The Annual Education Funding Puzzle
by Ed Wahl

The size of the puzzle below represents the total amount a school district must spend annually to meet all of its educational and operational expenses.  Approximately 80% of the school districts in Illinois now have a fourth piece added to their puzzle—the “Local Shortfall $” piece.

Few legal options are open to provided the cash needed by the “Local Shortfall $” piece, as noted above. The “EFAB” recommendation is a way of moving the green line between “State $” and “Local $,” but it does little to shrink the “Local Shortfall $” piece.  A “Mandate Shortfall Relief Levy” [“MSRL”] when applied to the special education and transportation mandates, both underfunded by Federal and State appropriations, will significantly reduce the size of the “Local Shortfall $” piece without changing the size of the puzzle. If adopted, the “MSRL” would involve no new state dollars (always welcome, though), reduced drain on cash reserves and local borrowing, and lower local real estate taxes to repay loans.

Better Funding for Better Schools Coalition Presentation – 6/13/2003

by Edward C. Wahl, Retired School Business Official

Allegory #1: How Special Education Is Funded

Suppose you are told by your boss and his boss that you will be joining them for lunch every day from now on.  This will be Dutch treat, with each of the bosses paying 40% of the tab and you pay the remaining 20%.  You are given no choice; you must do this.

After the first lunch, both bosses begin fumbling for the money to pay their share and come up short.  The big boss can only cover 15% of the check and your boss can only cover 35%. They both look at you and tell you to pay their missing 30% share and your own 20% share. After all, they pay you a “nice” salary.

This is not a one-time event.  This same thing happens day after day, week after week, month after month, and year after year, with you picking up your share plus the shares the bosses are not paying.

Eventually you have to tell your bosses that your covering their insufficient funding is breaking you. You explain that you have spent your entire savings balance, had to get a second mortgage on your house, and cut your family’s spending for even basic food and clothing and medicines.

Their response is that you must continue until you go completely bankrupt. Then they will add your burden onto another employee to whom they are doing the same thing at dinner.

This is an allegory to the way special education is funded for the schools.  The Congress of the United States is the “big boss” who funds just 15% of his 40% share; the Illinois General Assembly is “your boss” who manages to fund 35% of his 40% share; and your local school district is “you” who pays your full 20% share plus the missing 30% share the bosses stuck you with.  In this presentation, we will show you the true magnitude of the check we local taxpayers must pay.  Our problem is that there is no present mechanism for providing direct relief. Here is a legislative proposal to provide that relief.

Allegory #2: How School Districts Pay Their Bills With Debt

Consider a two-income family where the income is just sufficient to cover the expenses each month with perhaps just a little remaining for savings. The husband is called in by his employer one day and told that times are tough and there will be a need to cut salaries by 50% until things “get better” again.

Back home, strategies are discussed for getting along with the reduced income. While some cuts in living expenses can be made, the first real option is to start spending down their savings and drawing on their investments to keep up with the bills. After some months go by and things did not “get better” at the office, real cuts in spending are made in food, clothing, medical, and housing expenses to divert the cash not spent into meeting the mortgage and other expenses that can’t be cut.  Finally, when there is nothing left to cut and the savings are dwindling dangerously low, borrowing money seems the only option for meeting the monthly expenses.

The easiest method of personal borrowing is running up the credit cards to their maximum limits, while making only the minimum monthly payments.  Each month, the interest charges must be added to the payments even as the need to borrow more continues.  The debt spirals upward relentlessly.

Then, finally, things do “get better” at work, and the husband’s salary is restored to its original level. Relief!  While the family has no more money coming in each month and can meet expenses again without borrowing, the difference is that the money is all income rather than only 75% income and 25% debt accumulation.  With the savings money used for a while to pay off the debt and interest, the family has a chance to get out of debt, stop their interest payments, and start building up their savings and investments again.

When school districts have bills they are required to pay—mandates—with insufficient income to pay them, they are put in the same position as this family.  When cash reserves run out, when nothing is left to cut, then borrowing money through loans up to the permitted limit is all that is left. If the school district had the same dollars it is forced to borrow in the form of income instead of as accumulated debt, the need for deficit spending would be significantly reduced if not eliminated.

Here is a legislative proposal to provide the needed income.

