September 1, 2017
After several iterations and much disagreement, the State of Illinois now has a new statewide school funding formula. The Illinois General Assembly approved the new formula as Senate Bill 1947, House Floor Amendment 5 on August 29, with the Illinois House passing the bill Monday, August 28 and the Senate concurring the next day. The Governor signed the bill into law as Public Act 100-0465 on August 31, 2017.
This historic new funding formula will help alleviate the ailing finances of the Chicago Public Schools (CPS) by providing approximately $300 million in additional funding for teacher pensions and general funding, but will not pull CPS out of its liquidity and debt crisis and will likely mean a property tax hike for Chicago taxpayers. As part of the compromise reached between Democratic and Republican State leaders, CPS was granted authority to increase its property tax levy for teacher pensions by nearly 50% from the current maximum tax rate of 0.383% to 0.567%. CPS has not yet revealed how much it will increase its pension levy, but estimates have ranged from $120 to $150 million. More details about how the tax increase could affect Chicago taxpayers are discussed below.
What happened to Senate Bill 1?
The evidence-based funding formula, as originally written in Senate Bill 1, House Amendment 2, was approved by both chambers of the Illinois General Assembly in May. Governor Bruce Rauner issued an amendatory veto of the bill on August 1, which significantly changed several portions of the funding formula and reduced the level of funding for CPS. Senate Bill 1 and the Governor’s amendatory veto are described in this blog post. The Senate voted to override the Governor’s amendatory veto on August 13, but the House did not have enough votes for an override.
As the clock ticked toward the August 29 deadline to accept or override the veto, legislative leaders negotiated a school funding compromise. The compromise was Senate Bill 1947, House Floor Amendment 5. On Monday, August 28, the Illinois House convened and called three votes related to the school funding formula:
- A vote to pass Senate Bill 1947: It failed with a vote of 46 to 61.
- A vote to override the Governor’s amendatory veto of Senate Bill 1: It failed by a vote of 63 to 45. A three fifths majority, or 71 votes, was needed for the bill to take effect immediately. Therefore, Senate Bill 1 died.
- Another vote to pass Senate Bill 1947: It passed by a vote of 73 to 34.
The following day, the Senate voted to concur with the House and passed Senate Bill 1947 with a vote of 38-13. The Governor signed it into law on August 31 as Public Act 100-0465.
What’s in Public Act 100-0465?
The school funding compromise in Senate Bill 1947, House Floor Amendment 5, now Public Act 100-0465, leaves much of the original content from Senate Bill 1 intact. The new evidence-based funding model replaces the old school funding formula that provided General State Aid and supplemental block grants and categorical grants to school districts using an antiquated equalization formula originally intended to supplement school districts’ local resources, but that was criticized by both parties for inadequately funding school districts across Illinois.
The new evidence-based model sets a target funding level (“adequacy target”) based on a school district’s needs and calculates local capacity to fund schools based on the assessed value of property available to the school district for taxing, rather than setting the same funding level for every student, as did the previous formula. It also establishes a base funding minimum to hold current funding levels harmless, and rolls many of the block grants and categorical grants into the base minimum funding calculation.
Chicago Public Schools stands to gain additional funding of about $293 million from the new evidence-based formula in FY2018. This includes about $221 million to cover CPS teacher normal pension costs and approximately $71 million of an additional $350 million available through the new formula for allocation statewide. This funding was included in Senate Bill 1.
The following is a summary of the highlights of Public Act 100-0465.
Public Act 100-0465 includes several new components that were not originally part of Senate Bill 1 and fall outside of the evidence-based formula:
- Authorization for a five-year pilot program offering income tax credits to individuals or businesses who donate to private school scholarships. Donors would be eligible for a 75% income tax credit up to $1 million per donor. The program will provide a maximum of $75 million in tax credits and is estimated to cover fewer than 6,000 scholarships;
- Authorization for the Chicago Board of Education to increase its property tax levy for teacher pensions from a maximum rate of 0.383% to a maximum rate of 0.567%, which is estimated to increase the levy by anywhere from $120 million to $150 million, depending on how much of the authorization CPS decides to use and on the size of the tax base;
- Authorization for property tax reduction referenda to reduce the property tax levy by up to 10% in school districts that are funded at least at 110% of their adequacy target. A referendum would be allowed if 10% of registered voters sign a petition and if reducing the levy would not cause the district to fall below 110% of its adequacy target; and
- Creates a TIF Reform Commission to study and make recommendations on tax increment financing.
