Presentation to the CH-UH School Board Lay Finance Committee July - - PowerPoint PPT Presentation

Presentation to the CH-UH School Board

Lay Finance Committee

July 7, 2020

THE LAY FINANCE COMMITTEE

• Current version constituted in December 2018 after an

application process

• Membership is Adam Dew, Max Gerboc,

Quatrice James, Katherine Petrey and Ryan Routh

• District CFO Scott Gainer
• Ex Officio member: James Posch
• Meetings held roughly quarterly; open to the public

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WHAT THE COMMITTEE IS

• A diverse group of individuals representing a variety of

interests.

• A group of individuals with expertise on finance, legal and/or

education issues.

• A group that cares about our schools and the cities of Cleveland

Heights, University Heights and South Euclid.

• An independent entity.

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WHAT THE COMMITTEE IS NOT

• We are not beholden to the District but are free to make

recommendations as we see fit.

• We are not auditors or independent investigators -- we

ultimately rely upon the forecasts of the District CFO that are approved by the Board of Education.

• We are not an entity that focuses on political considerations in

making our recommendations.

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REFERENCE TO PRIOR PRESENTATION

• In November 2019, the LFC provided significant amounts of

background information regarding the nature of school funding in Ohio (House Bill 920).

• That presentation focused on how school property taxes do not

increase over time with inflation and thus school districts must pass levies in order to counteract inflationary impact.

• Will not repeat that presentation today.
• Members of the public can reference our November 2019

presentation and additional school funding information maintained on the CHUH District webpage.

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WHY ARE WE HERE TODAY?

• In late 2019, the Lay Finance Committee recommended that the

Board of Education place a levy on the ballot.

• The 7.9 mill levy was defeated in the March/April 2020 election.
• The LFC has since met multiple times to determine whether

another levy is necessary and to recommend to the Board the potential timing and size of such levy.

• The LFC is here today to make recommendations to the Board

regarding such a levy.

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LAY FINANCE COMMITTEE RECOMMENDATION The unanimous recommendations of the Lay Finance Committee are that: (1) the CH-UH School Board should place an

• perating levy on the November 2020

ballot and should not wait until 2021. (2) The amount of the operating levy should be between 4.8 and 8.5 mills, based on the considerations to be discussed.

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PROCESS

• Have had three meetings in past six weeks.
• Had the opportunity to question Mr. Gainer regarding

the five-year forecast, which resulted in some modifications to that forecast.

• Considered income tax and property tax options.
• Considered impact of delaying levy request until 2021.
• Gave greater consideration to short-term solutions in

light of high levels of uncertainty.

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SCHOOL DISTRICT INCOME TAX

• 203 of Ohio’s 611 school districts impose income tax
• Vast majority are rural Districts
• None in Cuyahoga County
• Euclid Schools has a shared income tax with City.
• 1 in Stark; 2 in Hamilton; 1 in Lucas
• No urban or inner ring suburbs in the State of Ohio

impose a pure school district income tax

• Income tax was proposed for CHUH in 1990 and failed

30% to 70%.

Sources: https://tax.ohio.gov/wps/portal/gov/tax/individual/school-district-income-tax

https://tax.ohio.gov/static/employer_withholding/2020%20tables/2020%20tax%20year/s chool%20districts%202020.pdf

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SCHOOL DISTRICT INCOME TAX

• Ohio’s school district income tax greatly benefits

corporate interests because the tax is only levied on individuals.

• Used primarily in rural districts where property taxes

can disproportionately impact farmers.

• School district income taxes are flat-rate taxes and are

not progressive taxes with different income-based brackets.

• School district income taxes have a disproportionate

impact on middle class and working poor.

Accordingly, the Lay Finance Committee does not believe that an income tax is appropriate for CHUH.

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FIVE YEAR FORECAST CHANGES

• In November 2019, the LFC made its recommendations based

upon the then-existing five-year forecast and recommended a levy amount of at least 7.9 mills.

• Significant changes since then:
• Property tax collection trends
• State of Ohio funding
• EdChoice
• Cuts made by BOE

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FIVE YEAR FORECAST TRENDS

• $1.4 million in annual revenue lost due to cuts from

State of Ohio (expected to be continued)

• $750,000 in revenue lost due to decreased property tax

collections (based upon advice from County)

• $2 million+ in additional annual voucher costs vs. what

was expected 6-8 months ago These changes have a negative $4 million per year impact. Balanced in part by the $2.5 million in cuts made by the Board and administration this Spring. On balance the District is slightly worse off financially.

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CALCULATION OF COMMITTEE RECOMMENDATION

• The prior LFC recommendation was calculated so that the

District would have a positive cash balance at the end of FY 2023 (as of July 1, 2023).

• That led us to the 7.9 mill amount that was on the ballot in early

2020.

