First, take on school finance

By IASB and William Phillips
William Phillips, Ed.D., is a field services director with the Illinois Association of School Administrators and an Associate Professor of Educational Leadership at the University of Illinois-Springfield.

The financing of public schools is the most common challenge confronting school boards. For new board members, understanding school finance is the steepest learning curve. As you first take on school finance, here is a “first take” for new school board members.

It will surprise no candidate or new school board member that the task of meeting a school district’s needs with the available funds is pressing. In IASB’s 2018 member survey, respondents ranked budgeting and funding as the top issue facing their district. District finances ranked second — only to overall leadership — as the topic of interest to most school board members. It’s a deep and dynamic issue that challenges everyone, especially but not exclusively new school board members. This introduction to school finance will be the first steps for a new board member in understanding a complex but vital topic.

Each school board should have adequate business management and legal talent available. The board receives and expends large amounts of public monies, and the board is accountable for all of it. Therefore, each school board must regularly and consistently monitor the financial health of the school district, both current performance and long-term trends. Boards also set budget priorities and standards for budget preparation, protection of assets, purchasing, and related business activities.

With limited revenue available to meet ever-increasing demands for improved and expanded educational services, the financing of quality education must be a concern that occupies the minds of board members much of the time. The school board must answer the question: “How much is this community willing to spend on its schools and how do we balance that with requirements of the state and the needs of our students?”

Sources of funds

In general, Illinois school districts have five primary sources of income: Local property taxes, the county sales tax, state aid, federal aid, and borrowing (long term debt, bonds).

Local property taxes

Each year the superintendent should present the school board with a proposed budget. The board examines the proposal and places a tentative budget on file for public inspection. At the end of the inspection period, the board must hold a public hearing and then formally adopt its budget.

Based on the educational needs of the school district, the board adopts a tax levy. The levy states the number of dollars the budget calls for in local taxes. The remainder of the budget consists of what the district expects to acquire in state and federal sources.

The board must adopt its budget during the first quarter of each fiscal year — that is, before October 1 — and then must file its tax levy with the county clerk no later than the last Tuesday in December. The county clerk then extends taxes and produces bills for individual property owners. Taxes are collected and distributed to school districts nine months to a year or more after the board adopts its tax levy. The timing of tax collection and distribution varies among the counties.

The timing of the levy presents a conundrum for school boards: They must ask for local funds based upon approved tax rates and the new Equalized Assessed Evaluation.   But the new EAV is not known when it is due in December; districts must estimate what this number will be.   This creates a forecasting problem and forces districts to guess their new EAV and yet ensure that their maximum authorized amounts of tax proceeds will be received. This process is known as “balloon levying.”   Board members need to keep in mind that if they do not ask for an increase in their previous tax extension by five percent, they are not required to post a public notice known as, “the black box.” However, a public hearing is required for their tax levy.  

For PTELL (Property Tax Extension Limitation Law) districts, the tax levy process is different in that their key numbers are their previous extension times this year’s Consumer Price Index. Thus their tax levies can be more precisely forecast after they compute their “limiting rate.”   After computing this rate, they will know how much their levy is and the district can distribute the levy notwithstanding fund limitations.  

Note, however, that taxes extended by the county clerk are typically lower than taxes levied by the board. Theoretically, the levy can be any amount called for by the budget. The extension, however, is limited by maximum tax rates allowable in each of the school board’s major funds and by an overall cap on annual increases applicable in some counties. The maximum tax extension is determined by multiplying the maximum tax rate by the district’s total equalized assessed property valuation.

County sales tax

With voter approval, school districts in Illinois can access a source of revenue through the County Schools Facility Occupation Tax. A county board must approve placement of the sales tax question on a ballot for voters, either on its own or at the request of school boards representing 51 percent of the total student enrollment for the county.

Money generated through the sales tax can only be used for school facility purposes, such as acquisition of land, construction, rehabilitation or architectural planning, among others. The tax, which can be levied at quarter-cent intervals up to one penny on the dollar, is collected by the State Department of Revenue and distributed to the regional superintendent, who in turn issues the money to any school district in a county that adopts the tax, based on its percentage of students that are residents in that county.

This tax gives school boards an additional option to the local property tax, but it is for limited purposes — school facilities — and must be kept in a specific, separate account designated for that purpose. As of this writing, 56 of Illinois’ 102 counties have approved the County Schools Facility Occupation Tax. Funds derived from this source do not affect a district tax rate and specific bonds may be sold and paid for with this source of revenue.  

State aid

In 2017, Illinois approved a new school funding formula. State aid in the Evidence-Based Funding formula (EBF) is fixed annually by four key components:

Determining the district’s Adequacy Target (AT), which is the cost of educating all students based on 27 defined cost factors, adjusted based on the needs of the student population and a regional cost factor.

Measuring the district’s available local resources (local capacity) and comparing the local capacity to the Adequacy Target as a percentage of adequacy.

Determining the district’s Base Funding Minimum, a hold harmless provision that will be recalculated each year, which guarantees a district no less state funding than the prior year.

Distributing additional state funds — known as Tier Funding — to assist districts in meeting their Adequacy Targets. Districts furthest below their Adequacy Targets receive the greater share of new dollars appropriated.

