Barrington Community Unit School District 220

1. Barrington Community Unit School District 220 Discussion for the Board to create standards. 7/26/09

2. Standards: • The State of Illinois Unemployment Statistic. • The Unemployment Statistics for Cook, Lake, Kane and McHenry Counties • Relevance: These extraordinary unemployment statistics reinforce that taxpayers are financially stressed and can/will not vote to pay more. The optics of public sector wage or benefit increases, which do not reflect the economy, against the backdrop of people losing their income, and even their homes, would be viewed by the public as a disconnect from the realities they face. • Unemployment statistics also underline the difficulty that would face unemployed teachers if a district has to lay off teachers at a higher rate due to above-market compensation packages squeezing FTE layoffs. • a. Daily Herald Op/Ed and • b. New Trier Contract • Relevance: The media and the public are carefully watching the leadership of School Districts for their actions in this environment. Future trust and support of the public is effected by our actions. New Trier’s (all hail the venerable New Trier, of course!) contract shows that other school districts had been suspending step at the same time Barrington was in the early ‘90s and characterize that as an indication of financial responsibility. • 4. CPI Assumptions – CPI statistics (annual historical and last 12 months as well as an article regarding CPI in recessionary times. • Relevance: We must start with the facts. They speak for themself. This article provides historical data showing that inflation has been depressed after a recession, especially one with high unemployment. It also provides a prediction based on this historical data done prior to further bad news. This supports that the district’s CPI assumptions are based on current economic climate and supported by history. Further supporting the use of a conservative assumption is Standard & Poors write-up of District 220 and the key to receiving a AAA rating.

3. Standards: • “What it takes for school districts to make the AAA grade” by Standard & Poors • Relevance: Here is what Standard & Poors says about the best of the best’s financial management. When the • BEA and others suggest we stray, this provides some expert observations about what good managers do. • 6. “District 220” AAA Rating by Standard & Poors April 2008 for our “ Lake, Cook, Kane, & McHenry Counties Community Unit School District No. 220 (Barrington), Illinois; General Obligation” bonds • Relevance: S&P is a credit rating agency and assesses a district just like an individual in theory. Financial • situation that effects your ability to pay debt – income ( in our case that we’re a high income area dependent on • property taxes – good, but economy and unemployment bad), behavior in spending (we HAD balanced budgets • and developed surpluses), behavior in savings (we have policies to build and maintain our fund balance), and • behavior in regards to debt (policies on the type of debt that we’ll issue and the presumption we’ll get • permission from our community to extend debt, etc.). • The district is already moving from the path that achieved the AAA rating. Some examples not anticipated at • the time S&P looked at us: Income will be depressed due to inflation, referenda to increase income is at best • unlikely, especially given our recent spending actions; potential for increasing need for expenditures due to • expansion of our program and wage pressure; issuing non-referenda debt; extending our policy of the length of • our non-referenda debt; spending down our fund balance and an apparent reluctance to change our behavior • given our new realities (my editorial). • State Financial Ratings Criteria and History • Relevance: The ratings criteria and history may be helpful to board members in understanding district in • evaluating the potential effect on our ratings of options we may look to implement.

4. Standards: 8. Career Earnings Data (2008-2009) Relevance: District 220 teachers are paid attractively measured against our reference districts. - Career earnings vs Reference Districts exceeded average by 3.8% - Only 1 other district is higher than District 220 9. Inflation versus District 220 Wages Data (Last 3 Contracts - 1998-2009) Relevance: District 220 teachers compensation has exceeded Cost of Living - Cell inflation has met or exceeded CPI 1998 through 2009 by as much as 6% - Step plus cell plus lane increase has exceeded CPI 1998 through 2009 by approx. 300 to almost 400% based on sampling. 10 . Freezing step, while obviously not a popular practice with teachers, is not an unheard-of practice, nor something that was unique to District 220 in the periods referred to by “he who will not be named”. Relevance: - District 220 cell freeze in earlier years and proposal today is in response to economic climate, and has precedence in other district at roughly the same time. - New Trier in 1993…refers to this as evidence of financial responsibility in conjunction with a stated goal to have well-paid teachers. These two items are not exclusionary and New Trier correctly judged that the community will recognize that.

