While some eastern Kentucky school districts may face insolvency this year because of tax revenue declines, Jefferson County Public Schools remains on a solid financial footing, thanks to economic growth and a healthy balance in the district’s “rainy day” fund.
School officials emphasized that this year, more than any other, they are dealing with significant uncertainties related to issues including the pension crisis, potential state tax legislation and Gov. Matt Bevin’s budget proposal.
The proposal, now in the hands of the state legislature, has school officials worried primarily because the governor hopes to shore up pension funds in part by reducing revenue for school transportation, employee health insurance, textbooks and teacher training.
For JCPS the projected cuts in those areas are about $30 million, Cordelia Hardin, chief financial officer, told JCPS board members at a recent meeting.
“I’ve never seen these kinds of cuts coming,” she told Insider. Hardin has been with the district for 27 years, including about half that time as CFO.
JCPS Acting Superintendent Marty Pollio said that for some school districts that already are struggling to make payroll, the proposed cuts would be “devastating.” State education officials have said that some districts in eastern Kentucky could run out of money this year.
“This is (an) unusual, very difficult year,” Hardin said.
Confusion over the ‘rainy day’ fund
Board member Chris Brady at a recent meeting criticized Bevin’s suggestion that schools dip into their fund reserves to make up for some of the governor’s proposed cuts.
The fund reserve, sometimes called the “rainy day” fund, is the money that schools have left over after they pay all their bills. By law, schools must carry a balance of 2 percent of their budget, but for many schools, that’s not enough to bridge the time between the beginning of the school year and the time they get their property tax draw.
They receive only some funds, such as Support Education Excellence in Kentucky, or SEEK funds, on a monthly basis.
Hardin said that if JCPS kept a reserve of just 2 percent, that would pay for only about two weeks of payroll.
In the past few years, the district’s fund balance in October has been as low as $29.5 million and as high as $68.3 million, in October of last year. At the time, the JCPS monthly payroll was $76 million.
The Government Finance Officers Association recommends that a government agency’s General Fund should have a reserve of at least two months of revenue or expenditures. Bond rating companies recommend up to 10 percent of operating expenditures.
At the end of the 2016/17 year, JCPS had a fund balance of $154 million, or 14.7 percent of expenditures. Thanks to a surplus of $20.6 million that year, the balance increased from the prior year. The district said it wanted a higher reserve in anticipation of higher pension-related expenses.
Brady said that dipping into the reserves would, among other things, undermine the district’s ability to pay for its infrastructure needs because it would lower the district’s credit rating and therefore increase borrowing costs.
JCPS in the last few years has set aside about $55 million annually for infrastructure improvements, but more than $1 billion in “unmet facility needs” remain, officials have said.
“Raiding our rainy day fund … is dangerous, and it puts all of our districts at risk,” Brady said.
The budget breakdown
The district has proposed for the 2018/19 school year a draft General Fund budget of $1.26 billion, up $17.9 million, or 1.4 percent, from the current year — though the district will again ask that its revenue be increased by the maximum allowed under state law: 4 percent.
The General Fund is the district’s main operating fund and pays for items including teacher salaries, utilities and transportation. The fund accounts for about 80 percent of total district spending.
Beyond Bevin’s proposed cuts, the district next year will have to pay an additional $17 million into the County Employees Retirement System. And, Hardin said, it is unclear how much more the district may have to pay into the Kentucky Teachers’ Retirement System, which Bevin and the state legislature want to overhaul this year.
JCPS also plans to pay an additional $3.5 million to provide more music and arts education at elementary schools and $1.33 million in early childhood education in response to a higher number of students with autism.
Brady at a recent meeting thanked his colleagues for their commitment to music and arts education. He said his son’s elementary school had recently discontinued its music program in favor of science, technology, engineering and math.
He said he understands the need for more STEM education, but, as a former music major, he also worried about eliminating arts, music and other critical areas of instruction.
The district next year also will add 20 new early childhood education teachers at a cost of $1.33 million, “based on an increase of over 200 students identified as needing specific” autism-related support, JCPS said.
More than 70 percent of district expenditures pay for salaries of teachers, other staff and pension obligations. For next year, the district is proposing to spend:
- $377 million on elementary schools, up 0.8 percent from the current year’s budget
- $219 million on high schools, down 2.1 percent
- $143 million on middle schools, down 1.6 percent
- $2.94 million on pre-school/pre-kindergarten, down 1.2 percent
- $224 million on “other systemwide costs,” up 15.5 percent
- $130 million on the operations division, up 9.8 percent.
The district is still in the early stages of the budget process. The budget won’t be finalized until the fall.
State funds decline, property taxes increase
While the district is dealing with some budgeting uncertainties and additional costs, some dynamics also are playing in its favor.
For one, it is projecting $10 million in unused salary through the end of the year. It also is expecting federal reimbursements for telecommunications and transportation of more than $1.6 million.
But the district is benefiting primarily from economic growth and its impact on property price appreciation. The rising value of property has meant that the district has been able to increase its revenue by 4 percent annually — the maximum allowed by state law — for several years without increasing its tax rate.
In fact, property values have grown so significantly that the district has had to lower its rate, as state law prohibits taxing units to increase their revenue more than 4 percent without voter approval.
The district said that it asks for the maximum increase every year because failure to do so would mean losing revenue in the coming year — and every subsequent year, because taking a smaller increase in any year sets a new revenue ceiling.
How this year’s budget will affect tax rates is unclear at this point — though a local official told Insider that property prices this year will not appreciate as much as in recent years, which would make a tax rate increase more likely.
The taxable total assessment of Jefferson County’s 325,000 properties, of which about 290,000 are taxable, reached $61.5 billion last year, up 16 percent in the last three years. The latest data, expected in April, likely will show another increase — though not quite as large as in recent years.
Colleen Younger, chief of staff of the Jefferson County PVA, told Insider that the agency this year is analyzing prices in the southwestern portion of the county, which is “a much slower market” than some other areas. The PVA analyzes about a quarter of the county every four years.
For the 2018/19 school year, JCPS said it expects to collect $434.3 million in property taxes. That would be an increase of about $19 million, or 4.5 percent, from this school year’s budgeted amount and up about $37 million, or 9.3 percent, from actual property tax collections in 2017.
Higher property tax collections have a flip-side: Kentucky law requires that when local revenue for schools goes up, state revenue, in the form of SEEK funds, declines.
JCPS projects that for next school year, it will receive $240 million in SEEK funds, down $14 million, or 5.6 percent from the amount budgeted for this year, and down $20 million, or 7.7 percent from the actual state contribution in 2017.
Property taxes and SEEK funds make up the majority of district revenue.