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SOURCES OF REVENUE

Module by: Thomas Kersten. E-mail the author

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Note:

This module has been peer-reviewed, accepted, and sanctioned by the National Council of Professors of Educational Administration (NCPEA) as a significant contribution to the scholarship and practice of education administration. This is Chapter 4 of a Collection (text) entitled Taking the Mystery Out of Illinois School Finance, authored by Thomas A. Kersten and co-edited by Theodore Creighton. CLICK HERE to access entire book.

Now that we have taken a brief look at the legal basis for public education and examined the role of the federal government, let us turn our attention to the first side of the basic finance equation – sources of revenue; or more specifically, where school districts find the dollars to operate. Overall, school districts rely on several primary revenue sources including:

  • Property taxes;
  • General state aid;
  • Categorical state aid;
  • Competitive grants;
  • Corporate personal property replacement tax (CPPRT);
  • Interest income;
  • Local fees; and,
  • Federal aid.

Property Taxes

I am sure that you would not be surprised to hear that the largest single source of Illinois public education funding is the property tax. In fact, in fiscal year 2009, local sources of revenue which are primarily property taxes comprised 56.2% of all public school revenues in Illinois (Illinois State Board of Education, 2012). Note: In school finance, fiscal year refers to a traditional school year July 1 to June 30. Therefore, FY 13 is July 1, 2012 through June 30, 2013. For some school districts, primarily in the northeast portion of the state, property taxes are the most substantial revenue source accounting for more than half of their total revenues. However, for other school districts with lower property tax bases, the impact of property taxes may be somewhat less than other revenue sources since their property tax bases provide a smaller portion of overall school district revenues. Also not surprising, some districts with low property wealth, such as those in rural areas, experience little if any property value growth from year to year.

Tax Base

A school district’s wealth is usually linked to the total value of taxable property within district boundaries. This is what is called the tax base. A school district’s tax base is determined by adding together the value of all taxable property whether it is vacant land, residential, or business-based. Since the value of property varies depending on its location and type, some school districts will have much more property wealth than others. For example, if your school district is located in the northern suburbs of Chicago and includes a regional shopping mall and multiple high-rise corporate office buildings, your overall tax base will be dramatically higher than in a farming community in Livingston County. Because of such wide discrepancies in Illinois school district tax bases, a great deal of inequity exists between the highest and lowest wealth school districts.

Tax Exempt Property

Some property owners do not pay property taxes because the property is tax exempt. Examples of common tax exempt properties include those occupied by governmental units such as military bases, municipal and state offices, and legally designated not-for-profits such as places of worship, some hospitals, universities, and other organizations. For many school districts, tax exempt properties are a small percentage of the overall tax base. But in others, such as Evanston Community Consolidated School District 65 which includes Northwestern University, a significant portion of property is not taxed and is unavailable for other development thereby reducing the school district’s property tax base.

Understanding the Property Tax in Illinois

Before considering issues surrounding property taxes, it is important to understand how property taxes are calculated. Theoretically, calculations for all taxable property in Illinois should, by law, be based on one-third of the property’s market value (actual selling price) (Fritts, 2008). Therefore, if your home has a market value of $600,000, it should be assessed for tax calculation purposes at 1/3 or $200,000. This $200,000 is called the assessed valuation. All Illinois counties including Cook are supposed to tax property based on one-third of market value. However, here is where Cook County differs from the rest of the state. Cook County, instead of assessing all property at 33%, uses a tiered system, which assesses business property at a higher rate than residential property.

Let’s examine this a little closer. In Cook County, homeowners’ property should be assessed at 16% of market value and businesses between 33% and 38%, depending upon the type of business entity (Illinois Department of Revenue, 2011). However, beginning with 2009 taxes received in 2010, Cook County residential property will be assessed at ten percent and commercial property at twenty-five percent (Houlihan, 2009). In all other counties, both homeowners and businesses are assessed at 33%. The figure below shows the legal assessment percentages.

Table 1: County Tax Assessment Levels
Taxpayer Cook County Other Counties
Homeowner 10% 33%
Businesses 25% 33%

This multi-tiered assessment system in Cook County was designed to reduce homeowner property taxes. In essence, businesses pay a higher percentage of the overall taxes to allow homeowners to pay less.

The concept of fixed assessment levels for property tax purposes seems logical and fair. If all Illinois real estate was assessed according to the mandated formula, the system would appear to be fair since everyone would be treated consistently. However, have you ever compared your tax bill with a neighbor, perhaps even with someone who has the same model home in your subdivision, and wondered why that person’s tax bill was different from yours? If so, you are not alone.