5. Standards: • Data from the IRS regarding the wages of US Taxpayers • Relevance: There was some specific concern that the Board and Administration do not value District • teachers. If compensation is a measure, District 220 compensation reflects status of teaching profession as: • - Single top teacher wage $100,000+ would retire in top x% of US wage earners • - Two top teacher wages $200,000+ would retire in top x% of US Wage earners. • Data regarding the Health Insurance packages of our reference districts prepared by Tom Beerheide. • Relevance: District 220 health insurance benefits are a very large and unpredictable expense. This data shows • that District 220’s health insurance benefits are above market. • Data regarding the District 220 Early Retirement Incentive (Johansinfo) • Relevance: District 220 retirement incentive uniquely subjects D220 to penalties, and reforming to our reference • group would mitigate the negatives. • Data regarding the fund balances (averaged over the last 3 years to try to get rid of any single year events) • Relevance: District 220 fund balance lower than average of Reference District (Not Excessive) • District 220 fund balance actually lower than stated due to ELC and BMS Station expenditures. • -

6. Standard: • The State of Illinois Unemployment • Statistic. • 2. Unemployment by County • Relevance: Unemployment statistics illustrate that taxpayers are financially stressed and can not pay more. The optics of public sector increases not reflecting the economy against the backdrop of people losing their income, and even their homes would be viewed by the public as a disconnect from the realities they face. • Unemployment statistics also underline the difficulty that would face unemployed teachers if a district has to lay off teachers at a higher rate due to above market compensation packages. • Data Summary: Unemployment is at 10.3% in Illinois…

8. . Unemployment rates by County (June 2009): Source: Illinois Department of Employment Security, Economic http://lmi.ides.state.il.us/rank.htm Cook: 11.6% Lake: 8.7% Kane: 11.5% McHenry: 10.9%

9. Standards: • Daily Herald Op/Ed • Relevance: The media and the public are carefully watching the leadership of School Districts for their actions in this environment. Future trust and support of the public is effected by our actions.

10. Excerpts from the Daily Herald 7/24/09: • …We previously praised teachers, administrators and school board members in Northwest Suburban High School District 214 and Palatine-Schaumburg High School District 211 for taking the right approach with contracts that go without base raises next year, in light of the economy. Both provided raises for education and logevity. • However, consider other deals sealed around the suburbs this year: • Geneva District 204 boosted pay .58 percent in a 3-year contract that also offers raises of about 3 percent a year for added education. • Indian Prairie Unit District 204 OK’d annual base pay raises of 2 percent. • Palatine District 15 approved a three-year deal with base salary raises of 1.9 percent. • In Woodland District 50, administrators pay is frozen, but teachers get a base raise and bonuses for education and longevity. • We fear school districts still don’t get it. When taxpayers are taking pay cuts or losing jobs, even a 2% raise sounds out of line….

11. Other Districts have suspended step in the past as a financial responsibility when faced with economic need. Per New Trier’s contract:

12. Standards: • CPI – a. Table with CPI actuals • b. Article regarding CPI in • recessionary times. • Relevance: Our work requires we project income based on inflation in the future. We must look at what inflation currently is. Inflation has run at a -1.4% rate over the last 12 months. We must also guess what it will be. This article provides historical data showing that inflation has been depressed after a recession, especially one with high unemployment. It also provides a prediction based on this historical data. I believe this supports that the district’s CPI assumptions are based on current economic climate and supported by history. Further supporting the use of a conservative assumption is Standard & Poors write-up of District 220 supporting the idea that AAA rated districts use longer term planning and projections with conservative assumptions.

13. CPI - Inflation Source: US Bureau of Labor Statistics

14. Besides current statistics, there is historical support for a moderate prediction underlying the District’s Inflation assumptions.

15. Standards: • “What it takes for school districts to make the AAA grade” by Standard & Poors • Relevance: There are best practices in financial management. These sound philosophical principles and are • enumerated and supported by Standard & Poors in this Article.

16. From “What It Takes For School Districts To Make The 'AAA' Grade” Standard & Poors January 17, 2008 Strong management practices with a focus on multiyear planning While managements naturally focus on current-year operations, the 'AAA' districts typically plan over a three- to five-year horizon. Conservative budgeting is a common trait. Many districts have strong fiscal policies, providing guidelines for spending, debt, and finances. Reserve levels tend to be high, especially when compared to all school districts. Some school districts, such as the 10 Illinois 'AAA's, have successfully managed within a property tax cap levy. Other schools have coped with state limitations, as in New Jersey, on the amount of unreserved fund balances that they can hold.

