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Published in Print: November 6, 2002, as Illinois Districts Using Red Ink To Pen Budgets

Illinois Districts Using Red Ink To Pen Budgets

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A few months ago, a seasoned financial consultant in suburban Chicago pored over the budget books of a debt-ridden school district nearby, calculating its salaries, other expenses, short-term cash flow, and long-term debt. It didn't take long before he realized the district had a big problem.

"I've never seen a district this poor in my life," Robert Grossi recalled thinking after reviewing the numbers for Hazel Crest School District 1521/2.

What emerged from the jumble of financial data was a district in need of $5 million to keep its doors open through the end of the school year, and lacking enough money to pay teachers through this month.

But as the story of Hazel Crest unfolds, it is becoming clear that the beleaguered district may be just an early indicator of where other Illinois districts are headed.

Shortly after Hazel Crest's woes emerged, the state released data showing that up to 85 percent of its 893 districts may be operating with deficits during the current school year—and many of them have been doing so for up to five straight years.

Those numbers were "shocking," said Ben Schwarm, the associate executive director of the Illinois Association of School Boards. "If we have another budget year like this year, a lot of districts will be looking at consolidation, or going bankrupt," he said.

Some state and national school officials say that policies in Illinois have not done nearly enough to prevent districts from digging themselves into financial holes. Those policies have allowed districts like Hazel Crest, which is in southern Cook County, to operate in debt, year after year, and put them at extreme risk when the economy turns south.

Mike Griffith, an associate policy analyst for the Denver-based Education Commission of the States, says deficit spending has become common in some large, urban districts around the country that have relied on state aid to bail them out. When state and local revenues dry up, those districts have nowhere to turn, he says.

"It's a horrible way of running a school system, and there's a fair number of school districts in Illinois doing that," added Mr. Griffith, whose organization shares education research and policy information among states.

To get a better measure of Illinois schools' fiscal well-being, officials of the state board of education last month began considering an overhaul of the system for judging districts' financial health.

"It is clear that our current system does not adequately portray the severe financial problems facing school districts," state schools Superintendent Robert E. Schiller said.

Trouble Brewing

Hazel Crest's story, meanwhile, reads like ThePerfect Storm of school finance.

The district's troubles stem from a combination of rising costs, heavy borrowing, insufficient state aid, and having reached a point beyond which it could not secure more loans, its superintendent says.

When he took his position two years ago, Superintendent Harry Reynolds said the 1,200- student, K-8 district in the Chicago suburb of Hazel Crest was so poor it was unable to pay for certain courses, such as some foreign languages and physical education classes. Textbooks were out of date, and school buildings needed physical upgrades.

During his tenure, Mr. Reynolds estimates, the district has borrowed roughly $4 million in long- and short-term debt, much of it devoted to paying for basic operating expenses. The district, which has an operating budget of about $9.3 million, borrowed against its property-tax revenues and against the aid it receives from the state—two steps that are allowed in Illinois.

The district has been running deficits for at least six years, according to Mr. Grossi's analysis, and the shortfalls now have reached $2.5 million per year. Eventually, the district was borrowing to cover its day- to-day expenses, and several lenders refused Hazel Crest more money.

Superintendent Reynolds said his options were limited: The district needed to borrow, or its students would have gone without fundamental classes and services. He would not allow that.

"We've made the determination that our kids still have to have the basics, and I've borrowed to do that," the superintendent said.

Last month, with no way out of its mounting debt, the district asked for oversight from a state financial panel. By approving the request, the state school board made Hazel Crest eligible for $270,000 in emergency aid, and $1.1 million in loans, pending the approval of the legislature and the governor. That money—which Mr. Grossi, the consultant, said the district had not yet received—would allow the system to make its payroll through Nov. 22.

The district still plans to ask the state for another estimated $3.4 million that it needs to stay open the entire school year.

In addition, the district put two tax referendums on the Nov. 5 ballot. The first would increase its education fund tax from $1.61 to $3.50 per $100 of assessed value. If approved by voters this week, the measure would raise $1.5 million. The second item would raise the district's debt-service limit from $400,000 to $1.5 million.

Mr. Reynolds said he didn't know of the district ever having asked voters for a tax hike before.

Even if the measures pass, more help will be needed, district officials say. It is unclear what Hazel Crest's options will be if the system runs out of money. Shutting the doors, though, remains a real option, the district's financial adviser said.

"It's a book that hasn't been written yet," Mr. Grossi said. "This situation [in Hazel Crest] has never happened in Illinois."

Tolerating Deficits

Illinois is unusual in allowing districts to operate with deficits from year to year, according to John L. Myers, a partner with Augenblick & Myers, a consulting firm in Denver that advises lawmakers and administrators across the country on education finance.

"Most states do not allow that," said Mr. Myers, though he wasn't sure how many states may do so. "At the end of the school year ... there's a requirement for a balanced budget."

Districts like Hazel Crest that have taken out loans to cover day-to-day classroom expenses are ignoring fundamental budgeting rules, said Mr. Griffith of the ECS.

"If you're using [bond money] to cover operational expenses, that's a problem," he said. He used this comparison to make his point: "If you're going into debt to buy a house, that's a good thing. If you're going into debt to pay for food and other expenses, that's not."

But now Illinois officials are looking at keeping a closer eye on district budgets and spending.

On Oct. 16, state board of education officials announced that they could soon be holding districts to a much tougher standard. Under a plan being considered by the state, school systems would be assigned a rating based on four new measures of their financial health: expenditures-to-revenue ratio; days' worth of cash on hand; percent of short- term borrowing remaining; and percent of long-term debt margin remaining.

Currently, Illinois districts are put on the state's "financial watch list" based on a computation of their balance-to-revenue ratio. Only 11 districts were on the 2002 watch list, and Hazel Crest was not one of them.

Hazel Crest's crisis also underscores a perennial debate over how the state pays for education. For years, Illinois schools have relied heavily on local property taxes, rather than state aid, and critics have complained that the revenue imbalance produced by that approach punishes tax-poor districts.

Illinois has the second-biggest gap in the nation in per-pupil spending between rich and poor districts, according to a study released this year by the Education Trust, a nonpartisan, Washington-based organization that promotes improved education for needy students.

And last month, an independent, appointed panel of school, business, and civic leaders in Illinois, called the Education Funding Advisory Board, said the state should cut local property taxes by $3.5 billion, and boost various forms of state aid. Those recommendations will be presented next year to the legislature and the successor to retiring Republican Gov. George Ryan.

As for Hazel Crest, Mr. Reynolds describes his district as a "relatively poor community," with a tax base of about $89 million that has seen little growth.

Mr. Grossi said Hazel Crest's lack of revenue has affected its ability to lure and keep good teachers. The average teacher salary in the district is $35,934, compared with the $47,865 statewide average for 2000-01 reported by the American Federation of Teachers. Some Cook County districts pay teachers more than that average, making it tempting for Hazel Crest staff to seek better pay nearby.

"They need to re-examine the way schools are funded," Mr. Reynolds said of state leaders. Many of the working-class districts in the southern end of Cook County, he said, "are only a year or two away from where we are."

Vol. 22, Issue 10, Pages 1,22-23

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