Fiscal Consolidation Study: Herman #22, Neosho J3 and Rubicon J1 School Districts May 26 th, 2014 Robert W. Baird & Co. Incorporated 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202 800-792-2473 / 414-298-7354 Fax Page 1
Table of Contents Executive Summary... 3 Important Insights... 3 Equalization and Consolidation Incentive Aid... 3 Findings and Key Variables... 4 Resident Student Membership (FTE)... 4 Revenue Limits... 4 Equalized Valuation... 5 Equalization Aid... 5 Consolidation Incentive Aid... 6 Fund Balance... 6 District Expenses... 7 General Obligation Debt... 7 Summary... 8 Taxpayer Impact... 8 Fiscal Viability... 9 Unresolved Issues... 9 Consolidation Study Fiscal Scenario Detail... 10 Page 2
Executive Summary In April 2014, the Herman, Neosho and Rubicon School Districts asked for a study of the potential fiscal impacts of creating a newly Consolidated School District with one or more of the above-mentioned districts. Important Insights State laws governing school aids, revenue limits and consolidation incentive aid are paramount in the resulting tax and financial impacts. When districts are similar in size and fiscal landscape, a consolidation will typically show a very similar structure. State law in this area is complex. Our focus is strictly on the fiscal impact as noted above. Reorganized districts receive special funding outside the revenue limit. Thus, the true impact of the consolidation is not fully realized for at least seven years after implementation begins. Additionally, the legal process to consolidate takes one to two years. Equalization and Consolidation Incentive Aid The tax rates are based upon levy and equalized valuation (TID-Out) for the Districts. State aid in this study has two components: State Equalization Aid is general financial assistance to public school districts for use in funding a broad range of school district operational expenditures. It is allocated based on district spending, equalized valuation and resident membership (FTE). Consolidation Incentive Aid is strictly meant for districts who have consolidated and is based upon a complex formula written in Wisconsin State Statutes 121.07(6)(e) and 121.07(7)(e). This aid would be received for seven years beginning in the first year of consolidation and would be counted as revenue outside of the Revenue Limit. Act 20 extended this aid from five years to seven years decreasing the multiplier in years six and seven. State law in this area is complex. Reorganized districts receive special funding outside the revenue limit. Page 3
Research Process and Key Variables Estimating the financial impact of consolidating two or three school districts is a complex and methodical process. The key variables are reviewed in the next section. Resident Student Membership (FTE) Resident Membership (FTE) is a key factor in determining a school district s revenue limit. The consolidated district will be the sum of the resident districts FTE and will continue to be impacted by enrollment trends existing prior to consolidation, i.e. declining enrollment. Additionally, open enrollment is an important consideration as students enroll to and from each district. Students once open enrolled between the two individual districts prior to consolidation will now be removed from open enrollment, as they will be resident students attending the newly-consolidated district. Revenue Limits Wisconsin Act 16 implemented revenue limits beginning with the 1993-94 school year. A district s revenue limit is the maximum amount of revenue raised through state general aid and property taxes. The maximum limit is based upon resident enrollment (FTE), a state-determined revenue amount per pupil and one-time and ongoing exemptions. Revenues from the revenue limit make up approximately 85-95% of any district s operating budget. Expenses generally do not fall in line with increases or decreases in revenue limit authority. This has become a theme that permeates throughout most Wisconsin school districts. The structural deficit in the state funding formula will continue to impact the consolidated district. 2,000 1,500 1,000 500-281 1,640 1,712 837 395 Green Lake Berlin Area Ripon Markesan Princeton Source: Department of Public Instruction Green Lake Berlin Area Ripon Markesan Princeton 2013-14 Revenue Limit Current Year FTE Ave $- $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 Source: Department of Public Instruction 2013-14 Revenue Limit Max Revenue / Member $9,125 $9,572 $9,125 $9,125 $12,350 Page 4
