Tough fiscal and policy decisions are ahead for the Area School District in Wisconsin after a state-appointed board denied its dissolution request.
The district’s board late year took the rare step of petitioning the state to allow it to dissolve after voters rejected an April referendum to raise its operating rate levy. District officials had said the $11.5 million that would have been raised over four years was needed to stay afloat as steep enrollment declines have cut its operating revenue. The 61% to 39% defeat was the latest in a series of failed revenue referendums.
After a series of public hearings and input from stakeholders, including districts that would be asked to acquire the district’s assets and liabilities, the School District Boundary Appeal Board set up under the Wisconsin Department of Public Instruction denied the request on Jan. 9.
In the aftermath “the status quo won’t do,” leaving the district with tough choices that will fall on the board that is seated after an April election, said district administrator Steven Bloom.
The district has warned that general fund reserves are projected to decline to 7.2% in fiscal 2020 from 20.1% in fiscal 2019 and it faces a $2 million negative fund balance by the end of 2020-2021 school year.
“With a projection of a negative fund balance at its end, we cannot begin the 2020-2021 school year,” the district warned in documents filed with the state.
The district has $13 million of bonds outstanding.
It could continue to cut spending but that would dig into academic and sports programming. It could consolidate facilities with school closures or go back to voters. Any interested party can also appeal the state board’s decision, Bloom said.
Additional funding is not expected in the form of a state bailout because of the precedent it would set. “There’s no pot of gold” that will solve the district’s fiscal strains, Bloom said.
The district's enrollment dropped by 400 students over five years to about 800 and numbers are not expected to pick up anytime soon. District operating revenues are determined by a three-year rolling enrollment average, so the quick drop led to a growing structural budget imbalance.
The district attributes the enrollment drop to the state’s open enrollment policies that allow students within the district boundaries to turn elsewhere. Divisions are deep among residents over school funding support and dissolution.
The members of the state board who voted against the petition cited worries that it would open the door to other such requests. The last district in Wisconsin to be dissolved was Ondossagon in 1990. The members also cited the concerns of neighboring districts that told the board being asked to absorb the Palmyra-Eagle’s liabilities could strain their finances. Some members said the district had not yet exhausted all other options.
The board members also cited support among some in the district for it to remain in operation and public concerns over long student travel times to their new schools.
The district’s operating decisions will fall to a different board to make. Three of the seven at-large board seats were up for election on the April ballot and two members are not seeking re-election. At the board’s Jan. 14 meeting, three members whose terms are not on the April ballot resigned.
The district’s cash flow troubles prompted S&P Global Ratings to cut its rating to BBB from AA-minus last year. For the time being, Bloom said the district won’t feel the impact because it doesn’t have capital needs that require a public offering. It has a relationship with a local bank that provides cash-flow borrowing in anticipation of tax revenue, Bloom said.
S&P has the rating on CreditWatch with developing implications and it has not acted since the vote.
“Management indicates it will exhaust operating cash by the end of fiscal 2020, according to its operating projections, without the additional revenue to balance the budget,” S&P analyst Andrew Truckenmiller said in last year’s report. “In our view, the district's changing circumstances are more likely to lead to a weakened capacity to make debt service payments.
“We could lower the rating if the dissolution is not granted and no additional revenue becomes available for operations, or if the structural imbalance widens further. We could raise the rating if the payment source for debt service regains the stability currently seen in the tax base supporting the bonds,” S&P wrote. “Revising the district's rating to stable, negative, or positive is contingent on further clarity regarding how bond payments will continue uninterrupted.”
The district serves a population of 7,700 in southeastern Wisconsin about 40 miles from Milwaukee and 50 miles from Madison.
