What if the State of Minnesota set school district revenues as if they were public utilities? That's the topic of my post today. Or, I might rephrase that question: suppose the State tried to set public utility rates by ignoring the cost of delivering services, as we do in the case of public schools?
I think that I started down this road, because I've been working on a number
of cases involving a Minnesota public utility, and that has caused me think about the stark difference in the approach to rate setting between the two. After all,
a public school system has a lot in common with public utilities. Both
provide important necessary public services. Both are required to
provide those services to all comers. And either one would surely fail if required to deliver services at below cost. As
with school districts, the government determines the reimbursement rate
for public utilities. However, think what would happen if the State tried to set utility rates in the same way that it set funding for public education---in other words, by ignoring the cost of providing mandated services? (Or, to rephrase the issue: if the State can set public utility rates by determining the cost of electricity or natural gas, why shouldn't it be able to do the same with the cost of public education)
Suppose, for example, the state decided to cut NSP's electric
utility rates by 20% next year, just because Minnesota families are
overburdened with medical costs, taxes and other expenses? Suppose the
state created a committee at the Public Utility Commission to examine
rates, but the committee was ordered to ignore the true cost of producing electricity! Would that be constitutional? That's what Governor Pawlenty, and now Governor Dayton have both done!
Clearly, our Courts would not allow the State to set utility rates at a level below
the cost of providing service! Indeed, if the State attempted to
force public utilities to deliver electricity in return for revenues
below the cost of service, the state or federal courts would strike
those rates down as unconstitutional, because it is just not possible
to deliver a product for less than cost, and you can't rationally set
rates, unless you have a system that determines the rates based on
real hard facts.
"A [public utility's operating expenses, such as wages, salaries, supplies,
maintenance, taxes, and research and development, must be recouped if
the utility is to stay operational. Operating costs are most often the
largest component of the revenue requirement, and the easiest to
determine. Although both agencies and courts have the legal authority
to supervise the utility's management, they will not substitute their
judgment unless there is an abuse of managerial discretion.
In other words, when setting power or natural gas rates, the management of the public utility informs the state utility commission what the reasonable expenses of the utility are going to be, and the state basically accepts that judgment. But actually public utility rate-setting requires the State to assure that the utility's expenses are completely covered by revenues, with profit to spare. Public utilities are protected by a process that assures that their right to full funding of their operations, plus a substantial rate of return sufficient to attract investment to build necessary infrastructure, is guaranteed. The way it works is that the utility prepares a cost estimate which sets out the various component costs required to cover their costs plus a reasonable profit. The State administrative agency that regulates utilities reviews those costs and reduces them where they are unreasonable through an administrative process that guarantees the utility due process. The Minnesota Public Utility Commission is headed by an Executive Director with a PhD in economics. The reason is that the public utilities expect that before their revenues are determined by the State, experts in evaluating the true costs of delivering electricity must make a fair and rational determination of the necessary revenues. Under threat of constitutional litigation, the state has carefully crafted an administrative process, implemented by staff trained in the economics of costing public utility services, to determine the cost of service, and if the state ever attempts to make a public utility conduct its business at less than cost, the court will most certainly strike that attempt down.
Periodically,
I've posted opinions that argue that Minnesota's school finance system
is unconstitutional because it requires school districts to deliver
mandated services, but fails to provide the funding necessary to
deliver those services. Links to some of those posts are listed below
at the bottom of this post. Suppose your spouse demanded that you
purchase a lake home on Gull Lake on two acres of forested land with three
fancy bedrooms, a family room and two modern bathrooms, but insisted
that you "keep the price under $125,000." That would be
unreasonable, wouldn't it, because you can't budget $125,000 to buy a
house with specifications for many times that price. You'd have to
figure out what a house like that costs, before you can set your
budget. The same is true with regard to public education. You can
specify how much a school district will have to spend per student. Or,
you can specify what the school district must accomplish: what quality
of education it must produce in its students. But you can't specify
revenue and results, unless you assure that the revenue is sufficient
to get the job done.
In Minnesota, however, the State makes absolutely no effort to
determine the necessary operating expenses. As I pointed
out in an October post, a 2004 Minnesota Education Finance Reform Task
Force recommended that our public schools should be funded based upon a rationally
determined, learning-linked, student-oriented and cost-based Instructional
Services Allocation. (See Inve$ting in our Future, Seeking a fair,
understandable and accountable, twenty-first century education finance system
for Minnesota, Recommendation. But
the state terminated the task force designated to establish the
reasonable cost of mandated services. Recently, the Governor
established a new task force, he told the committee not to try to
determine the cost of providing state mandated services. In other
words, like Governor Pawlenty before him, the Governor decided that it
would be inconvenient for the public to find out how much state
revenues it would actually require to deliver the services that the
State requires.
If it is unconstitutional to order public utilities to deliver electricity at below cost, how can it be constitutional to order public school districts to deliver education at below cost, while providing them with no taxing power to meet state requirements? I'm not suggesting that the same Constitutional law principles govern public utility rates and public education. I am suggesting that the same common sense principles make it impossible to contend that when a state mandates that districts deliver a specified service, that it need not provide sufficient funding, or a taxation source to provide sufficient funding, to provide that service.
If Minnesota is ever going to fix its school finance system, we need to
stop avoiding hard economic facts. You can't budget for public
education unless you figure out the actual cost of providing that
education. What's true for electricity is true for education:
revenues must cover costs or the system is broke.
Links
Jvonkorff on Education McCleary v. State, Part I
Jvonkorff on Education McCleary v. State, Part II
Jvonkorff on Education McCleary v. State, Part III
Jvonkorff on Education McCleary v. State, Part IV
Summary of Decision Network for Excellence
Washington Supreme Court Blog
JvonKorff on Education, The Rose Decision
Minnesota's School Finance System is Unconstitutional, Part I
Minnesota's School Finance System is Unconstitutional, Part II
Minnesota's School Finance System is Unconstitutional, Part III
Minnesota's School Finance System is Unconstitutional, Part IV
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