This year's school budget and our plans for 2037.
Updated: Jan 16, 2019
This post was first published on my original site Oct. 23, 2017
An overwhelming number of Shorewood residents moved here for our schools, and even after their kids are grown, many stay and are totally OK with paying relatively high taxes, specifically in support of our school district. This is great, and I am in that same group. But the same commitment to public education also makes some folks a bit complacent about following the fate of their tax dollars that go to the district.
I think few folks realize that the district is in such good financial shape today. Times were very tough for the district not too long ago, and across the state, school budgets are not full of unexpected revenue. Our district, however, has been doing well.
No one in Shorewood has demanded tax relief, and the district leadership hasn't initiated it. I'm glad everyone is so willing to pay for education, but I'm not sure most people realize how much of the tax levy -- more than $4 million, and about 20% of the district's tax levy -- is budgeted for debt service this year. Do we want to keep that number so high, not just this year but for 20 years?
The $55 million referendum the district has sketched out (not formally proposed, but as drawn up by our financial advisors) could leave us and our neighbors in a tough spot a decade or two from now, long after facilities improvements have been made and aged again. District leadership says we can borrow that much and keep our annual budget for debt service the same. First of all, that number is more recent than they let on. Secondly, I believe some different choices should be on the table, and I'm concerned that no one is discussing those other choices.
Using cash instead of borrowing would save us money in the long run and allow the district more flexibility to respond to the unexpected things that always have a way of happening.
How we ended up flush
School District Business Manager Patrick Miller loves reminding the school board and public that the district has kept the tax rate the same for several years. That's true -- the millage rate, defined as the amount taxed per $1,000 assessed value of a property -- has been stable at 13.88 since 2013. But village property values have risen overall since that same year, meaning that without "raising taxes" the district is collecting more money from property owners. Next year's budget calls for for a 2% increase in the overall amount levied, or $401,232 as shown below. Since 2013, when my family moved to Shorewood, the annual levy has grown from $18.3 million to $20.5 million -- check out this table from the annual meeting to set the millage rate earlier this year.
Over the same period, it's worth noting that enrollment rose and state aid increased in fits and starts, further improving the district's finances. Neither of those can be counted on to continue, but it's been the pattern for the last four years, meaning the district sits in pretty good shape to some extent because of circumstances outside the district's control -- and, credit where credit is due, likely because of disciplined budgeting even in years when state aid and enrollment were very uncertain.
Paying off debt aggressively ... in order to prepare for more debt
To understand the district's recent choices, imagine this hypothetical: say my monthly mortgage payment is $2,500. Then I get a great raise at work that gives me a higher monthly income and a little bonus, so I made a few early payments on my mortgage by paying $5,000 extra one month. I got my the principal down and saved on interest I would have paid otherwise. Lucky me, right?
That's what the district did last year: it used more than $2 million in debt service reserves to pay down debt early -- on top of regularly scheduled debt payments. This isn't bad by any means. We save money on interest down the road, and cut down our overall debt. Cool beans.
There are a couple of related problems, though:
First, there remains a hefty balance in our debt service fund, just sitting -- about $2.7 million. It's important to note this isn't our general fund balance, which is important to keep healthy for our bond rating and in case of emergencies. This is a separate fund just for debt service. When I asked about the debt service fund balance prior to the annual meeting to set the school's tax rate, Mr. Miller was open about the fact that this little nest egg could help offset how much we have to ask to borrow in a future referendum. This apparently is totally legal as long as we don't have more in reserves than we already have outstanding in debt. So yes, it's legal, but it's not exactly what we have in mind when we reassure ourselves about paying higher taxes in exchange for good schools.
In the personal finance analogy, it's me hanging on to a pile of cash -- say, $5,000 -- in case I need it for a down payment on a car. If I don't need it for the car, technically I could use it to help pay off my house. Neither option is terrible, but are there other options? Could I be improving my house instead with that cash, ultimately adding to the value of my house? What about giving to charity? or investing in the stock market? My point is that there are a bunch of options not under consideration -- including lowering taxes.
Here's the second problem with paying down the debt early: the dishonesty about our borrowing pattern that was on display at the listening sessions about our facilities. The district wants to borrow as much as $55 million over the course of a few years, and pay it back over 20 years. Debt service, Mr. Miller promises, will stay at the current level. He and Superintendent Bryan Davis showed a graph at its community meetings meant to show that nothing much would change from this year -- we already pay $4 million+ in debt service every year, and borrowing that much would be manageable with about the same payments, so, no big deal.
But that's not exactly true. We haven't always paid $4 million in debt service. Last year we only had $2.87 million in scheduled payments due, but we used another $1.3 million to make extra payments -- debt defeasement. In the years prior, our debt service was even lower. Four million dollars a year in debt service is a new high for the school district that we would have to maintain for 20 years, not a status quo that we could continue without even blinking.
So, go back to that scenario where I made those extra mortgage payments because I got a raise. It would be a bit dishonest to buy a lake house and a boat and say it's no big deal because my overall debt payments had were already $7,500 a month. Now that I have to pay down the lake house mortgage and boat payment for $5,000 a month and a mortgage payment of $2,500 a month, that's my monthly debt payment total. Since I got a raise, I can afford it, yes, and I can keep the rest of my household budget the same. But comparing it to the month I paid down my mortgage a bit obscures that fact that I'm choosing not to do a whole host of other things with that $5,000 a month -- and we're not even considering what happens if the lake house floods.
I'd venture to guess that most Shorewood residents comfort themselves that paying relatively high taxes is worthwhile because it helps our kids. We like to imagine that we're paying a bit more so that our district can pay good teachers, afford to keep up our old buildings, and buy the latest technology. That's what we want to believe. But while teachers feel underpaid (according to our survey earlier this year), our buildings are crying out for renovations and upkeep, and the PTOs have to raise money for new playgrounds, the district has been socking away hundreds of thousands of dollars to lay the groundwork for our next referendum rather than attending to the work that could have been happening already with the fairly plentiful cash we have on hand. We could start now and keep doing that -- using the cash we have on hand.
I attended the district's community session at the library and looked at the list of potential improvements -- there's no proposal to build an entire building that would require spending tens of millions of dollars all at once. These are a lot of small and medium-size projects we could prioritize and tackle a few million dollars at a time -- using the $4 million each year, rather than sending that same amount to pay down interest on a giant loan. Then if our plans change, our priorities shift or something catastrophic happens, we can take a pause and be more flexible. If we've got a $55 million loan to pay down, that payment will have to be made even if vouchers slash our budgets, Lake Michigan turns toxic or one of our schools burns down. Enough unprecedented things have happened in the last year for me to feel uncomfortable committing to anything but my husband and kids for the next 20 years.
Instead of debt service that leaves us on the hook for a set payment for 20 years, we could use the same revenue as cash to make smaller-scale improvements to our schools over time. We would save on interest, and we'd be more flexible to make other choices if in ten years our priorities changed. And don't priorities always change? So, here's what I think we should ask district leadership: let's broaden the conversation. If Shorewood is so comfortable paying taxes to our schools, let's give our neighbors the benefit of an honest explanation of what they're signing up for and what the alternatives are. We're lucky to have these choices -- let's take advantage of them by truly considering all of our options.