September/October 2021

Confronting Fiscal Challenges of COVID-19

By James B. Fritts

The coronavirus (COVID-19) pandemic presented new fiscal and operational challenges that stretch beyond the 2019-2020 and 2020-2021 academic years. Excerpts below from the 2021 edition of Essentials of School Finance by James B. Fritts, discuss potential short- and long-term effects of the COVID-19 pandemic on revenue sources and managing costs, including the important role played by boards of education in the financial oversight of the distribution of relief funds.
Pandemic Upsets the State Budget Picture
Confronted with a projected revenue shortfall of $2.7 billion in FY 2020, and from $4.5-5.7 billion for FY 2021, the General Assembly and Governor JB Pritzker approved a General Fund budget calling for no change in public education funding, which would have interrupted progress towards full funding of EBF. As the session drew to a close, however, and based on a “better than projected revenue picture,” an additional $350 million was placed into the budget.  The 2017 EBF statute called for an annual increase of at least $350 million in the EBF appropriation, of which $50 million is earmarked for a Property Tax Relief Fund.
Education funding competes with other pressing needs for the limited available discretionary funds in the state’s overall budget. Options to reduce other state expenditures to provide additional school funding are limited, the more so as a result of the pandemic. Most General Fund expenditures are non-discretionary, including those committed to servicing debt, required transfers to other state funds, and pension contributions. They do not require a budgetary appropriation. Other expenditures are required by court orders, contracts, and administrative decisions, including those for health care and human services, Medicaid, and salaries and group insurance for state employees.
With the economy in distress, non-discretionary expenditures, those for the operations of state government, public safety, and essential human services are expected to consume more than the projected revenue. Individual and corporate income taxes contribute 57% of General Fund revenue in the FY 2021 budget, and sales taxes contribute 20%. These revenues are vulnerable in a severe recession unless income and sales tax rates were to increase, or coverages broadened to include previously exempt items. Other options include increases in corporate taxes, in lottery, gaming, liquor, or various “excise taxes.” One bright spot in FY 2020 revenues was higher-than-expected receipts from state taxes on recreational marijuana during the first six months of its legalization in January 2020.
Among the most productive revenue-increasing options would be broadening the sales tax to include services, common in most sales tax states. Increasing the personal income tax through taxation of retirement income and elimination of deductions and credits have also been proposed. However, an Amendment to the Illinois Constitution to establish graduated income tax rates on higher-income taxpayers did not receive voter approval in the November 2020 election. Some school supporters fear that a property tax freeze or other restrictions may accompany higher income tax rates, and that shifting some of the state’s obligation for teacher funding to local districts may also occur to alleviate pressure on the state education budget.
Federal sources contribute $3.63 billion or 20% of State General Fund revenues, not including COVID-19 emergency funding. Such funding recalls grants to states under the American Recovery and Investment Act of 2008, without which state aid to Illinois schools could have suffered severe cuts. Other sources, including the lottery and gaming taxes and transfers account for the remaining revenues.
Board members and school leaders will need to become and remain familiar with the state budget process, the mechanisms of distributing grants to school districts, and especially proposals to restrict access to the local property tax and/or to shift teacher pension obligations to school districts in trade for state tax increases. A goal of Essentials of Illinois School Finance is to educate them on these topics to the end of making them more effective advocates for their schools.
The Importance of Budgeting Revenues
School districts engage in budgeting activities throughout the school year. A sound revenue premise is essential for making decisions on the programs, personnel, and purchases that will be reflected in the following year’s expenditure budget. Information pertinent to estimating the following year’s revenues from property taxes, state and federal aid, and other major sources should be gathered regularly, and a first draft of a revenue budget for the following year prepared in the fall. These estimates can be revised over the coming months, as additional information becomes known. The final budget is adopted in September and can reflect accurately the revenues that will accrue to the school during the year.
Long-term revenue projections are an essential element of planning for the future of the school program. Such projections are commonly constructed by “trending forward” the changes that have taken place for the most recent three to five years. A major disruption in one or more revenue sources, especially one of uncertain duration such as occurred in 2020 due to the COVID-19 pandemic, may also require alternative “best-case and worst-case“ projections under differing assumptions about property taxes and state and local funding. Adjustments are made to reflect new factors, such as changes in property valuations and state funding. Like the annual revenue budget, projections should be frequently updated and shared with the board of education, so that long-term planning can take place based on the latest information on available resources.
