At the Sept. 14 meeting of School District 65’s Finance Committee, Business Manager Kathy Zalewski presented a final budget for the year ending June 30, 2023 (FY’23). The budget shows operating revenues of $157.2 million, operating expenses of $156.7 million, and a surplus of $574,886.
A number of changes were made to the tentative budget which Zalewski had previously presented to the Finance Committee on Aug. 8. Since then, the budgeted revenues increased by about $3.7 million, primarily due to an increase in revenues from the Corporate Personal Property Replacement Tax (CPRT) and federal aid. Expenses were increased by about $3.4 million, primarily to pay additional amounts for salaries and purchased services. All told, the changes increased the operating surplus by $290,889.
Zalewski said the district was able to balance the budget for FY’23 primarily due to a reduction of 25 classroom teaching positions. Nonetheless, the district is adding 46.3 new positions, including 7.2 special education teachers and 3.5 English as a second language teachers.
Updated financial projections show a surplus of $1.5 million in FY’24, and then deficits growing to $13.4 million by FY’28.
Major drivers of the budget
Property Taxes. Property tax revenues for operations are budgeted at $119 million, about $1.72 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 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 that is valued at about $50 million.
Some other major changes from last year are that revenues from the CPRT are expected to decline by about $1.5 million, and federal funding is expected to increase by about $700,000.
Last month, 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 expected to jump to $105.3 million, about $7.5 million more than the actual salaries for FY’ 22, or an 8% increase. Benefits are budgeted at $18.6 million, about $2.6 million more than the actuals for FY’22, a 16% increase. Salaries and benefits account for 79% of the district’s operating expenses.
Zalewski said a total of 25 classroom teaching positions will be eliminated in FY’23 and generate savings of $1,875,000. These cuts in staff were made through natural attrition, said Zalewski.
She said the cuts were tied to a decrease in student enrollment, which declined by 985 students in the last three years, and was projected to decline by 58 students this year. During those three years, the district added 18 teaching positions and 77 staff positions. The cuts for this year do not bring staffing ratios in line with where they were four years ago.
While the district is cutting 25 teaching positions, it is adding 46.3 new positions this year. The 46.3 new positions will be added at a total cost of $2,944,500.
The positions fall into the following categories:
- Zalewski said 18 of the new positions 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.
- There are four FACE liaisons, or Family and Community Engagement 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.
Horton said that 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.”
A table below, which was included in Zalewski’s tentative budget memo, summarizes the additions and reductions in staff.
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.
Salary expenses may 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 $640,000.
The district has not yet provided data showing the total number of employees by position (e.g., regular teachers, principals, assistant superintendents, managers, coaches, librarians, social workers, custodians, administrative assistants, etc.), but it has provided a document showing expenditures by categories.
That data shows that the total expense for “teachers regular,” “teachers special education,” “interventionists” and “track movement” decreased from $55.6 million in FY’22 to $55.4 million in the budget for FY’23. So the salary expense for those major employee categories went down for FY’23. That means that the increase of $7.5 million in salaries in FY’23 is attributable to other categories.
Some other major changes on the expense side are the cost of purchased services, which are pegged at $19.2 million, down 14% from last year’s actual expenses.
Zalewski said the district was eliminating ESS, the company which provided substitute teachers on a contract basis, which would save $1 million on a net basis by eliminating ESS and bringing the management and employment of substitute teachers in-house. The cost of substitute teachers will show up next year as a salary expense.
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, Raphael Obafemi, Chief Financial Officer, told the RoundTable.
Another major expense category, supplies and materials, is pegged at $7 million, down 8% from last year.
Maintaining referendum reserves
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, then use the surpluses to balance budgets for the next four years, 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.
Funding of 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.
The cost of the new school, estimated at $40 million, will 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.
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 total of these payments is $20.7 million in FY’23.
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.
On Sept. 14, Zalewski presented updated financial projections. The projections show a surplus of $1.5 million for 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 projections are illustrated in the chart below.
CFO Obafemi said in prior meetings that 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.”
One major factor impacting the projections is what the increase in the CPI will be this year and in subsequent years. Property tax caps limit the amount by which District 65 may increase property taxes to the lessor 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 Aug. 31, 2022 was about 8.3%, and the CPI for calendar year 2022 is on track to exceed 5%. If so, the District 65 School Board could increase its property tax levy by 5% in December 2023. The district’s financial projections, though, assume that the board will increase the property tax levy by only 1.5% in its December 2013 levy and subsequent years.
What the CPI will be for 2022 and subsequent years is unknown, and whether the board will increase property taxes to the full extent permitted is also unknown. A 1.0% increase in property taxes, though, means an extra $1.1 million in property tax revenues, said Zalewski, and because of the way property taxes operate, an increase in one year carries through to each subsequent year.
Other unknowns include what the compensation will be under new contracts negotiated with employee groups, whether student enrollment will decrease of increase, whether one or more schools will be closed, whether the state legislature will freeze property taxes or shift the cost of funding teacher pensions to school districts, and other factors.
Finance Committee Chair Joey Hailpern said,” I know times are tight for our community, right when the CPI factor is high. That means things cost a lot for people who live here. And the least we can do with that is trying to make the school communities as awesome for the kids as it can be.”
The School Board is expected to vote on the final budget at its meeting scheduled for Sept. 19.