District 65 tentative FY’23 budget puts $153.3 million to operating expenses, plus $20.7 million for Fifth Ward school

At the Aug. 8 meeting of District 65’s Finance Committee, Business Manager Kathy Zalewski reported that the district finished its fiscal year ending June 30, 2022 (FY’22) with a surplus of almost $6 million, about $5.7 million more than the surplus budgeted for the year.

Zalewski also presented a tentative budget for FY’23 showing an operating surplus of $283,997. She said the district was able to balance the budget for FY’23 primarily due to a reduction of 25 teaching positions that were tied to a decrease in student enrollment. Nonetheless, the district is adding 46.3 new positions.

Updated financial projections show a small surplus in FY’24, and then deficits growing to $13.4 million by FY’28.

She said the budget for FY’23 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 diverse quality staff that is representative of our student body.
• “Commitment to a system of accountability throughout the District, and
• “Maintaining long-term financial sustainability.”

Closing out FY’22

The district is projecting to end FY’22 with a surplus of about $5.7 million more than the surplus budgeted for the year.

Over all, operating revenues were about $3.3 million higher in FY’22 than budgeted. Property tax revenues came in about $2.2 million higher than budgeted. Zalewski said the district received “a large chunk payment in June, which is very unusual and unexpected.”

Zalewski also said the corporate property replacement tax was about $3.9 million higher than budgeted due to legislative changes affecting corporate taxpayers and continued improvement in economic conditions.

“During my tenure, we never received more than $2.5 million … this is the money that we did not expect,” she said.

Both state and federal aid, however, were about $1 million lower than budgeted.  

On the expense side, salaries and benefits were $4.8 million lower than budgeted due to staff shortages during the year and vacancies that were not filled, said Zalewski.

The cost of purchased services, though, was about $4.8 million over budget due to increased expenditures for legal services, temporary help/agency, transportation services, consulting and building security.

Zalewski said the surplus in FY’22 will be added to the Referendum Reserve. That reserve was set up to hold surplus revenues due to the referendum passed by residents in April 2017.

The tentative budget for FY’23

The tentative budget for FY’23 projects that the district will operate at a surplus of $283,997.

Operating revenues are pegged at $153.6 million, which is about $1.1 million less than the actual revenues for FY’22.

Operating expenses are estimated to be $153.3 million, about $4.6 million more than FY’22.

Major drivers of tentative operating budget

Property Taxes.  Property tax revenues for operations are budgeted at $118.7 million, about $1.4 million more than last year. Property tax revenues account for 77% 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%, Zalewski said the district was able to levy a tax on new property that is valued at about $50 million.

Some other major changes from last year are that revenues from the corporate property replacement tax are expected to decline by about $2.6 million, and federal funding is expected to decline by about $1.3 million.

Superintendent Devon Horton said the district was successful in obtaining a number of grants totaling about $1 million. He mentioned grants for the teacher residency program, a grant to help with the principal pipeline and developing leadership within the district and a grant for mental health and social emotional support.

Salaries. Salaries for FY’23 are budgeted at $103.9 million, about $6.2 million more than the actual salaries for FY’ 22, or a 6% increase. Benefits are budgeted at $18.2 million, about $2.2 million more than the actuals for FY’22, a 14% increase. Salaries and benefits account for 80% of the district’s operating expenses.

Student enrollment is projected to decline by another 58 students, following a decline of 985 students in the last three years. A total of 26 teaching positions will be eliminated in FY’23 and generate savings of $1,920,000.  But, 46.3 new positions will be added at a total cost of $2,944,500.

New Positions: Of the 46.3 new positions:

• Zalewski said 18 relate to safety: a Manager and an Assistant Manager of Prevention and Special Response, and 16 people serving as school concierges.
• There are 10.7 new teaching positions: 3.5 English as a second language teachers, and 7.2 special education teachers.
• There is one new occupational physical therapist.
• Four FACE liaisons.
• The balance of the positions are a Director of Schools, two Assistant Principals (one of Haven Middle School and one of the Dual Language Programs), a Diverse Learning Coordinator, a Multilingual Coordinator, a Manager of Temporary Staffing, a Temporary Staffing Coordinator and one receptionist for the district.

