Minnesota K-12 Education Finance System Overview

Minnesota K-12 Education Finance System Overview 2014 MASBO Institute Presented by Tom Melcher February 24, 2014 This presentation is a cooperative effort between the Minnesota Department of Education and the Minnesota House of Representatives Research Department. The presentation is updated periodically as forecasts change and better data becomes available. MDE thanks House Research for its help with this version of the presentation. Any errors or omissions in this version are Tom s alone. 2 Topics for Discussion 1) Context for School Funding: Legal ( e.g., MN Constitution, state & federal laws, agency guidance) Terminology (e.g., pupil accounting, property tax base) How K-12 education fits into overall public finance system Variations in school district characteristics School funding, staffing & financial condition trends 2) Major Components of School Finance System: General Education Revenue Categorical Revenues 3) Current School Finance Issues: State Budget Outlook Shifts Operating Referendum Levy Revenue Disparities Special Education Cross Subsidies 3 1

Legal Context Minnesota Constitution, Article 13, Section 1 it is the duty of the legislature to establish a general and uniform system of public schools. The legislature shall make such provisions by taxation or otherwise as will secure a thorough and efficient system of public schools throughout the state. 4 Legal Context Minnesota Supreme Court, Skeen v. State of Minnesota, August 20, 1993 education is a fundamental right in Minnesota. However, the current system of state educational finance satisfies that fundamental right, particularly where all plaintiff districts are provided with an adequate level of education which meets or exceeds the state s basic educational requirements and where the districts are given sufficient funding to meet their basic needs our decision requires the state to provide enough funds to ensure that each student receives an adequate education and that funds are distributed in a uniform manner the State of Minnesota provides an adequate and uniform education which meets all state standards. It merely allows localities to augment this basic amount the determination of education finance policy, in the absence of glaring disparities, must be a legislative decision because it involves balancing the competing interests of equality, efficiency, and limited local control 5 Legal Context Minnesota Statutes: 120A Compulsory Attendance, School Calendar 122A Q Comp, Staff Development 123A ALCs, District Reorganization 123B Contract Deadline, Fee Law, Facilities Funding, UFARS, SOD, Transportation 124D Enr. Options, PSEO, Charter Schools, Community Ed, Integration, Nutrition 125A Special Education and Special Programs 125B Technology, Telecommunications/Internet Access Equity Aid 126C General Education Funding, Levies, District Borrowing, Capital loans 127A MDE responsibilities, Payment Metering Session Laws: Education Omnibus Bill and other legislation includes amendments to statutes, uncodified (one-time) laws, and appropriations. Statutes & Session Laws available online at: https://www.revisor.mn.gov/pubs 6 2

Legal Context Federal Regulations: Special Education (IDEA) 34 CFR 300: http://idea.ed.gov/download/finalregulations.pdf Title I 34 CFR 200: http://www2.ed.gov/legislation/fedregister/finrule/ 2008-4/102908a.html Education Department General Administrative Regulations (EDGAR): http://www2.ed.gov/policy/fund/reg/edgarreg/edgar.pdf OMB Circulars A-87 (Cost Principles for State, Local and Indian Tribal Governments) http://www.whitehouse.gov/sites/default/files/omb/assets/ agencyinformation_circulars_pdf/a87_2004.pdf A-133 (Audits of States, Local Governments and Non-Profit Organizations): http://www.whitehouse.gov/sites/default/files/omb/assets/a133/ a133_revised_2007.pdf 7 Legal Context MDE Guidance: Superintendent E-mails http://education.state.mn.us/mde/welcome/officecom/super/index.html School Business Bulletins http://education.state.mn.us/mde/schsup/schfin/finmgmt/index.html UFARS Manual http://education.state.mn.us/mde/schsup/schfin/finmgmt/ufars/index.html MARSS Manual http://education.state.mn.us/mde/schsup/schfin/marssstuacc/ MARSSRepInst/index.html SERVS Webinars http://education.state.mn.us/mde/schsup/datasublogin/servs 8 Terminology Fiscal Year: State July 1 - June 30 (Currently State FY 2014) Federal October 1 September 30 (Currently Federal FY 2014) Pupil Accounting: Average Daily Membership (ADM) = the average number of pupils enrolled in the school district throughout the school year. Regular ADM limited to 1.0 for each student. Extended Time ADM (Students served more than full-time in a learning year program) limited to 0.2 ADM per student; used only for extended time revenue. Resident Weighted ADM Pupil Units (WADM) = Resident ADM X Pupil Weight Grade Level FY 14 Weight FY 15 and Later Weight Pre-K 1.250 1.0 K-Disabled 1.000 1.0 Regular K.612 1.0 Full time/.55 Part Time Grades 1-3 1.115 1.0 Grades 4-6 1.060 1.0 Grades 7-12 1.300 1.2 9 3

