Sales Tax Redux

The Grundy Economic Development Council and Grundy County Chamber of Commerce and Industry are hosting a meeting and presentation regarding the proposed County School Facility Tax (the proposed sales tax increase which I have previously written about here and here) at 7 p.m. on Tuesday, October 22, in the board room of the Grundy County Administration Center.  The address is 1320 Union St., Morris.  The public is welcome to attend this meeting.

The meeting will feature a presentation from representatives of Stifel, Nicolaus, an investment banking firm based in St. Louis, Missouri.  They, of course, will tell everyone that they are doing this out of the "goodness of their hearts" and have "no financial interest" in seeing a sales tax increase pass.  I find that hard to believe, when they make their money by helping school districts to float bond issuances, and there will be a lot of money to be made on those if this sales tax passes in Grundy County.  Mark my words, if the sales tax passes, and Grundy County schools float bonds based on the anticipated revenue from this sales tax, you will see Stifel, Nicolaus and their ilk collecting handsome fees from Grundy County school districts.

An additional side note:  the County School Facility Tax has been defeated twice in neighboring LaSalle County (the second time around the percentage opposed was greater than the first time around). 

Get Ready for the Largest Municipal Bankruptcy in U.S. History

In his book The Sun Also Rises, Ernest Hemingway penned a classic exchange regarding bankruptcy.  "How did you go bankrupt?," asked one character.  "Two ways.  Gradually, then suddenly." was the reply.

Well, the same can certainly be said of Detroit, Michigan.  Detroit is getting ever closer to declaring bankruptcy (see here).  If Detroit does declare bankruptcy, it would be the largest municipal bankruptcy in the history of the United States.

What does this have to do with Minooka CCSD 201?  Well, most of us know that the State of Illinois has financial trouble of its own, including the worst underfunded pensions in the nation and pension contributions that are increasingly eating into current services.  Well, if you follow the link above and read the article, you will notice that the Detroit emergency financial manager, Mr. Orr, is contemplating a plan where, among other things, retirees will receive less than 10% of their promised benefits under the current pension plan.  I am quite sure that this is going to cause a great deal of financial hardship for those retirees.  One lesson that we can learn from Detroit's example is that when a municipality (or perhaps a state, in the case of Illinois) gets into serious financial trouble (and by all accounts Illinois is already there), the "promises" that were made pursuant to a pension plan become negotiable.

Now a state is different in at least one important respect: under current law, states cannot file for bankruptcy protection.  They can, however, renegotiate "promises," and you can be sure that they will.  States after all go bankrupt (or become insolvent) just like any other entity . . . "[g]radually, then suddenly."

Why I Oppose a Sales Tax Increase for Grundy County

At a recent joint school board meeting of Grundy County school boards, the possibility of asking voters to approve a School Facility Occupation Tax for Grundy County was discussed.  For more background on this tax, see here.

As a member of the Minooka CCSD 201 school board and as a voter, I will be voting "NO" on the question of the tax increase.  Here is why:

1.  I have two children, currently attending Minooka CCSD 201 schools, who will one day be taxpayers.  I would like them to be able to afford to live in Grundy County if they so choose.  I am therefore opposed to increasing their future tax burden.  This is not a one time referendum for issuing bonds to build a school or two.  This is a permanent tax increase.  There is no provision in the statute for a county to decide that this tax is no longer needed (if it ever truly was).  So, on top of a recent 67% increase in the state income tax (from 3% to 5%), we would be piling on a 16% increase in our sales tax (from 6.25% to 7.25%).  I know many people are going to say that "this is for the children" (in fact, I have already heard this), but we should be careful what we do "for the children."  The people that are children right now are going to be taxpayers one day.  We should do everything in our power not to burden them with additional taxes.  Otherwise, they may find that it is too expensive to live in the communities in which they were raised.