Property Assessment Inconsistencies

To understand why this occurs, it is important to recognize that assessment of property is not an exact science. In Illinois, county property tax assessors oversee the assessment and reassessment of all property in their respective counties. As with any such process, the assessment process is somewhat subjective since it relies on individuals who have some discretion to interpret information and make judgments. As a result, property assessments vary from area to area from year to year.

In addition, Cook County property has been historically under-assessed. Recent studies of actual assessment levels show these discrepancies. Fritts (2008) reports that residential property is actually assessed at 10% of fair market value and business property in a range of 27-30%. In part, because of these underassessment practices, the Cook County Board recently revised the Real Property Assessment Classification Ordinance to set residential assessment at 10% and business/commercial at 25% beginning with 2009 assessments (Herman & Kownacki, 2008).

To adjust for some of the assessment variance from county to county, the state created a balancing system called the State Equalization Factor.

State Equalization Factor

The State Equalization Factor or as it is commonly called the “Multiplier” is a factor assigned to a county to bring the average county-wide property assessment level to the required one-third (Illinois Department of Revenue, 2011). If a county is under-assessing, the state can eliminate some of the discrepancy by increasing the multiplier.

Here is how it works. When property in a given county is correctly assessed at one-third of its market value, the state assigns a multiplier of 1.0. On the other hand, when property in a county is under-assessed, the state assigns the county a higher multiplier which is applied equally to all property in the county. The multiplier is supposed to bring the overall assessment of property in the county to the one-third standard. For example, the state assigned a multiplier of 3.3000 for Cook County for Tax Year 2010 because both residential and business/commercial properties were under assessed.

The figure below demonstrates the different assessment levels in Cook and Lake Counties. It also shows how the multiplier is used to bring property assessments to the mandated level. You will note that businesses in Cook are assessed at a significantly higher than residential property. Also by applying the multiplier, the state has attempted to bring the total county-wide property assessment in Cook to 33% of the total market value.

Table 2: Effect of Multiplier
County Market Value Assessed Value Multiplier Equalized Assessed Value
Lake – Home $600,000 $200,000 1.0000 $200,000
Lake – Business $600,000 $200,000 1.0000 $200,000
Cook – Home $600,000 $60,000 2.9786 $178,716
Cook – Business $600,000 $150,000 2.9786 $446,790

Equalized Assessed Valuation (EAV)

In the figure above, you may have noticed that I introduced a new term, Equalized Assessed Valuation (EAV). Since assessment levels may vary from county to county, in particular from Cook, the property tax calculation you will see shortly requires that assessed values be converted to EAV as part of the property tax calculation process. So when you hear EAV, be aware that this is the revised assessed value of the home after the state multiplier has been applied to adjust for under-assessment.

Further Exemptions

If calculating property taxes was not complicated enough, the state legislature has created several special tax exemptions designed to reduce property taxes for specific groups (Illinois Department of Revenue, 2011). These “exempt” a portion of the EAV from the property tax calculation thereby reducing taxes for that particular property. The most common exemptions in Illinois are:

  • Homestead (An exemption for owners of primary residences);
  • Senior Homestead (Additional exemption for seniors); and,
  • Disabled Veterans.

In addition, low income seniors who meet certain eligibility requirements qualify for a Senior Citizen Assessment Freeze. Later in this chapter, we will examine a sample property tax bill which will include some of these exemptions.

So far we have discussed several factors which are used in the property tax calculation: market value, assessed valuation, equalized assessed valuation (EAV), and exemptions. The last factor you need to understand is tax rate.

Tax Rate

The most confusing term in the property tax formula is the tax rate which is the percentage at which property is taxed. State laws regulate tax rates. However, for most individuals other than school business officials and superintendents, what is most important to know is not how the tax rate is calculated but rather how it is applied to individual taxpayer bills. Since the imposition of the tax cap in Illinois and recent legislation, the tax rate has become a less important factor for school districts. Tax rate will be discussed further later.

Property Tax Formula

Now that we have examined the factors that are used in the property tax calculation, we can now apply the formula. Although the mathematical calculation is quite simple, it often appears confusing unless you understand the factors. I like to tell graduate students that the actual math problem could easily be completed by many third graders! What makes the formula particularly confusing is that the tax rate is applied for every one hundred dollars of EAV not total EAV. The property tax formula is:

  • Individual Property Owner’s EAV/100 X Total Tax Rate = Total Property Tax Bill
  • To understand this calculation, let’s consider a specific example of a typical home. Our assumptions are:

(a) Home has an EAV of $50,000 (Market value of $150,000) and (b) The total tax rate for all taxing bodies is $6.00.

