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.

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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

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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

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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

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ons

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

GSA Poverty Grant - Statewide

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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

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GSA Payments - Statewide

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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

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ons

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

Federal Grants - Statewide

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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

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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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