2.  This would be a pure tax increase no matter what anyone would lead you to believe.  This is not swapping one form of tax for another.  It has been argued that school districts could lower their property tax levies to offset the impact of this tax.   Even if they could, that does not mean that they will.  There is no provision which requires them to lower property taxes in response to increased revenue from a sales tax.  If you think that some or even any school districts would lower their property tax levies in response to an increased sales tax, you are putting a lot of faith in school boards to look out for the interests of taxpayers.  A school board may promise to do this in order to get the voters to support the sales tax increase, but such a school board would have no legal obligation to fulfill the promise and, in any event, cannot bind a future school board (remember, the tax increase would be permanent).

3.  Voters will be giving up an enormous amount of control over spending on school facilities.  As it stands right now, school districts must come to the voters for approval to issue bonds for capital projects such as building new facilities or improving old facilities.  With this tax increase in place, the voters will be giving up the ability to control such spending.  School boards will no longer need to "sell" projects to the voters.

4.  This money will burn a hole in the pockets of many school boards.  Governments, even more than individuals, have a tendency to burn through any money that they can get their hands on.  If there is no pressing need to spend and they have money, they spend on what are arguably wasteful projects.  Right now, many school districts are feeling the pain of the recession (which brought about falling property tax revenues) and are looking for a way to raise more money.  Rather than cutting back on spending to make it through the rough patch, they want to increase revenue.  Once we get through this rough patch, however, they will still be collecting money through this tax, even though they will no longer need the revenue.  Again, this tax is permanent.  You will be paying the tax whether the school districts need it or not.  And it can only be spent on school facilities.

5.  The revenue from any potential tax increase can only be spent on school facilities.  It can not be spent "in the classroom."  Some school districts in Grundy County may need new facilities now or in the future.  This tax would be collected on behalf of all the school districts in Grundy County whether they need new facilities or not.  Let those school districts that have a need for new or improved facilities ask the voters of their districts for approval to issue bonds to fund such projects.  That way, taxpayers in those districts that don't have such a need will not have an additional tax burden.

6.  A sales tax is the most regressive form of taxation.  That is, it has the most impact on those who are least able to pay the tax.  Everyone who buys goods in the county will see their sales taxes increase.

7.  There has been some talk about how many people who are not residents of Grundy County will pay this sales tax.  Well, I doubt that the percentage of such people is very high compared to those of us that live and shop in Grundy County.  So, I doubt that there will be much of a subsidy from non-residents.  But, even if there were, how is it fair to try to shift the financial burden of educating our children to others?

 

Our Very Own Fiscal Cliff

I hope everyone in Minooka CCSD 201 is prepared for our very own "fiscal cliff."  Yes, the school board and the superintendent have set up a situation in which the district is purposely spending more than its revenue.  And when the district runs out, they are going to go to the taxpayers for more money.  The school board and the superintendent are going to tell the taxpayers that unless the taxpayers give the district more money, educational programs and/or athletic programs will be hurt and it will be the taxpayers' fault if the district goes over the cliff.

In the meantime, the school board and the superintendent are going to act like they are doing something about the current operating deficit (which is in excess of $2 million per year).  The latest deficit reduction plan, passed at last month's board meeting (see here), consists mainly of "smoke and mirrors."  If you read to the end of the deficit reduction plan, you will see a projected savings of $768,000.  Two-thirds of that number (the $500,000 "Health Insurance Fund" surplus), however, consists of savings that have already been realized and are already accounted for in the calculation of the current deficit. 

You see, the "Health Insurance Fund" is part of the Education Fund.  And even though there might be a surplus in the "Health Insurance Fund" (which is not a fund recognized by the state for school budgetary purposes), there is a deficit in the Education Fund as a whole.  It is as if you decided not to spend the $100 in your left pocket (which you counted as a saving, which of course it was at the time) and later transferred that $100 to your right pocket (counting it again as a saving, which of course it is not).  You see, it is not just politicians in Washington D.C. and Springfield that engage in "smoke and mirror" games.  Local entities are just as adept at these type of shenanigans.  So, the real number is closer to $268,000 (though even that contains more than a little wishful thinking).

