And So It Begins...

Well everyone, it begins.  "What begins?," you might ask.  Minooka CCSD 201 has begun to issue working cash fund bonds (see here at page 4 of the July 17, 2017 meeting minutes under Item 5.01).  This is the end result of years of overspending.  It is an eventuality that I have warned about a number of times both in this blog (see here, here, and here) and as a member of the school board.

Essentially, the school board is funding day-to-day expenses with long-term debt (in this case five-year bonds).  Why?  Because the district has been overspending for years.  Rather than cut expenses to meet the revenue that the taxpayers have provided based on the approved tax rates, the school district has created and the school board has approved a cost structure that exceeds such revenue.

This is not something that is responsible for you or I to do in running our households, and it is not responsible for a government body to do either.  Many people decry the financial condition of the State of Illinois, the City of Chicago, and Chicago Public Schools, among many others.  If one looks back in the history of each of those entities, one would find the point at which they each began to fund day-to-day expenses with long-term debt.  That point represents the beginning of the financial crisis that each such entity finds itself in. 

No one should expect this to be an isolated event.  This represents merely the first of what will likely be many such bond issuances.

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? 

Next Minooka 201 School Board Meeting and Finance Committee Meeting

The next meeting of the Minooka CCSD 201 school board is Wednesday, November 16, 2011. The Committee of the Whole Meeting starts at 6:00 p.m. in the board room (the old library) at the Minooka Primary Center located at 305 Church Street in Minooka. The Committee of the Whole Meeting will be followed by the regular Board Meeting at 7 p.m. Please be sure to mark your calendars. You can find the agenda for each of the meetings here.

Also, there will be a meeting of the Minooka CCSD 201 Finance Committee on Tuesday, November 15, 2011 (the day before the school board meeting). The Finance Committee meeting starts at 6:00 p.m. in the board room (the old library) at the Minooka Primary Center located at 305 Church Street in Minooka. If you want to have some input into the Minooka CCSD 201 finances, you may want to attend this meeting. You can at least get some information about when and by what amount the school board will eventually seek to raise your property taxes. It may not be this year or next year, but you can be assured that in the next few years the school board will seek, either by a rate hike referendum or a "back door referendum," to raise property tax rates. (For an explanation of a "back door referendum" see here.)

The Back Door Referendum: Part II

My first post on the "back door referendum" has provoked quite a few comments (I have declined to publish the comments to protect anonymity). Some concern has been raised that Minooka CCSD 201 may be considering a "back door referendum" in the near future. At this time, there is no cause for concern. My initial post on this subject was merely for informational purposes. To my knowledge, the Minooka CCSD 201 school board has not had any discussions about an imminent or proposed "back door referendum." If this issue arises in the future, I will publish a post on this blog. It will then be up to the voters to decide if they want to force the school board to put the question to the voters of the district in a subsequent election. According to Illinois law, petitions can not be circulated until a school board has voted on and approved a "back door referendum" and thereby started the 30 day time clock. Interested persons can, however, begin getting together and planning to gather signatures. With decent prior planning and the help of the internet and email, it would be relatively easy to gather the signatures of 10 percent of the registered voters of the district. The people who gathered signatures in the recent Palatine SD 15 case were able to gather hundreds more signatures than they needed.

I have also received a number of questions regarding bonds and school finance in general. In the near future, I will attempt to explain certain aspects of school finance. At the most recent school board convention (a couple of weeks ago), I attended a number of seminars, one of which was on the topic of school finance and issuance of school bonds. I will share what I learned.

The Back Door Referendum

Typically when school districts such as Minooka CCSD 201 want to raise additional property tax revenues or sell additional bonds, they must put a rate increase referendum or a bond referendum on the ballot and ask the voters to approve the referendum by a majority vote. Illinois law, however, provides the school board with another option, which has come to be known as the "back door referendum." Essentially, the way it works is that the school board is allowed to vote to issue "working capital" bonds. Once the school board approves the working capital bonds, any resident of the district who wishes to protest the issuance of the bonds has 30 days to gather the signatures of 10 percent of the registered voters in the district. If they are able to do this within the 30 day time limit, then the school board must put the issuance of the bonds to the decision of the voters in a referendum at the next election. If no person protests the issuance of the bonds and gathers the appropriate number of signatures, then the school district is allowed to issue the bonds. This turns the usual bond issuance process on its head. Under the normal process, bonds are only allowed to be issued upon a majority vote in a referendum. Here, bonds are allowed to be issued unless the protest of 10 percent of the registered voters forces a referendum. Hence, the term "back door referendum." The bond issuance sneaks in through the back door unless 10 percent of the registered voters close the back door.

Because voters typically do not keep a watchful eye on their elected representatives and because the time frame to gather the required signatures is fairly short, "back door referendums" are usually successful. Since this process has been available to school boards, there are very few instances in which voters have forced a referendum. The difficult economy and the internet may change that, however. In the past year, some concerned citizens in Palatine School District 15 were able to force a referendum on the issuance of $27 million in "working capital" bonds. In the recent election on November 2, the voters in that district voted "NO" on the referendum by a vote of 67 percent to 33 percent. You can read about it here, here, here and here.