Here is the calculation:

Step 1: Take the EAV and divide it by 100. The formula says that the tax rate is applied to every $100 of EAV not the total amount. Therefore, you must calculate how many hundreds of dollars of EAV you have.

$50,000/100 = $500

Step 2: Multiple this number by the tax rate. In reality, the property owner is paying $6.00 in property taxes on every 100 of EAV.

$500 X $6.00 = $3,000

It is that simple! What confuses everyone is how you arrive at the tax rate and how you calculate the final EAV.

Understanding a Tax Bill

Have you ever studied your own property tax bill? You have probably looked at the bottom line, compared various figures from the current to last year’s but never really took time to understand it. Yet, one of the best ways to understand property taxes is to examine an actual property tax bill. The basic components of property tax bills are common in all counties. However, because Cook County is different in some respects, we will examine a sample Cook County tax bill (See Sample Cook County Tax Bill below).

To begin, you will note that this is the second installment, which is due in the fall. In the bottom right hand corner, you will find the amount paid in the first installment, $4,480.77, and second, $4,582.35. The total property taxes due on this residential property for the year are $9,063.12.

Cook County Tax Calculation

This bill illustrates how Cook County property taxes are billed differently from the remainder of the state. This taxpayer paid $9,063.12 in tax year 2008. The first installment due for tax year 2009 was 55% of the previous year’s total bill, $4,984.72. Since the first installment is due earlier in Cook than other counties, the exact annual property tax is unknown at the time so 55% of the prior year’s amount is billed. The second installment is $3,776.75 which reflects the difference between the first installment and the total actual property taxes due after property tax calculations are completed.

Figure 1: Sample Cook County Tax Bill
Figure 1 (figure3.1.b.png)

Year in Arrears

When you hear that property taxes are always billed a year behind, this is because they are assessed in one year, in this case 2009, and actually paid in the next, 2010. This bill provides an example of this process which often causes some confusion when trying to explain property taxes.

Adding further to possible misinterpretation is the difference between tax year and fiscal year. In the Sample Tax Bill above, the tax year is January 1 to December 31 and is different from fiscal year which is always July 1 to June 30.

Reassessment Practices

The 2009 Assessed Value is $57,283. This can remain the same from one year to the next if it is not a reassessment year. Cook County property is reassessed every three years.

In other counties, state statute requires that individual properties be reviewed every four years. However, it is common for townships in these counties to review the fair market value of properties annually against assessment levels sometimes resulting in the application of a township equalizer.

Taxing Districts

The tax bill also identifies the taxing bodies legally authorized to levy property taxes. On the sample bill, both the elementary and high school districts collect the majority of property taxes. One interesting point to remember is that taxing bodies are not required to levy taxes. In non-election years, for example, no taxes are typically collected for “Consolidated Elections."

Tax Rates

As mentioned earlier, tax rate are very confusing particularly since the property tax cap became law in such counties as Cook. What actually occurs is that the tax rate is calculated after the amount of property taxes a district is entitled to under law is determined and the overall EAV within the boundaries of the taxing body is established. The tax rate is then set at the level needed to generate the amount of property taxes the taxing body is requesting as long as the rate does not exceed the maximum permitted by law. If it does, then the tax rate is reduced to the legal limit and the taxing body does not receive all the property taxes requested. This is one of the reasons that school districts ask the voters to approve a tax increase through a referendum.

Tax Calculator

Earlier we discussed the formula used to calculate a property owner’s tax liability. In summary, the EAV of the property is divided by 100 and multiplied by the tax rate to establish the total property taxes due for the year. You can understand this process by examining the information listed under Tax Calculator on right side of the sample tax bill.

2008 Assessed Value

This represents the value assigned to the property by the county assessor for the prior tax year.

2009 Property Value

This line should be the projected value of the home if it was sold.

2009 Assessment Level

Here is where the legal assessment level is indicated. In Cook County, this should be 16% of the actual value of the property. Note: For 2010 property taxes paid beginning in 2011, the assessment percentage was reduced to ten percent. As you will see as we study this bill, the assessed value is far below the required 16% level. In other counties, this figure is 33%.

2009 Assessed Value

This figure represents the assessed value based on the county assessor’s calculation for this tax year. If you simple multiple the property value, $572,830, by 10%, you have an assessed value of $57,283.