As you can see, the latest deficit reduction plan at best represents a mere 10% of the current deficit.  Within two or three years, the balance in the Education Fund will be depleted and it will start going "into the red."  Rather than trying to significantly reduce or eliminate the deficit, the school board and superintendent are choosing to run the district right up to the cliff.  Then when we are at the cliff, they will try to convince the taxpayers that the taxpayers will be responsible for going over the cliff unless the taxpayers give the district more money by passing a referendum to increase the tax rate.

Our Children's Future

A recent article in the New York Times about the plight of Detroit (click here) got me to thinking.  I sure hope that our children take better care of their children's future than we have taken of our children's future.  You might ask, "what does the plight of Detroit have to do with my children's future?"  Well, the quote from John Boyle at the end of the article sums it up nicely:  “Detroit is a microcosm of what’s going on in America, except America can still print money and borrow."  Detroit is indeed a microcosm of what is going on in America.  From coast to coast and from local government on up, we have made promises that were unsustainable.  We should have known that they were unsustainable when they were made.  After all, a little basic mathematics, including an understanding of exponential functions, is all that is necessary to know that continuous growth in public sector wages, pensions and taxes cannot be sustained.  That was then, and this is now.  Now it is time to pay the piper.

We have created a society which our children cannot afford.  And, what is worse, we continue to make the same mistakes at every level of government.  

Is This The Future Of Illinois?

This blog is about Minooka CCSD 201, but sometimes I post about happenings in other places in order to illustrate a point.  (Also, because the school district is affected by happenings on the state and federal level).  This is one of those times.  It seems that Harrisburg, Pennsylvania is sinking, not only financially but literally (see here).  You see, they spent money unwisely and took on too much debt.  As a result, the city is on the verge of bankruptcy and is having difficulty getting a loan.  Over the years, they neglected the maintenance of basic infrastructure like sewer and water pipes.  Now, sink holes are opening up all around the city due to the sandy soil and the leaking pipes.  The city not only neglected this maintenance but now is having trouble even making its payroll.  The State of Illinois, meanwhile, had its credit rating recently down graded (again) by one of the major rating agencies (see here), leaving Illinois with the worst credit rating of any state in the nation.  As a result, Illinois recently shelved plans to issue $500 million in bonds for school and transportation projects (see here).  Now, Illinois may eventually issue these bonds, but the state (and, therefore, ultimately the taxpayers) will end up paying more in interest on the bonds due to the state's poor credit rating.  This is a classic debt-spiral, which I have written about previously (see here and here).  Harrisburg is merely farther along down the spiral than Illinois.

So, what causes a debt-spiral and how does a state, city, school district (or nation, for that matter) avoid one (or, if it is already in one, how does it get out)?  If you boil it down to its root cause, a debt-spiral is caused when an entity (state, city, school district, etc.) refuses to live within its means.  Public sector entities are supported by taxes on the private sector (even money printing by a central bank like the Federal Reserve is ultimately a tax).  However, there is only a certain level of taxation that the taxpayers (the private sector) are willing or able to support.  It is sometimes difficult to determine what that level of taxation is for any given public sector entity since it depends on a multitude of factors.  As is all too typical, once a public sector entity starts to bump up against that level of taxation and has trouble raising current revenue it enters the debt markets and floats bonds in increasing amounts to obtain current funds in exchange for future taxation.  (Long term debt financing for necessary and prudent capital projects is one thing, but debt financing for current consumption is a clue that you have entered debt-spiral territory.)  The interest payments on these bonds, of course, just make the current problems worse and the public entity finds itself going to the debt markets with increasing frequency just to pay for current services.  (This is very much like a family that lives beyond its means and starts to use mortgage debt or a home equity loan to pay for day to day expenses.)

So, how does a public sector entity avoid a debt-spiral?  The same way that an individual or a family avoids a debt-spiral: it lives within its means.  For a public sector entity, that means that it must keep its expenses below (to be safe, well below) that level of taxation that the relevant taxpayers are willing or able to support.  This is the crux of the matter since most people spending public money do not spend such money as if they were spending their own money.  They tend to spend it much more freely.  Once a public sector entity finds itself in a debt-spiral, how does it get out?  There are really only two ways out: some form of debt restructuring (such as bankruptcy) or a bailout from a public sector entity higher up the food chain (also known as "kicking the problem upstairs").  In order to avoid going back into the debt-spiral again, the public sector entity must live within its means.

