A Deep Dive into a Sustainable Financial Plan

Forecasting the Financial Future of LeRoy CUSD #2

 

As a part of the Board of Education retreat in 2019, the Board asked about the next 5 years of our financial wellness.  They tasked our administration with looking at all funds in an effort to determine the sustainability of our financial position.

 

Rationale for the Request

  1. The new State Funding Model has changed the way in which schools are funded, so what is the impact to the LeRoy School System?
  2. We have had budget deficits in successive years, so is there going to be an end to that budget reality?
  3. As we seek a referendum for the Auditorium project, do we have a comprehensive understanding of our financial position?

 

As has been the practice of this Board, we are going to share the process, the assumptions, and the findings in a transparent manner.  This posting is intended to provide both a quick summary of the findings as well as a detailed explanation of the findings accompanied by the supporting data analysis.

 

Quick Summary

 

Key Points from the Analysis

  1. The Education Fund will need a reduction in spending or an increase in revenue over the next five years.  We will need to fill a $100,000 to $175,000 gap that exists within the $7.3 million Education Fund budget.  The growth target that we used revolved around windmills/megawatts of energy.  We chose that as the example simply because it is a familiar concept.  The growth is most available to our community in the commercial/industrial space and we project a need for $5,000,000 in needed growth over the next 5 years.
  2. All other funds are projected to be balanced or operate at a surplus.
  3. The funding goal for LeRoy Schools, as established through the new Evidence Based Funding model, is to provide an additional $1.8 million over the next 7 years.  The model validates that the LeRoy Community is meeting 100% of our local obligation.  The increase in funding to fill the gap is the responsibility of the State of Illinois.  But, at the current rate of funding, LeRoy Schools receives less than $30,000 in new State revenue each year.
  4. The proposed referendum for the Auditorium project will result in a decrease of $0.10 to $0.15 in our Bond and Interest Tax Rate.

 

The Deeper Dive

 

Process of Analysis & Conclusions Along the Way

 

It became apparent very quickly that in all funds other than the Education Fund, we would be able to operate at a balanced budget or at a surplus.  We looked back 5 years in order to get a clear picture of our trending data for both revenue and expenditures.  There were some unusual fluctuations due to the timing of State payments, particularly in the Transportation Fund.  In general, it held true that over a two-year period the State payments were made and allowed our Transportation Fund to remain balanced.  An important note to make is that the State of Illinois only has a direct impact to revenue in our Education Fund and in our Transportation Fund.  All other fund revenues are exclusively funded by property taxes.  As a result of this preliminary work, our focus turned exclusively to the sustainability of our Education Fund.  It is the largest fund and pays for the majority of our operations related to students.  The Education Fund accounts for approximately 70% of our total budget.

 

In performing the analysis of the Education Fund, we looked uniquely at our salary and benefit data, but made general assumptions about all other Education Fund spending categories such as materials, supplies, fees, and purchased services. 

 

We performed historic analysis of our Education Fund spending from FY2015 to FY2019 using our audited data.

 

Average Increase in Spending FY15 to FY19

  • Salaries 1.42%
    • All staff except custodial and transportation
  • Benefits 7.05%
    • Health insurance
  • Purchased Services 4.16%
    • Services provided by contracted agencies
  • Materials and Supplies 2.34%
    • Consumable supplies
  • Capital Expenditures 3.70%
    • Sustainable Equipment
  • Other Fees -0.57%
    • Related Contracted Services
  • Total Education Fund Spending Average Increase 1.76%

 

Once we had determined the trends within the Education Fund, we were able to forecast the next 5 years.  We were able to make some specific corrections for known changes in staffing and known adjustments based upon our collective bargaining agreement.  While not perfect, it is reasonable that our estimates for salary and benefits should be responsibly accurate.  We are projecting that our spending will slow to a rate of 1.64% on the average, mostly a reflection of changes in staffing.  Our audited Education Fund expenses were $6,901,489.71 in FY2019.  We are projecting expenses to increase to $7,458,485.30 by FY2024.  While we believe that the 1.64% growth rate is within reasonable economic tolerances, but we do have a concern with the growth in Special Education costs.  Our costs for Special Education have grown by 3.2% on the average.  Our gap representing unreimbursed cost for Special Education services has grown to $792,865.  Special Education revenues come from State, Federal, and Local sources, but our local sources are created through a $0.04 tax rate for Special Education or approximately $45,000 of the $596,721 in revenue.  At some point, this is the primary issue that may need a solution.

