School District 65 Business Manager Kathy Zalewski presented a new set of financial projections at the School Board’s Finance Committee meeting on Feb. 14. The latest projections show that the operating deficits will grow from $757,000 in the 2022-23 school year (FY’23) to $12.4 million in FY’27.
The latest projections, though, paint a rosier picture than the financial projections presented in September 2021. The main reason is higher property taxes.
For the next school year, FY’23, District 65 is projecting an operating deficit of $757,000, compared to the operating deficit of $1.5 million projected by the District last September. Zalewksi said a projected deficit of $757,000 was “a very manageable amount.”
For FY’24, the District is now projecting an operating surplus of $981,991 compared to a deficit of $4.3 million that was projected last September.
For FY’25 and FY’26, the District is currently projecting growing operating deficits, but they are significantly lower than those projected in September.
The chart below shows the latest projections of surpluses and deficits for FY’23 through FY’27 (the orange bars), compared to the projections made in September 2021 (the blue bars). (In September, there were no projections for FY’27.)
While the latest projections provide a much more favorable picture than six months ago, they may underestimate the surplus and overestimate the deficits for two reasons. First, the district may be underestimating its potential to increase property taxes in future years. Second, the District has not cut staff to align with the reductions in student enrollment that have occurred and are projected to occur in the future.
Property tax revenues
District 65’s ability to increase property taxes is limited to the increase in the Consumer Price Index or 5%, whichever is less. For calendar year 2021, the CPI was 7.0%, the highest level in 39 years. Thus, District 65 may increase its property tax levy by the maximum 5% in its December 2022 levy.
In its September 2021 projections, the district assumed that the CPI would be 1.5% in calendar year 2021, and that the district could increase its property tax levy in December 2022 by only 1.5%. If the district increases its 2022 property tax levy by 5% as permitted by tax caps, it will be able to levy $4.2 million more in property taxes than previously assumed, Zalewski said.
The December 2022 tax levy will be collected in two installments in calendar 2023. Because of the way the installments are determined, the full impact of the 2022 tax levy will be felt in FY’24, said Zalewski.
The chart below shows the amount of property taxes projected in September 2021 and in February 2022. It shows a significant bump in property taxes in FY’24 because the district will be able to levy an additional $4.2 million in its December 2022 levy. And once the $4.2 million is added to the property tax base, it operates to increase the amount of property taxes that may be levied in each subsequent year. Thus, the property taxes in FY’25 and FY’26 are significantly higher than projected last September. (In September, there were no projections for FY’27).
While the property tax revenues projected for FY’25 and FY’26 are much higher than projected last September, the projections may end up being too low.
In the latest projections, the district is assuming that the CPI will be 1.5% in calendar year 2022. If the CPI comes in at a higher percentage, then the district would be able to raise property taxes by the higher percentage.
The business magazine Barron’s reported on Feb. 14 that the consensus estimate for 2022 CPI is 2.9%. If the CPI comes in at that level, the district could increase property taxes by about $3 million more than assumed in its latest projections. That increase would benefit FY’ 25 and each subsequent year.
Zalewski acknowledged that the 1.5% may be conservative. In explaining her choice, she said she wanted to be conservative, and she pointed out that the CPI was 4.1% in FY’07 and dropped to 0.1% in FY’08. She added that if the CPI did come in higher the district could modify its projections.
“The truth is nobody knows,” she said. “But we are being conservative and very cautious. And the good news is we have two years to recalibrate.”
While a higher CPI may help out the district, higher property taxes increase the cost of housing in Evanston and make it less affordable to live here.
Aligning staffing with a decline in student enrollments
One major item not addressed in the February projections is how to align staffing with the decrease in student enrollment.
There was an $8 million increase in salary expenses from $93.2 million in FY’21 to $101.1 million in FY’22, due in part to cover the cost of adding temporary positions made possible by federal stimulus funds, called ESSER funds.
The February projections do not show a decline in salary expenses, but an increase from the $101.1 million in FY’22 to $103.4 million in FY’23. And salary expenses are projected to increase to $117 million by FY’27.
Zalewski pointed out when the FY’22 budget was adopted that student enrollment had declined by about 1,000 students since 2018. During the same time the number of full-time employees (FTEs) at District 65 has increased.
The chart below shows the student enrollment in grades K – 8 at District 65 for FY’16 through FY’22, according to the District’s Opening School Reports.
Enrollment has declined by 1,166 students since FY’17.
The chart below shows the increase in the number of FTEs at District 65 for the years FY’16 through FY’22. During that period, the District increased FTEs from 1,122.7 to 1,235.75, or by about 113 FTEs. This does not include the increases in FY’22, which Zalewski said were temporary and funded by federal ESSER funds or grants.
The charts illustrate that student enrollment has declined by 1,166 students while the number of FTEs has increased by more than 100.
In presenting the updated projections on Feb. 14, Zalewski said, “Overall cost of salaries is projected to increase by approximately 2 percent in FY’23 and 3 percent in the following years.” She added that the projections do not build in any reductions in staffing levels.