2009 State Equalization Factor

If the Cook County Assessor had calculated the assessed value of residential property at approximately the 16% level, the multiplier would close to 1.0. However, since the state through an analysis process determined that the assessor undervalued property, the state assigned a higher “multiplier” to attempt to equalize the low assessed value. Since the state has assigned the county a multiplier of 3.3701, the property was substantially under assessed in relationship to other counties.

2009 Equalized Assessed Value (EAV)

The EAV is the revised assessed value after the multiplier has been applied. To calculate the EAV, the County Clerk multiplies the assessed value, $57,283, by the multiplier, 3.3701, for an EAV of $193,049.

2009 Tax Rate and 2009 Total Tax before Exemptions

Now that the EAV is set, the actual tax calculation can occur. The County Clerk divides the EAV, $193.049 by 100 which equals $1,930.49 and then multiplies this figure by the tax rate of 5.063 which yields a Tax Year 2009 (payable in 2010) bill of $9,774.07.

Tax Exemption

In Illinois, certain taxpayers are provided some property tax relief through the legislative process. This particular homeowner received a Homeowner’s Exemption of $1,012.60. Most homeowners have a Homeowners Exemption and receive a reduction in property taxes due to a reduction made in the EAV.

2009 Total Tax after Exemptions

To arrive at the final property tax bill, the homeowner exemption amount is deducted from the amount listed under Property Tax before Exemptions which determines the total property taxes paid in 2010. For this property, this was $8,761.47.

In other counties, the homeowner exemption may be stated as an amount of EAV which is deducted from the total EAV rather than a dollar amount. In any event, they both reduce the taxpayer’s property taxes.

What never ceases to amaze me is just how complicated the formula appears to be. However, when you understand each of the parts, the actual calculation is quite simple. The real challenge for school administrators and school board members is to explain this process to citizens and employees in a way that they understand the calculation but also appreciate the issues and political factors which have and continue to play a role in this process over time, particularly since any major revision is not imminent.

Tax Collection Timeline

School districts submit their property tax levy to the county by the last Tuesday in December. The tax levy is the specific dollar amount in property taxes that the school district requests. We will examine further how the levy is determined when we discuss the Illinois tax cap.

Property taxes are collected twice a year and distributed to taxing bodies as they are received. School districts typically receive their first property tax payments in the spring. Since these arrive before the beginning of the school year for which they are intended, they are referred to as early taxes.

Early taxes can be a source of confusion for some school districts. For example, if your district is in the process of contract negotiations and receives $3,000,000 in early taxes, the teachers’ union may argue that the district has an additional $3,000,000 in reserves. The school board may counter that this is not part of the carryover reserve, but only a temporary increase in the reserve because the funds are actually for the next school year.

One other confusing property tax issue is how Cook County residential spring property tax bills are calculated. School districts have to request property taxes in December before they know how much they are entitled to receive. The county clerk’s office determines the exact level later in the spring. Because Cook County tax bills are distributed before the process is completed, the Cook County Clerk bills the property owner for 55% of the last year’s tax. Then, in the fall after all pertinent data have been received, the actual full-year tax bill is calculated. The difference between what the property owner paid in the first installment and what is outstanding is the amount the property owner is billed for the fall installment. This is why the second half property tax bill may be higher or lower than the first. Since other counties distribute the first tax bill later than in Cook, usually in June, this is not an issue for the counties as the total property tax bill is divided equally between the two payments.

General State Aid

A second source of revenue is general state aid that is distributed based on a formula. The operating principle behind the Illinois’ general state aid formulas is this. School districts that have the least local wealth should receive the most general state aid. This is, in concept, an equity principle. The Illinois State Board of Education uses a worksheet which school district administrators complete to establish their level of local wealth. For the most part, local wealth is tied to EAV per pupil. The higher the EAV is per pupil; the wealthier the school district.

In theory, by providing increased state aid to less wealthy school districts, the inequity gap in overall spending per pupil between property wealthy and property poor school districts should be reduced. I say in theory because, as you will soon see, state aid does not come close to accomplishing this.

Foundation Level

The first step in establishing general state aid is for the legislature and governor to set a foundation level. This represents the minimum guaranteed amount of funding per student including local and state funds deemed necessary to educate a child in Illinois (Center for Tax and Budget Accountability, 2006). For FY 2011, this figure was $6,119 per student. See table below for a recent history of the foundation level (Illinois State Board of Education, 2012).

Table 3: Recent History of the Foundation Level
Year Level
FY02 $4,560
FY03 $4,560
FY04 $4,810
FY05 $4,964
FY06 $5,164
FY07 $5,334
FY08 $5,734
FY09 $5,959
FY10 $6,119
FY11 $6,119
FY12 $6,119

The foundation level is important since the Illinois State Board of Education uses it as a factor in the general state aid calculation.