Calvin Coolidge (one of the most underrated Presidents of the United States) once stated the following:  "I favor the policy of economy, not because I wish to save money, but because I wish to save people.  The men and women of this country who toil are the ones who bear the cost of the Government.  Every dollar that we carelessly waste means that their life will be so much the more meager.  Every dollar that we prudently save means that their life will be so much the more abundant."

Next Minooka 201 Finance Committee Meeting

The next meeting of the Minooka CCSD 201 Finance Committee will be Wednesday, December 5, 2012. 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. Finance Committee meetings are open to the public, so everyone is welcome to attend. The Finance Committee will be discussing a new deficit reduction plan to further address our operating deficit.  So, if you want your voice heard during the process, you may want to attend the Finance Committee meeting.  The agenda for the meeting is available here.

As an informational reminder, here is a link to the Minooka CCSD 201 budget for fiscal year 2012-2013, as well as a link to a previous post regarding the financial projections which were presented to the Finance Committee this past January.  We now know that the EAV (the property value upon which property taxes are based) in the district fell by roughly 8% in 2011, whereas the projections had assumed that the EAV would be stable.  Therefore, updated projections would reflect a bleaker local revenue picture than previously projected.

There are really only two courses of action open to the school district.  The first course of action is to make the needed cuts in order to bring our spending into line with our realistic revenues under the current property tax rates.  The sooner these cuts are made, the smaller the cuts will need to be since their effects would be compounded over time.  If the district were going to opt for this course of action, what would be needed would be a complete top to bottom review of the district budget.  Every dollar that is being spent would be questioned.  Every opportunity to save money would be explored.  The current deficit is approximately 5% of the total budget.  Which means that for every dollar that the school district spends, it would have to find a way to save 5 cents.  The second course of action is to refuse to make the needed cuts (or make largely symbolic cuts) and hope that the voters in the district will vote in favor of a referendum to raise their tax rates.  Of course, if the voters vote down the referendum, then the school board and the school district will be faced with making drastic cuts quickly.  If this is the situation that we find ourselves in a few years from now, it will not be the fault of the voters but rather the fault of the school board.

Anothery Canary in the Coal Mine: San Bernardino, CA

Is this the ultimate outcome of the public pension crises?  One day, when the money runs out, when the bond buyers will no longer finance the deficits, and when taxpayers refuse to pay more in taxes, do the pension payments just stop?  While the article is talking about a city (which can file for bankruptcy protection under current law) and not a state (which cannot file for bankruptcy protection under current law), perhaps Illinois politicians should redouble their efforts to reform the state pension systems, for the sake of the pension participants, bond holders (which are, interestingly enough, often pension funds themselves), and taxpayers.  Every day of delay merely makes the problem that much larger (actually, this could also be said of our own school district's deficit spending).

What Does Fiscal Responsibility Look Like?

At a meeting on September 19, 2012, the school board in Quincy, Illinois (Quincy Public School District #172) passed resolutions stating that they were going to end the all too common practice of end of career salary bumps for district personnel (you can read the resolutions here).  In the resolutions, the Quincy school board stated their reasoning for this move.  The resolutions state that "the [Board of Education] believes the practice of pre-retirement compensation increases to staff members is a contributing factor to the current economic crisis of the [Teachers' Retirement System]" and further that "the [Board of Education] believes it fiscally appropriate to work for the expeditious elimination of such pre-retirement compensation increases as they exist today within the Quincy Public Schools, in order to strengthen the financial condition of the Quincy Public Schools, contribute to the strengthening of the [Teachers' Retirement System] and contribute to the financial integrity of any other retirement systems affected by such increases."

So, at least one Illinois school board is considering the affect that their actions have not only on their own school district (and, therefore, local taxpayers) but on the pension systems as a whole (and, therefore, participants in the pension systems as well as local and state taxpayers).  But, we must keep this in perspective, since these glimpses of fiscal responsibility are few and far between.

