Report to the Hall Board of Education on the Financial Health of the District
December 2009
by Mike Struna
January 03, 2010
THE STATE OF HALL HIGH SCHOOL FINANCIAL HEALTH
DECEMBER, 2009
Essential Facts to Know
- The ISBE Financial Profile system ranks Hall High School as under “Financial Review”.
- At the start of the FY2010 fiscal year, the District had a fund balance of 1.7 million dollars with a balance in the Education Fund of $771,440 including 1 million dollars that was transferred from working cash to keep the Education Fund in the black.
- The District will be paying back 4.8 million dollars in bonds through the year 2017.
- The District is levying the maximum amount allowable with a tax rate higher in comparison to most high school districts in the area.
- The District’s largest revenue source (local property tax) is increasing at the lowest rate since 2004.
- The District’s second largest revenue source (general state aid) is decreasing due to declining student enrollment.
- The District’s third largest revenue source (state categorical grants) is declining due to revenue deficits at the state level.
- The District’s fourth largest revenue source (corporate personal property replacement tax) declined in FY2010 and will most likely decline again in FY2011.
- The District’s two largest expenditures (salaries and benefits) are increasing for FY2011. Salaries are increasing by 3.5% and health care benefits increasing by 14%.
- The District has one of the highest operational expenditures per student for high school districts in North Central Illinois.
A) ISBE Financial Profile System
The Illinois State Board of Education conducts annual financial rankings of all public school districts in Illinois. The ranking system analyzes five financial indicators ranked 1 to 4:
- fund balance to revenue ratio
- expenditure to revenue ratio
- days cash on hand
- percent of short-term borrowing
- percent of long-term debt
The profile system then assigns a total score with 4 being best and 1 being worse.
The profile system also assigns a total ranking based on this scale:
4.00-3.54…..Financial recognition
3.53-3.08…..Financial review
3.07-2.62…..Financial early warning
2.62-1.00…..Financial watch
For the fiscal year 2009, Hall High School earned the ranking of 3.25 which is “financial review”
This designation indicates that Hall High school needs to improve its’ financial health especially in the areas of cash on hand and percent of long-term debt. In the area of “days cash on hand”, the District falls in category 2 “less than 90 day to at least 30 days.” This cash on hand data is a major concern. To illustrate the point, during July of 2008 and July of 2009, the District had enough cash on hand to pay two payrolls in July, but we did not have enough cash on hand to pay the first August payroll. Fortunately the District received the first property tax revenue during the last week of July. This illustrates the fact that the District is at financial risk.
The District’s long-term debt is also considered a category 2 risk. Although our bonding capacity is 8.120 million dollars, our current debt is 4.285 million dollars which is a ratio that ISBE considers a risk.
In the areas of fund balance to revenue and expenditure to revenue ratio, the District receives high marks, but the District’s fund balances include a little over 1 million dollars of borrowed money. Without the borrowed money, our fund balance ratio would be marked in a lower category and be considered at risk.
In summary, the District’s financial health is at risk and has been bolstered by borrowed money in order to keep it off the Financial Watch List.
B) Fund Balances
The District’s fund balances at the beginning of the fiscal year 2010 reflect a total balance of 1.7 million dollars with an Education Fund balance of $771,440. It is important to note that the Education Fund has a balance only because 1 million dollars were transferred from the Working Cash Fund to the Education Fund at the end of the 2009 Fiscal Year. Most of that working cash was borrowed money which reveals that without borrowed funds, the Education Fund would be at a deficit. This deficit occurs when the amount of Education Fund expenditures exceeds the amount of Education Fund revenues, which has occurred four of the five past fiscal years.
2004-2005…………Ed Fund deficit of $601,165
2005-2006…………Ed Fund deficit of $599,233
2006-2007…………no deficit in Ed Fund (expenditure cuts were made)
2007-2008…………Ed Fund deficit of $64,315
2008-2009…………Ed Fund deficit of $61,288
Although the size of the deficit in the Education Fund has declined since 2004-2005, the District has borrowed money and transferred that money to the Education Fund to keep the Education Fund balance in the black.
