Excess cost Aid Pro-ration: how the state quitely increase unfunded mandate costs

I have begun a series on the cost-drivers that confront our school district this year. I chose this point in time because on Wednesday of next week, our Board of Education will conduct a workshop to begin the budgeting process for budget year running from July 1, 2011 through June 30, 2012.

In my first post, I provide a list of some of the cost-drivers that are visited on our school district, and others. The central question that I'm asking in these posts is how we, in public education, can address the continuing upward financial pressures, many of which come to us from state and national legislation and mandates. It is inevitable that a central part of this discussion that it will focus on public employees, because education we are in the teaching and learning business, and that business puts adult professionals and their helpers in schools.

If, when you read these posts, you think that my long-term solution is to somehow significantly cut the general level of compensation for teachers and employees as a state policy, then you are drawing the wrong conclusion. My posts are related to finding ways to solve our short term financial cost and revenue needs. I believe that our state and national leaders need to recognize that one part of the necessary strategy for improving education is to fund adequate compensation for teaching professionals. But we cannot get there by increasing compensation at the local level without additional revenues. Education cannot thrive unless it maintains a balance between compensation and revenues--if we are going to increase compensation, we need to do it with increased revenues.

Yesterday's post discussed the unfunded cost increases resulting from TERA and PERA contribution increases set by the Governor and the Legislature without compensating revenue increases. Today, I'm going to explain the mechanism by which the legislature and governor last year increased our special education deficit by another $350,000 per year, again without compensating revenue increases.

As I have explained in prior posts, for more than a decade, the State of Minnesota has underfunded special education mandated costs by at least $300 million per year, $600 million per biennium. Starting with the first term of Governor Pawlenty, that deficit, the difference between funding provided to school districts and the mandated spending rose dramatically. The Governor's administration aggressively promoted additional special education spending by school districts--because his administration was an advocate for special education. But that advocacy ran up against the Governor's other policy objective--to freeze taxation. The result was that special education costs grew statewide, but the shortfall in revenues provided to school districts was, under the Governors' budget proposals, on the road to being nearly doubled. In 2007, the legislature tried to reverse this trend, but the reversal was only temporary. The deficit between special education spending and revenues started to rise again in the last legislative session.

Now, special education funding is provided to school districts based on the number of students attending public school, not on the number of students receiving special education. If all school districts had the same proportion of special education school districts, then all school districts would share this deficit equally. But special education populations are not distributed equally for several reasons. The primary reason for the difference is the proportion of families who send their children to private schools. That's because the local public school district is responsible for the special education of children whose families send their regular education students to private schools. Since the St. Cloud area has historically been near the very top of the percentage of families using private education, our special education ratios have been historically high. Area school districts have markedly different special education populations for this reason.

Now some time ago, the legislature recognize the unfairness of reimbursing school districts based on the number of public school students, instead of the number of special education students. The fix that was adopted was to create a fund for "excess cost aid," which was supposed to reimburse Districts like St. Cloud for the fact that the regular formula imposes a disproportionate cost burden on some school districts. The problem is that the excess cost aid appropriation is a fixed fund, that is not increased in proportion to the actual excess cost. One of the ways that the Governor and legislature can quietly avoid the reality of rising costs is to neglect the size of the excess cost aid fund. Nobody understands it. Nobody really watches it. So, we can pretend at the state level that we are not cutting education by implementing those cuts under the radar screen.

In our district, we have responded to the special education funding crisis by seeking to freeze the total cost of special education. We have accomplished this objective by implementing staffing reductions in the special education program, primarily teachers and paraprofessionals.

So, if we have frozen our special education spending in St. Cloud, why the heck is our special education deficit rising. The answer is that most other districts in the State of Minnesota continue to increase their total special education budget. And as other districts increase their special education funding, they become eligible for more and more special education excess cost aid out of the fixed aid pool. Since the pool of excess cost aid is a fixed pool, the State applies what is called "excess cost aid pro-ration." As demands on the fund rises, the reimbursement rate to school districts is calculated by applying the ratio of the amount that the formula says should be reimbursed divided into the amount that has been appropriated for the fund.

Now you and I can think of some other ways to address this problem. The State could order school districts to freeze their spending levels, as St. Cloud has tried to do. Or, if the legislature genuinely believes that spending increases are warranted, it could increase the appropriations for excess cost aid. Or, the legislature could start reimbursing districts for the amount they actually spend on special education, while implementing state efforts to assure that money is spent efficiently. Or the legislature could provide taxing authority at the local level for the difference.

If you say, well why isn't he talking about cutting special education below current spending levels. The answer is that state and federal funding laws prohibit us from cutting the total amount of spending. Also, we have to keep in mind that special education is a very important educational program. So its not really a long term solution to say that we can just cut our way out of this problem.

Currently, the system is that the governor and legislature have systemically, persistently and intentionally, underfunded the excess cost aid fund. Based on the current system, we are therefore projecting that in the next budget year, if we keep our special education budget constant, nonetheless we will experience a reduction in excess cost aid of $350,000 the first year of the biennium, and another $350,000 in the second year of the biennium, requiring that we cut other programs by a total of $700,000, or find new revenues to make up the difference. Keep in mind that this is only one of the financial drivers that we are confronting in the next budget year. In my next post, I will discuss another financial challenge--rising health insurance premium contributions.

Just by way of summary of the cost drivers, we face the following financial challenges:

• Unfunded cost increase in TRA and PERA retirement fund contributions will rise $250,000 per year each of the next four years. (I'll explain this cost in the current post)
  
• Annual cost of special education pro-ration revenue reductions will increase $350,000 per year, each year until the legislature fixes this problem. (I'll explain this cost in my next post)
  
• Total state special education unfunded mandate deficit in our district is about $8.5 million.
• Annual cost of compensation increases under continuing contract agreements (health benefits and lanes) $500,000 per year. Of the costs listed above, this is the only one that we can do something about through bargaining.
• The cost maintaining the last biennium's collective bargaining agreement.
  

I'll try to discuss each of these in this series of posts.