To understand your district’s dependence on local revenues, especially property taxes, as compared with state and federal revenue sources, read the revenue pages of your district’s budget. Locate the lines showing the local, state, federal, and total revenue for each fund and for all funds. For each fund, calculate the percentage of fund revenues from local, state, and federal sources. Make the same calculation for the total revenue budget. How does the revenue breakdown compare to current Illinois averages? This information is useful in telling the community about how its schools are funded.
In practice (effective starting with FY2021), one form (50-36/50-39) is provided for both the school district budget and the joint agreement budget. … In addition to recording revenues, expenditures, and other budget data, the budget form also contains sections on which budget deficits are calculated and, if required, the district reports its deficit reduction assumptions and required plans. Other information reports are required on its administrative salaries, vendor contracts, and plans to use its Evidence-Based Funding grants.
Essentials of Illinois School Finance offers a guide in reading and using the budget form, an overview of the property tax cycle, the procedures that determine a school district’s actual revenue yield from its levy, dives into Evidence-Based Funding and state categorical funding, federal and grant revenue, borrowing options, and more.
Operations, Budgeting, and the Pandemic
Some of the standard recommendations for managing ad budgeting operations and their costs don’t fully apply to the near-post-pandemic environment, but one thing is hasn’t changed: Preventive maintenance (PM) is preferable to and less expensive than emergency repairs, and should be scheduled for each building component. Heating, ventilating, air conditioning systems, roofs, and fire safety systems are priorities, and playgrounds, athletic areas, laboratories, and communication and security systems require regular inspections. PM requires training, supervision, and inspection.
The transportation program took on new functions and required new procedures during the pandemic. Social distancing requirements reduced seating capacities and required additional buses and trips to transport students to and from school. Hybrid instruction required mid-day trips as students attended split-day sessions. Buses were equipped with hand sanitizer and tissues and were sanitized and disinfected during the day. Drivers took on responsibility for identifying sick children and were required to learn and carry out many new procedures.
When the pandemic caused Illinois schools to abruptly shut down, a major portion of the food supply for many homes where children received subsidized breakfasts and lunches also ended. Realizing that plans for delivering interim instruction and eventually reopening school required healthy families to succeed, districts immediately developed interim feeding programs. As schools resumed remote, hybrid, and in-school instruction in the fall, often with schedules not permitting in-school meal service, creative planning and marshaling of resources continued.
Chapter 18 in Essentials discusses the budgeting and cost management of building operations, transportation, food services, debt service, insurance, and administrative costs. It includes tables that provide budgetary benchmarks that will enable the reader to compare a district’s budget for instructional and non-instructional services to the FY 2017 cost survey of the National Center for Education Statistics.
The Role of the Board
Essentials of School Finance explains the roles of the board and the superintendent in school finance management. While school business officials, superintendents, and other administrators handle budgeting responsibilities, the role of the school board includes policy development and a calendar of board financial actions. That calendar includes many duties necessary to securing and expending district funds. Among them are adoption of the annual budget and tax levy, reviewing and approving the annual audit and financial report, awarding contracts for goods and services after competitive bids and proposals, authorizing budget transfers and borrowing as required, overseeing the investment of school funds, and approval of monthly financial reports and expenditure.
James B. Fritts, Ph.D., has 35 years’ experience in the public schools as a teacher and administrator and teaches graduate courses in educational administration. He is a senior associate of Hazard, Young, Attea & Associates, where he specializes in administrative selection, organizational studies and financial planning. This piece is excerpted from the new Ninth Edition of Essentials of Illinois School Finance, which is now available in the IASB Bookstore. The new edition updates information on the basic principles and operations of Illinois school financial management, the Evidence-Based Funding formula, and the response to the coronavirus pandemic. Resources associated with this excerpt can be accessed at