Additionally, Public Act 100-0465 made a few moderate changes to Senate Bill 1:
- Moves the CPS normal pension cost out of the evidence-based formula and into the State Pension Code;
- Extends the adjustment to CPS’ local resources for the District’s annual unfunded pension liability amortization payments to all school districts. If any school district develops a legacy pension cost attributable to Tier 3 members, the district will get the same deduction;
- Allows up to $50 million in property tax swap funding starting in FY2019 while maintaining the minimum funding base of $350 million; and
- Provides mandate relief related to some physical education and drivers’ education requirements and streamlines the process for waiver requests.
How Will Chicago Taxpayers be Affected by a Property Tax Increase?
Several different reports have estimated how much CPS will raise its property tax levy, ranging from approximately $120 to $150 million. The tax increase authorization included in Public Act 100-0465 permits CPS to raise its reinstituted property tax levy for teachers’ pensions, which is applied outside the property tax extension limitation law, from 0.383% to 0.567%.
This increase in the property tax levy for pensions would be in addition to the $2.8 billion CPS already receives in property tax revenue. CPS reinstated its dedicated levy for its pension costs as part of the FY2017 budget in August 2016. The authority for the levy was provided at the end of June 2016 by the General Assembly and Governor as part of a stopgap State spending agreement. CPS generated $272 million for its FY2017 pension contribution through the reinstated levy, even though it did not levy up to the 0.383% rate ceiling.
It is not possible to calculate at this point exactly how individual property bills could be affected by an increased CPS levy without knowing how much additional tax revenue CPS intends to levy for and without an updated measure of the size of the tax base (the equalized assessed value or EAV of all the property in Chicago). CPS has until the end of December to submit its updated levy request to the County Clerk and the tax year 2017 EAV will not be announced until summer 2018 before tax bills go out in July. Taxpayers will not see an increase in their tax bills due to an increase in the CPS levy until they receive their tax year 2017 second installment tax bills due August 1, 2018.
However, it is possible to generate a ballpark estimate using tax year 2016 data. According to a Chicago Sun-Times report, CPS has said it will only levy for an additional $125 million. Based on that assumption, we can make a rough estimate that a tax bill for a residential property with a full market value of $300,000 and an assessed value of $30,000 would increase by about $130.
Cook County Clerk David Orr’s office reported that if CPS were to increase its tax levy by $148 million, it would mean an increase of $98 on the tax bill for a property worth $200,000.
What does this all mean for Chicago Public Schools and the City of Chicago?
The Chicago Public Schools Board of Education approved the District’s proposed budget for fiscal year 2018 on Monday, August 28, 2017. The fiscal year started on July 1, 2017 and ends June 30, 2018. The FY2018 budget proposal relied on nearly $300 million in new State funding and $269 million in unidentified local resources from the City of Chicago to help close its projected budget deficit of $544 million.
After two years of relying on State funding to help fund CPS teacher pensions that never came to fruition due to partisan division in Springfield, the Civic Federation again warned CPS not to rely on uncertain funding and come up with a contingency plan in case the State or the City failed to pull through.
The passage of Public Act 100-0465 is an important step in the right direction for CPS and will begin to bring pension parity to the District compared with the teacher pension funding in the rest of the State. The additional revenue raised from the pension levy could also alleviate some of the pressure on the City of Chicago to come up with funding to close CPS’ budget gap. However, it does not solve the ongoing structural issues CPS faces. CPS is in a severe cash flow crisis because it no longer has reserves to cover periods of cash shortfalls due to the timing of revenues and expenditures, which forces the District to rely on short-term borrowing. Additionally, CPS has an increasing debt burden and continues to use long-term borrowing to free up cash for current operations. For these reasons, we urge CPS to produce a multi-year plan to bring the District back to financial stability. For other concerns and recommendations related to the CPS budget, see the Civic Federation’s analysis of the CPS FY2018 budget.
The Civic Federation looks forward to learning more about how the City will finance its contribution to CPS, and about developments related to CPS’ pension levy increase.