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Serving Northern St. Louis County, Minnesota

District facing SOD by next fiscal year

David Colburn
Posted 4/10/24

REGIONAL- The harsh reality of declining enrollment on ISD 2142’s financial status was made clear Tuesday when Finance Director Kim Johnson revealed her projection that the district will fall …

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District facing SOD by next fiscal year


REGIONAL- The harsh reality of declining enrollment on ISD 2142’s financial status was made clear Tuesday when Finance Director Kim Johnson revealed her projection that the district will fall into statutory operating debt in the 2024-25 school year.
“Our enrollment for fiscal year 2024-25 is at levels we were back in 2013-14,” Johnson said. “Based on the way that schools are funded, that’s a very bad thing, because we’re paid state aid based on our student enrollment.”
Statutory operating debt is a condition in which the expenditures for a group of seven general fund line items, collectively called the unassigned fund, exceed revenues by more than 2.5 percent. Johnson projected the unassigned fund balance for 2024-25 will be in the red by 2.8 percent, a total of $956,376.
Falling into this funding hole means the district will have to create a plan for the 2025-26 fiscal year to erase the debt and have it approved by the Commissioner of Education. And with a continued projected decline in enrollment leading to even less state aid, the district will have to make more hard choices about cuts to resolve the deficit.
“We have a lot of work to do to try to figure out how we are going to, in the long run, eliminate our SOD problem and get back on track with limited enrollment and funding options,” Johnson said.
The shortfall means the district will have to resort to borrowing money.
“We are probably going to have to start borrowing money for cash flow purposes next year, probably mid-year is my guess,” Johnson said. “And what that does is increase our interest costs when we have to borrow money for cash flow purposes.”
The board already approved the elimination of ten full-time equivalent faculty positions for 2024-25, but with the projected revenues and expenses that move was insufficient to prevent the district from falling into SOD. And it’s likely the district will have to look at more staffing cuts, as spending of $34,430,602 for salaries and benefits next year represents almost three-quarters of the district’s projected expenditures of $46,606,843.
“That is one of the reasons why when the district has to make cuts to costs, salary and benefits are the first place we look,” Johnson said. “That’s the only place that has a significant enough total dollar value to make any difference.”
Enrollment declines
For purposes of state aid, enrollment is expressed in terms of average daily membership, or ADM, a calculation of the total number of students factored against attendance. In the case of a student who drops out of school early to take a job, the district would receive reduced state aid for that student.
In 2013-14, the district’s ADM was 1,879 students and that number grew to 2,016 by the 2019-20 school year. The district took a big hit from the COVID pandemic as the district’s ADM fell the following school year by 137 students as many families opted for homeschooling to keep their children out of group-based education. Many of those students returned as the district rebounded slightly the next year, but ADM has been on a steady decline since 2022-23, and is projected to be at 1,860 for 2024-25, below that of 2013-14. And while overall enrollment is down over the past decade, expenses have only continued to rise, creating the current financial dilemma.
The decline in enrollment has left the district unable to fully capitalize on the historic investments in education made by the state Legislature last year. Additionally, some funds were earmarked for purposes outside of general aid, such as special education, and such earmarks do not allow the district to use those funds for anything other than the designated purpose.
As Johnson walked board members through the intricacies of each fund and line item, she frequently pointed out where the district’s hands are tied when it comes to reallocating funds to other areas.
“I cannot use my long-term facilities maintenance or my operating capital or my taconite building maintenance for anything except facilities, maintenance, and operating capital, that is all,” she noted at one point. “I can’t use those to fund teacher salaries. I have to use my unassigned fund balance for those kinds of things.”
Maintenance costs will likely skew higher next year due to the planned repair of the wastewater plant at North Woods. That project will go out for bids next year and it will probably come in well above original estimates. The district tackled the same issue at South Ridge this fiscal year, with an initial $200,000 commitment, but bids came in around $400,000 higher than that— an overage the district had to eat.
“Right now, we don’t know what the cost of the North Woods wastewater project is going to be,” Johnson said.
Current year
While finances have also been challenging this year, the district’s unassigned fund balance, projected to end the fiscal year about $66,000 in the red, isn’t near triggering statutory operating debt just yet. The district realized some savings from the change in health insurance providers, although half of the nearly $350,000 has to be allocated to the next budget cycle. Additionally, Johnson expects the cost of the plan to increase in the last half of next year when the agreement allows for a maximum increase of nine percent.
Possible respite?
As the largest geographic district in the state, rich in seasonal recreation properties, the district has struggled in the past to win approval for excess operating levies. But Sen. Grant Hauschild, DFL-Hermantown, has introduced legislation that would create a seasonal and recreation tax base replacement aid program that would reduce the tax burden facing local residents when considering an operating referendum. The aid program would underwrite 44 percent of taxes levied under a general operating referendum in ISD 2142, Johnson said, significantly reducing the amount levied on individual homeowners.
“An operating referendum has to be voted on by all of the voters,” Johnson said. “If we were to go out for an operating referendum, the state would pick up 44 percent of the cost and give it to the district and therefore the taxpayers would not have to pay for that. This is a big deal. We don’t know if (the bill) is going to pass. But it’s something we have to keep in the back of our minds when we’re looking at our position and going into SOD in 2024-25.”