Owatonna school officials warn of multi-year budget gap as federal pandemic aid ends

Owatonna Public School District finance director Lori Veil told the school board that the district faces a multi-year budget challenge after federal pandemic-era ESSER grants expired, reducing federal aid in the general fund by about $3,000,000.

Veil said the district used ESSER funds to retain positions during the pandemic but that those grant revenues have now dropped off, leaving the district to absorb salaries and benefits originally covered by one-time federal dollars. "We have come to the expiration of those grants," Veil said, "and so in this current fiscal year, we have seen a reduction of Federal aid then, has dropped by $3,000,000." Superintendent Mr. Elstad added that the district deliberately stretched ESSER-funded positions over time to avoid an earlier levy request.

Rising special-education expenses are another major driver of the forecast. Veil said the district's unduplicated special-education child count rose from around 668 in 2014–15 to 1,001 in the current year and that special-education expenditures climbed from about $9.9 million to $17.4 million over a 10-year period. "Even with improvement in the special ed aid revenue stream, it is not enough to cover that additional expenditure," she said. The presentation noted that state reimbursement does not cover all special-education costs, leaving the general fund to fill the gap.

Veil also highlighted enrollment dynamics that affect revenue. Average daily membership (ADM) funding — the base for general education revenue — has been steady but is projected to decline in coming years, driven by lower kindergarten cohorts. She said the district receives roughly $11,000 per pupil in general education funding, so losses of 100 students would materially reduce revenues.

To narrow the gap in the near term, the district plans $1.7 million in cost reductions for FY2026. Veil projected those cuts would reduce deficit spending for the year but would not eliminate long-term pressure: "Even with making these reductions, coming pretty close to balancing our budget ... the concern is look at the next year, FY '27." She projected the district's unassigned general fund balance could fall from about 12.89% to roughly 12.26% in FY2026, with FY2027 showing continued deficit spending and an eventual drawdown toward ~10% of unassigned balance.

Board members and presenters also discussed broader context: many Minnesota districts face similar pressures as ESSER funds expire and demographic trends reduce kindergarten enrollments. The board noted referenda and tax-equalization issues as potential levers; Veil and Elstad said an operating levy is one possible future option but emphasized state equalization and funding formulas would affect outcomes.

The board did not take immediate fiscal action beyond approving planned cost reductions; presenters said further conversations and analysis will continue ahead of future budget decisions and the district's December and January work sessions.

What happens next: the board will review additional budget details, and a Bridge Street School proposal and other administrative items are scheduled for the Dec. 9 meeting.