Terminology Pupil Accounting (Continued): Adjusted Pupil Units = Resident WADM + WADM of nonresidents attending the district under alternative attendance programs (e.g., open enrollment) - WADM of residents attending another district or charter school under alternative attendance programs Adjusted Marginal Cost Pupil Units (AMCPU) = Greater of: Current Year Adjusted Pupil Units or (.77 X Current Yr Adjusted PU +.23 X Prior Yr Adjusted PU) Resident Marginal Cost Pupil Units (RMCPU) = Greater of: Current Year Resident Pupil Units or (.77 X Current Year Resident PU +.23 X Prior Year Resident PU) Note: FY 2014 is the last year AMCPU and RMCPU are used 10 Terminology Property Tax Base (Taxes Payable 2014) Taxable Market Value = Estimated Market Value Market Value Exclusion Market value exclusion = 40% of first $76,000 of value, less 9% of value over $76,000 (no exclusion for homes valued at $413,800 or above) Tax Capacity = Taxable Market Value X Class Rate Class Rates are statutory percentages applied to taxable market value: Residential Homestead: First $500,000 1.00% Remainder 1.25% Agricultural Land and Buildings (homestead) First $1,290,000 0.55% Over $1,290,000 1.00% Commercial and Industrial First $150,000 1.50% Remainder 2.00% Seasonal Rec. Residential First $500,000 1.00% Remainder 1.25% 11 Terminology Property Tax Base (Continued) Sales Ratio = Estimated Market Value / Actual Sales Price (Computed by State Revenue Department based on comparison of assessor s estimates of market values with actual sales prices.) Adjusted Net Tax Capacity = Net Tax Capacity / Sales Ratio Referendum Market Value Equals estimated market value, excluding the following property classes: Ag Land & Buildings (Note: house, garage, and one acre are not exempt) Seasonal Recreational Residential Used only for operating referendum, transition and equity levy calculations Market value exclusion does not apply to these levies 12 4

State and Local Tax Revenue History Source: DOR 13 Where the Money Comes From: FY 14 State General Fund $21.013 Billion Gambling MA Tax surcharges 0% 1% All Other 5% Individual Income 45% Non-Tax Revenue 3% Statewide Property Motor Tax Vehicle 4% 0% Fund Balance In 8% Sales 24% Liquor/Cigarette 3% Corporate 7% 14 Where the Money Goes: FY 14 State General Fund Spending $19.457 Billion Environment & Eco Dev 1% All Other 1% Debt Service 3% Health&Human Services 29% K-12 Education 43% Higher Ed 7% State Govt 4% Intergovt Aids 7% Criminal Justice 5% 15 5

Property Tax Overview Property taxes have been a major part of school district funding for more than 100 years. Changes made by the 2001 Legislature substantially reduced the share of property taxes that go to school districts, but school districts are still the second largest user of property taxes. 16 Taxable Market Value ($546 Billion) and Taxes Paid ($8.506 Billion) by Property Type Taxes Payable in 2013 Seasonal Rec 4% Agricultural 19% Commercial/ Indust 15% Residential Homestead 51% Other Residential 11% Seasonal Rec 3% Agricultural 7% Commercial/ Indust 36% Residential Homestead 42% Other Residential 12% 17 Property Taxes Payable in 2013 By Type of Government $8.506 Billion County 31% Special 4% School Districts 27% City 22% Townships 3% State 10% TIF 3% 18 6