State Aid Formulas

Once the foundation level is established for the fiscal year, it is used as a factor in determining under which of the three state aid formulas a school district receives general state aid funding. School districts qualify for funding based upon their local wealth per student as measured against the foundation level for the coming year.

The first is the Foundation Formula or as it is sometimes called the Resource Equalizer. Do not confuse foundation level with Foundation Formula even though they use similar terms. School districts that have low local revenues qualify for funding under the Foundation Formula. Since these districts are below the basic state-identified foundation level minimum, they are by definition the least wealthy school districts in Illinois. Consequently, they receive the most general state aid. For FY 2012, 70 school districts were funded under the Foundation Formula (Illinois State Board of Education, 2012).

For those school districts whose local revenues are slightly higher but do not have enough local property tax support, the ISBE assigns them to the Alternate Method. These school districts (171) receive less general state aid than the least wealthy school districts but more than the wealthiest school (Illinois State Board of Education, 2012).

School districts that have more substantial local funding receive the least general state aid. Most of these 69 school districts are in northeast Illinois where property values are significantly higher than other areas of the state. These school districts qualify for what is termed the Flat Grant method. These districts receive a “flat” $218 per student. This figure has remained constant for many years as most general state aid increases have been directed at the needier school districts (Illinois State Board of Education, 2012).

Educational Funding Advisory Board

In 1997, Illinois established the Educational Funding Advisory Board (EFAB), which is composed of representatives from business, education, and the public. EFAB is primarily responsible for recommending an annual minimum foundation level tied to the actual cost of providing students an adequate education. “Adequate” is defined as an amount necessary to ensure that at least 67% of non-at-risk students achieve a passing test score on Illinois’ standardized achievement test. Initially, EFAB worked with a nationally recognized consulting firm to create a formula designed to achieve the goal of providing a minimum level of public school funding needed for an “adequate” education while ensuring that the spending levels of wealthier school districts did not inflate this foundation figure. When the formula was developed, EFAB included an inflation factor, which was tied to the Employment Cost Index and designed to adjust the foundation level automatically each year (Center for Tax and Budget Accountability, 2006).

Unfortunately, due primarily to a lack of revenues, the state has never fully funded EFAB recommendations. In fact, the state typically sets the foundation level well below that deemed necessary by EFAB and has never implemented the inflation adjustment process (Center for Tax and Budget Accountability, 2006).

State Aid Issues

Earlier, I mentioned that state aid does not actually close the gap between wealthy and poorer school districts. Let’s examine some of the issues related to state aid that impact school districts.

Inadequate Foundation Level

Do you think that your school district can adequately educate a child on the FY 2011 foundation level of $6,119? Not likely since the average operating expense per pupil expenditure in Illinois for FY09 was $11,197 (Illinois State Board of Education, 2012). Such a low funding level would mean huge class sizes, few non-essential courses, low paid employees, and more.

So why not raise the foundation level to the point that the poorest districts are on par with the wealthiest? Simply, the state does not have the resources to do so. The dollars needed would be so high that it would be economically unfeasible. To put this in perspective, Illinois public schools enrolled 2,074,806 students in FY 2011 (Illinois State Board of Education, 2012). If the state contributed merely $1,000 more per student, this would require $2.1B initially in additional state funding.

As a result, the foundation level continues to increase slowly from year to year (See Table 3.3) without closing the inequity gap. However, what many hope is that the legislature will approve some substantial increase in general state aid for school districts which qualify under the Foundation Formula and the Alternative Method formulas. They may not achieve equity with Flat Grant districts, but they would receive much needed additional revenues without negatively affecting the Flat Grant districts which are fixed at $218 per pupil.

Categorical State Aid

In additional to general state aid which is available for a wide range of expenditures, school districts receive categorical state aid funding, which is most often targeted at special need students and programs. As distinguished from competitive grants, school districts do not compete for categorical aid. Rather, those districts that meet specific requirements and complete the necessary paperwork receive funding. Examples of Illinois categorical state aid programs for FY 2012 were (Illinois State Board of Education, 2012):

  • Special Education Personnel;
  • Special Education Transportation;
  • Special Education Private Tuition;
  • Regular Transportation;
  • Bilingual Education;
  • Regular Education Orphanage; and,
  • Free Breakfast/Lunch.

School districts submit their state categorical grant applications in the summer and generally receive payments quarterly during the fiscal year.