For a refresher on our own school board's actions with regard to these matters, see here, here and here.

Next Minooka 201 Finance Committee Meeting and Our Continuing Deficit Problem

The next meeting of the Minooka CCSD 201 Finance Committee will be Thursday, October 18, 2012. 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. Finance Committee meetings are open to the public, so everyone is welcome to attend. The Finance Committee will be discussing a new deficit reduction plan to further address our operating deficit.  So, if you want your voice heard during the process, you may want to attend the Finance Committee meeting.  Of course, you could wait until a future board meeting when the deficit reduction plan is voted on, but at that point it might be too late to have much of an impact.

As an informational reminder, here is a link to the Minooka CCSD 201 budget for fiscal year 2012-2013, as well as a link to a previous post regarding the financial projections which were presented to the Finance Committee this past January.  We now know that the EAV (the property value upon which property taxes are based) in the district fell by roughly 8% in 2011, whereas the projections had assumed that the EAV would be stable.  Therefore, updated projections would reflect a bleaker local revenue picture than previously projected.

Illinois Debt Downgraded . . . Again

So, after another failure of Illinois politicians to address the ever-growing pension problem, Standard & Poor's (one of the largest credit rating agencies) has downgraded Illinois debt from "A+" to "A."  (see here)  Now an "A" might seem like a good grade, but when it comes to ratings of state debt, it is atrocious.  Only California has a lower debt rating than Illinois (these two states seem to be competing for last place).  Standard & Poor's has also attached a "negative outlook" to the rating, which means another downgrade may come soon.  What does this mean for Illinois?  It means that Illinois is going to have to pay more to borrow money.  For better or worse, bond investors pay a great deal of attention to debt ratings.  When ratings go down, they demand a higher interest rate on the debt of the rated entity.  Which in turn means that Illinois' fiscal problems will grow worse.  Since Illinois is living on borrowed money to fund its spending and pensions, the "hole" just got bigger.  This is a small glimpse of what a "debt-spiral" looks like.  If Illinois politicians continue to ignore the problem, the ratings will continue to drop, the cost of funding will continue to rise, the problem becomes bigger, rinse and repeat.  Once a "debt-spiral" gets started, delay only increases the difficulty and pain of pulling out of the "debt-spiral."  Time works against an easy solution.  As time goes on, the reforms to the pension system will have to be increasingly more drastic in order to fill the "hole."  If one wants an example of a more advanced stage of a "debt-spiral," one merely needs to look to Greece.

Update:  Since I mentioned California, here is the latest news on pension reform out of California.   

A "Date with Destiny" or Another Opportunity to Kick the Can Down the Road?

So, Governor Quinn has called a special session of the Illinois General Assembly and set a vote on pension reform for August 17th.  Governor Quinn has called this a "date with destiny" (see here).  Depending on whose figures you believe, Illinois has anywhere from an $83 billion to $203 billion unfunded pension liability (see here).  It is getting to the point where Illinois will soon be spending more on pensions than on education (see here).  Increasingly, pension payments are "crowding out" spending on other state services (see here).  This fiscal calamity that is staring the Governor and the General Assembly in the face, however, may not be enough (at least, not yet) to prod politicians to actually do anything about pension reform, however.  The politicians already seem to be lining up their excuses for kicking the can down the road one more time (see here).  Unfortunately, every time that Illinois politicians kick the can further down the road, the problem continues to grow, and the pain necessary to alleviate the problem (including the pain for those who depend on state pensions) continues to grow.  Not only does the unfunded liability continue to grow, but the cost of financing state deficits will grow as bond rating agencies downgrade Illinois debt (see here).

