Friday, May 4, 2012

Risk Management Plans: Legitimate Policy or End Run Around Tax Caps

At the last meeting of the Minooka CCSD 201 school board, the superintendent presented a new Risk Management Plan for the district (see here).  So what is a risk management plan?  Is it a legitimate policy tool to reduce the risk associated with running our schools or is it an attempt at an end around the tax caps placed on certain funds in the school district's budget (or is it a combination of the two)?  And why is this coming up now?

To answer these questions, you have to know a little bit about school finance and how an Illinois school district raises revenue.  You also have to understand that our school district raises the overwhelming majority of its funds (80 to 90%) through local property taxes.  Now, if you own property in the district, you get a property tax bill every year which includes an entry that shows the tax rate for Minooka CCSD 201.  For example, that tax rate for last year (if you lived in Grundy County) was 2.95428 (this is the number you get when you add the rate for "Minooka Grade 201", which was 2.87206 with the rate for "Social Security" listed just below "Minooka Grade 201", which was 0.08222).  Well, this one number really consists of a combination of tax rates for each of the various categories of spending that the district has.  You can think of these as buckets.  The buckets are labeled: education; operations, building and maintenance; transportation; working cash; municipal retirement; social security; tort immunity; special education; fire prevention and safety; lease purchase; and bond and interest.  Now some of these buckets (or categories) have rate limits that are set by law and can only be increased by the voters of the district pursuant to a referendum.  Others do not have limits that are set by law.  The categories and their limits for Minooka CCSD 201 are as follows (the rates are per $100 of equalized assessed value):

Education: 1.62
Operations, building and maintenance: 0.25
Transportation: 0.12
Working cash: 0.05
Municipal retirement: none
Social security: none
Tort immunity: none
Special education: 0.02
Fire prevention and safety: 0.05
Lease purchase: 0.05
Bond and interest: none

You will notice that the funds that do not have tax caps are municipal retirement, social security, tort immunity and bond and interest.  The amounts levied for municipal retirement and social security are merely a function of the school district's payroll and so there is not much here to play with.  The amounts levied for bond and interest are a function of the school district's current indebtedness.  The county clerks are required to levy enough in the bond and interest category to pay the current principal and interest payments on the school district's debt.  Since the amount of this debt is limited by statute and the debt typically can only be issued pursuant to a referendum of the voters (but see my post on the Back Door Referendum), the amount levied for this fund is subject to certain controls.  You may notice if you look at one of the levies approved by the school board, that the school board does not set a levy amount for this fund.

That leaves the tort immunity fund.  Now, the purpose of the tort immunity fund is two-fold.  The first is reactive and the second is proactive.  The reactive part is to allow the school district to raise money to pay tort claims for which it becomes subject pursuant to a judgment as a result of a lawsuit.  The proactive part is to allow the school district to raise money to pay for insurance to cover such tort claims and to pay for risk management activities to decrease the chances of such tort claims in the future.

There is, however, a potential for abusing the tort immunity fund as a way to raise revenue that is more properly categorized under one of the other funds and therefore create an end run around the statutory tax caps.  This has been documented by commentators (here and here), as well as being remarked upon by the Illinois legislature itself ("Notwithstanding the extraordinary nature of the [tort immunity tax] . . . it has become apparent that some units of local government are using the tax revenue to fund expenses more properly paid from general operating funds."  745 Illinois Compiled Statutes 10/9-107).

At the end of the day, as long as a school district is raising revenue in the tort immunity fund in accordance with the letter and spirit of the law, the school district should not have any problem.  However, if the school district is using the tort immunity fund to pay for items that really should be paid for with another fund, then the school district has a problem.  A taxpayer has the right to sue the school district for return of the improperly levied funds.  Now, you might think that the likelihood of recovery on a lawsuit of this nature is slim.  But there have been some high-profile cases in which taxpayers have won and forced the school district in question to return the improperly levied funds.  (See here and here).  Notably, the Illinois State Board of Education has even cautioned school districts about their use of tort immunity levies in the wake of the Freeport and Quincy cases (see here).

So, why is this topic coming up now here at Minooka CCSD 201?  Well, probably because the school district is levying taxes at the maximum rate in each of the funds that has a rate limit.  In addition, the district is currently operating at a deficit with more deficits as far as the eye can see.  Faced with that situation, what is a district likely to do? 

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