 

The new funding system in Illinois provides a great deal of data to better understand our own district.   The most significant data point for us to understand at this point is the “necessary rate” or the idea of a prescriptive tax rate.  The model allows us to see exactly what the State would suggest we should generate through local property taxes, named in the model as the Local Capacity Target.  We used that data point and our Equalized Assessed Value to determine what tax rate would be necessary to generate that amount of revenue.  The necessary rate for our school district is $4.440 and our current rate is $4.471 (these rates are our total tax rate less our rate for Bond and Interest and our rate for Transportation).  What is the significance of this information?  It indicates that according to the model for State funding, our tax rate is correctly designed to meet the funding demand for an Evidence Based Education.  The other significant revelation from this information is that the $1.8 million gap to adequacy then belongs exclusively to the State.  As long as our property values continue to grow consistent with inflation, the responsibility to close our funding gap will fall to the State.  The issue with that reality is that the State has provided us with approximately $25,000 per year on the average to close that gap.  According to the legislation passed three years ago, they are supposed to close that gap in 10 years.  The State has 7 more years to close the gap.  The challenge is obvious.  The funding rate has to change if the State is going to close our gap to adequacy in any meaningful manner.

 

In the absence of the State funding at a more rapid rate, we did some analysis on what it would take to appropriately solve the issue through a revenue perspective.  In our analysis of property values in the school district, our residential property values have flattened to 1.71%, our farm values have continued to grow at a steady pace of 4.45%, and commercial property has grown at 1.9%.  These are all reflective of averages over a 5-year period.  What our analysis has indicated in a more immediate time period is that our total growth is still at nearly 2%, but residential values have flattened to less than 1%, farm values remain steady but closer 3%, and commercial values are on trending negative.  We do not believe that we can expect our residential values to do any more than sustain at current levels and are not expecting more than nominal growth in new construction.  Our farm values will likely continue to grow but will not likely surpass the current 3% trend.  If we want to control our own destiny, the opportunity exists in the space of commercial property.  For our long-term sustainability and to reduce the burden on our farmers and homeowners, we need commercial growth.  In our analysis, we looked specifically at the energy market, whether it be solar or wind, where there has been an expressed interest in our school district.  Each megawatt brings a value of $119,998 to our school district.  Sustainability for the district is reached at 30 megawatts of energy production.  There are obviously other ways to increase commercial growth in our community and we believe that it is in this area where the greatest potential exists to realize both sustainability and ease the burden on other property owners.

 

The analysis for auditorium project was done by First Midstate Inc.  This analysis is simply mathematical calculations based upon logical assumptions and the objective of the Board was to ensure that if the referendum were successful that we would not have to increase our tax rate to fund the project.  We asked First Midstate Inc. to target a $0.10 to $0.15 reduction in our Bond and Interest Fund rate in order to determine if the project were possible.  They used the following assumptions: 1.0% growth in EAV for the district, 3.75% interest rate on the debt (which they believe will ultimately be lower), refund/refinance $2.73 million of current liability, and extend our term of financing for 15 years.  With those assumptions, we were able to deliver on the $0.10 to $0.15 reduction in the Bond and Interest Rate.  To be clear, that does not mean that our total rate will decrease by the full $0.10 to $0.15.  Our total rate is also impacted by IMRF, Medicare, and FICA contributions for our employees, and that impact increases or decreases as the contribution rates swing.  First Midstate Inc. has determined, based upon the assumptions, that the project will not cause an increase in our current tax rate.

 

Comprehensive Summary of Findings

  1. Our Education Fund will continue to operate at a deficit based upon current trends.  The deficit is projected to narrow to $43,602 in Fiscal Year 2021, but will grow by $15,000 per year over the next 4 years.
  2. All other Funds are projected to operate as balanced to surplus.
  3. Within the new funding model, the State has calculated that an appropriate operating tax rate for the LeRoy School System is $4.440, and our current operating tax rate is $4.471.
    1. Operating Tax Rate in the model is the Total Tax Rate less the Bond & Interest Tax Rate and the Transportation Tax Rate.
    2. Meaning of this finding: the tax-paying base of LeRoy Schools is meeting the full obligation to fund our schools as defined by the funding model and the gap to adequacy ($1,871,683.00) is exclusively the responsibility of the State to fill.
    3. Current funding rate to fill that gap is $26,000 per year.
  4. Our Education Fund is stressed by the increasing demand placed on our Special Education services.  We currently have nearly $800,000 in unreimbursed Special Education expenses.
  5. Based upon current assumptions, we will be able to reduce our Bond and Interest rate by approximately $0.10 to $0.15 through the referendum project.  Our Total Rate is impacted by the Bond and Interest Rate, but it is also impacted by IMRF, Medicare, and FICA rates, so it is not appropriate to say that our tax rate will be reduced by $0.10 to $0.15.
    1. Assumptions
      1. 1.0% growth in property value
      2. Total cost of the project: $8,315,223
      3. Interest rate on the bonds: 3.75%
      4. Refunding $2,730,000 in current debt
      5. Add 15 years to our current term of debt

 

Supporting Documents

Analysis Plan Outline

Referendum Rate Analysis

Tax Rate Analysis

EAV Trend Analysis

ED Fund Expenditure Projections

ED Fund Revenue Projections

ED Fund Balance Projections

ED Fund Gap Analysis, Necessary Growth in EAV