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September 22, 2019

8/21/2019 1:34:00 PM
School District 65 Projections Show Balanced Budgets Through FY'25; Structural Deficits Remain
By Larry Gavin


At the Aug. 12 meeting of the Finance Committee of the District 65 School Board, Kathy Zalewski, the District’s Business Manager, presented financial projections for the District’s next six school years. These projections incorporate the new salary structure provided in the five-year agreements with the District Educators Council (DEC, the teachers union) and the District Evanston Teacher Assistant Association that were unanimously approved by the School Board on June 10 of this year.

While the projections rest on many assumptions, they show the District is on track to balancing its budget through the next six school years ending June 30, 2025 (FY’25), and to have a surplus at the end of that year which can go toward reducing or eliminating a potential deficit in FY’26.

The projections also show that the new five-year contracts entered into with the teachers’ union and the teacher assistants’ association do not solve the structural deficit that the District has faced for many years. The District may thus be facing some budget issues in FY’26, and more significant issues in subsequent years.

The Referendum Plan

The projections need to be considered in the context of the Referendum approved by voters in April 2017. In the Referendum, voters approved an additional $14.5 million in funding for operations each calendar year. Under the Referendum Plan, District officials said they would set aside surpluses generated in FY’18 through FY’21 in a Referendum reserve, and then use the amounts set aside to balance projected operating deficits in FY’22 to FY’25. The commitment made during the months preceding the Referendum was to balance the District’s budgets for eight years, through FY’25.

The District has already set aside or is projecting that it will set aside the following amounts in the Referendum Reserve for the years indicated: $18.5 million in FY’18; $6.6 million in FY’19; $4.6 million in FY’20; and $1.8 million in FY’ 21, for a total of $31.5 million.

The District plans to use the amounts held in the Referendum Reserve to balance projected operating deficits of $1.0 million in FY’22; $3.5 million in FY’23; $ 6.1 million in FY’24; and $9.1 million in FY’25, or a total of about $19.7 million.

At the end of FY’25, there will be about $11.8 million available to cover a possible operating deficit in FY’26.

The District has not yet issued projections for FY’26, but if the trend continues, the operating deficit in FY’26 would be about $11 million (assuming a $1 million contribution would no longer be made to the fund balance), and there would be about $11.8 million left in the Referendum Reserve to go toward balancing that deficit. There would be very little left to cover operating deficits in subsequent years.

The District may thus be able to use the Referendum funds to balance it budgets for nine years after the Referendum, rather than just eight committed to as part of the Referendum. 

The accompanying chart illustrates the deficits projected by the District for FY’22 through FY’25, and it shows a potential deficit of $11 million for FY’26 based on the trend. The chart also shows the projected applications of the Referendum Reserve to balance the budgets, which is projected to essentially run out after FY’26.

The Structural Deficit

The District has been facing a structural deficit for many years, where expenses  increase at a faster rate than revenues. This has generally been due to salaries increasing at a rate faster than the increases permitted under property tax caps, which is the lesser of the Consumer Price Index (CPI) or 5%.

District officials have told the RoundTable that the new five-year contracts with DEC and the teacher assistants association do not solve the structural deficit.

Ms. Zalewski said in one of the budget memos presented to the Board on Aug. 19 that “the District has not been able to resolve the problem of the structural deficit, which occurs when expenditures outpace revenues on an ongoing basis.”

The projections illustrate this problem by comparing the projected rate of growth of operating revenues versus the projected growth of operating expenses for the next six years. The table below summarizes the growth rates for the years listed.

Analyzing the impact of the structural deficit in terms of dollars, the District is projecting that it will operate at deficits of about $1 million in FY’22, $3.5 million in FY’23, $6.1 million in FY’24, and $9.1 million in FY’25. (These deficits are after $1 million is contributed each year to the fund balance as promised in the Referendum.)

The District will only be able to balance its budgets in those years by applying the surplus built up in the Referendum Funds. Unless cuts are made, the surplus will likely be used up in FY’26, and the District will face significant deficits in subsequent years. 

Former Superintendent Paul Goren told the RoundTable in an interview on June 21 that the five-year contracts and the surplus in the Referendum Funds provide the District with time “to be able to think about what sort of restructuring needs to occur.” 

Dr. Goren said the community can think about increasing class sizes and changing the way the District deploys support staff. While he said he was not sure if it would yield any cost savings, he said the District could consider restructuring schools in a different grade-level configuration. He said the District could also consider closing a school, but added, “This also has to be juxtaposed with the great desire to provide a school for kids who live in the Fifth Ward. I think that also has to be put on the table.”

“There is going to be some important and tough work ahead over the next five, six, seven years to be able to think about how the District can sustain … We’re in good shape right now, but we’re not at a point where we’ve solved the issue.

“All of us who live in Evanston have to be keenly focused on how we maintain our schools, but how do we maintain them in a slightly different way than we are doing now.”

One of the FY’20 budget memos says, “The administration is committed to reduce the structural deficit as well as annual operational deficits so all future annual budgets are balanced without the use of referendum reserves.”

This may be challenging to accomplish because property tax revenues, which account for 78% of the District’s revenues, are subject to property tax caps; and teacher and teacher assistants salaries and benefits, which account for a significant percentage of the District’s total operating expenses, are locked in for the next five years.

At the Aug. 12 Finance Committee meeting, Finance Committee Chair Joey Hailpern asked if the Committee should begin discussions about how to address the structural deficit this coming year. Assistant Superintendent Stacy Beardsley said it may make sense to wait until a new Superintendent was in place to begin those discussions.

In the past few years the District has been attempting to cut costs through zero-based budgeting for non-personnel expenditures, renegotiating vendor contracts, beginning to implement a priority/equity budgeting model, offering retirement incentives and other measures.




Assumptions Used in the Projections

There are several key assumptions that shape the projections. The CPI limits the amount the District may increase property taxes, which account for 79% of the District’s revenues. The projections assume that the CPI will be 1.5% in 2019 and in subsequent years. 

The actual property tax revenues that the District will receive may be higher or lower than projected depending on the actual CPI.

Another key assumption relates to total increases to salaries, which account for 68% of total operating expenses. In making the projections, the District used the salary structure agreed to with DEC and the Teacher Assistants Association for the next five years (i.e., through FY’24), and assume that salary increases will increase at the rate of 3% in FY’25.

While a new five-year contract is in place, there are still some unknowns that may impact the total expense for teacher salaries. In the last three years of the contract, the increase in base salary may be impacted by a minimum or maximum increase provided for in the contract. Salary increases also depend on step and track increases. In general terms, if the overall workforce has a higher number of teachers in higher steps and tracks than in the prior year, it would be a factor that would tend to increase total salary costs. Conversely, if there were more teachers in lower steps and tracks than in a prior year, it would be a factor that would tend to decrease total salary costs. 

Another expense item which is taking on increased significance is employee benefits (including health care costs), which account for 11% of total operating expenses in FY’19. The projections assume that benefits will increase to 13% of total operating expenses by FY’25.

In addition, there are still some significant threats from Springfield that might affect the District. The legislature has been considering shifting the cost of funding teacher pensions to school districts. The District’s projections build in a cost of $300,000 in FY’21, growing to $1.2 million in the next four years. If there is a cost shift, it could be larger than assumed.

The State is also considering whether to impose a property tax freeze in tandem with the effort to amend Illinois’ Constitution to allow higher tax rates on higher income levels. A property tax freeze would have an adverse impact on the District’s financial position.







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