The Magnitude of the Unfunded Special Education Costs Passed Along to School Districts

Through SCOPE in Spring 2002, nineteen member school districts completed a specially designed worksheet to determine the true cost of the special education mandate and the total revenue they were permitted to receive to pay those costs. The basis for the study was their Illinois State Board of Education Annual Financial Report for Fiscal Year 2001 as completed and filed by their auditors. Each school district reported an excess of expenses over revenues, to the collective total of $30.6 million of deficit spending.  On average, this deficit amounts to over $1.6 million per district per year.  The actual amounts of the deficit for 2001 are included in Table One.

Hazel Crest School District 152½ over the last seven audited fiscal years (1996-2002) had an average annual deficit spending level of $516,000. The same worksheet and methodology from the audits used to generate the figures in Table One were used to determine these amounts for Hazel Crest 152½ as shown in Table Two. In great part, this district encountered its severe financial difficulties in attempting to find the cash to pay this amount each year.  The same legal options as described in the Educational Funding Puzzle above were utilized to the extreme: the school district has no cash reserves; the cuts in programs and services resulted in per-pupil expenditures of 85% or less than the state average for elementary school districts; and the debt schedule was filled to the maximum for the next twenty years.

Table One: School District Deficit Spending for the Special Education Mandate for FY2001 and the Equivalent Tax Rate of the Deficit in the District’s EAV Tax Base

District Number	District Name				FY2001 Audited Surplus or (Deficit)	Equivalent Tax Levy Rate
110	Central Stickney				(603,441)	0.361
117	North Palos				(921,387)	0.200
122	Ridgeland				(2,030,074)	0.550
123	Oak Lawn-Hometown				(2,495,512)	0.495
124	Evergreen Park Elementary				(1,554,753)	0.565
127.5	Chicago Ridge				(552,056)	0.439
130	Blue Island Elementary				(2,214,973)	0.564
135	Orland				(3,637,292)	0.295
142	Forest Ridge				(595,111)	0.324
146	Tinley Park				(1,594,633)	0.343
153	Homewood				(730,417)	0.374
159	Matteson				(807,911)	0.295
210	Lemont High School				(335,626)	0.072
217	Argo Community High School				(458,173)	0.084
218	Community High School				(3,857,822)	0.230
228	Bremen Township High School				(857,895)	0.094
230	Consolidated High School				(3,731,173)	0.130
231	Evergreen Park Community High School				(1,523,633)	0.554
233	Homewood-Flossmoor High School				(2,154,920)	0.423
		Total			(30,656,802)
		Average			(1,613,516)

Table Two: Hazel Crest School District 152½ Deficit Spending for the Special Education Mandate for FY1996 through FY2002 and the Equivalent Tax Rate of the Deficit in the District’s EAV Tax Base

Fiscal Year	District Name			EAV	Audited Surplus or (Deficit)	Equivalent Tax Levy Rate
1996	Hazel Crest District 152.5			82,818,261	(504,021)	0.609
1997	Hazel Crest District 152.5			88,414,029	(575,199)	0.651
1998	Hazel Crest District 152.5			87,112,837	(509,632)	0.585
1999	Hazel Crest District 152.5			87,515,225	(498,361)	0.569
2000	Hazel Crest District 152.5			93,124,772	(545,932)	0.586
2001	Hazel Crest District 152.5			89,346,434	(447,088)	0.500
2002	Hazel Crest District 152.5			87,514,176	(532,783)	0.609
		7-Year Total		615,845,734	(3,613,016)	0.587
		7-Year Average		87,977,962	(516,145)	0.587

NOTE for Table One: Illinois Statutes currently permit a school district to levy only $0.02 per $100 EAV. The levy rates in the right column are those needed in addition to the $0.02 already levied and included in the special education revenues used to determine the deficits. The school districts must raise this money elsewhere, outside the tax cap, through spending down reserves, cutting costs and diverting the cash, and borrowing. When it finally gets to borrowing, the taxpayers pay these principal amounts back through the Bond and Interest Fund Levy plus interest.  Over the years, the interest repaid equals a major percentage of the amount originally borrowed, all paid by the taxpayers.

