This document has been formatted for printing from your browser from the Web site of the Illinois Association of School Boards.

COPYRIGHT NOTICE -- This document is © copyrighted by the Illinois Association of School Boards. IASB hereby grants to school districts and other Internet users the right to download, print and reproduce this document provided that (a) the Illinois Association of School Boards is noted as publisher and copyright holder of the document and (b) any reproductions of this document are disseminated without charge and not used for any commercial purpose.

Illinois School Board Journal
January/February 2007

Cornfields to subdivisions Rapid housing growth equals financial woes
by Curtis A. Smith

Curtis A. Smith is a professor of educational leadership at Southern Illinois University in Edwardsville.

Residential growth is a good thing — financially — for school districts, right? Wrong. Here's why:

Let's look at a typical example and assume the following: (1) A new, $300,000 house is built on land previously assessed as agricultural, so the land itself wasn't generating much local revenue; (2) The district has a $4 operating tax rate (total minus bond and interest); (3) A family moves in with two school-age children, who are new to the district.

Hang on, we're about to look at some numbers, but we'll do it one step at a time by first examining the effect on local revenue, then state revenue, and finally we'll combine the two to see where we end up for a net fiscal impact.

Step One. For the purposes of this example, let's just keep things simple and not worry about homeowner deduction, multipliers, etc. Here's what happens to local revenue: Illinois has a uniform assessment rate of 1/3 of market value, so the taxable value of this home is $100,000. With a $4 tax rate, the gain in operating revenue for the district is $4,000. So far, so good — the district is up four grand.

Step Two. How about the effect on state funding? Well, there's a little bad news and a bit of good news. First, the bad news. Again, we're going to simplify things by ignoring cash flow and timing issues and just examine the long-term fiscal effects. The General State Aid Formula uses a calculation rate of $3/$100 for unit districts. What this means is that General State Aid (GSA) is reduced by .03 times the increase in the district's EAV, so the reduction in state revenue is $3,000. Definitely not good news. How are we doing? Well, we were up $4,000 from Step One, but now we're only up $1,000.

Step Three. Here's the good news, in fact, the best news of all. The addition of two students will net the district two times the current Foundation Level, which is currently $5,334 per pupil, or $10,668. This is assuming that the district hasn't been losing students and has an upward-trending Average Daily Attendance (ADA). If not, the state averages the last three year's ADA (this actually helps the district by smoothing losses), and they would only get one-third of an ADA for each student, or a total of two-thirds. If this were the case, GSA would only increase $3,556. But, let's assume the best and that the GSA increase due to ADA is $10,668.

Step Four. Now, how are we doing? We were up $1,000 from the previous three steps, so now we're up $11,668 ($1,000 plus $10,668 from Step Three). Pretty good, huh? Yes, but the catch is that we have to educate those kids. This will vary considerably by district, and to find out what it is for your district, just check the district's Report Card. The state average in 2003-04 (the most recent available) is $8,786 per pupil. So, let's assume it's at least $9,000 by now, a conservative assumption, so it will cost us $18,000 to educate these two kids.

Step Five. Finally, where do we end up? We're down $6,332 (combining a positive $11,668 and a negative $18,000). Suppose there are 50 new homes in that subdivision that used to be a cornfield and that each and every one of them has two school-age kids. That's a negative $316,600!

Well, you say, not every new house has two kids. Probably not, but take a look at the end of Step Two — it would take seven houses with no kids to offset the financial loss to the school district of just this one house (seven times $1,000).

Before we wrap this up, a note about cash flow and marginal cost is in order. Some of you, no doubt, noticed that we haven't addressed the cash flow issue here, which might call our results and conclusions into question. Quite the contrary.

The cash flow picture is actually worse than the scenario above because the students walk in the door way ahead of any funding that follows them. The real estate taxes on the new home, for example, aren't due until the year after the house is built and the students arrive. The same is true for the increase in GSA because of the ADA increase.

Okay, you say, but when a new student enters the district, it doesn't immediately cost us $8,000 because we simply place them in an existing classroom and they end up consuming just a few more dollars worth of materials — this is called marginal cost. True, but sooner or later the cumulative effects of new students does approach whatever your per-pupil cost is because you will have to add teachers and other staff to accommodate them.

So, the cash flow effects are negative and the marginal cost effects are positive, but over a period of a few years, both of these factors largely disappear and you are left with the picture we have painted — a significantly negative fiscal impact on your district.

And this is just the effect on operating funds — what it takes to pay salaries, turn on the heat, air conditioning and lights, buy materials, and pay other recurring expenses. We haven't even mentioned building more classrooms, which is inevitable in most growing communities.

Show me a district that's experiencing mostly residential growth, and I'll show you a district in financial trouble.

Is there any hope for such districts? Yes! Commercial development — retail stores, office buildings, restaurants, car dealers, etc. — all generate more local revenue (if they aren't in a TIF district) without directly bringing in more students to educate. Show me a district that is experiencing commercial development, and I'll show you a financially healthy district.

If, however, this development is taking place next door, or is in a TIF district, watch out!

So, what are the lessons here? First, when you see those cornfields start to become subdivisions, buckle up — you're in for a bumpy ride. The ride won't get better until and unless there is commercial development following the residential rooftops. Anything you can do to assure it does occur in your district, without being TIF'd, and to shorten that interval will serve your district well financially.