, teaching and support
- Shrink overall costs: reduce central administration expenses and outsource non-core functions to vendors such as custodial, Early Head Start, etc.
- Revenue enhancement options such as sponsorships, naming rights, advertising, etc.
- Enable creative staffing and teaching with technology: schools may be able to use online or blended learning instruction to teach more efficiently
- Replace some certified staff, such as librarians with non-certified paraprofessionals as way to save money. (Board member Rebeca Mendoza said the reference to “librarians” was inserted as an example and that the Board had not discussed that issue.)
One Café slide says, “Addressing the structural deficit must become one of the District’s priorities, however, it must be done in accordance with the community standards of equity, including racial and social equity.”
The Process: How Much is the Board Doing in Private?
Last August the Finance Committee decided to explore how to address the projected deficits facing the District. Since then, the Finance Committee has held three meetings to discuss the projected deficits, one on Nov. 19 for an hour, one on Dec. 14, for an hour and one-half, and a third on Feb. 8 for about an hour and a half.
The District collected information through a “Thought Exchange,” in which about 1,376 people participated.
School Board members held two Community Cafés, one in English on Jan. 27 and one in Spanish on Jan. 30. Mr. Hailpern said about 30 people attended the Café on Jan. 27. Ms. Mendoza said about five people attended the Jan. 30 Café.
On Nov.19, 2020, Mr. Hailpern said members of the Board would be conducting two-by-two meetings with administrators to gather information. He said no more than two members of the Board would meet with administrators to ask questions and to get insights and dig deeper and talk about the instructional programs.
Ms. Tanyavutti told the RoundTable in a Dec. 2 email that the Board is demonstrating transparency in “our disclosure about the informal meetings that we will be having with Administration to ensure we are as informed trustees as possible. As part of our commitment to transparency we will disclose any conclusions that we come to as a result of these meetings, though we will not be opening those meetings to the public, due to the sensitive content being discussed as hypotheticals (programs and reduction in force that may impact individuals’ household income levels). We do not want to cause unnecessary anxiety or disclosure of HR status of individuals. …”
On Jan. 11, the RoundTable submitted an FOIA request to District 65 that asked the District to produce, among other things, “All communications between any Administrator and any member of the District 65 School Board that refer or relate to the District’s projected deficits, budgets, or finances, including without limitation, emails, texts, slack channel entries, zoom, google meet, correspondence, memos, reports, and all other Records constituting a communication.” The term “Administrator” was defined to mean “the Superintendent, any Assistant Superintendent, and the Chief Financial and Operations Officer of School District 65.” The request covered the period, Nov. 15, 2020 through Jan. 11, 2021.
In its response dated Jan. 26 to this Request the District said, “An initial email search using your key words and specified timeframe resulted in over 500 emails that are potentially responsive to the request. Thus, the request is unduly burdensome. It would take an ureasonable amount of time for a staff member to review all of the records to determine if they are responsive and then if any of the records or information contained in the records is exempt from disclosure.”
This suggests there were more than 500 email communications between members of the School Board and senior administrators that refer or relate to the District’s projected deficits, budgets, or finances during the period Nov. 15, 2020 and Jan 11, 2021.
The public has not privy to these communications.
Mr. Hailpern said the District plans to conduct a community survey and forums with staff to obtain input concerning budget reductions.
Superintendent Devon Horton said the goal is to release the survey in the next few days. “Everything’s finalized and ready to go,” he said.
He said the forums with staff are targeted to be held in about two weeks.
Several Board members asked that the District educate the community before the survey was conducted, so community members would be providing their views based on accurate information. Board members suggested how that could be done, including by posting the videos of the Board Cafes.
Mr. Hailpern said the next Finance Committee meeting is scheduled for March 8 and the next School Board meeting for March 22. He said administrators would present a plan containing the three phases at the March 8 Finance Committee meeting for further discussion, and the plan would be presented to the School Board on March 22 for action.
Mr. Hailpern added that a Board Policy provides that contracts over $25,000 must brought to the Board for approval. He said he wanted the Finance Committee to discuss lowering that amount, “specifically so that purchases cannot be done without Board approval at a lower threshold.
“I think for me, that’s just one way that we can slow the rate of spending, and bring a little bit more oversight to the financial interests of the District long term.”