Minnesota K-12 Education Finance System Overview

Minnesota K-12 Education Finance System Overview 2013 MASBO Institute Presented by Tom Melcher February 25, 2013 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 13) Federal October 1 September 30 (Currently Federal FY 13) 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 Weight Pre-K 1.250 K-Disabled 1.000 Regular K.612 Grades 1-3 1.115 Grades 4-6 1.060 Grades 7-12 1.300 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) 10 Terminology Property Tax Base (Taxes Payable 2012) 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 $18.614 Billion Source: HRD 14 Where the Money Goes: FY 14 State General Fund Spending $18.419 Billion Source: HRD 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 have 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 ($552 Billion) and Taxes Paid ($8.384 Billion) by Property Type Taxes Payable in 2012 Source: HRD 17 Property Taxes Payable in 2012 By Type of Government $8.384 Billion Source: HRD 18 6

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22 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. Statewide enrollment slowly declined from 2002 to 2009, began increasing in 2010, and is projected to continue to increase over the next decade. Enrollment changes are very different across the state. Most school districts have faced declining enrollment during the last 5 years. Minnesota has a few very large school districts and many very small school districts. 23 Minnesota School Enrollment 1960 to 2015 Source: HRD 24 8

School Enrollment by Region FY 2013 Source: HRD 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 Source: HRD 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 Source: HRD 27 9

Percent Change in Enrollment, FY 2003 FY 2011, School Districts and Charter Schools 28 28 PK-12 Education Revenue Total Revenue by Funding Stream General Education Revenue Breakdowns Revenue Trends 29 Total Revenue for Education $10.725 Billion FY 2013 Source: HRD 30 10

General Education Revenue by Component $6.926 Billion FY 2013 Source: HRD 31 General Education Revenue $6.926 Billion in FY 13 General Education Revenue consists of several components including: Basic Aid--$4,991 million Extended Time--$71 million Compensatory Revenue--$461 million Limited English Proficiency (LEP) Funding--$40 million Small Schools Revenue--$16 million Operating Sparsity Revenue--$25 million Transportation Sparsity Revenue--$62 million Operating Capital Revenue--$197 million Equity Revenue--$93 million Gifted and Talented Revenue--$12 million Q Comp Revenue $70 million Transition Revenue--$30 million Pensions Adjustment Reduction ($31 million) Referendum Revenue--$860 million 32 Change in General & Special Ed Revenue By Component FY 2003 FY 2013, $ in millions FY 2003 FY 2013 Change % Change 292 195% Referendum 860 568 Basic 4490 4,990 500 11% Special Education 631 990 359 57% Compensatory 263 461 198 75% Extended Time 0 71 71 New Q Comp 0 70 70 New Equity 35 93 58 166% Transition 0 30 30 New School Land Endowment Trust 0 24 24 New Small Schools 0 16 16 New Pension Adjustment -47-31 16-34% Compensatory One-time 0 15 15 New Gifted and Talented 0 12 12 New Sparsity 16 25 9 56% Transportation Sparsity 56 62 6 11% Compensatory Pilot 0 2 2 New Operating Capital 198 197-1 - 1% LEP Total 37 40-7 - 15% Training and Experience 25 0-25 - 100% Subtotal 6,007 7,927 1,921 32% 33 11

34 35 Percent Change in General Revenue / ADM, FY 2003 to FY 2013, Including Referendums, Not Adjusted for Inflation 36 12

Percent Change in General Revenue / ADM, FY 2003 to FY 2013, Excluding Referendums, Not Adjusted for Inflation 40% 30% 20% 15.1% 25.6% 21.5% 17.5% 17.0% 21.6% 18.9% 10% 0% -10% -20% MPLS & ST OTHER OTHER NONMET>=2K NONMET 1K-2K NONMET < 1K CHARTER 37 Percent Change in General Revenue / ADM FY 2003 to FY 2013, Excluding Referendums Adjusted for CPI 40% 30% 20% 10% 0% 0.4% -10% -8.0% -2.9% -6.1% -6.5% -2.8% -5.0% -20% MPLS & ST PAUL OTHER METRO, OTHER METRO, INNER OUTER NONMET>=2K NONMET 1K-2K NONMET < 1K CHARTER TOTAL 38 State Share of School Funding The state aid for school districts, as a percentage of state aid plus levy (which excludes federal funds and other local funds such as fees for food service, etc.) had been fairly constant during the 1970s, 1980s and early 1990s. The state aid 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 nearly 90% of the total. Since that time, the state share has been steadily decreasing so that the state share for FY 2011 is now about 77% of total revenue. 39 13

