Minnesota K-12 Education Finance System Overview 2016 MASBO Institute Presented by Tom Melcher School Finance Director, MDE February 22, 2016

The materials in this presentation are prepared jointly by Tom Melcher of the Minnesota Department of Education, and Tim Strom, Minnesota House of Representatives Research Department, to provide a context for school finance in Minnesota. Any errors or omissions in this version of the presentation are Tom’s alone. Presentation Materials 2

1)a. Education finance principles b. How does funding actually work? 2) Context for school finance 3) Major components of school finance system 4) Trends and Issues: how are we doing? 5) State Budget Outlook Topics 3

1a) Education Funding Principles: Goals of State School Finance System Adequacy and Equity for Students: Ensure that all local education agencies have the resources needed to provide an adequate basic education for all students, regardless of geographic location: –Basic formula covers the cost of providing an adequate basic education for students without special needs. –Additional funding for excess costs:  high-need students  unique district characteristics 3

Education Funding Principles: Goals of State School Finance System Equity for Taxpayers: Tax burden to provide adequate basic funding is uniform throughout the state, regardless of local tax base. This can be accomplished with either: –full state funding or –A mix of state funding and a uniform local property tax levy. Additional revenue to supplement basic programs is equally available to all districts, regardless of geographic location (state aid or equalized levy). Equalizing factors are indexed to state average tax base / student to maintain stable state share of funding. 5

Education Funding Principles: Goals of State School Finance System Stability, transparency, efficiency and effectiveness: Provides stable, predictable and sustainable revenues over time; Allocates resources through understandable statewide formulas that are rationally related to educational need and minimize burdensome paperwork; Provides incentives and flexibility for local education agencies to increase achievement for all and close achievement gaps in an efficient and effective manner. 6

1b) How Does School Funding Actually Work in Minnesota? The state legislature has primary responsibility for school funding. It sets funding levels and the mix of state aid and local levies in state statutes. Funding is based mainly on the count of students served: the greater the student count, the larger the funding. Funding per student varies among districts and charter schools depending on student and district / school characteristics. State and federal special education formulas, while significant, do not cover the full cost of special education services; the resident school district is responsible for most unfunded special education costs of open- enrolled and charter school students State statutes allow school districts to raise additional revenues through voter approval (operating referendums, bond issues) 3

2) Context for School Finance Legal –MN Constitution –State & federal laws –Agency guidance Terminology –Pupil accounting –Property tax base Overall public finance system –Property Taxes –State Budget Variations in school district characteristics School funding, staffing & financial condition trends 8

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. – 9

Skeen v. State of Minnesota, August 20, 1993 …education is a fundamental right in Minnesota. …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 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… …the State of Minnesota provides an adequate and uniform education which meets all state standards. It merely allows localities to augment this basic amount… Legal Context: Minnesota Supreme Court 10

Minnesota Statutes: 120A Compulsory Attendance, School Calendar120A 122A Q Comp, Staff Development122A 123A ALCs, District Reorganization123A 123B Fee Law, Facilities Funding, UFARS, SOD, Transportation123B 124D Enr. Options, PSEO, Charter Schools, Community Ed, Integration, Nutrition124D 125A Special Education and Special Programs125A 125B Technology, Telecommunications/Internet Access Equity Aid125B 126C General Education Funding, Levies, District Borrowing, Capital loans126C 127A MDE responsibilities, Payment Metering127A Session Laws: Education Omnibus Bill and other legislation includes amendments to statutes, uncodified (one-time) laws, and appropriations. Legal Context: Laws and Rules 11

MDE Guidance: Superintendent s School Business Bulletins UFARS Manual MARSS Manual SERVS Webinars Federal Regulations: Program-Specific (e.g., Special Education, Title I) OMB Omni Circular Legal Context: Laws and Rules 12

Fiscal Year: –State July 1 - June 30 (Currently State FY 2016) –Federal October 1 – September 30 (Currently Federal FY 2016) 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. Pupil Weights: Grade Level FY 15 and Later Weight Pre-K and K Disabled1.0 Regular K 1.0 Full time/.55 Part Time Grades Grades Pupil Units = ADM x Pupil Weights (Sometimes called Weighted ADM or WADM) Context: Terminology 13

Pupil Accounting (Continued): Two Types of Pupil Units (PU): –Resident Pupil Units = Resident ADM X Pupil Weight  (Resident ADM includes all MN public school students residing in the district) –Adjusted Pupil Units = Resident PU + PU for nonresidents attending the district under alternative attendance programs (e.g., open enrollment) - PU for residents attending another district or charter school under alternative attendance programs Terminology 14

Property Tax Base Two tax bases used for school levy calculations: Referendum Market Value = Estimated market value, excluding:  Ag Land & Buildings (Note: house, garage, and one acre are not exempt)  Seasonal Recreational Residential –Used only for operating referendum, local optional, transition and equity levy calculations Adjusted Net Tax Capacity = ( Taxable market value for all types of property x Statutory class rate) / Sales ratio –Used for all other school levies, including debt service levies Terminology 15

