At the June 6 meeting of District 65’s Finance Committee, Kathy Zalewski, Business Manager, presented a report estimating how the District will end its current fiscal year on June 30, 2022 (FY’22), as well as a draft tentative budget for the 2022-2023 school year (FY’23). Zalewski also provided information on expenses for the new school in the Fifth Ward.
The District is projecting to close out FY’22 with a surplus of $675,822, which is about $373,300 more than the surplus budgeted for the year.
For FY’23, the District is projecting it will operate at a surplus of $203,748. Zalewski said the District was able to balance the budget for FY’23 primarily due to a reduction of 23 teaching positions that were tied to a decrease in student enrollment.
Zalewski said the pandemic has put pressure on the District’s resources, and that the federal pandemic relief Elementary and Secondary Education Emergency Relief Fund (ESSER) helped, but did not fully address all the financial challenges brought on by the pandemic. “Some of the pandemic related expenditures, especially those related to learning loss and social emotional health of students will continue well into the foreseeable future,” she said.
She said next year’s budget is aligned with the District’s priorities:
- “Improving the instructional core so that all students and especially students of color have access to common core aligned grade level standards,
- “Building the organizational culture grounded in collaboration, trust and engagement of staff and community,
- “Improving instructional and organizational culture which will include continuing the efforts on culturally relevant teaching, equity learning and restorative practices to disrupt predictability of student performance,
- “Improving equity,
- “Attracting and retaining quality staff,
- “Commitment to accountability, and
- “Maintaining long-term financial sustainability.”
Closing out FY’22
While the District is projecting to end FY’22 with a surplus of $373,300 more than budgeted, there are significant swings in some of the revenues and expenses that were budgeted for the year.
Overall, operating revenues are now projected to be about $2.3 million higher in FY’22 than initially budgeted. Some big-ticket items such as property taxes are expected to be about $1.4 million higher than budgeted due to “additional scavenger revenues as well as additional property tax refunds.” The corporate personal property replacement tax is expected to be about $2.3 million higher than budgeted due to legislative changes affecting corporate taxpayers and continued improvement in economic conditions. Federal Aid is expected to come in about $850,000 lower than budgeted due in part to delayed billings for Medicaid revenues.
On the expense side, salaries and benefits are expected to be about $1.3 million below budget due to staff shortages during the year and vacancies. The cost of purchased services, though, is expected to be about $4.7 million over budget due to increased expenditures for legal services, temporary help/agency, transportation services, consulting, and building security, said Zalewski. Expenses are coming in lower in other areas.
The surplus for FY’22 will be added to the Referendum Reserve, said Zalewski.
Tentative budget for FY’23
The draft tentative budget for FY’23 projects that the District will operate at a surplus of $203,748.
Operating revenues are projected to be $152 million, which is about $1.6 million less than the actual revenues estimated for FY’22.
Operating expenses are expected to be $151.8 million, about $1.2 million less than FY’22.
A major reason why revenues and expenses are expected to be lower in FY’23 than FY’22 is that federal ESSER funds are expected to be about $4.1 million lower in FY’23 than in FY’22.
Major drivers for tentative budget
Property Taxes. Property tax revenues for operations are pegged at $118.1 million, about $1.8 million more than last year. Property tax revenues account for 78% of the District’s operating revenues.
School Districts are subject to property tax caps. They may increase property taxes by the lesser of the Consumer Price Index or 5%, whichever is lower. In calendar year 2020, the CPI was 1.4%. Because of the way the CPI is applied and the way property tax installments are calculated, that CPI impacts District 65’s property tax revenues in FY’23. With some exceptions, it caps the District’s increase in property taxes in FY’23 to 1.4%. In addition to the 1.4% increase permitted under tax caps, Zalewski said the District was able to levy a tax on new property with a valuation of about $50 million, and to recapture some refund amounts.
Salaries. Salaries for FY’23 are budgeted at $101.4 million, about $2.2 million more than the actual salaries estimated for FY’ 22. Benefits are budgeted at $18.7 million, about $700,000 more than the actuals estimated for FY’22. Salaries and benefits account for 79% of the District’s operating expenses.
Zalewski said the increase in salaries reflects the latest employee salary agreements. Last year, there was a salary freeze for administrators and certain miscellaneous staff; this year administrators and certain other staff are scheduled to receive a 3% increase.
The cost of salaries reflects the savings due to a reduction of 23 teaching positions. These reductions will be made through natural attritions and declining student enrollment, said Zalewski. She said in February that the cost savings through these reductions will be about $1.6 million.
Zalewski said the number of teacher reductions may vary because the number of special education teachers is determined by students’ individual education programs, and those are not yet set; and there may be other changes.
In addition, 15 certified staff are retiring in FY’22, which will result in savings. The District may replace a retiring teacher with a less experienced teacher at a lower salary, resulting in a cost savings. Zalewski said the savings will be primarily realized in FY’24 and beyond.
ESSER Funds. The federal government has provided District 65 with ESSER funding in the last several years. This funding was made to assist school districts throughout the nation to deal with COVID-19 and learning loss due to COVID-19.
In FY’22, the District budgeted $7.4 million in ESSER funding. For the coming school year, FY’23, Zalewski said the District is budgeting about $3.3 million, or $4.1 million less than in FY’22.
The decline in District 65’s budgeted operating revenues and expenses for this year is attributable in large part to the reduction in ESSER funding.
Assuming the number of teachers is reduced by about 23, the reduction would bring the number of teachers down to about the level they were in FY’18. But in FY’18, the teachers were serving about 1,000 more students than the District is projected to have in FY’23.