Horton said 90% of the new positions were added for safety or equity. He said the additions show that the district “is willing to do the work that we’ve committed to as a school district and as a community. These are just some of the things that we’ve done around making sure that we can address safety and equity.”

Zalewski said the cost of the new positions was more than offset by cuts in 26 teaching positions and the elimination of two programs.

Eliminating Positions and Programs: The budget documents reflect that 25 classroom teachers will be eliminated due to a reduction in student enrollment, and that a homeless MV Liaison position will be eliminated. These cuts in staff were made through natural attrition, said Zalewski. No people were terminated to effectuate these cuts, said Horton. These cuts will reduce expenses by $1.92 million in FY’23.

In addition, Zalewski said the district was eliminating ESS, the firm which provided substitute teachers on a contract basis. She said the district would save $1 million on a net basis by eliminating ESS and bringing the management and employment of substitute teachers in-house.

In addition, Zalewski said Phoenix Security was eliminated with a savings of $400,000. Phoenix provided executive protection to Horton in FY’22, and those services stopped in June, Chief Financial Officer Raphael Obafemi told the RoundTable.

Taking into account the cost of the 46.3 new positions, the savings due to the elimination of 26 positions and the elimination of ESS and Phoenix as service providers, and the securing of grant funding of $125,000, there is a total net savings of $500,500, said Zalewski.

A table included in Zaleski’s budget memo summarizes the budget.

Salaries may also be reduced due to the retirement of 16 employees in FY’22.  The district may replace a retiring teacher with a less experienced teacher at a lower salary, resulting in a cost savings of about $40,000 per retired teacher, Zalewski told the RoundTable. This could yield savings of $600,000.

The salary expense builds in the increases called for under contracts with employee groups. In addition, 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, said Zalewski.

Some other major changes on the expense side are the cost of purchased services, which are pegged at $17.7 million, down 20% from last year’s actual expenses. One reason for the decline is that the district will receive less in federal Elementary and Secondary School Emergency Relief Fund or ESSER funds than last year, which were emergency relief funds to mitigate the effects of the COVID-19 pandemic.

Purchased services are also going down because, as noted above, contracts with third parties to provide substitute teachers and to provide executive protection will be eliminated. The cost of substitute teachers will show up next year as a salary expense.

Another major expense category, supplies and materials, is pegged at $6.8 million, down 11% from last year.

Staff reductions/student enrollment  

The tentative budget for FY’23 eliminates 25 classroom teachers but adds 7.2 special education teachers and 3.5 ESL teachers for a net reduction of 14.3 teachers. The reduction in classroom teachers is the first time since at least FY’18 the district has specifically reduced the number of teachers due to the decline in student enrollment, said Zalewski.

Last year’s budget documents reflected that the district had 651 teachers in FY’22. If the district reduces the teacher workforce by 14.3 teachers, the number of teachers in FY’23 would be 636.7 full time equivalent teachers. Those teachers would be serving a projected student enrollment of 6,439 students.

In FY’18, the district had 625 teachers serving 7,482 students. So, in FY’18, the district had 10 fewer teachers serving 1,043 more students than will be the case in FY’23.

Viewed another way, since FY’18, the total workforce of District 65 has gone up by more than 100 FTEs, while the student population has dropped by just under 1,000 students.

The chart below illustrates the trends for FY’18 through FY’22. The student enrollment is taken from a memo prepared by Sarita Smith, Manager of Student Assignments, to the School Board in December 2021. The number of FTEs is taken from District 65 budget documents. FY’23 has not been included.

Funding the Fifth Ward school

On March 14, the School Board approved establishing a new school in the Fifth Ward. The proposed site is Foster Field, located along Simpson Street between Dewey and Ashland Avenues.

In a letter to the community dated May 16, Horton said the cost of the new school is estimated at $40 million, to be financed through the issuance of “lease certificates.”

Lease certificates, like bonds, are a form of debt. Once the building is complete, 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.

These savings will not be realized until after the new school is opened.  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 $5.1 million after deducting the state’s grant for transportation. Once the new school is open, Obafemi estimates 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.