• Because the District’s financial situation now is slightly worse,

the Board would need to place an 8.5 mill levy on the ballot to have a positive cash balance at the end of FY 2023.

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HEIGHTENED UNCERTAINTY IN FIVE-YEAR FORECAST

Uncertainty Area #1: State and Federal Funding

• At the tail end of the last fiscal year, the State of Ohio made

last-minute cuts to schools.

• No guidance yet on the state funding that will be in the budget

for the upcoming school year.

• District forecast assumes state funding will be maintained at

reduced levels.

• District forecast does not anticipate further federal funding

through second round CARES-type Act.

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HEIGHTENED UNCERTAINTY IN FIVE-YEAR FORECAST

Uncertainty Area #2: EdChoice and Vouchers

• Projected costs of all voucher programs combined:

FY 2017: $7.5 million (actual) FY 2018: $8.5 million (actual) FY 2019: $9.9 million (actual) FY 2020: $13.0 million (actual) FY 2021: $15.5 million (budget) FY 2022: $16.3 million (budget) FY 2023: $17.1 million (budget)

• Our District has consistently underestimated voucher costs in

future years.

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HEIGHTENED UNCERTAINTY IN FIVE-YEAR FORECAST

Uncertainty Area #2: EdChoice and Vouchers

• In early 2020, GOP-controlled legislature acknowledged

problems with how state has handled this unfunded mandate.

• It is possible that legislative solutions might be considered or

implemented in upcoming school year.

• Historical trend, however, is that changes to voucher programs

have caused CHUH financial situation to worsen.

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HEIGHTENED UNCERTAINTY IN FIVE-YEAR FORECAST

Uncertainty Area #3: Salaries, Wages and Benefits

• In light of economic turmoil, five-year forecast is now

significantly less generous in its assumptions regarding staff raises.

• Prior forecasts assumed increase in wage bill of $1 million+ per

year.

• Current forecast anticipates freezing salaries for upcoming

school year.

• Current forecast anticipates increase in wage bill of $600,000

per year for future years (about 1%).

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HEIGHTENED UNCERTAINTY IN FIVE-YEAR FORECAST

Uncertainty Area #4: Assumption of Future Cuts

• Future cuts are already baked into the forecast.
• District is projecting that they will be able to find an additional

$750,000 in budget cuts for FY 2022 and FY 2023.

• This would be on top of the $2.5 million in cuts that were

approved this Spring for the upcoming school year.

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HEIGHTENED UNCERTAINTY IN FIVE-YEAR FORECAST

Uncertainty Area #5: Ending FY 2023 at $0

• At 8.5 mills, the District would be projected to be at a $0 cash

balance at the end of FY2023 (i.e., in July 2023).

• The District would operate at a financial loss for the three-year

levy cycle (i.e., costs would exceed revenues for this period).

• Many districts seek to have 10-15% of annual costs as their

target cash balance, and maintaining adequate cash balances is important to maintain District credit ratings.

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HEIGHTENED UNCERTAINTY IN FIVE-YEAR FORECAST

• Combined impact of all of these areas of uncertainty could lead

a reasonable person to conclude that some cushion should be built in to the 8.5 mill levy request.

• Such concerns must be balanced against political

considerations beyond the purview of the LFC.

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CALCULATION OF COMMITTEE RECOMMENDATION

It bears emphasis that our recommendations are based upon the existing five-year forecast. That said, if the Board of Education and administration were to believe that additional cuts could be made, a lesser millage could be appropriate. We would encourage the Board and administration to seek out areas where financial savings can be made. Proposing specific cuts is beyond the purview of the Committee. The LFC determined, however, that if $2 million in cuts could be made for FY 2022 (instead of the projected $750,000), then necessary millage could be reduced from 8.5 mills to 7.6 mills.

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CAN WE DO NOTHING?

• In light of economic turmoil, Board members have

stated publicly that they are concerned about putting a levy on the ballot.

• Accordingly, the LFC considered the impact of not

seeking to pass a levy at all.

• The five-year forecast assumes receipts of $109 million

balanced against expenses of $119 million in FY 2022.

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CAN WE DO NOTHING?

• If revenue were projected to hold steady for the next 3

years, the Board would need to make $10 million in cuts and hold expenses completely flat going forward (no raises, etc).

• This could only be accomplished by cutting 10-15% of

existing staff and laying off well over 100 current employees.

• Significant cuts to extracurriculars and transportation.
• Based upon the above, the LFC has concluded that,

notwithstanding existing uncertainty and economic hardship, doing nothing is not an option.

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CAN WE WAIT?

• In light of economic turmoil, Board members have

stated publicly that they are concerned about putting a levy on the ballot this fall.

• Accordingly, the LFC considered the impact of waiting a

year to put a levy on the ballot until sometime in 2021.