40 40 41 Selected School Finance Issues State Budget Shortfall Shifts Operating Referendum Levy Revenue Disparities Special Education Cross Subsidies 42 14

State General Fund Budget November 2012 Forecast ($ in millions) FY 2012-13 FY 2014-15 Beginning Balance $1,289 $ 1,011 Revenues 34,944 35,793 Spending* 35,222** 36,866 Reserves 994 994 Stadium Reserve 17 39 Budget Balance $ 0 ($1,095) * Net spending after school shifts ** Reflects K-12 Education shift buybacks 43 43 School Shifts 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. 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 shift percentage to 64.3% for FY 12 and 82.5% for FY 13 and later. There is no scheduled date for the shift amount to return to 90% of the aid entitlement, but any state budget surplus above the budget reserve and cash flow amounts first will be applied to the school shifts. Aid Payment Delay The statute that allowed the Governor to delay certain school aid payments within the school year was repealed for FY 12 and later. 44 School Shift Summary November 2012 Forecast Aid Payment Shift @ 82.5 17.5 (vs 90-10) $ 546 Million Property Tax Shift (@ 48.6% of Gross Levy) $ 555 Million Total School Shift (as of 6/30/2013) $1.101 Billion (Reflects paybacks of $313 million in March 2012 and $1.324 billion in December 2012) 45 45 15

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 payment percent is 82.5% for FY 2013 Re-evaluated with each forecast: If state budget improves, increase current percent ($73 M for each 1% increase) If state budget gets worse, current percent remains 82.5 unless changed by legislation 46 Referendum Election Trends, 2005-2012 Success Rates for All Elections vs Revenue Increases Only $ in Millions Election Year 2005 2006 2007 2008 2009 2010 2011 2012 Fiscal Year 2007 2008 2009 2010 2011 2012 2013 2014 Total $ Requested (Including Renewals) 84 136 250 129 63 90 96 81 Total $ Approved (Including Renewals) 67 64 167 78 35 21 59 56 Overall Approval Rate 80% 48% 67% 61% 55% 23% 62% 69% Total $ Requested (Rev Increases Only) 70 108 156 101 42 78 58 42 Total $ Approved (Rev Increases Only) 53 37 72 51 13 9 28 16 Approval Rate, Revenue Increases 76% 34% 46% 50% 32% 11% 48% 38% 47 48 16

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School Expenditures, Staffing and Financial Condition Expenditures by Program and Object Pupil Teacher Ratios Unreserved Fund Balances Statutory Operating Debt 52 GENERAL FUND EXPENDITURE PERCENTS BY PROGRAM FY 2011 GENERAL FUND EXPENDITURE PERCENTS BY OBJECT FY 2011 18

Pupil-Teacher Ratios, 1996-2011 22.0 20.5 20.0 18.3 19.2 19.3 18.0 16.0 14.0 17.1 15.2 16.1 15.9 12.0 10.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Including Special Ed Excluding Special Ed 55 Pupil-Teacher Ratios Excluding Special Educ by Strata, FY 03 and FY 11 24 22 20 18 16 14 12 10 8 6 4 2 0 18 19 20 20 21 21 20 20 18 18 16 16 16 17 Mpls& St Paul Other Metro Other Metro Nonmetro Nonmetro Nonmetro Charter Inner Ring Outer Ring >=2K 1K- 2K < 1K FY 2003 FY 2011 56 57 19

58 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/11fined.pdf (House Fiscal Analysis) Minnesota Management & Budget State Budget Forecast and Biennial Budget documents http://www.finance.state.mn.us/ 59 Questions? Tom Melcher School Finance Director Minnesota Department of Education (651) 582-8828 tom.melcher@state.mn.us 60 20