17. From “What It Takes For School Districts To Make The 'AAA' Grade” Standard & Poors January 17, 2008 Manageable debt burden The 'AAA' school districts tend to have manageable debt burdens and strong capital planning profiles. This is to be expected given their high wealth levels and generally large tax bases. Most of these school districts have well-developed multiyear capital plans that focus on future capital needs, measuring the effect of borrowing on future budgets. Funding sources, whether through pay-as-you-go financing, intergovernmental aid, or long-term borrowing, are also articulated. The multiyear capital plans are reviewed and modified annually. Funding usually consists of a combination of bond proceeds and pay-as-you-go financing. A comprehensive plan encompassing these characteristics is yet another characteristic of sophisticated management and is a sign of credit strength. Here’s an interesting fact: Barrington net direct debt per capita is $5,204 and characterized as high (Barrington’s April 2008 S&P report). “Overall debt per capita for the 26 'AAA' school districts ranges from $37 to $10,367. The districts with the highest debt per capita have populations much smaller than the median of 45,144. Average overall net debt per capita is $3,728 and the median is $3,302.” (January 2008 S&P report) Our population is less than the median (isn’t it around 37,000 to 40,000?) S&P tempers our high debt per capita with a high property value (they apparently assume we can raise taxes through referendum)…bad assumption.

18. From “What It Takes For School Districts To Make The 'AAA' Grade” Standard & Poors January 17, 2008 Financial position is key The degree of financial control a district exerts correlates to a sound financial position. This quality is intrinsic The general fund balance provides one measure of financial flexibility. A strong and liquid fund, built up with surpluses during periods of growth and through careful budgeting, provides an ample cushion against the unanticipated. A sizable fund balance is also a resource the district can tap between payments of state aid or property taxes. We give credit when management's financial strategy includes a formal fund-balance policy or an internal, targeted level, and adheres to it. Highly rated school districts establish fund balances with the expectation that certain circumstances will prompt use of reserves while also containing a mechanism to replenish if drawn on. Almost every school district relies on a combination of property taxes and state aid. Districts reliant mostly on property taxes control their destinies to the extent that they have solid tax-base growth and thus an expanding, highly predictable revenue source. In highly rated school districts, property taxes account for the largest revenue source, with state aid playing a minor role. As a result, a reliance on stable tax revenues shields districts from fluctuations in state revenue, which tends to get cut during economic slowdowns. No district, however, is immune from fiscal pressures such as rising health care and other personnel-related costs, which in some cases outpace or have the potential to outpace revenue growth. Dealing with these costs requires good management, which 'AAA‘ school districts have demonstrated. This is why managing to conservative and being wrong on the plus side is important. When we get a string of negative news out of our control and we were counting on good news, we lose the ability to exert financial control and we’re in a bad place with no choice. Our hard fought fund balance policy and our debt policy are good practices per S&P.

19. From “What It Takes For School Districts To Make The 'AAA' Grade” Standard & Poors January 17, 2008 A Review Of Key Ratios And Rankings Standard & Poor's uses several ratios as part of the credit review process. Among them are a school district's overall net debt per capita, per capita market value, and unreserved general fund balance as a percentage of expenditures (see glossary in table 3). A high overall net debt ratio is an indication of a heavy debt burden, which each resident theoretically bears in equal measure. In some cases, we make distinctions between direct debt, for which the issuer itself is responsible, and overlapping and underlying debt, which is not the issuer's direct obligation. If the issuer's direct debt is low, we may give less weight to overlapping and underlying debt than if the issuer's own debt burden is high. Overall debt per capita for the 26 'AAA' school districts ranges from $37 to $10,367. The districts with the highest debt per capita have populations much smaller than the median of 45,144. Average overall net debt per capita is $3,728 and the median is $3,302. Per capita market value measures property wealth. The average is $212,028, the median is $204,152, and the highest is $474,639. When examining a school district's financial position, we also review reserve levels, both in terms of policies and trends. We look at the unreserved general fund balance as a percentage of operating expenditures to determine the size of reserves in relation to the total budget. While we do not advocate an ideal reserve level, our report, “U.S. GO Rating Distributions And Summary Ratios: Year-End 2007,” published Jan. 2, 2008, sets ranges for cities, school districts, and counties based on population segments with descriptors that range from high to low. However, we consider each situation on its own merits. The 'AAA' school districts' ratio for unreserved general fund balance as a percentage of general fund operating expenditures varies. The average is 26.9%, and the median is 14.5%.

20. Standards: • “District 220” AAA Rating by Standard • & Poors April 2008. • Relevance: Contains the things S&P saw when they rated us highly. Some of these things are changing...partly • within our control, partly not.