Replace with Slide Heading Replace with bullet points or subheading 19 School District Certified Levy By Type, 1996-2014 20 21 7

22 Student Enrollment and Counting Students Public school enrollment in Minnesota peaked in 1972 at the height of the baby boom at nearly 922,000 pupils. Public school enrollment fell sharply from 1973 to 1985 then increased at a moderate rate from 1985 to 2001, declined from 2002 to 2009, began increasing in 2010, and is projected to continue to increase over the next decade. Enrollment changes vary by region across the state. Many school districts have faced mildly declining enrollment during the last 5 years but now predict stable enrollments for the next several years. Minnesota has a few very large school districts and many very small school districts. 23 Minnesota School Enrollment 1960 to 2015 1,000,000 900,000 800,000 700,000 Pupils 600,000 500,000 400,000 300,000 200,000 100,000 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 School District Charter Nonpublic Home School 24 8

School Enrollment by Region FY 2013 #1 Northwest 3% #4 WestCentral 4% #5 Northcentral 3% #3 Northeast 5% #6 SW 6% #7 EastCentral 12% #9 Southcentral 5% #10 Southeast 9% #11 Metro Area 54% 25 School District 5 Year Enrollment Change by Region FY 2009 to 2013 Northwest Northeast North Central Southwest West Central East Central South Central Southeast 7 County Metro 26 Percent of Students Enrolled by School District Size Quintile FY 2013 67 Largest Districts 68 Smallest Districts 67 next Smallest Districts 67 Middle Districts 67 Second Largest Districts 27 9

Source: MDE 28 28 PK-12 Education Revenue Total Revenue by Funding Stream General Education Revenue Breakdowns Revenue Trends 29 Total Revenue for Education $11.430 Billion FY 2014 Other 4.0% General Education 54.6% Fees 7.0% Federal 6.2% Facilities 9.6% Early Childhood 1.8% Special Education 9.2% Op. Referendum 7.7% 30 10

General Education Revenue by Component $7.124 Billion FY 2014 Perm School Fund. 3% Qcomp 1.2% Transition.4% Gifted and Talented.2% Basic 71.3% Referendum 12.4% Small Schools.2% Op. Capital 2.8% Equity 1.3% LEP.6% Transpo Sparsity. 9% Op. Sparsity.3% Compensatory 7.1% Extended time 1.0% 31 General Education Revenue $7.124 Billion in FY 14 General Education Revenue consists of several components including: Basic Aid--$5,099 million Extended Time--$72 million Compensatory Revenue--$508 million Limited English Proficiency (LEP) Funding--$41 million Small Schools Revenue--$16 million Operating Sparsity Revenue--$25 million Transportation Sparsity Revenue--$62 million Operating Capital Revenue--$199 million Equity Revenue--$94 million Gifted and Talented Revenue--$12 million Q Comp Revenue $87 million Transition Revenue--$30 million Pensions Adjustment Reduction ($31 million) Referendum Revenue--$885 million 32 33 11

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State Share of School Funding The state aid share of total PreK-12 education revenue, had been fairly constant during the 1970s, 1980s and early 1990s,in the 55% to 60% range. The state share began increasing in the late 1990s, and the 2001 overhaul of the state s property tax system increased the state share of K-12 funding to 75% of the total. During the rest of the 2000s, the state share steadily decreased, returning to the pre-2001 reform level of 62% in FY 2010. Since then, the state share has slowly increased, reaching 67% of total revenue in FY 2015. 37 38 38 Source: MDE 39 13

