Education at Risk An Analysis of the Current Economic Crisis on
Illinois Public School Districts
Robert G. Grossi January 2013 Crystal Financial Consultants, Inc.
Historical Trend in Revenues Illinois Public School Districts
The Economic Downturn has affected all major revenue sources since 2010.
2
Trend in Real Estate Tax Revenues Historical Growth Rates Due to Inflation and New Property
Real estate taxes grow at the rate of inflation (minimum) – Tax Capped Counties
Tax growth rate can exceed rate of inflation when schools have new taxable property within district
3
0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%
CPI “Inflation”
0.00%
0.50%
1.00%
1.50%
2.00%
Estimated Additional Growth Rate in Tax Revenues due to new property
Trend in Real Estate Tax Revenues Dramatic Decrease in New Property with Schools
0
2
4
6
8
10
2003 2004 2005 2006 2007 2008 2009 2010 2011
Total New Construction Costs – New Privately-Owned Housing
State of Illinois
Billi
ons
4 Source: U.S. Census Bureau
Trend in General State-Aid Revenues Part 1 -GSA Formula Grant (Based on Property Wealth) Part 2 -GSA Poverty Grant (Based on % of Low-Income Students)
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
GSA Formula Grant - Statewide
Billi
ons
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
GSA Poverty Grant - Statewide
Billi
ons
5 Note: GSA Formula Grant figures include PTELL Adjustment Dollars
3.000
3.200
3.400
3.600
3.800
4.000
4.200
4.400
4.600
4.800
GSA Payments - Statewide
Billi
ons
4.000
4.200
4.400
4.600
4.800
5.000
5.200
5.400
5.600
5.800
Restricted State Grants - Statewide
Billi
ons
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
Federal Grants - Statewide
Billi
ons
Summary of Historical Revenue Patterns
O Real estate tax revenue growth has been significantly reduced due to little new property growth Statewide.
O Statewide general State-aid revenues in 2013 are at their lowest levels since 2007.
O Statewide restricted State grant revenues in 2013 are at their lowest levels since 2006.
O As one-time Federal stimulus programs are unwinding, Federal grant revenues are dropping dramatically back towards 2009 levels.
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Impact of Revenue Patterns on Illinois School Districts
School districts’ reliance on the different revenue sources are based on two primary factors:
O Property Values Per Pupil within District O Concentration of Low-Income Students in District
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Reliance on Revenue Sources Two Extreme Examples
R/E Taxes
General State-Aid
State Grants
Federal Grants
Other Local
Cook County SD 168 Low Property Values Per Pupil High % Low-Income Students
R/E Taxes
General State-
Aid
State Grants
Federal Grants Other
Local
DuPage County SD 53 High Property Values Per Pupil Low % Low-Income Students
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Most Districts
Somewhere Between Extremes
Major Variables Impacting Revenue Growth
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Inflation – Tax Capped Districts
State Funding Levels
New Property Growth
Tax Appeals
State Funding Levels
Inflation – Tax Capped Schools
Federal Funding
District Type One: Property Wealthy, Low Concentration of Low-Income Students
District Type Two: Property Poor, High Concentration of Low-Income Students
Projected Condition of School Finances in Illinois
High Probability of a Long-Term Crisis
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Projected Trend in Real Estate Tax Revenues
Expect an extended period of historically low growth in real estate tax revenues.
O As of September 2012, one in every 298 properties in Illinois had a foreclosure filing report.
O New construction will not pick up until credit crisis gets resolved. This will limit real estate tax revenue growth in school districts to the rate of inflation.
O Most economists project low inflation levels through 2022.
Projection: Real estate tax revenues will increase at an average annual rate of 1.7% - 2.4% over next ten years in most school districts.
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Projected Inflation Two Forecasts – Same Story
0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
UBS Investment Research December 7, 2012 O Five year CPI Forecast:
O Downside 1.00% O Expected 2.30% O Upside 3.50%
O Ten year CPI Forecast: O Downside 1.00% O Expected 2.40% O Upside 4.00%
Congressional Budget Office January 2012
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Projected Trend in State Revenues
Expect State revenues to continue to decrease or be flat for the next several years.
O The financial condition of the State of Illinois is so grave that the State would need several years of economic recovery before school funding can increase.
Projection: State revenues to school districts will decrease, on average, 2% annually (worst case) to increase, on average, 1% annually (best case) over next ten years.
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Financial Condition of State of Illinois
“In telling the story of Illinois’ fiscal troubles, several themes will emerge: The lack of transparency: The way the budget is presented
and decided is muddled and confusing. Chronic short-sightedness and avoidance of tough choices
have pushed problems into future years and made things worse.
Progress — while Illinois still struggles, problems are being recognized and tough decisions are being made.
Unfortunately, Illinois started out in such a deep hole that it still has a very long way to go.”
Report of the State Budget Crisis Task Force, Illinois - October 2012
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State of Illinois Five-Year Projections Total Unpaid Bills FY 2012 – FY 2017
0
5
10
15
20
25
30
35
40
2012 2013 2014 2015 2016 2017
Outside General Fund
General Fund
Billi
ons
Source: Governor’s Office of Management and Budget, Three-Year Budget Projections (General Funds), FY 12-FY 15, January 2012; Illinois Department of Healthcare and Family Services, Five Year Medical Assistance Budget Outlook, January 2012; Civic Federation calculations based on communications with Governor’s Office of Management and Budget and the Illinois Department of Healthcare and Family Services.
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Projected Total Revenue Growth (Average percentage growth rate over next ten years)
Based on Degree of Dependency on State Revenues
School Type
Low
Estimate
High
Estimate
Expected Growth in Revenues
Low State Dependency 0.98% 1.95% 1.47%
Medium State Dependency 0.05% 1.60% 0.83%
High State Dependency -0.86% 1.08% 0.11%
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Breakdown of Revenue Sources: Low State Dependency: 15% (State), 10% (Federal), 75% (Local) Medium State Dependency: 40% (State), 10% (Federal), 50% (Local) High State Dependency: 60% (State), 20% (Federal), 20% (Local)
Can School Districts Keep Expenditure Growth Rates at or Below Revenue Growth Rates?
O Salaries continue to grow despite declines in revenues. Will this continue?
O A likely shift in pension liabilities from the State of Illinois to school districts will increase district-level expenses.
O Healthcare reform will likely cause medical insurance costs to increase above historical growth levels.
O Schools must continue to address growing needs of students.
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What Happens When Expense Growth Exceeds Revenue Growth?
Comparing Expense Growth Rate to Revenue Growth Rate (Example) School District: $20 million balanced budget, 3 months fund balance reserves Current Rating: Financial Recognition by State (highest rating)
Revenues vs. Expenses (Year 3) Zero Balances
Exp. Rate = Rev. Rate Balanced never Exp. Rate > Rev. Rate by 1% -$0.6 m 7 Years Exp. Rate > Rev. Rate by 2% -$1.2 m 5 Years Exp. Rate > Rev. Rate by 3% -$1.9 m 4 Years
Consequences of Extended Financial Crisis on School Districts Throughout State
O Survival of the fittest: Several school districts will close and merge over the next 5-7 years.
O Many other districts will be left with annual deficits that will be unsustainable.
O There will be a significant increase in the number of strikes throughout the State, disrupting student learning.
O Few districts will be able to improve student learning due to lower staff morale and decreasing resources.
O There will be a push to shift revenues from wealthy to poor districts as property-poor districts will be the first districts vulnerable to crisis.
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