Millions Research Process and Key Variables Equalized Valuation The equalized valuation of a school district is defined as the full value of all taxable general property as determined by the Wisconsin Department of Revenue. This value is determined independently of the locally assessed value and is meant to reflect the fair market value of the property in the district. This value is a key component of tax rate and state aid calculations. The consolidated district will have a total equalized value equal to the sum of the two/three individual districts value. State Equalization Aid The Wisconsin State Equalization Aid is allocated based on prior year spending, equalized valuation and membership. The key factor in determining equalization aid is a district s property value per student. Typically, the more property rich a district is, the less state equalization aid received. Equalization aid is calculated based on prior year data. Therefore, in the first year of consolidation, the spending, equalized valuation and membership will be the sum of the individual districts figures. It is necessary to run exact aid calculations for the specific districts looking to consolidate as the severity of property richness and the size differential of the districts consolidating will impact the final calculation and aid figure. The proposed districts vary greatly property richness and will cause larger-than typical fluctuations in aid placement once consolidated. Green Lake Berlin Area Ripon Markesan Princeton $0 $400 $800 Source: Department of Public Instruction 80% 60% 40% 20% 0% 0% TIF-Out Eq. Value (in millions) Oct 2013 w/o computer value 66% 65% $393 28% $620 $624 $584 2013-14 Revenue Limit Aid as a % of Revenue Limit $ 10% Green Lake Berlin Area Ripon Markesan Princeton $867 $20 $15 $10 Equalization Aid Allowable Limited Revenue (Levy) Aid as a % of Rev. Limit Authority Source: Department of Public Instruction $5 $0 Page 5
Research Process and Key Variables Consolidation Incentive Aid According to Wisconsin State Statutes 121.07(6)(e) and 121.07(7)(e): For the first year, and for each subsequent year for four years the cost ceilings and guarantee values shall be multiplied by 1.15 and rounded to the next lowest dollar. In the 6 th school year the amounts shall be multiplied by 1.10 and rounded to the next lowest dollar and in the 7 th year, multiplied by 1.05 and rounded to the nearest dollar. Additionally, Wisconsin State Statutes 121.105(3) states that for each year, and for each subsequent year for four years the consolidated aid shall be an amount that is not less than the aggregate state aid received by the consolidating school district in the school year prior to the school year in which the consolidation takes effect. In the fifth and sixth years, the consolidated school district is entitled to a payment amount equal to 66% and 33%, respectively, of the payments that the consolidated school district received in the fifth year of consolidation. In the first five years, the difference between the consolidated aid calculation (without the 1.15) and the greater of a) the combination of prior year s aid for each consolidating district or b) the consolidated aid payment with the 1.15 is the amount of additional aid the District would receive to spend outside the revenue cap. The additional aid will sunset after seven years and will fluctuate annually. Consolidation aid is received outside of the revenue limit, and because it is not ongoing revenue, it is typically earmarked for one-time expenses. Consolidation aid is received outside of the revenue limit, and because it is not ongoing revenue, it is typically earmarked for one-time expenses. District Expenses This study does not consider any operational or facility cost reductions as a result of the consolidation. It is important to note that salaries and benefits typically comprise 70-85% of total expenses; adjustments to staffing levels as a result of the consolidation must be considered. Additionally, adjustments due to shared operational cost savings from consolidation will impact future expenditure budgets. Page 6
Research Process and Key Variables Fund Balance Fund balance is a critical factor for financial planning and budgeting processes. The cash portion of fund balance is typically used to bridge the gap between receipt of revenues and payment of expenditures. It can also be used to fund certain expenditures. A district with an appropriate fund balance can avoid excessive short-term borrowing and make designated purchases or cover unforeseen expenditure needs. General Obligation Debt Typically, for a consolidated district, the overall debt burden would not be compromised. An aided K-12 district is allowed to borrow up to 10% of their equalized valuation; whereas K-8, non-aided and UHS districts are eligible to borrow up to 5%. The consolidated district, having property value equal to the sum of the individual districts values, would see no change in their overall borrowing authority. For existing debt, the consolidated district would assume outstanding principal balances for all outstanding issues. 1 Source: Department of Public Instruction 1 Neosho issued $155K in Sept 2013 Page 7