C) Indebtedness
The District has sold bonds (borrowed money) five times since 1998. The District will be paying those bonds off until the year 2017. The remaining principal of the debt is 3.5 million dollars, or 4.2 million dollars when including interest. The repayment of the bonds is added to the tax levy each year which adds approximately 41 cents to the property tax rate that property tax owners must pay. When the bonds are repaid, the District’s tax rate will drop by approximately 41 cents. The District has a bond capacity of 8.2 million dollars which means that the District can borrow again at this time if the Board so wishes.
D) Property Tax Levy (click here for attachment A)
The District tax rate has fluctuated from 2.88 to 2.79 during the past 6 years. The District is currently levying the maximum amount of each fund. School districts cannot levy more than the maximum rate unless they receive approval in the form of a referendum. Although Hall High School is levying $1.61 for the Education Fund, a high school district can only levy 92 cents for the Education Fund. The Education Fund rate must have been increased in the past as the result of a successful Education Fund referendum. The District’s tax rate is one of the highest in the area for high school districts. (click here for attachment B) An increase in property tax revenue can only occur if the EAV increases or if the District increases the tax rate through referendum.
E) Revenues (click here for attachment C)
The District has four main revenue sources. The largest revenue source is the local property tax extension. The local property tax extension is based on the tax rate multiplied by the local EAV (equalized assessed valuation.) During the current fiscal year (FY10) the local EAV had a growth of only about 2% which is the lowest EAV growth since 2003. Consequently, the District’s largest revenue source is currently seeing only small growth.
The District’s second largest revenue source is state funding known as General State Aid.
GSA is a complicated formula that is based on a foundation level (per student amount), average daily attendance, local wealth and student poverty level. The District’s GSA declined slightly ($537.00) in fiscal year 2010 because of declining average daily attendance.
The District’s third largest revenue source is state funded categorical grants. Categorical grants are quarterly reimbursement funds given to school districts to offset the cost of expenditures such as special education programs, special education personnel, driver education costs, lunch program costs, special education transportation and regular education transportation. During the fiscal year 2009, the state was only able to reimburse school districts for about 50% of the categorical funding. For the fiscal year 2010, the state has reimbursed two late payments from 2009, but has not reimbursed any of the fiscal 2010 payments. The District will lose approximately $200,000 if the state fails to make the four payments for fiscal year 2010. Categorical reimbursements for the fiscal year 2011 will most likely remain underfunded.
Corporate personal property replacement tax (CPPRT) is the fourth largest revenue source for the District. CPPRT revenue comes from the tax payments of Illinois businesses. In the fiscal year 2010, the CPPRT revenue for Hall High School declined from $139,000.00 to $115,000.00. In light of the declining economy of Illinois, CPPRT revenues will most likely decline again in fiscal year 2011.
F) Expenditures
Although revenues are decreasing, expenditures continue to increase. Operational expenditures per student (OEPS) have increased from $8,843 in 2001-2002 to $11,155 in 2007-2008. (click here for attachment D) Salary increases for FY10 were approximately 3.5% and will also be about 3.5% in FY11. In addition to salary increases, health care benefits (major medical, dental and life insurance) are increasing by 14%. The District’s share of health care costs for January 2010 to January 2011 will be approximately $541,000. Salary and benefits accounted for 74% of our Education Fund budget in 2008-2009.
Analysis
The financial health of the District is not good. Three of the Districts’ four largest revenue sources are declining while expenditures continue to increase. The ISBE financial profile status of “Financial Review” indicates that the District must act proactively to improve the financial status of the District before it slips down into “Financial Watch” as it was designated in 2005-2006. Although the districts’ status has improved in the past three years, the declining revenue/increasing expenditure trend is putting the District at risk. The District should not continue to deficit spend and supplement the budget with borrowed money. It is financially irresponsible to spend more money annually than you actually have, and then rely on borrowed money to balance the budget. If the District continues to spend (expenditures) more money annually than it brings in (revenues), the balance of 1.7 million dollars (mostly attributable to borrowed money) will soon be gone.