The distribution from the state to the district starts with the base funding minimum, then adds “Tier Funding,” new money as determined above. There are four tiers; districts with the greatest gaps between their level of resources and Adequacy Target are Tier 1 and receive the majority of new funding, districts that have resources greater than targets are Tier 4. Each new dollar a school district receives through this formula becomes part of its Base Funding Minimum the next year.

EBF replaces the funding model known as General State Aid, which from 1997 to 2017 was distributed to public schools in the form of grants to make up the difference between a foundation level established by the state, and the property tax revenue that districts generated locally.

Federal aid

The federal government has been involved with school support for many years in such areas as title programs, school lunches, special education, funds for educationally disadvantaged students, career and technical education (including agriculture), etc. Some federal money supports the state in its funding of schools; some of it goes to districts that apply for special grants. All federal dollars are subject to appropriation, and vary depending upon federal priorities.

Borrowing

School boards can incur both long-term and short-term debt. Long-term debt usually represents bond and interest payments and requires voter approval within various types of bonds that can be sold. Some require referendums, some do not, and some require what is called a “backdoor referendum.”   There are several types of long term bond instruments available to meet a district’s specific need.   In addition, short-term debt most often represents borrowing against future state aid or tax collections by issuing warrants or notes or applying for a “line of credit.”   Short-term borrowing is designed to enable a school district to pay its bills when income is delayed. Such borrowing does not represent true deficit financing so long as the loans are repaid from current income.

Many districts, however, are forced by circumstances to borrow against taxes anticipated for the next fiscal year. In a few unusual circumstances, boards may borrow against taxes anticipated two years ahead. Borrowing against future years’ taxes is deficit financing in that it means either that current income is less than current expenditures or that a deficit is being carried over from an earlier year. While it is not unusual for a district to sell bonds to generate revenue for annual expenses, this is a temporary generation of revenue and will raise taxes in districts utilizing this situation.

Boards also have access to longer-range forms of borrowing to help them deal with accumulated debt. One of the most valuable insights a school board member can acquire is to understand the meaning of borrowing and the meaning of debt in their various contexts. Borrowing can be constructive or — if not managed properly or over-relied upon — it can become an insidious burden of the school district. Every situation is unique, and new school board members are encouraged to discuss the district’s long- and short-term debt with their superintendent, school business official, and full board of education. Districts utilizing the various types of long term debt available need to be aware of the types of bonds available, effect of additional debt on local property taxes, and repayment options available to their district.   This normally requires professional assistance from one of the various professional firms that provide this service.

Still other sources of revenue for the school district include student tuition and fees, rental of school property, private funds, income from school-sponsored activities, proceeds from insurance claims, interest, and gifts. Such sources usually provide limited amounts of money. However, many districts have found it productive to actively manage the investment of idle funds. Some districts have created educational foundations to pursue private donations and other fundraising activities. Such foundations require a written charter approved by the school board and a board of directors that controls the dissemination of these funds.   They can provide tax reduction opportunities for individuals and companies to donate.

Accounting for school funds

Accounting procedures in the state of Illinois require that income and expenditures be accounted for through the use of funds, which in this case means a group of revenue and expenditure accounts set up to obtain an objective. The education fund deals primarily with the instruction of students; the operations and maintenance fund is primarily concerned with energy costs and the upkeep of buildings; the transportation fund records all revenue and expenditures pertaining to the transportation program of the district. There are other smaller funds set up to meet specific purposes. These funds should be studied and understood by each board member.

Board policies should be very specific in relation to the budget, accounting, purchases, other expenditures, financial reports, audits, and other financial records of the board.

Financial decision-making and board policy

A well-informed board of education can make a big difference to the financial health of a school district. Both the board and superintendent must have access to a wide range of information that accurately portrays the financial condition of the district and its outlook in both the short and long term.

The school board, of course, cannot make the day-to-day financial decisions characteristic of a large and dynamic institution. But the board must make its direction clear through written policies that define fiscal responsibilities, direct the staff toward financial goals, and establish limits regarding budgets, debt, protection of assets, and related issues.

Essentials of Illinois School Finance , an IASB publication by James B. Fritts, outlines the school board’s responsibilities for the school district’s financial performance as follows:

  • Establish clear expectations for maintenance of the school district’s “financial health.”
  • Establish desired outcomes and priorities that need to be reflected in the budget.
  • Establish related expectations of the administration in its construction of the budget.
  • Establish policies and limitations on staff authority governing budget preparation, purchasing, protection of assets and related business procedures.
  • Monitor month-to-month financial performance — income and expense — in relation to the financial plan represented in the budget.
  • Monitor the district’s financial health, both current and long-term.
  • Stay abreast of other financial issues affecting the district.

Additionally, according to Fritts, school board members need to be assured that

  • Board policies adequately govern school district financial and business management procedures, including budgeting, purchasing and bid letting, payment of bills, investing of funds, and other standard fiscal practices necessary to safeguard school district monies.
  • Procedures are in place requiring the segregation of duties of district personnel so as to establish checks and balances in the receiving, banking, and recording of funds, and in requesting, making, and recording of payments.
  • The district is in compliance with school board policies and administrative procedures.

Each of the topics addressed above could fill volumes beyond the scope of this introduction to school finance. New board members are advised to have a conversation, or a series of conversations, about the realities of school funding in your district, and then see of questions and resources below to acquire the next level of understanding.

Editor’s note: Links to the resources in this story can be accessed at blog.iasb.com/p/journal-resources.html.