Categorical state aid is an important source of revenue for school districts, even those with high per pupil spending. In fact, flat grant districts unusually receive more actual dollars per student in categorical than general state aid. Therefore, categorical aid is quite important to these wealthier districts as well.

Prorating of Categorical Aid

Historically, in a poor state economy, Illinois is short on revenues. Does this sound familiar today? Consequently, one strategy that the state employs in tough financial times is to prorate categorical funding; that is, provide school districts with only a percentage of the categorical funding they are entitled to receive. For example, if Illinois decides to short change, or prorate, special education funding to 90%, a school district entitled to $200,000 would only receive $180,000. Prorating categorical funding can create a level of uncertainty which most affects those less wealthy districts which are more state aid dependant and most need state revenue.

Politics

One of the most substantial benefits of property taxes is they are not subject to the state political process and partisan politics. When a school district requests property taxes to which it is entitled, it receives almost its entire request. However, local politics can play a part in determining local school district property tax revenue.

Each year the school board must pass a tax levy, a board action authorizing a specific dollar amount in property taxes for which the school district has the legal authority to request. The exact amount a district can receive is defined in state law. However, boards of education must follow legally defined procedures which include providing notice to the public and conducting a public hearing, if levy is 5% or higher than the previous year, before they can request a specific tax levy amount (Braun, 2008). Through this process, interested citizens have the opportunity to address the board. As such, taxpayers can pressure school boards to levy less than what the district is entitled under the law.

I remember a meeting during which sixty senior citizens packed our school board meeting to attempt to pressure the board to lower its tax levy. Administrators must be prepared to respond to this type pressure in the present anti-tax political climate.

While politics play only a minimal role with property taxes, the same cannot be said of state aid. School districts which rely heavily on general state aid (Foundation Formula and Alternative Method districts) are most affected by the annual Springfield legislative process. In recent years during which state revenues have been relatively flat as the state economy weakened, K-12 educators have often found themselves in competition with other state agencies such as public assistance, mental health, and transportation for a share of a finite state revenue pool. Recently, public education has fared reasonably well through this process with annual general state aid increases. However, the reality is that there is one pie and many groups vying for a bigger slice!

In contrast, flat grant districts which receive only $218 in general state aid and often spend more than $10,000 per student care a great deal more about property taxes than general state aid (Illinois State Board of Education, 2011a). The Foundation Level really has little real impact on them because they are not as state aid dependent.

As you can probably surmise from above, general state aid is much more important to Foundation Formula and Alternative Method than Flat Grant school districts.

Another equally important economic and political issue is categorical state aid funding. Since all school districts even those under the Flat Grant formula receive these state funds, school boards and administrators must pay particular attention to legislative discussions on categorical funding levels. All school districts share a common interest in categorical funding.

Finally, since Illinois is such a diverse state, where your school district is located, how dependant you are on state aid, whether you are a large unit, suburban, urban, or rural school district, or, for that matter, the Chicago Public School system, you may have common or conflicting school funding interests with other school districts. As a result, individual school districts or groups of districts traditionally advocate for their personal needs through the state political process.

Both state legislators and governors, all of whom are elected officials and hope to retain their positions, must find some way to walk this political tightrope. As a result, they are often reluctant to favor one group position at the expense of another. Consequently, those seeking their share of state revenues must not only lobby the legislature and governor regularly for additional funding but often fight to maintain the level of support they already have.

Corporate Personal Property Replacement Tax (CPPRT)

Another source of school district revenue is CPPRT, which was initiated following the abolition of the Illinois Personal Property Tax when the Illinois Constitution was revised in 1970. Unless you are a school business official, you really only need to understand that CPPRT is a state tax on either income or invested capital, on some businesses to replace lost revenue from the abolition of the personal property tax on corporations, partnerships, and other business entities (Illinois Department of Revenue, 2011). School districts receive money from state-collected CPPRT taxes each year. Usually, school districts are notified of their estimated CPPRT amount in the summer and receive payments throughout the year. The amount generally increases annually but can also decrease. For some school districts, this can be a significant resource revenue. An economic downturn can negatively affect this revenue source. Since school districts have no control over the tax, they merely include CPPRT funds as revenue in their budgets.

Competitive Grants

Similar to the federal government, state public officials will use specific initiatives to promote their policy agendas. For example, a recent Illinois governor proposed providing all day kindergarten and reducing primary class size. Rather than distributing funding to all school districts which is not realistic due to limited availability of state funds, he initiated a competitive grant program. Some school districts competed against each other for a fixed pool of dollars.