Selected School Finance Issues State General Fund Budget Shifts Operating Referendum Levy Revenue Disparities Special Education Cross Subsidies 40 State General Fund Budget 2013 November Forecast ($ in millions) FY 2014-15 FY 2016-17 Beginning Balance $1,712 $ 1,854 Revenues 38,878 42,736 Spending* 39,067 40,783 Transfers / Prior Year Adj 331 245 Reserves 1,011 1,011 Stadium Reserve 18 0 Budget Balance $ 825 $3,040 41 School Shifts Aid Payment Shift Percentage--The aid payment shift (the portion of each district s state aid entitlement that is paid in the current year) was statutorily lowered from 90% to 73% of the aid entitlement in FY 2010, 70% of the aid entitlement in FY 2011, and 60% of the aid entitlement for FY 12 and later. Forecast surpluses increased the actual shift percentage to 64.3% for FY 12, 86.4% for FY 13, and restored the shift amount to 90% of the aid entitlement for FY 14 and later. Property Tax Recognition Shift The 2010 legislation made the property tax recognition shift ongoing until a sufficient state general fund surplus exists to repay it. The shift moves the June property tax payments into the fiscal year that is just ending and offsets the revenue by a state aid reduction of the same amount. The October 2013 allocation of state surplus funds lowered the shift percentage from 48.6% to 23.1% for FY 14 and later. The November 2013 Forecast contained sufficient funds to repay the remaining $225 million of the property tax recognition shift. 42 14

Repayment of School Shifts M.S. 16A.152 requires unrestricted state general fund budget balances to be allocated in the following order: 1. $350 Million to state s cash flow account 2. $653 million to state s budget reserve account 3. Pay back school aid payment shift 4. Pay back school tax shift Current aid payment percent is 90 for FY 2014 and later Property tax recognition shift fully repaid November 2013 43 Referendum Election Trends, 2006-2013 Success Rates for All Elections vs Revenue Increases Only $ in Millions Election Year 2006 2007 2008 2009 2010 2011 2012 2013 Fiscal Year 2008 2009 2010 2011 2012 2013 2014 2015 Total $ Requested (Including Renewals) 136 250 129 63 90 96 81 111 Total $ Approved (Including Renewals) 64 167 78 35 21 59 56 95 Overall Approval Rate 48% 67% 61% 55% 23% 62% 69% 86% Total $ Requested (Rev Increases Only) 108 156 101 42 78 58 42 57 Total $ Approved (Rev Increases Only) 37 72 51 13 9 28 16 42 Approval Rate, Revenue Increases 34% 46% 50% 32% 11% 48% 38% 73% Source: MDE 44 45 15

46 47 Source: MDE 48 16

School Expenditures, Staffing and Financial Condition Expenditures by Program and Object Pupil Teacher Ratios Unreserved Fund Balances Statutory Operating Debt 49 GENERAL FUND EXPENDITURE PERCENTS BY PROGRAM FY 2011 Source: MDE 50 GENERAL FUND EXPENDITURE PERCENTS BY OBJECT FY 2011 Source: MDE 51 17

Pupil-Teacher Ratios, 1996-2013 Source: MDE 52 Pupil-Teacher Ratios Excluding Special Education by Strata, FY 03 and FY 13 Source: MDE 53 Source: MDE 54 18

Source: MDE 55 Additional Resources Additional information on Minnesota s school finance system is available online. The following sources may be of help: MDE School Finance Website http://education.state.mn.us/mde/schsup/schfin/index.html MN House of Representatives - Summaries of Minnesota s school finance system http://www.house.leg.state.mn.us/hrd/pubs/mnschfin.pdf (House Research), or http://www.house.leg.state.mn.us/fiscal/files/13fined.pdf (House Fiscal Analysis) Minnesota Management & Budget State Budget Forecast and Biennial Budget documents http://www.finance.state.mn.us/ 56 Questions? For additional information, please contact: Tom Melcher, Director School Finance Division 651-582-8828 tom.melcher@state.mn.us 57 19