Education Funding: How Much is Enough? Mark Haveman, Executive Director Minnesota Center for Fiscal Excellence

Background 2015 legislative session featured contentious, lengthy debate over the appropriate increase in the basic per pupil education formula School representatives were quite critical of proposed increases coming from both parties Eventually 2% increase each year of the biennium was signed into law Our questions: Was this “enough”? Why and on what basis?

Answering This Question is Very Difficult State has substantial control over school revenue but has much less influence over school cost structures that exist in over 300 school districts In K-12 education, the primary cost is labor (77.1% of school district general fund spending) Through collective bargaining agreements, districts have the ability to influence and manage inflationary pressures in what is by far their largest purchased input.

Study Purpose Study Questions Examine the recent relationship between school district labor costs and state education aid and the implications for education aid provision going forward Study Questions Does providing uniform per pupil basic education aid result in similar compensation trends among all districts? What’s the relationship over time between district employment changes (which drive costs) and enrollment changes (which drive revenue)? How is the labor purchasing power of the new basic education aid provided in 2015 affected by district level employment costs and trends?

Does providing uniform per pupil basic education aid result in similar compensation trends among all districts? No, there is considerable variation across districts both in any given contract time period and over time

Does providing uniform per pupil basic education aid result in similar compensation trends among all districts? Growth in District-Paid Salary and Benefit Costs per Teacher (FTE Basis), All Contract Periods Between 2006-07 and 2014-15

Does providing uniform per pupil basic education aid result in similar compensation trends among all districts? Average Growth, per Districts, in Negotiated Salary and Benefit Costs per Teacher (FTE Basis), 2006-07 through 2014-15 Contract Period

What’s the relationship over time between district employment changes (which drive costs) and enrollment changes (which drive revenue) Percent Change in Pupils and Percent Change in FTE Counts, Minnesota School Districts, FY 2006-07 to FY 2013-14

What’s the relationship over time between district employment changes (which drive costs) and enrollment changes (which drive revenue) Districts once again exhibit diversity and some counterintuitive relationships On a percentage basis staff changes occur about 70% as fast as pupil changes Relationship between staffing levels and pupil count changes is complicated reflecting factors over which districts have varying levels of influence: Significant influence: e.g. negotiated contracts and educational programming Some influence: e.g. voter approved levies, access to supplemental aids from the state Little or no influence: e.g. at risk youth, special education populations

How is the labor purchasing power of the new basic education aid provided in 2015 affected by district level employment costs and trends? Hugely. The purchasing power of new per pupil basic education aid varies tremendously across the state Our Analysis Calculate each district’s total compensation cost per student for all employees for 2014 (including district admin) AND annual growth rate in that measure since 2007 Project historical average growth rates into the future to estimate total compensation cost per student in 2017 Compare projection with increase in per student basic education aid to see if enacted formula increase is “enough”

How is the labor purchasing power of the new basic education aid provided in 2015 affected by district level employment costs and trends? Findings Annual growth trends in compensation costs per student vary dramatically (12.2% to – 3.7%) In 240 of 326 districts, compensation cost per student is projected to exceed the formula increase per student. Average ”shortfall”: $225 per student In 86 districts formula aid per student is projected to exceed compensation growth per student. Average “surplus”: $95

So, What is “Enough”? If we assume: No changes in compensation designs currently existing in collective bargaining Statewide pupil counts change per State Demographer projections Current ratio of total students to total employees remains constant Total compensation per FTE increases at 3% per year (in line with historical trends) Aggregate school general fund compensation expense will be $4.2 billion higher by FY2029 Financing 100% of these costs through new basic education aid translates into a 4.1% increase in the formula allowance per year between FY2014 and FY 2029 If the current split in general education revenue is maintained (roughly 80% basic ed formula and 20% other sources, then basic aid allowance would need to increase 2.6% per year (with an additional $840 million coming through increases from other general education revenue programs)

But these are likely conservative estimates No inflation in the other 20% of general fund spending State requires districts reserve a portion of general fund revenue for staff development and operating capital Teacher shortages likely creating supply and demand imbalances Ignores future impact of addressing underfunded pensions Unfunded liability for retirement benefits already earned is approximately $9,300 per pupil. That’s just for TRA and SPTRFA members (doesn’t include PERA professionals in school systems.) The $9,300 total assumes an 8.47% annual investment return going forward

Our Conclusions 1. Reported aggregate trends in “real” (inflation adjusted) education spending can be quite misleading because of the district–specific nature of educational cost structures 2. Supplemental state general education aids and other aid programs designed to compensate districts for having more challenging and costly educational environments should be based on an understanding of the influence those conditions have on labor requirements and accompanying costs 3. Alternative compensation designs are rapidly moving from “contentious policy” to “fiscal necessity.” There is a need for greater fiscal transparency disclosure of cost implications of each individual compensation dimension in collective bargaining agreements quantification of the cost of state mandates