For some school districts, particularly those with limited revenue, competitive grants, which may include those from private sources, may be an important source of funding. Competitive grants may mean the difference between either offering or not providing much needed programs in cash-strapped school districts.

However, school districts must be careful to ensure that a competitive grant makes educational and financial sense. You may want to ask yourself the following questions when you are considering applying for a competitive grant. How you respond to these will help you decide whether a particular competitive grant is appropriate for your school district.

  • Does the purpose of the grant align with district needs?
  • Does the grant require the district to provide additional funding?
  • How will the faculty and parents react if a grant-funded program is discontinued after two or three years?
  • How will the district maintain a grant-based program after funding is discontinued?

Federal Aid

Illinois, similar to other states, receives substantial federal education funding. For FY 12, the federal government contributed $3,460.8 billion or 12.3% percent of Illinois K-12 public school revenues (Illinois State Board of Education, 2012). These funds are distributed by the federal government to states where they are disbursed primarily as categorical grants to school districts. Examples of the major federal categorical grants include the Federal Lunch Program and ESEA (No Child Left Behind) Title programs. School districts with larger economically disadvantaged student populations generally receive a higher proportion of need-based federal funding. In addition, the federal government also uses a competitive grant process to promote particular initiatives. The United States Department of Education includes competitive grant information on its website at www.ed.gov. Although federal funding for almost all Illinois school districts is not as substantial a source of school district revenue as are property taxes and state aid, it is none-the-less important for all school districts in this era of limited revenues and rising expenditures.

Local Sources

School districts also collect a variety of local user-based fees throughout the school year. Although most of the amounts are relatively small, the revenue is important in times of revenue shortfalls and ever increasing expenditures. Fee increases in financially strapped school districts are often viewed by those without children in school as a preferable option to increase revenues since those who benefit directly are only affected. Local funding sources generally include fees that are established annually by the board of education on the recommendation of the administration.

  • School textbook, yearbook, and activity fees (athletic and extracurricular);
  • Breakfast and lunch program fees;
  • Bus fees;
  • Student fines;
  • Student technology fees;
  • Other program fees such as summer school or after school childcare; and,
  • Building rental fees.

Interest Income

One source of revenue which you may not have considered is investment income. School districts always maintain some reserve funds for cash flow purposes to ensure that they have sufficient dollars available to pay bills and meet their payrolls while waiting for state aid and property tax revenues to arrive. Everyone from individuals to businesses usually have some funds in reserve at any given time.

Laws govern where school districts can invest reserve funds and how they can be used. However, in general, reserves must be kept in low risk, reasonably accessible short-term financial investment vehicles such as certificates of deposit (CDs) and government securities, many of which yield interest income (Braun, 2010). School districts with substantial reserves often generate significant interest revenue that can be used to pay operating expenses. In Illinois, investment options are more conservative than in some other states. For districts with large reserves and current operating budget deficits, interest revenue is very important part of the revenue stream.

Although interest income is an important revenue source, a budget deficit can dramatically impact its effectiveness. When a school district is in deficit spending, the dollars needed to make up the deficit come from reserves. As a result, when the school district draws down its reserve to offset a budget deficit, not only does the district have fewer reserves, but also less dollars to invest and therefore reduced income from investments.

Additional Revenue Issues

Beyond the sources of revenue already discussed, an understanding of other issues which affect revenues is helpful. Below are several questions and answers which will clarify other important revenue issues.

  • How does the Illinois lottery affect K-12 public school funding?

Almost everyone has heard that the primary argument posed by original lottery proponents was that lottery revenues would benefit public education, right? Well, the truth is that lottery revenues do fund public education and have certainly increased school funding; however, they have not had the impact most citizens expected.

This is a how the process works. Lottery revenues are collected by the state. After paying for prizes and expenses, the profit is placed in the Common School Fund. However, instead of earmarking all lottery funds as new revenue to fund public education, some are used to supplant present funding sources. Political leaders can, if they so choose, say that all lottery dollars went to public education but avoid pointing out that simultaneously other education funding was reduced (Illinois School Board Association, 2006).

  • Can school boards levy sales taxes?

School boards may not. However, the legislature recently passed Public Act 95-675 which allows all counties except Cook to levy a 1% sales tax for school facility purposes through referendum. Revenues received are allocated to schools based on the enrollment of students living in the county (Local Governments’ Guide to Tax, 2008). Presently, the following counties have approved the sales tax: Cass, Champaign, Jo Daviess, Knox, Laurence, Macon, Schuyler, Warren, and Williamson. The tax was rejected by voters in Macoupin, Madison, and Sangamon counties.