You may not be able to depend on Illinois politicians to tackle the problem of pension reform any time soon, but you can depend on at least one thing in this mess: pension liabilities that are not sustainable (and every rational person on both sides of the aisle from the Governor's office to the General Assembly agrees that the pension liabilities are not sustainable) will not be paid in full.  Kicking the can down the road does not help anyone (except maybe the politicians, who seem to care only about their next election).  It does not help the taxpayers, who can only look forward to their taxes being raised yet again.  It certainly does not help the people that depend on the pension liabilities being paid, who may wake up one day to only to find out that the pension they relied upon is being cut drastically (one town in Alabama stopped paying pensions entirely, see here).  And it most certainly does not help the younger public sector workers (teachers, firefighters, policemen, etc.) whose positions are being cut because pension obligations are taking a larger and larger share of state and local budgets (see here). 

Next Minooka 201 School Board Meeting or Par for the Course Part II

The next meeting of the Minooka CCSD 201 school board is Wednesday, June 27, 2012. 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 a Budget Hearing at 6:45 p.m. in the gymnasium. The Budget Hearing will be followed by the regular Board Meeting at 7 p.m. Each of the meetings are open to the public, and everyone is encouraged to attend. You can find the agenda for each of the meetings here.

You may notice that one of the items on the agenda is the retirement of Assistant Superintendent Stef Palaniuk after the 2015-2016 school year. This may seem like an innocuous agenda item, but instead it will be another instance of padding an administrator's salary for his last years of service and consequently his pension (for a discussion regarding this practice see Par for the Course). The school board is likely to vote to give the Assistant Superintendent a package that is substantially similar to the one recently given to the Superintendent (including four annual raises of six percent per year, severance bonuses for a number of years after retirement, and health care coverage until he is eligible for Medicare). This practice which pads an administrators' pension is one of the reasons that among the Illinois pension reform proposals is a plan to shift the pension costs of local teachers and administrators to the local school district (see here and here).

A reason that is commonly given to support this practice is that this is "the same deal that the teachers receive pursuant to their contract."  While this may seem like a fair point, it is not the whole story.   The provision of the teachers contract that is being referred to is an early retirement incentive (see page 29 of the teachers contract).  This provides an incentive for veteran teachers to retire.  When a veteran teacher (often being paid in excess of $70,000 per year) retires at the end of their many years of service, they are typically replaced by a recent college graduate who enters the salary schedule at a much lower rate of pay (close to $40,000 per year).  This early retirement incentive was put in place so that the district can SAVE money.  But, when an administrator is replaced, the new administrator's salary is typically based upon the previous administrator's last salary.

So, padding the administrators' salaries at the end of their careers is just throwing the taxpayers' money at them with NO SAVINGS and no real advantage for the district.  In other words, the district gets nothing of value for this give away.  In addition, the reality of the situation is that this practice harms the school district.  Many people act as if the amount of money available for public services is infinite, but I assure you that it is not.  And whether the additional money for these padded salaries and padded pensions comes out of local district money or state money, the truth is that there is less money to be spent in the classrooms.

Therefore, this practice directly harms education in order to enrich a small group of people.  If the local district had to pay the increases to the TRS pension liabilities due to this practice, it is very likely that districts would engage in the practice much less often.  So, we can talk all we want about the unsustainable spending practices that occur in Springfield or Washington, D.C., but if we want to find unsustainable spending practices, we need look no further than our own local school district.

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? 

Par for the Course

Dramatically increasing a superintendent's salary at the end of his career so as to pad his retirement is nothing new in Illinois.  Rather, it is par for the course.  Illinois seems to have a tradition of doing just this, among our other illustrious traditions.  It is one of the reasons (among other reasons, like the state failing to pay its required contributions in full over the last thirty or so years) that the Teachers' Retirement System (TRS) is in financial trouble.  In fact, TRS is projected to become insolvent by 2029 according to Executive Director Dick Ingram (see here).  School districts all over Illinois have engaged in this practice of increasing salaries and thereby padding retirement pay (you can read about it here).  This may be one of the reasons that Governor Quinn has proposed in his pension reform plan to shift the state's responsibility for TRS contributions to the local school districts (click here for analysis of the pension reform proposals).