21. S&P says in April of 2008: “Although the district is subject to a property tax levy cap equal to 5% or the rate of inflation (except with regard to new construction), financial performance has remained strong. The district has reported general fund (combined education and operations and maintenance funds) surpluses at least since fiscal 2001. On fiscal year-end June 30, 2007, the general fund had a $6.0 million surplus resulting in an unreserved balance of $31.3 million (or, a very strong 32.7% of expenditures. Financial projections indicate that the general fund balance should stay above a level representing 25% of expenditures through fiscal 2013. While the district does have a moderate to high debt burden, debt service represents a reasonable percentage of expenditures and all debt is retired by 2027. Overall net debt represents a high $5,204 per capita, but a low 2.6% of estimated market value. Debt service has typically represented less than 15% of operating expenditures. The district anticipates that it will issue additional debt for a middle school and early childhood project, but the extent of it will depend on passage of a referendum by voters. Financial Reality: (Spending) Surpluses may be a thing of the past without action on expenditures if revenues (Income) continue to be depressed. (Savings) Fund balance is being depleted by our action and may be stressed by operation. (Borrowing) The district did NOT receive referendum approval for ELC and Station, and depleted our non-referendum debt capabilities as well as spent down our surplus to buy these items with the strong lobbying of BEA and parent interest groups.

22. Lake, Cook, Kane, & McHenry Counties Community Unit School District No. 220 (Barrington), Illinois; General Obligation Standard & Poors April 4 2008 “Financial Management Assessment: 'Strong‘ The district's management practices are considered "strong" under Standard & Poor's Financial Management Assessment (FMA). An FMA of strong indicates that the district's financial management practices are strong, well-embedded, and likely sustainable. Formal documents relating to capital and financial planning, debt management, and liquidity all help to support the district's strong FMA. In addition, consistent communication between the administration and elected officials regarding these items and budgetary and investment performance support the FMA.” • Strong, yes. Well-embedded, yes. Communication? Sustainable? Depends. • Financial Reality - Debt management practices and situation are changing: • Extended/depleted all non-referenda borrowing to pay for ELC and Station renovations and extended debt to 5 years. • Liquidity: Spent down fund balance by $7,208,367 million to pay for ELC and Station • (not reflected in current numbers) and facing a possible surprise deficit in 2008-2009. Fund balance equivalent for 08-09 expenditures is not what we think it is when considering the fund balance already spent.

23. Standards: • State Financial Ratings Criteria and History • Relevance: The State Rating is a measure of our financial management. If we jeopardize our • state ratings, we lose a key optics to our Community’s confidence in us (and aren’t following best practices). • Here’s the test, and I’ve attached the full explanation and our last 5 years results. Fund Balance to Revenue Ratio (has a weighting of 35%) Category 4 Greater or equal to 25% [lowest risk] Category 3 Less than 25% but greater or equal to 10% Category 2 Less than 10% but greater or equal to 0% Category 1 Less than 0% [highest risk] Expenditures to Revenue Ratio (EXRV) (has a weighting of 35%) Category 4 District is spending $1.00 or less for every dollar they are receiving [lowest risk] Category 3 District is spending more than $1.00 to $1.10 for every dollar they receive Category 2 District is spending more than $1.10 to $1.20 for every dollar they receive Category 1 District is spending more than $1.20 for every dollar they receive [highest risk] If the resulting calculation places a district in category 1 or 2, and the Fund Balance to Revenue Ratio (FBRR) is a category 4 then the following calculation is completed: • (FBRR - .1) divided by (EXRV – 1.0) • If the result is greater than 2, then the Expenditures Revenue score is assigned a 3 • If the result is greater than 1 but less than 2, then the Expenditure Revenue score is assigned a 2 Days Cash on Hand (has a weighting of 10%) Category 4 At least 180 days cash on hand [lowest risk] Category 3 Less than 180 days cash on hand to at least 90 days cash on hand Category 2 Less than 90 days cash on hand to at least 30 days cash on hand Category 1 Less than 30 days cash on hand [highest risk] Percentage of Short-Term Borrowing and Long-Term Borrowing Remaining (Short-term and Long-term borrowing each has a weighting of 10%) Category 4 Greater than or equal to 75% debt margin remaining [lowest risk] Category 3 Less than 75% but at least 50% debt margin remaining Category 2 Less than 50% but at least 25% debt margin remaining Category 1 Less than 25% debt margin remaining [highest risk]