Thousands Summary Taxpayer Impact There are two crucial questions to be answered concerning the fiscal impact of a potential consolidation. The first involves the tax impact. The obvious question is: Will my taxes rise or fall? The second and equally important question is: Is the new district fiscally viable? There are several ways to answer the first question. One approach is to compare future tax rates to current ones. The problem with this is that even without a consolidation, tax rates and burdens will rise or fall due to changes in enrollment, property values and the state s complex schoolfinance system. Typically, in the first year of consolidation, the tax rate for the consolidated district will fall between the projected tax rates for the individual districts. Therefore, it is likely that Herman will see a decrease in their mill rate in this consolidation scenario; whereas it is likely that Rubicon will see an increase in their mill rate. Resident enrollment, property value, spending and the consolidation aid received in the consolidated district scenarios will result in future year mill rate fluctuations. It is also important to note that Rubicon is the only district with referendum approved debt. This debt would need to be levied for the consolidated district outside of the revenue limit. $15.00 $10.00 $5.00 $0.00 $8,000 $6,000 $4,000 $2,000 $0 $5.14 Total School Levy by Type 2013-14 Green Lake Berlin Area Ripon Markesan Princeton Revenue Limit Levy Referendum Approved Debt Levy F80 Levy Source: Department of Public Instruction $10.02 Mill Rate 2013-14 $11.58 $12.23 $9.91 Green Lake Berlin Area Ripon Markesan Princeton Mill Rate Source: Department of Public Instruction -- K-8 State Ave Page 8
Summary Fiscal Viability The second question relates to fiscal health of a consolidated district. It is clear that the consolidation incentive aid is a key component of the fiscal stability of the newly created district. Absent of those funds, however, a consolidated district will face similar fiscal challenges as the independent districts. Overall, the projected deficits for the individual districts and the consolidated district must be examined. Most districts are subject to the current structural deficit in the school funding formula; the newly consolidated district could have more fiscal stability for a longer period of time. This is due, in part, to the consolidation incentive aid the district receives. It is also important to note that, as a consolidated district, shared staff and services would result in reduced expenses. It is recommended that administration review and possibly report on the operational savings a consolidated district might achieve if this, in fact, becomes a viable option. It is recommended that administration review and possibly report on the operational savings a consolidated district might achieve if this, in fact, becomes a viable option. Unresolved Issues Given the statutory timeline for consolidation and the complexity of the financial issues associated with it, this study reflects only the key high-level variables. There are outstanding issues that this report either does not address, or addresses only in part. It is important to note that this financial analysis does not make assumptions about program offerings, staff reductions, or mode of delivery. Additionally, cost savings including, but not limited to, building modifications, transportation and staffing levels need to be considered. The school boards would ultimately need to decide how the consolidation would affect academic achievement. Page 9
Consolidation Study Fiscal Scenario Detail Scenario 1: Herman #22 consolidated with Neosho J3 Page 10
Consolidation Study Fiscal Scenario Detail Scenario 1: Herman #22 consolidated with Neosho J3 Page 11
Consolidation Study Fiscal Scenario Detail Scenario 2: Herman #22 consolidated with Rubicon J1 Page 12
Consolidation Study Fiscal Scenario Detail Scenario 2: Herman #22 consolidated with Rubicon J1 Page 13
Consolidation Study Fiscal Scenario Detail Scenario 3: Neosho J3 consolidated with Rubicon J1 Page 14
Consolidation Study Fiscal Scenario Detail Scenario 3: Neosho J3 consolidated with Rubicon J1 Page 15
Consolidation Study Fiscal Scenario Detail Scenario 4: Herman #22, Neosho J3 and Rubicon J1 consolidated Page 16
Consolidation Study Fiscal Scenario Detail Scenario 4: Herman #22, Neosho J3 and Rubicon J1 consolidated Page 17
Disclosures Robert W. Baird & Co. Incorporated is providing this information to you for discussion purposes only. The information does not contemplate or relate to a future issuance of municipal securities. Baird is not recommending that you take any action, and this information is not intended to be regarded as advice within the meaning of Section 15B of the Securities Exchange Act of 1934 or the rules thereunder. In providing this information, Baird is not acting as an advisor to you and does not owe you a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934. You should discuss the information contained herein with any and all internal or external advisors and experts you deem appropriate before acting on the information. Page 18