• This would essentially mean that the District would

forego the additional funding raised by a levy for one year.

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CAN WE WAIT?

• Under the same assumptions that were made above,

the levy amount would need to be 14.2 mills if placed

• n the ballot in 2021 (whether Spring or Fall).
• Assuming an 8.5 mill levy were to PASS in 2021, the

Board would still need to make $5.4 million in cuts (instead of $750,000) in the upcoming school year.

• Significant RIFs would likely be required.

Based upon the above, the LFC has concluded that, notwithstanding existing uncertainty and economic hardship, it would be unwise for the Board to delay another levy until 2021.

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ALTERNATIVE APPROACH

• In light of some of the daunting figures in the prior

slides, the LFC considered an alternative approach that has significant pros and cons.

• This alternative approach seeks to only solve the

District’s short term economic problems and thereby results in a reduced millage request.

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ALTERNATIVE APPROACH

• The District has historically calculated levies based

upon 3-year cycles and used belt-tightening or positive variances from budget to stretch to permit 4-year cycles.

• A potential alternative approach would seek a levy on a

2-year cycle.

• This results in a reduced millage request of 5.6 mills.
• The LFC determined that if $2 million in cuts could be

made for FY 2022 (instead of the projected $750,000), then necessary millage could be reduced from 5.6 mills to 4.8 mills.

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PROS AND CONS

The LFC believes that whether or not the alternative approach is utilized is for the Board and not the LFC to decide. PROS to Alternative Approach Much smaller millage benefits taxpayers. Political advantages in that levy is more likely to pass Cons to Alternative Approach Requires District to likely be back on ballot in 2022 (or 2023 at latest) absent major changes in state/federal funding. Reduced ability of District to survive negative variances from assumptions without further cuts.

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LAY FINANCE COMMITTEE RECOMMENDATION The unanimous recommendations of the Lay Finance Committee are that: (1) the CH-UH School Board should place an

• perating levy on the November 2020

ballot and should not wait until 2021. (2) The amount of the operating levy should be between 4.8 and 8.5 mills.

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WHAT WILL A 5.6 or 8.5 MILL LEVY RAISE?

For each additional 1.0 mill in taxes, CH-UH will collect roughly $1,113,679 per year in additional funds in property taxes. A 8.5 mill levy will raise an additional $9.5 million in funds per year. Thus, property tax receipts for the District would increase from $72.3 million to $81.8 million. A 5.6 mill levy will raise an additional $6.2 million in funds per year. Thus, property tax receipts for the District would increase from $72.3 million to $78.5 million.

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WHAT WILL A LEVY COST

A 8.5 mill levy will raise the effective millage from the existing 121.39 mills to 129.89 mills (a 7.0% increase in property tax) A 5.6 mill levy will raise the effective millage from the existing 121.39 mills to 126.99 mills (a 4.6% increase in property tax).

Note: Chart above for Cleveland Heights; actual current and new taxes may vary by minor amounts due to assessments other peculiarities of Ohio/local law

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WHAT WILL A LEVY COST

Before the 2018 re-assessment, the average CH homeowner was paying 4.12% of the market value of the property. After the 2018 re-assessment, the average CH homeowner was paying 3.84% of the market value of their property. A 8.5 mill levy will result in the average CH homeowner paying 4.11% of the assessed value

• f the property -- essentially

putting the average homeowner back to the same tax rate that they paid prior to the 2018 reassessment. A 5.6 mill levy will result in the average CH homeowner paying 4.02% of the assessed value

• f the property -- less than the

percentage tax rate that they paid prior to the 2018 reassessment.

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COMPARISON TO OTHER DISTRICTS

• Garfield Heights taxpayers pay 3.93% of market value.
• Shaker Heights City taxpayers pay 4.00% of market value
• Shaker Heights Schools/Cleveland City taxpayers pay 4.04% of

market value. Thus, a 5.6 mill levy would make CHUH property taxes similar to Shaker Heights’ property taxes.

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LEVY COMPARED TO INFLATION

According to the Bureau of Labor Statistics website: Inflation Rate of 6.73% over the past 4 years (from 5/2016 to 5/2020) This is roughly 1.7% per year, which is slightly below the Federal Reserve Bank’s announced 2% target rate. The levies being considered (with 4.6% or 7.0% percentage increases in propety taxes at the 5.6 and 8.5 mill amounts) thus are in line with the inflation that we have experienced since the last levy passed in 2016.

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LAY FINANCE COMMITTEE RECOMMENDATION The unanimous recommendations of the Lay Finance Committee are that: (1) the CH-UH School Board should place an

• perating levy on the November 2020

ballot and should not wait until 2021. (2) The amount of the operating levy should be between 4.8 and 8.5 mills.

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