  • Why is Illinois allowed to operate with large funding inequities among school districts when other states such as Texas have had their school funding systems declared unconstitutional?

On the surface, this would seem unfair. Yet the reason is quite simple. The Illinois Constitution only states that equitable funding is a goal not a requirement (White, 2007). As a result, no legal basis exists to declare our system unconstitutional. Without a change in the State Constitution, the focus of school funding will likely remain on finding ways to address inequities through the legislative versus judicial process.

  • What is a TIF district and how does it affect school district revenues?

A Tax Increment Financing district, TIF, is tool created through state legislation which allows municipalities which otherwise would not have adequate resources a vehicle to provide the financial assistance necessary to redevelop blighted areas. In essence, one taxing body, the municipality, is allowed to divert future property tax dollars from another taxing body, a school district, to pay for improvements (Benson, 2006). Common TIF projects include redevelopment of commercial and industrial sites, renovation of existing residential and commercial building, acquisition of land, and infrastructure improvements (Illinois TIF, 2007).

According to The Illinois Tax Increment Association, under a TIF, the value of the property at the time the TIF is established serves as a baseline. Taxing bodies such as school districts continue to receive property taxes calculated on this “base” or fixed value at the beginning of the TIF for its duration. However, as the property increases in value, the additional taxes generated beyond the “base” are used by the municipality to pay for TIF improvements. The difference between the “base” value of the property and the future increased value is what is referred to as the increment (The Illinois Tax Increment Financing Association, 2007).

At the end of the TIF, which is usually 23 years but can be either shorter or longer depending upon need and legal requirements, all taxing bodies ultimately receive the new property value. In almost all instances, the new value is considerably higher since significant improvements were made to the blighted property (The Illinois Tax Increment Financing Association, 2007).

School districts are generally negatively affected by a TIF because the value of the property is frozen for many years. Even though ultimately a TIF will likely generate increased property tax revenues, the loss of increases in property tax dollars during the life of the TIF district means less school district revenue.

School administrators working with their boards of education may challenge the validity of a TIF or attempt to negotiate a compromise in the distribution of increased taxes generated during the TIF. At times, this can be an uphill battle. Sometimes this process creates animosity between the two units of government whose interests may be at odds. However, some districts have succeeded in convincing their municipalities to return a portion of TIF funds to their school districts annually. You can increase your chances for some financial consideration if you are cooperative rather than confrontational. It is more effective to work cooperatively with the municipality. At the same time, it is also important to monitor TIF's regularly. Do not assume that your needs will never be considered.

  • If you make the assumption that you have two identical homes with all other property tax-related factors held constant across the street from each other, one in Cook County and the other in Lake, why would the Cook homeowner pay less property tax?

Although this scenario as presented is unrealistic, it does demonstrate why Cook County residential taxpayers generally have lower property taxes on properties then those in other counties with similar EAVs. At first look, you might guess that the property taxes are lower because Cook has substantially more business property. However, the actual reason is that Cook County residential properties should be assessed by law at 10% while their counterparts in other counties at 33%. In Cook, businesses have a much higher assessment level (25%), which means that they pay a larger percentage of taxes than homeowners.

  • What is a tax exempt school district educational foundation?

In recent years as school districts searched for additional sources of revenue, some have considered establishing educational foundations. In concept, a foundation must be organized as a not-for-profit organization. School district foundations are typically overseen by an independent board that accepts donations and gifts. The foundation board distributes funds as it chooses (Braun, 2010).

Highly successful school district foundations are more the exception than the rule and more prevalent in affluent school districts. Many start with great enthusiasm but fail due to unsustainable interest and/or lack of substantial funding. These foundations often target specific projects or use funds to encourage innovation. As such, they supplement the current program rather than reduce budget deficits.

There are, though, exceptions. A few Illinois school district have well functioning and ongoing foundations, which annually raise substantial revenue. The Winnetka Schools Foundation regularly raises at least $300,000 which is used to fund such programs as teacher mini-grants, sports and club programs, and more (Mesic, 2007).

Summary

In Chapter 4, we have examined the primary sources of school district revenues. Furthermore, we studied in-depth the two largest revenue sources: the Illinois property tax and state aid. We also discussed the role politics plays in school governance and funding and additional revenue issues which further impact school district revenues.

Finally, as you have probably surmised, school districts have limited revenue sources. What is equally disconcerting is that school districts have very little influence over the amount of revenue most of these can generate, and for those over which it does have some control such as competitive grants and local fees, the amounts often represent a very small proportion of overall district revenues.

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