NOTE for Table Two: Through all seven fiscal years in this table, The Education Fund tax rate was no greater than $1.61 per $100 EAV (it was lower in 1996, 1997, and 1999 because of tax caps) plus the $0.02 for the Special Education Fund tax levy rate.  This table shows that over 36% of the total Education Fund local tax revenue would have to be diverted each year to pay the unfunded costs of special education, leaving only $1.00 of the levy revenue for all the other educational programs and services.  Because such a massive diversion was not possible, the District resorted to borrowing.  Another provision of the Tax Cap Law, the Debt Extension Limitation, prevented the District from repaying more than $427,000 in principal and interest each year when it had to borrow $500,000 or more to keep up.

If the average deficit spending per district per year as developed in Table One of $1.6 million is reflective of the costs on a statewide level, then the annual deficit spending by the 890 or so school districts in Illinois comes to a staggering $1.4 billion dollars. Even if the average from these nineteen south suburban school districts is high (at the EFAB hearing in June 2002, the representative from the Chicago Public Schools estimated his District 299 alone would exceed $100 million per year), and the real annual deficit spending is closer to only $1.0 billion, it is clear that the schools in Illinois cannot continue to absorb this annual loss for just one mandated program.

As in the second of the opening allegories, if only the schools could have these same dollars annually as revenue income instead of as debt accumulation.  Without any more dollars than they spend today, they can be on a pay-as-you-go basis and not build up the same amount of debt that the taxpayers must repay plus added interest.

Using the basic principles described so far, it is possible to introduce legislation that will erase almost all of the annual deficit spending for special education. This legislation needs to be introduced, approved, and signed into law yet this year if possible. Because of the time lag to make the law fully operational, it will take school districts two years thereafter before the needed relief dollars arrive.

Here’s how the proposed legislation will work to the benefit of all school districts faced with deficit spending to meet two of the most costly mandates—special education and student transportation.  The suggested title of the legislation is Educational Funding Relief Act of 2003.

Educational Funding Relief Act of 2003

Legislative Provision	Comments/Intent/Benefits
1. General Assembly specifies the mandates included in the provisions of the Act. First covered mandates are special education and student transportation.	a. The General Assembly retains the right to choose which mandates are to receive funding relief.  Additional mandates could be added and deleted by amending the Act in later legislative sessions. b. School districts cannot abuse the Act by including mandates that are not specifically listed. c. A Special Education Fund separate from the regular Education Fund will be a new feature in the school district budgets and audits because of the listed mandate. d. The Transportation Fund presently exists, and no new budget and audit structure is necessary for this listed mandate.
2. Require the Illinois State Board of Education to annually audit the revenue and expenses of each school district for the specific mandates covered by the Act through the Annual Financial Report due October 15 each year beginning with the audits for Fiscal Year 2004 due October 15, 2004.	a. To assure uniform application of the Act, the Illinois State Board of Education will need to develop the accounting structure and modify the Annual Financial Report to create a Special Education Fund for use by all school districts and auditors. b. Beyond some minimal administrative costs for the Illinois State Board of Education for staff time to make the revisions to the Annual Financial Report forms, there is no cost added to the state budget. c. Once the initial revisions to the Annual Financial Report are completed, the annual cost thereafter to keep them updated will be minimal.
3. Create a special levy category for each of the listed mandates in the Act.  The title shall be as follows: “Mandate Shortfall Relief Levy for …(mandate name).” If the criteria as follows are met, a separate relief levy may be used for each listed mandate.  A Mandate Shortfall Relief Levy, when or if used, will be included in the aggregate amount of the school district’s annual tax levy on the tax bill and will not be listed separately.	a. This provision has no cost to the state budget. b. Only local tax revenue will be received from a Mandate Shortfall Relief Levy. c. As local tax revenue, the audit will report the dollars as income. d. Criteria must be met before a school district may use this levy; otherwise, they may not use it. e. The levy is permissive, not required, when the criteria are met.
4. A Mandate Shortfall Relief Levy, when permitted and used by a school district, will be excluded from the provisions of the Property Tax Extension Limitation Law in any county with such a law in effect.	a. Without this provision, the Act will not work. b. All school districts are treated equally when applying the Act. c. No change is proposed for the Property Tax Extension Limitation Law in any county having such a law in effect.
5. Establish a not-to-exceed limitation for any Mandate Shortfall Relief Levy used by a school district in any levy year to the amount of the audited deficit for such mandate listed in the most-recent Annual Financial Report completed and submitted to the Illinois State Board of Education.	a. Any Mandate Shortfall Relief Levy, if used, is limited to an amount rather than a tax rate that is based on an audited deficit for that mandate for the previous fiscal year. b. A school district will recover the excess dollars it spent on the listed mandate in the fiscal year prior to the adoption of the levy. c. If Federal and State funding for the mandate increases, the amount of the audited deficit and subsequent relief levy will decrease. d. If Federal and State funding for the mandate decreases, the amount of the audited deficit will increase, and the school district may increase the relief levy up to the audited shortfall amount. e. Taxpayer objections filed in the courts will be minimal because the Mandate Shortfall Relief Levy is based on an audit rather than on an estimate. f. If a school district does not have an audited deficit for a listed mandate, the school district shall not be able to use this Act for such mandate.
6. All real estate tax dollars received by a school district from a Mandate Shortfall Relief Levy shall be restricted for use to the particular mandate for which it was originally levied.	a. Restricted tax dollars cannot be diverted by a school district to offset the costs of any other program, service, activity, or mandate.  The Mandate Shortfall Relief Levy is not intended to provide general discretionary money for spending by school districts.
7. For the Annual Financial Report and audit of a mandate’s deficit, any amount received from a Mandate Shortfall Relief Levy during the fiscal year shall be excluded from the revenue total.	a. Without this provision, the Act will not work. b. All school districts are treated equally when applying the Act.
8. Amend the Property Tax Extension Limitation Law to change the amount of the Debt Extension Limitation from the dollar amount of the school district’s 1994 levy for principal and interest for the Bond and Interest Fund to 33% of the school district’s current Debt Limitation based on 6.9% of the school district’s EAV.	a. All school districts in Illinois will be treated equally. b. The arbitrary nature of the existing limitation will be removed. c. Linking the Debt Extension Limitation to the current tax base of a school district allows the limitation to be adjusted automatically over the years with inflation and economic growth occurring in the community. d. Keeping the Debt Extension Limitation tied to a specific dollar amount forever erodes the purchasing power of the limited dollars and, in fact, punishes those school districts that were operating with little or no debt in 1994 but now need to borrow to cover their costs in bad economic times