The District has three options. One, to increase revenues to equal expenditures, two, decrease expenditures to equal revenues or, three, increase revenues AND decrease expenditures.
INCREASING REVENUES
In order to increase revenues, the District has two options, both of which will increase the tax burden of the local property tax payer. Option one, the District can borrow again which is not advisable considering the District will be paying off 4.2 million dollars of loans during the next seven years. Borrowing money again will only weaken the financial status of the District further. In order to give you an idea of how borrowing impacts the property taxpayer, here is an illustration:
If you live in Spring Valley, and own a house with a cash value of $150,000, last year you paid $1,395 in property tax to Hall High School. Of that $1,395.00, $200.00 was repayment of bonds. That same homeowner who lives in Spring Valley, also paid off bonds borrowed by the Spring Valley Elementary School District at an amount of $240.00. (If that homeowner lives in Bureau, Ladd or Dalzell, they are also paying increased taxes to pay off bonds from their elementary school districts.) Taxpayers in the Hall High School District will continue to see a similar amount on their tax bill to pay off the high school bonds until the year 2017.
The second option the District has is to raise the tax rate permanently by passing a tax referendum which would be very difficult in these trying economic times. Raising the tax rate would be unfair to the taxpayers of the District who already supply over 60% of our revenues.
As you can see from attachment C above, the taxpayers of our five communities (Spring Valley, Ladd, Dalzell, Cherry and Bureau) are paying school property taxes at a rate higher than almost all other area communities (with the exception of Streator).
The District can also receive an increase in revenues if two things occur that are out of our control. One, the state increases funding for public schools, and two, the local property tax base (EAV) grows significantly.
I do not foresee state funding increasing in the near future. The state is billions of dollars in deficit which impacts most of our state funding. Furthermore, if the state does find a new revenue source (such as raising state income tax or expanding the sales tax base) the district is seeing declining enrollment which also decreases our General State Aid which is our second highest revenue source. The enrollment of the District has seen a 10% decline since 2005-2006 and will most likely see another decline in 2010-2011. (Assuming that 90% of feeder school graduates attend Hall, we will see another decline in enrollment in 2010-2011, with possible small increases during the next 8 years.)
In regards to possible EAV growth, the Wal-Mart Distribution Center will come on the tax rolls in 2011, which should give a boost to the EAV, but other significant increases to EAV are doubtful.
I do not believe that state funding will improve or EAV growth will increase significantly in the next few years. Consequently, the District should not wait for a major increase in revenues, either local or from the state.
DECREASING EXPENDITURES
In order to decrease expenditures, the District should reduce spending in the Education Fund, which accounts for over 70% of the total expenditures of the District. Within the Education Fund, salaries and benefits account for close to 75% of expenditures. The District could cut Education Fund expenditures, such as textbook purchases, technology, and classroom supplies, but those cuts would have only a small impact on the deficit. The most effective approach to getting the District expenditures decreased, unfortunately, is to reduce salaries and benefits. The District did in fact make expenditure cuts in the Education Fund in 2005, which explains the absence of a deficit in the 2006-2007 budget. (see part B above). The administration is currently discussing Education Fund reductions that would help to reduce the deficit while keeping the negative impact on the education of Hall students to a minimum. The administration will propose a three phase deficit reduction plan to the board within the next few months.
SUMMARY
The District is entering into a dangerous “perfect financial storm” that is characterized by declining revenues (GSA declining, categorical grants declining, local property tax stagnate) and increasing expenditures (salaries and benefits increasing, energy costs increasing, special education costs increasing) that threaten the financial health of the District. It is the belief of the administration that the only course of action is to reduce expenditures. The administration recommends that the Board adopt a three-year deficit reduction plan that would reduce expenditures while closely monitoring revenues. Hopefully revenues will increase during the three year period, and the expenditure reductions can be limited. If revenues do not increase significantly, the administration recommends deficit reduction measures starting in 2010-2011, to continue in 2011-2012 and 2012-2013. It is the hope of the administration that by making small expenditure cuts now, we will not have to make major expenditure cuts later.