24. Standards: 8. Career Earnings Data (2008-2009) Relevance: District 220 teachers are paid attractively measured against our reference districts. - Career earnings vs Reference Districts exceeded average by 3.8% - Only 1 other district is higher than District 220 • Summary: • District 220 teacher’s salaries are above market. • Career earnings vs Reference Districts exceeded average by 3.82% • Only one comparable district is higher, taking into consideration equalization for unit/high school/elementary school differences

25. Career Earnings Methodology: • Gathered all contracts of reference districts • Assume 35 year career with the following progression • Placed salary on spreadsheet and totaled to get lifetime earnings. • Graphed Result 1 - BA 2 - BA 3 – BA12 4 – BA24 5 – BA24 6 – MA 7 – MA 8 – MA 9 – MA6 10 – MA12 11 – MA18 12 – MA24 13 – MA30 14 – MA 36 15 – MA42 16 – MA48 17 – MA54 18 – MA60 19 – MA60 20 – MA60 21 – MA60 22 – MA60 23 – MA60 24 – MA60 25 – MA60 26 – MA60 27 – MA60 28 – MA60 29 – MA60 30 – MA60 31 – MA60 32 – MA60 33 – MA60 34 – MA60 35 – MA60

26. Career Earnings Methodology Applied:

27. The Reference Group:

28. Career Earnings Question: What difficulties face us in determining competitiveness regarding Career Earnings? Answer: Equalizing the structural differences in high school-only and elementary school-only districts when comparing salaries with unit districts. Unit districts have 1 schedule for both high school and other levels. Question: How can we “equalize” and measure these divergent types of districts? Answer: Convert high school and two feeder schools in each reference district to Unit districts by creating a career earnings model for each unit district (apples to apples), high school districts (apples and oranges), and elementary districts (apples and oranges). Then weight the non-unit districts to make a “UNITIZED” district out of the High School and feeder districts.

29. 197.8 FTE 29.17% of Total 480.136 FTE 70.83% of Total 197.8 FTE 29.17% of Total 240.068 FTE 35.41% of Total 240.068 FTE 35.41% of Total

30. It’s a big spreadsheet:

33. Career Earnings – Districts “Unitized” Arlington Heights 214 Highland Pk/Deerfield 113 Wheaton Warrenville 200 Crystal Lake 155 Lake Zurich 95 Stevenson 125 Naperville 203 Barrington 220 Glenbrook 225 New Trier 203 Elmhurst 205 Dundee 300 Palatine 211 Average is 3.82% Less than Barrington

36. Standards: 9. Inflation versus District 220 Wages Data (Last 3 Contracts - 1998-2009) Relevance: District 220 teachers salary grid has exceeded Cost of Living - Cell inflation has kept pace or exceeded CPI 1998 through 2009 by as much as 6% - Step plus cell plus lane increase has exceeded CPI 1998 through 2009 by almost 300 to 400%

37. Additional step added in 1999.

38. Grid Inflation – Did our grid increases keep up with cost of living? Grid inflation kept pace with cost of living and outpaced cost of living in some cases by as much as 6%.

39. Additional step added in 1999. Longevity bonus Is $1150 in addition to step 20-25.

40. Teacher’s Pay– What did a teacher experience?

41. Teacher’s Pay– What did a teacher experience? Teacher pay outpaced cost of living by between approximately 3 times to almost 4 times the cost of living.

42. Fund Balance Basics • Fund Balance is cash on hand . • Fund Balance is stated as a ratio of cash on hand measured against annual revenue. • A budget surplus increases fund balance • A budget deficit decreases fund balance. • Because a district budget gets bigger every year, it is necessary to have a certain level of surplus to have the fund balance stay the same. A budget without surplus will see a decreasing fund balance. • Districts need a level of fund balance to be able to pay expenses while waiting for uneven revenue. • The state weighs fund balance in evaluating whether a district is financially healthy, a key optic to the community. • Rating agencies weigh fund balance in evaluating whether a district is financially healthy and a good credit risk. These credit ratings are a key factor in the expense a district pays to borrow money. The higher the rating, the lower the cost of borrowing for capital projects.

43. Average = 49.40% Barrington Currently = 34.38% Barrington – Station and ELC Spend = ? ($7,208,367)

44. % of Fund Balance to Revenue RatioDoesn’t reflect $7+ mil spend and Budget results. Going the wrong way.

45. Barrington CUSD 220Operating Surplus 2006-2009 * * Unaudited financial results

46. % of Surplus to Revenue RatioTrend is going the wrong way.

49. Insurance Plan Costs Compared to Referent Districts Average