Benefits to the State

• No new state dollars are required in this proposal, yet at least $1.0 billion dollars of school district deficit spending on just two mandated programs will disappear.
• State officials can claim they have truly done “something” to relieve the deficit spending crisis in Illinois school districts.
• Enacting this law will give some breathing room to state officials as they work to create a new system of providing state funding for education while reducing reliance on local property taxes.
• School districts will be able to do what they have been mandated to do and have the resources to pay for the mandates without otherwise destroying their districts in the process.
• Providing relief will give elected officials the opportunity to claim they have kept their promises to hold education first.
• Because the only money involved is from local, not state, sources, there are no “winners” or “losers” as are always identified in the media when a fixed amount of state dollars are divided up.
• Because audits are required, the state cannot be accused of opening loopholes to give schools access to discretionary money without taxpayer approval.

Benefits to the School Districts

• School districts will receive more income without receiving more dollars.
• Reliance on debt and borrowing to pay operating expenses for special education and student transportation will be virtually eliminated.
• The dollars a school district must raise each year to make principal and interest payments will be minimized as borrowing decreases and income increases.
• The new income dollars will stop the diversion of dollars from reduced or eliminated services and educational opportunities for students.
• School districts will need the newly available income dollars, which stay in the district rather than get sent away to pay off a loan, to help them meet the financial challenges that accompany the provisions and requirements of the No Child Left Behind Act.
• School districts presently on the Illinois State Board of Education’s Financial Watch List or Financial Warning List will have a chance to get off. The ISBE wants school districts to have more income and less debt.
• Legal costs to respond to taxpayer objection lawsuits will be minimized.

Benefits to the Local Taxpayers,
Individuals and Businesses

• Local taxpayers, who pay the principal and interest for the loans taken out by school districts to pay their annual special education and student transportation mandated cost deficits, will actually experience a lower tax rate with the Mandate Shortfall Relief Levy than they pay with a Bond and Interest Levy.
• Major interest payments for school debt will be reduced as school district borrowing is reduced.
• Local property values will be maintained when the finances of the school district are healthy and the district is not on any ISBE Financial Watch or Warning List.

Benefits to the Children

• Children will benefit from the added resources in their schools to help them make “adequate yearly progress” toward the ever-increasing performance levels demanded by the No Child Left Behind Act.

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