VIRGINIA — Facing a projected budget deficit that could exceed $6 million next year, ISD 2142 officials warned Tuesday that difficult decisions lie ahead as the district enters statutory operating debt and begins considering whether to seek voter approval for additional funding.
The school board approved both a revised 2025-26 budget and a preliminary budget for 2026-27 following an extensive working session devoted almost entirely to the district’s financial outlook.
According to Finance Director Kim Johnson, the revised budget for the current fiscal year places the district in statutory operating debt, or SOD, a state designation applied to districts whose unassigned fund balance falls below negative 2.5 percent of expenditures.
“Guess what? We’re in SOD,” Johnson told board members. “SOD is a negative 2.5 percent unassigned fund balance. We will be at a negative 6.39 and our unassigned fund balance will be a negative $2.2 million.”
The outlook for next year is even more troubling.
Johnson’s preliminary 2026-27 budget projects the district’s unassigned fund balance deficit to grow to $6,169,283, or 18.03 percent.
The district will now be required to develop and submit a recovery plan to the Minnesota Department of Education outlining how it intends to emerge from statutory operating debt.
Johnson said the district’s financial challenges stem from multiple factors, including declining enrollment, rising employee benefit costs, and inflationary pressures affecting district operations.
Enrollment projections included in the district’s budget documents show total average daily membership, or ADM, declining from 1,695.5 students in the revised 2025-26 budget to 1,668.3 students in 2026-27, a loss of 27.2 students. The district has lost nearly 348 ADM since reaching a pre-pandemic peak of 2,016.1 students during the 2019-20 school year.
North Woods School is projected to experience the largest enrollment decline among the district’s schools next year, dropping from 420.6 ADM to 400.1.
While the district has reduced the number of students leaving through open enrollment in recent years, Johnson said ISD 2142 continues to experience a net loss of students to other districts.
“We are not net gaining. We are not losing as much. So, we’re still a net loser,” she said.
Johnson noted that the district’s broader enrollment decline reflects demographic and economic changes across northeastern Minnesota. She said other school districts across the region are experiencing similar losses.
“It has nothing to do with the fact that we restructured the district back in 2010 and 11,” she said. “It has everything to do with jobs in the area.”
While declining enrollment continues to pressure revenues, Johnson said rising health insurance costs have become a major factor in the district’s financial challenges. The district’s health insurance costs increased 25 percent in 2026, adding nearly $500,000 in expenses, and another significant increase is expected next January.
“We know that the minimum increase we’re going to get in health insurance is 25 percent come January,” Johnson said. “That is $718,000. Let that soak in.”
Johnson cautioned that additional revenue alone would not solve the district’s long-term challenges.
“Even with an operating referendum, we cannot continue doing what we’re doing with health care,” she said.
Johnson noted that salaries and benefits account for about 75 percent of expenditures in the district’s general fund.
“We have to take a really hard look at staffing,” she said. “That’s one of the reasons we’ve cut so many staff at the district office already this year, because the only way to get a handle on that is staff reductions.”
Later in the meeting, the board eliminated the vacant director of facilities and grounds position, transferring some of the duties to assistant director Brad Betterley, who received a $10,000 salary increase. Incoming Superintendent Brian Masterson, who starts July 1, will assume overall responsibility for the department, a move Johnson said will save more than $100,000 in salary and benefits.
“We’ve done a lot of rightsizing already with the district, but it’s not enough,” Johnson said. “It’s not sustainable at these levels. Going forward, we’re going to have to make some very unpopular, hard decisions, and we have to stick with them.”
Johnson said maintaining local schools across the district remains a priority and argued that additional school closures are not the answer.
“We’re better off together, but we’ve got to figure out how to do it moving forward,” she said.
Board member Ron Marinaro said the board needs to build future budgets around revenues it can count on rather than hoped-for funding.
“We don’t have the money,” he said. “We’ve got to budget as if we’re not getting it. That’s got to be the mindset this year. If additional money comes later, you deal with that then, but otherwise you’re running negative again.”
The sobering budget discussion set the stage for a presentation by representatives of Ehlers, the district’s financial consulting firm, who outlined referendum options that could provide additional revenue in future years.
Jodie Zesbaugh and Aaron Bushberger of Ehlers reviewed two potential funding tools available to the district, an operating referendum and a capital projects levy.
Operating referendums are widely used throughout Minnesota. Zesbaugh told the board that 172 districts currently have operating referendum authority, while 68 districts use both an operating referendum and a capital projects levy.
An operating referendum generates revenue on a per-pupil basis and is primarily paid through taxes on residential, commercial, and agricultural homestead property. Seasonal recreational properties are generally exempt from those taxes.
A capital projects levy, by contrast, can be used for expenses such as technology, curriculum, software, buses, and other equipment. Taxes supporting that levy are spread more broadly across the district’s property tax base, including seasonal recreational property.
The discussion focused heavily on a new state aid program approved by the Legislature this year that could significantly reduce the tax impact of an operating referendum in districts with large concentrations of seasonal recreational property.
Because approximately one-third of ISD 2142’s property tax base consists of seasonal recreational property, the district qualifies for the new seasonal recreational tax base replacement aid program. Seasonal recreational properties generally do not pay school taxes tied to operating referendums, and the new aid program is intended to help offset that lost tax base.
Under an example presented by Bushberger, a referendum generating approximately $2 million annually would have increased taxes on a $300,000 home by about $249 per year under the previous system. With the new state aid program, that annual impact would fall to approximately $136, with the state contributing more than $900,000 toward the total revenue generated.
The change prompted extensive discussion among board members about how the program works and whether voters would understand that seasonal property owners remain exempt from operating referendum taxes.
“The seasonal rec taxpayers still would not be subject to paying for it,” Zesbaugh explained. “Money to help out would come from the state directly.”
Board members also discussed the possibility of pursuing both an operating referendum and a capital projects levy, a strategy that consultants said has been successful in other Minnesota districts.
“We talked about using a capital project levy in combination with an operating levy to possibly pay for software, which is mostly curriculum for us, and school buses and vehicles because we don’t have enough operating capital to cover all of our vehicle needs,” Johnson said.
But some board members expressed concern about the challenge of winning voter approval for multiple ballot questions.
“Trying to get two may make it harder,” Marinaro observed during the discussion. “Could shipwreck it where you get nothing,” he said.
The district has until Aug. 11 to place questions on the November ballot. Even if voters ultimately approve additional funding, district officials noted that the resulting revenue would not begin flowing to the district until the 2027-28 school year, meaning it would do nothing to address the projected $6.2 million deficit facing the district next year.