You see, this problem of school districts dramatically increasing salaries just prior to retirement in order to pad pensions has been going on for a long time.  Because the burden of those increased pensions is borne by the state, the state has tried to rein in the practice.  In 2005, they passed a law saying that the local districts could continue to do this but that a district would have to pay a penalty (meant to help the state bear the burden of the increased pension) for any raise greater than 6% per year.  Since the passage of that law, it is interesting to note just how many of these end of career raises were exactly 6% per year (the recent proposed contract for the Minooka CCSD 201 superintendent contains annual raises of exactly 6% per year).

Now 6% per year is still a large number (and remember this is just the increase in salary--it does not include the three years of retirement payments or post-retirement health insurance costs) when your economy and, therefore, tax revenues are growing at a much slower rate.  It is a very large number when, as is the case in Minooka CCSD 201, the equalized assessed valuation upon which property tax revenue based is dropping (the EAV of the district dropped almost 6% from 2009 to 2010 and nearly 10% from 2010 to 2011).  All the talk about our district's budget over the past three years has been about how we are projecting sustained and growing deficits as far as the eye can see (remember deficits, debt and insolvency are not the same thing, but deficits over a sustained period of time certainly create debt and insolvency once your cash balances are depleted).  In addition, as we will see in the near future, even these projections do not present an accurate picture since the assumptions of stable or growing EAV upon which they are based are already proving to be seriously flawed.  As many of you are aware, over the course of the past few years, our school district has instituted many deficit reduction measures from saving money on our health insurance costs, increasing our student registration fees, and, unfortunately, reducing teaching and support staff positions.  And, based on the budget realities going forward, there will be many more such hard decisions to come.  But, the taxpayers and parents of Minooka CCSD 201 can rest assured that the district has taken care of its superintendent both now and in retirement (see previous post).

Superintendent Offered New Contract

At yesterday's meeting of the Minooka CCSD 201 school board, the school board voted (by a 5-2 vote) to offer the current superintendent, Mr. Al Gegenheimer, a new four-year contract (click here for a copy of the proposed contract; see subsequent post for more information).  Those voting "yes" were Skwarczynski, Hannon, Budde, Carlson and Satorius.  Those voting "no" were Brozman and Martin.  The new contract, which purports to take Mr. Gegenheimer up to his retirement, includes a 6% raise for each of the four years of the contract.  This is after the school board voted at the January 2012 meeting to increase the superintendent's salary by 3% for the 2011-2012 school year, retroactive to July 1, 2011 (another 5-2 vote, with the same members voting "yes" and the same members voting "no").  The salaries over the four years of the new contract would be as follows (the superintendent's current salary for the 2011-2012 school year is approximately $136,269):

2012-2013:  $144,445
2013-2014:  $153,112 (approximate based on 6% raise)
2014-2015:  $162,298 (approximate based on 6% raise)
2015-2016:  $172,036 (approximate based on 6% raise)

A little quick math tells you that the final projected salary of $172,036 represents an increase of approximately 26% over the superintendent's current salary.  If you include the 3% retroactive raise from January of this year, the $172,036 represents an increase of approximately 30% over the superintendent's salary at the end of the last school year. 

In addition, the new contract provides for three annual post-retirement payments equal to 20% of the superintendent's final annual salary.  So, assuming a final salary of $172,036 as projected above, the three annual payments would be $34,407 each.  That is, the taxpayers of Minooka CCSD 201 will be paying the then former superintendent $34,407 each year for three years at the same time he is collecting a pension of up to 75% of the average of his highest four years of salary from the Teachers' Retirement System (approximately $118,480 based on these assumptions).  Keep in mind also that in addition to paying the then former superintendent, the taxpayers of Minooka CCSD 201 will be paying the salary of a new superintendent as well.

The contract also provides for the school district to provide the superintendent with health insurance (hospitalization/major medical) during his retirement until such time as he qualifies for Medicare (typically at 65) or becomes employed by another employer offering health insurance coverage.  This means that if the current superintendent retires at the end of this agreement, the school district would be obligated to provide him health insurance for approximately five years.  At the time that the proposed contract was voted on, it was unclear whether this provision was legal.  As a consequence, the motion that was voted on provided that the proposed contract be accepted pending further consultation with the school district's attorneys.  Since the proposed contract was presented to the school board for the first time at some time after 10 p.m. on the night of the meeting, it would have been difficult to consult the school district's attorneys before the vote was taken.