Zalewski’s budgeting memo relies on a Dec. 13, 2021, memo presented by Sarita Smith, Manager of Student Assignments, to the School Board in December 2021. Smith’s memo provides both actual and projected student enrollment numbers.
According to Smith’s memo, the District’s actual K-8 student enrollment (excluding Park and Rice schools) has declined from 7,482 in FY’18 to 6,497 in FY’22, or a decrease of 985 students in four years. During the same time period, according to the District’s budget documents, the number of full-time employees has increased by 97, and the number of teachers has increased by 26. The chart below illustrates the changes, on a year-by-year basis.
Smith’s memo also projects that student enrollment in the K-8 grades (excluding Park and Rice schools) will decrease by an additional 58 students from 6,497 in FY’22 to 6,439 for FY’23.
Thus, in FY’18, about 625 teachers were serving 7,482 students. In FY’23, about 625 teachers will be serving about 6,439 students.
The RoundTable asked the District’s Chief Financial Officer Raphael Obafemi in February why the District was reducing staff by only about 23 classroom positions to align with the decline in student enrollment and why there are so many more staff members per student than four years ago.
“What we’re finding out, especially with the pandemic, is a lot of our students need more support than they did before,” said Obafemi. “And the fact that we have kids who have been out of school for a whole year, more of our students have emotional needs than they did before the pandemic. For example, this year, for the first time, we hired counselors. We’ve never had counselors before. And those counselors are working with our kids. So even though I hear you, the enrollment is going down, the level of needs that student have seems to be going up. And we attribute a big chunk of that to emotional issues that have been visited upon our children by the pandemic. So, we can’t just apply a ratio, and just keep it like that. Remember, staff assignment is driven by the needs that exists among our students.
“Just to be clear,” Obafemi continued, “we would like to reduce more staff. But at the core of what we do, since we’re in the business of education, we want to make sure that a) our students get the support they need to be able to achieve their ultimate potential, and b) to be able to have the level of growth and achievement that they need to be successful. So, we’d like to reduce more staff, but we have to take into account the increased need that seems to be around now because of the pandemic and experiences in the last few years.”
Funding Fifth Ward school
On March 14, the School Board approved establishing a new school in the Fifth Ward. In a letter to the community dated May 16, Superintendent Devon Horton said the cost of the new school is estimated at $40 million, and that the cost will be financed through the issuance of “lease certificates.” Lease certificates, like bonds, are a form of debt. Dr. Horton said the District will pay $3.2 million annually over 20 years to pay off the lease certificates. The District plans to use the savings from reduced bus transportation costs to fund the payments.
The savings resulting from reduced busing transportation costs may be realized once the new school is opened. Dr. Horton explained that once the new school is built, “Over 500 students will no longer have to be bused to other schools which will provide significant savings in annual transportation costs. These savings will be repurposed and used towards largely making the necessary debt service payments.”
For FY’23, the District is tentatively budgeting that transportation will cost about $4.9 million after deducting the state’s grant for transportation.
Once the new school is open, Obafemi estimates that the District will be able to reduce transportation costs by at least $3.2 million per year to cover the cost of paying the lease certificates.
It is anticipated that the new school will be completed by the Spring of 2025.
The District issued a total of $38,315,000 in lease certificates which are due between Dec. 1, 2024 through Dec. 1, 2041. The offering memorandum reflects that the interest rate stated on the certificates is 5.0%, and Obafemi told the RoundTable that the stated interest rate on the coupons is 5.0%.
Because the 5% interest rate was higher than the general market interest rate at the time of the issuance, the public was willing to pay more for the lease certificates than their face amount, or in other words, to pay a premium. The total premium paid for the lease certificates was about $6.3 million. Thus, the District received a total of about $44.6 million through the issuance of the lease certificates (before subtracting the fees and costs of to issue the lease certificates). Obafemi confirmed this.
Obafemi added that the premium paid for the certificates will enable the District to pay interest on the lease certificates during the period the new school was being constructed and during the time the District was not yet benefiting from a reduction in the cost of busing students.
Zalewski’s budget memo dated May 26, 2022 says the District plans to pay $2 million of lease certificate interest in December 2022. This amount is included in the District’s summary for the Debt Service Fund. Obafemi said that future payments of the lease certificates will be processed through the Debt Service Fund, but he added that the lease certificates must be paid from what are generally viewed as operating funds.
In addition to this payment, Zalewski says, “The FY’23 budget includes funds for initial soil testing, architectural drawings, engineering, construction cost and furniture. The FY’23 construction budget will be equal to $18.7 million.”
The CPI for calendar year 2021 was 7%. The District’s property tax levy in December 2022 will thus be limited to 5%, and that levy will be felt in the District’s FY’24 year.
Finance Committee Chair Joey Hailpern said, “I do note while a high CPI is good for the school budget, it is a strain on our families. And it’s something that we have to be mindful of. It’s a strain on the homeowners who aren’t our District 65 families, but our community. And it’s important that we are continuing to be good stewards of the money that comes to the School District, especially during times where what is good for us is stressful for them.
“We take that responsibility very seriously as an administration,” said Obafemi. “It’s really an honor to be a fiduciary for committee members. And we take that very seriously.”
The School Board will have to decide in December 2022 whether to raise property taxes by the full 5% permitted due to the high CPI in 2021. With a high CPI continuing in 2022, the School Board may face a similar decision in December 2023.
The Finance Committee did not discuss any budget reduction strategies that have been put on the table, including whether to close one or more schools in light of the projected declines in student enrollment.
In addition, the Committee did not discuss potential capital improvements to the schools.
Administrators are scheduled to present a tentative budget to the Finance Committee on Aug. 15 and a final budget to the School Board on Sept. 27.