The difference between the two system is a measure of what we really value. Neither public schools nor public utilities are free to decide unilaterally the quality of public services they choose to provide. If their revenues are set permanently below the costs of providing state required services, they will go broke eventually, or to avoid going broke they must violate the state minimum services requirements. In both cases, constitutional law guarantees relief in theory, but while both state and public utilities take this obligation very seriously for utlities, frankly, the state and the education establishment just look the other way, when it comes to the constitutional obligation to fully fund public education.
In the case of public utilities, the moment that the state attempts to force them to provide service at levels below cost, the utility will seek prompt relief, and most certainly they will receive it. It is accepted as a given that public utilities have a right to judicial relief if the state or its public utility system attempts to force a utility to operate at a loss. Moreover, if the public utility attempts to evade its minimum service requirement, the state will immediately intervene. Public utilities, although privately owned, are franchised by the government and regarded as providing an essential service entitling the state to regulate prices and terms of services. Munn v. Illinois, 94 U.S. 113, 125 (1877).
Nobody expects public utilities (electricity, natural gas, for example) to deliver their products for less than the cost of production. That would be silly wouldn't it! It costs the electric company different amounts to serve different customers. Some customers are in more remote rural areas and the cost per customer of serving them is high; some customers are bunched up together, and the cost of them is relatively low. Because the electric company is a public utility, it must serve all of these customers at fair and reasonable rates set by the public utility commission, and when the commission sets rates, if it sets some rates too low to recover costs, it must make sure that the other rates are high enough to cover the loss. It is possible to require a public utility to "cross subsidize" some customers, but it is unconstitutional to make the public utility to do so unless the total of all revenues cover the total of all costs plus a reasonable rate of return.
To assure that government will not commit the unpardonable sin of forcing a public utility from operating at a loss, a highly developed legal and administrative framework has been developed to protect the consumers and utilities. If a public utility fails to receive adequate funding, it will stop investing in necessary infrastructure.
In the case of public utilities rates are set by the Public Utilities Commission. However, the state must not set rates so low that the utility cannot recover enough revenues to cover its costs plus a reasonable rate of return. The US Supreme Court has held:
In each case, the our constitutional law requires the government to assure adequate revenues to cover the cost of meeting the respective service requirements. In the case of public utilities, the fifth and fourteenth amendment of the federal constitution and corresponding state constitutional protections demand that regulators must assure that public utilities receive "enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock .... By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. FPC v Hope Natural Gas (1944)Thus, if the Minnesota Public Utilities Commission forced Xcel Energy, or some other public utility to deliver electricity or natural gas at below cost, we'd all regard that is completely ridiculous. Moreover, a rate order implementing such a foolish policy would be soon overturned without hesitation by the state or federal courts. Its a fundamental economic concept that nobody, government or private enterprise can deliver products or services at a loss, and in the public utility context, doing that is unconstitutional. Enforcement of this principle is not at all controversial; the courts have been applying this standard persistently and with rigor for more than a century. This obvious principle is applicable everywhere, except in public education, where the government expects schools to deliver an state standard education without regard to cost.
The Courts will not let government set total revenues of a public utility based on politics or by pulling the rates out of thin air. Those rates are subject to rigorous judicial review, and in order to sustain the rates set by the state, the state must show that it has carefully investigated those rates, and that the ultimate rate decision has been based on data and competent economic and accounting judgments. (See Mitchell Hamline Law Review) The Minnesota Public Utilities Commission has a staff of 20 dedicated to economic and financial analysis. Assuring that the utility receives its full cost of service plus an adequate rate of return is serious business, and a trained staff conducts rate reviews with meticulous caser. It is critical to the economy of the state that the utility can serve all of its customers, that the utility can afford to invest in plant and equipment, and that investors can rely upon receiving an adequate rate of return.
Electricity is important to Minnesota and were the state to backslide, a stable of high-priced lawyers would bring a major case to set things right. The appellate courts would have no trouble striking down an attempt to regulate utilities without regard to cost. No such nonsense would be tolerated. If Minnesota treated public utilities like public schools, our electrical service would begin to fail, our electrical infrastructure would depreciate, but before that would happen, the courts would set things right. The staff of 20 experts in the public utility commission, trained costing and financial experts are there to make absolutely sure that this never happens. Under-funding electricity is illegal and unconstitutional and not to be tolerated.
The difference between the way that we fund public schools and public utilities is stark. Like public utilities, public schools have an obligation to provide educational services that meet state standards. Statutes, (which we call state standards), establish what school districts must provide. The Minnesota constitution demands that school districts provide an adequate education, and our Supreme Court has twice held that this means that the legislature must provide sufficient funding to districts to meet all state standards for all students. However, the Minnesota department of education has nobody on staff dedicated to tracking the cost of providing state required education. The state is meeting its obligation to meet all state standards purposely blindfolded.
Twenty trained public utility commission experts are dedicated to assuring that public utilities are fully funded. Nobody at the Department of Education is even trying. Universities don't train people to provide costing information on public education; there is no demand for that expertise. When so-called experts attempt to offer opinions on the topic, they base their opinions on what underfunded schools are already doing, instead of calculating the cost of delivering an education that meets state standards, but in Minnesota we don't even listen to them. As with public utilities, some education customers are more costly to serve than others. But the state legislature and its attorneys contend that the cost of those students is an "extra cost" which need not be included in the calculation of what schools need. Honestly, they do. This is a proposition they would not dare inflict upon public utilities, because judges would dismiss their position as laughable.
Public schools are really a form of public utilities. Both public schools and public utilities 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
Minnesota has been doing in public education for over two decades.
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.
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.
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 expect that before their revenues are determined by the State using 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.
In 2011 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.
In 2011 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 broken.
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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