For those who like to put the pieces together and see the big picture, see my previous posts regarding financial projections, unsustainable spending, and underfunded pension systems.  The most difficult thing about being an elected official is that it is easy to spend other peoples' money (Margaret Thatcher had a famous saying about spending other peoples' money).  It is much more difficult to enforce discipline.  There is something akin to a moral hazard at work.  If you need proof, you can merely look to the budget deficits of the federal, state and local governments.

Bumps in the Road: Part 2

So here is Governor Quinn's pension reform plan.  As you can see, the plan calls for an increase of 3% to employee contributions, reduction of the cost of living allowance (COLA), delay of COLA, increase of the retirement age to 67, and shifting the state's current payment responsibility to local school districts, community colleges and public universities over a period of years.  Of course, this is merely a plan at this point and will be subject to political deal-making and subsequent modifications.

Bumps in the Road

I saw this article about municipal defaults, and it reminded me about the bumps in the road.

Seeing the Bumps in the Road

What happens when the future does not look like the recent past? Psychologists tell us that human beings are subject to something called "normalcy bias." In essence, it means that human beings believe that their future will look a lot like their past (typically, their more recent past). According to the "normalcy bias" theory, we humans have a hard time seeing the bumps in the road ahead, and the larger the bump, the harder time we have seeing it (as counterintuitive as this may seem).

So why do I bring this up? Because, it has something to do with what is likely coming down the road in terms of our school district. In order to see what the future holds for our school district, we have to see beyond the borders of our district and look at the bigger picture (i.e., what is happening at the state level and the federal level). Most of us know that both the State of Illinois and the United States government have budget problems. But, how many have thought about the true extent of those problems, the likelihood of any constructive solutions to those problems and what this means for our school district? If we are being brutally honest with ourselves, we must accept that due to political constraints, neither the state nor the federal government are likely to solve their budget problems until they are forced to do so.

Illinois will be forced to confront its budget problems much sooner since Illinois does not have the ability to print money like the federal government. In fact, Illinois is in the beginning stages of really confronting its budget problems. I say "confronting" rather than "solving" because many of the strategies that are being floated are methods of shifting the burdens caused by the state's profligacy to the municipalities and school districts in Illinois. So, for example, some of the strategies being discussed are (1) cutting back on transportation funding for school districts (see here); and (2) shifting the burden of teacher's pensions to the local school districts (see here and here). Other strategies would hit retired teachers directly (see here).

Now, the discussion of these strategies are largely preliminary at this point.  Some strategies will be followed and others will be discarded.  However, it should be clear that in the future (the very near future), education funding from the State of Illinois will be dropping significantly (more than it already has).  It is also likely that at the same time that the amount of state education funding is dropping, the state will be shifting additional financial burdens (at least some portion of unfunded pension burdens) to the local school districts.  We should not assume that federal funding will replace state funding, since even though the federal government can print money to finance its deficits, it can not do so without causing inflation.  Also, the federal government's budget problems are just as serious, if not more so, than those of Illinois.  For those who think that the economy is on the mend and the financial crisis is a thing of the past, all you have to do is compare the annual growth rate of federal debt (roughly 10% per year) to the annual growth rate of the U.S. economy (roughly 2 or 3% per year, if we are lucky).  Perhaps this is an opportunity for us to teach our children what it means for something to be "unsustainable."

So, what is a local school district to do?  I would suggest that Illinois school districts like ours should plan for the future by preparing for zero funding from the state and federal government.  This will, of course, imply changes to the operation of our school district.  The loss of transportation funding would be a large adjustment on its own.  The more difficult adjustment, however, would be the possibility that, in the not too distant future, the cost of all local teachers' and administrators' pensions will be borne by local school districts.  The adjustments will be even harder if we allow ourselves to be lulled into complacency by the "normalcy bias."