Property Tax Base (continued) 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) Net Tax Capacity = Taxable Market Value X Class Rate  Class Rates are statutory percentages applied to taxable market value: Residential Homestead: First $500, % Remainder1.25% Agricultural Land and Buildings (homestead) (Taxes Payable 2016 for FY 17) First $2,140, % (Was $1,900,000 for pay 15 taxes) Over $2,140, % Commercial and IndustrialFirst $150, % Remainder2.00% Seasonal Rec. ResidentialFirst $500, % Remainder1.25% Terminology 16

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 Terminology 17

Context : Overall Public Finance System – Property Taxation Taxable Market Value Taxes Paid ($624 Billion) ($8.868 Billion) by Property Type, Taxes Payable in 2015 Source: HRD 18

Property Taxes Payable in 2015 By Type of Government $8.868 Billion Source: HRD 19

School vs Non-School Property Taxes 1990 – 2016 February 2015 Forecast Replace with bullet points or subheading Source: MMB, Price of Govt, Feb

School District Certified Levy By Type, 1996 – 2015 $ in Millions Source: MDE 21

State and Local Tax Revenue History Source: DOR 22

Where the Money Comes From: FY 16 State General Fund $ Billion 23 Source: HRD

Where the Money Goes: FY 16 State General Fund Spending $ Billion 24 Source: HRD

Context: Minnesota School Enrollment State Total Enrollment, 1960 to Source: HRD

Source: MDE 26

School Enrollment by Region FY Source: HRD

School District 5 Year Enrollment Change by Region FY 2011 to 2015 NorthwestNortheast West Central Southwest East Central South Central Southeast 7 County Metro North Central Source: HRD 28

Percent of Students Enrolled by School District Size Quintile FY Largest Districts 66 Second Largest Districts 66 Middle Districts 67 next Smallest Districts 67 Smallest Districts Source: HRD 29

3) Major Components of the School Finance System Total Revenue for Education: $ Billion FY Source: HRD

General Education Revenue by Component Excluding Referendum and Local Optional Revenue $6.599 Billion - FY “Other” includes Declining Pupil, Sparsity, Small Schools, Gifted & Talented, Pension Adjustment, and Transition.

Show trend in basic formula vs inflation here 4) School Funding Trends General Education Formula Allowance, 2003 – 2017 Adjusted for Pupil Unit Weight Change and Inflation (CPI) 32

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SCHOOL FUNDING TRENDS, FY 11 – FY 17 General Education Revenue Excluding Referendum and Local Optional per ADM by Strata – Current $ November 2015 Forecast 41

SCHOOL FUNDING TRENDS, FY 11 – FY 17 Referendum and Local Optional Revenue per ADM by Strata – Current $ - Nov 15 Forecast 42

SCHOOL FUNDING TRENDS, FY 11 – FY 17 State Special Education Aid per ADM Including Tuition Adjustments By Strata, Current $ - Nov 15 Forecast 43

SCHOOL FUNDING TRENDS, FY 11 – FY 17 Integration, Literacy, Q Comp & CTE Revenue per ADM By Strata, Current $ - Nov 15 Forecast 44

SCHOOL FUNDING TRENDS, FY 11 – FY 17 Total General Ed, State Spec Ed, Integration, Literacy, Q Comp and CTE Revenue per ADM By Strata, Current $ - Nov 15 Forecast 45

SCHOOL FUNDING TRENDS, FY 11 – FY 17 Total General Ed, State Spec Ed, Integration, Literacy, Q Comp and CTE Revenue per ADM By Strata, Inflation-Adjusted (CPI) 2017 $ 46

5) SCHOOL FUNDING ISSUES –How are we doing? Source: MDE 47

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Special Education Cross Subsidy per ADM, FY 2003 – 2017 November 2015 Forecast Source: MDE 49

ESTIMATED FY 2017 SPECIAL EDUCATION CROSS SUBSIDY PER ADM BY STRATA November 2015 Forecast Source: MDE 50

Source: MDE 51

Source: MDE 52

Pupil-Teacher Ratios, Source: MDE

Pupil-Teacher Ratios Excluding Special Education by Strata FY 2014 Source: MDE 54

Selected E-12 Finance Issues That May Be Considered in the 2016 Legislative Session Rough Cost Estimates Based on Pay Schedule 55

5a) State General Fund Budget End of Session vs November 2015 Forecast ($ in millions) End of Session Nov 2015 FY FY Beginning Balance $1,421$ 2,103 Revenues 42,629 42,718 Spending 41,834 41,585 Balance Before Reserves 2,216 3,236 Cash Flow & Budget Reserve 1,344 1,352 Stadium Reserve 7 13 Forecast Balance $865 $1,871 Allocation to Env. Funds 0 71 Transfer to Budget Reserve Budgetary Balance $865 $1,206 56

5b) State General Fund Budget November 2015 Forecast ($ in millions) FY FY Beginning Balance $2,103$ 3,165 Revenues 42,718 46,603 Spending 41,585 44,557 Balance Before Reserves 3,236 5,211 Cash Flow Budget Reserve 1,002 1,596 Stadium Reserve Forecast Balance $1,871 $3,253 Allocation to Env. Funds 71 Transfer to Budget Reserve* 594 ?? Budgetary Balance $1,206 $3,253 *Statute requires additional transfers of budgetary balance to budget reserve until about 4.8% of general fund revenue is in budget reserve, or roughly $2 billion. 57

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Questions? For additional information, please contact: Tom Melcher, Director School Finance Division