The projected teacher salaries and benefits are shown in the chart below.
In her memo presented to the Finance Committee, Zalewksi said the salary expenses in the February projections do “not reflect any potential future savings achieved through attrition due to lower student enrollment.
“The staffing levels, although not reflected in the current projections, will be reduced in FY’23 to reflect the reduced student enrollment, which according to the District’s demographer is here to stay. The administrative team is currently working on the final staffing numbers which will determine the final number of staff for the upcoming school year.
“The required staffing levels, based on updated student enrollment, will be estimated in the spring and incorporated into the FY’23 budget.”
Reducing staffing levels to align with a declining enrollment provides an opportunity to reduce salary expenses. The amount of any reductions remains to be seen.
Student enrollment has not only declined significantly in the last few years, but it is projected to decline in the future, said Zalewski.
The Opening School Report dated January 2022 reports that there are 6,393 students enrolled in grades K-8 at District 65 in FY’ 22.
On Dec. 13, the District published projections showing that enrollment is expected to decline to 6,264, or by 129 students, in FY’26.
Charles Kofron, a demographic consultant working with the district, presented projections of enrollment in K-8 grades at the Finance Committee meeting on Feb. 14. He had a starting enrollment of 7,411 students for the 2021-2022 school year (1,018 students higher than the actual enrollment reported in the Opening School Report dated January 2022), and he gave high, mid, and low estimates of enrollment at FY’26. His estimates are: a) a high of 7,322 students; b) a mid-level of 5,796 students; and c) a low of 5,563 students.**
He said the high estimate takes out the sharper decline in student enrollment in the Covid years.
The City of Evanston has historically paid the cost of crossing guards for students walking to school. The City wants the District to pick up that cost, starting by the end of the current school year. If that cost is passed on to District 65, it is estimated that it will increase the district’s expenses by $577,500 in FY’23 and $701,954 in FY’27.
Those amounts are not built into the projected deficits reported above, but Zalewski presented a separate schedule incorporating the cost of crossing guards.
Federal COVID funding
The District received about $10.4 million in federal stimulus funds and those funds must be spent by September 2024.The District spent some of the federal funds in FY’21, and its budget for FY’22 included more than $7 million in ESSER funds. Zalewski said most of those funds will be spent in FY’22, and that approximately $1.5 million will be carried over to FY’23.
Both Zalewski and Chief Financial Officer Raphael Obafemi said the administration planned to take steps to address the projected operating deficits, including by reducing the district’s “footprint.”
Zalewski said, “Although eliminating the structural deficit completely may not be possible, the District is determined to reduce the District’s ‘footprint’ by redesigning certain services and education delivery. In addition, various cost control measures will tie expenditures to student enrollment and needs and limit expenditures that do not support student achievement.”
In prior meetings, district administrators made clear that “reducing the footprint” could include closing one or more of the District’s schools.
Zalewski said she would proposed budget reduction strategies at the next meeting of the Finance Committee.
$262 million in capital costs
While administrators are looking at ways to reduce operating deficits, including increasing property taxes, the district’s consultants Cordogan, Clark & Associates put another major issue on the table at the Feb. 14 Finance Committee meeting. The consultants presented a report showing “deficiency needs” in the district’s buildings totaling $187 million, and a total of $75 million in other capital expenditures, including $40 million for a new school in the Fifth Ward.
Board members asked a few questions about the extensive report, but did not discuss the deficiency needs of any school building, the proposed repairs or remodeling of any of the schools, or how the District could pay the costs. The Board did not discuss a new school in the Fifth Ward or its estimated cost.
* In addition to the increase due to the high CPI, CFO Obafemi said the district is now assuming that there will be new construction valued at $50 million in Evanston and the Skokie portion of District 65 each year, rather than $30 million which was the prior assumption. New construction is not subject to property tax caps in the year it is placed on the tax rolls. It provides an additional source of property tax revenues.
Zalewski added that there would be a one-time “recapture” of $1.4 million in tax refunds, half of which would be in FY’22 and the other half in FY’23. In addition, the projections now assume the collection rate of property taxes will be 98.5%, instead of 96% assumed during the pandemic.
** Kofron’s starting point of 7,411 students in FY’22 is higher than the actual K-8 enrollment of 6,393 stated in the District’s Opening School Report dated January 2022. He describes the enrollments in FY’21 and FY’22 as “Covid impacting enrollments”.
In his Geodemographic Study dated January 2022 presented to the Finance Committee on Feb. 14, 2022, Cordavan, Clark says at page 10, “It must be noted that the 2021-22 student record count was taken from August 2021 enrollment records. Another file of 2021-22 records was provided by the district which was 461 student records lower than the total counts in the August file. Comparing the total student record counts from the two student record data sets and, after consulting with the district on the differences in totals not only for the 2021-22 school year but also the goodness of fit of the 2021-22 student records from the August data set compared to Illinois State Board of Education (ISBE) enrollment totals, it was decided (jointly) to use the first dataset in its entirety (i.e., records obtained in August, 2021).”