In the meantime, in FY’23, the district plans to pay $2 million in interest on the lease certificates. That payment is due in December 2022.

In addition, the district’s tentative budget calls for payments of $18.7 million for initial soil testing, architectural drawings, engineering, construction costs and furniture. The proceeds of the sale of the lease certificates will be used to cover these costs.

The interest payment is not reflected in the district’s budget for its operating funds, but is reflected in a Debt Service Fund. Obafemi told the RoundTable that this and 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 revenues.

Financial projections

Property tax caps limit the amount by which District 65 may increase property taxes to the lesser of 5% or the increase in the CPI. The increase in the CPI for calendar year 2021 was 7%.

The district’s property tax levy in December 2022 will be limited to 5%, and that levy will be felt in the district’s FY’24 year. The district’s updated financial projections assume that property taxes will rise by 5.6% in FY’24.

The CPI for the 12 months ending July 31 was 8.5%, and the CPI for calendar year 2022 might exceed 5%. If so, the increase in the district’s property tax levy in December 2023 would be limited to 5%.

The district’s financial projections, though, assume the property tax levy will increase by only 1.5% for its December 2013 levy and subsequent years.

Zalewski said people have asked why the district is assuming a low CPI. She said, “The truth is, we don’t know, nobody has a crystal ball. And we have to be conservative in our assumptions.”

The School Board will have authority to significantly increase property taxes in its December 2022 levy, and it may also have authority to do so in its December 2023 levy. A 1% increase in property taxes means an extra $1.2 million in property taxes, and because of the way property taxes operate, an increase in one year carries through to each subsequent year. Whether the board will increase property taxes to the full extent permitted is unknown.

Finance Committee Chair Joey Hailpern said a higher CPI may benefit employees if their salary increases are tied to the CPI, and it may be good for the district’s budget, but “it is also hard for our community to bear the burden of that. So, it’s our responsibility to care for that money while we have it, to make it last as long as possible so that we don’t go asking for more money in a manner that’s irresponsible.”

Using the assumption that the CPI will be 1.5% in 2022 and subsequent years, the district is projecting a surplus of $300,000 in FY’24, and then deficits of $2.4 million in FY’25, $6.3 million in FY’26, $10 million in FY’27, and $13.4 million in FY’28. The chart below illustrates the trend.

Obafemi said these projections assume no budget reduction strategies will be employed. He said, though, “We always have to look at our expenditures and look for ways to right size. …  We will do whatever is necessary to make sure that revenues balance out with expenditures. I will never have deficit spending.”

Zalewski and Obafemi both said the district has exercised prudent financial stewardship. In the last two years, Zalewski said the district has added $6.9 million to the Referendum Reserves. As of June 30, 2022, the balance in the Referendum Reserve is about $37 million, she said.

As part of the April 2017 referendum, the district planned to deposit surpluses generated as a result of the referendum in a Referendum Fund for four years and then use the surpluses to balance budgets for the next four years, up through FY’25. The plan contemplated that at the end of FY’22, the Referendum Fund would have a balance of $23.3 million. The District currently has $13.7 million more in the fund than initially contemplated.

Obafemi said, “We can say with certainty, we have a philosophy of fiscal conservatism in District 65. We will not veer from that. We’ll continue to do that because we appreciate the extra tax money that the residents of Evanston sent us during the referendum. And we also appreciate the trust that the community placed in us. … We take that very seriously.”

Horton raised the specter of closing an existing school, something that has been mentioned from time to time during the last year. “I would just like to add two quick things with the master facility plan being completed and the Fifth Ward school being approved, now there are opportunities for us to really look at the square footage that we currently operate in.

“I don’t have a targeted school or space really to speak of.  But I will say when we look at our numbers and our enrollment, we have ample opportunity, as we think about ways to how we’re going to address the master facility planning.

He referred to a parent advisory group and said, “One of the key topics will be about massive facility planning and getting ideas from members in the community and families, seeing what we can stomach you know, and some other ideas that generate that. But those are all part of Phase Three.

“It’s really about the heavy lifting now around how do we make, create better spaces? Do we reduce square footage, and then just finding our sweet spot for you know, right size fitting our district.”