2018 Levy Planning – Part 2 November 14, 2017

Purpose of Today’s Study Session Complete overview of new state funding and requirements Accountability and transparency Revisit estimated revenue impacts to Pasco addressing questions received Changes in use of levy revenue Staff recommendation for levy term and amounts This afternoon I’ll be providing you with information about the replacement levy the district anticipates putting the voters on February 13, 2018. In order to get there I’ll be sharing information regarding the recent changes in state funding for school districts. What these changes mean for the district and its taxpayers. Just a couple of things to keep in mind: As you’ve heard, there are several pieces of the new funding that are not abundantly clear. Lots of information, feel free to ask questions today, I may have to research answers. But we do have follow up Study session on November 14. Finally, I have Jim McNeil here today to help us wade through some of the implications to levy in particular.

Levy Planning Calendar February 13, 2018 Election October 24 Study Session November 14 Study Session November 14 Adoption of Election Resolution* December 12 Appointments to Pro/Con Committees *Resolution is due at Franklin County on December 15, 2017 Planning calendar, working backwards from December 15 (correction) which is the due date for Board action on an election resolution, to get the levy included on the February 13 election date. Second study session on November 14, followed by Board action on an election resolution, followed by board appointments to the Pro/Con Committees Before we get there, let’s start with something we do know – things that haven’t changed about levies.

HB 2242 – Threefold Purpose Revises and increases State salary allocations for education staff Revises state and local education funding contributions Increases transparency and accountability of education funding Now I want to go through the major changes in state funding of school districts from HB 2242. Three main purposes and this presentation will be divided accordingly 1. Increases salary allocations, big ticket amount Largest piece in the quest to fully fund basic education; attempt to more closely align state funding for salaries to what it actually costs to hire and retain education professionals. 2. Changes the mix of state and local funding, shifting more to the state. This is designed to counter the argument that local taxpayers have been bearing increasingly more of the State’s burden of providing basic education 3. Big investment, has strings. Fundamental change in how state and local dollars are accounted for. This will have considerable impacts for Fiscal, Employee Services, OSPI and the state auditor’s office – more about this at the next study session.

Accountability and Transparency Current state-required accounting structure makes it difficult to answer basic question: what does the levy pay for? Beginning with levy collections in 2020 (FY 19-20), enrichment levies must be deposited in a separate “subfund” Districts provide separate accounting of state and local revenues to expenditures State auditors to review district expenditures to ensure local funds used for enrichment Costs for software rewrite, additional labor FIRST LETS LOOK AT HOW STATE FUNDING WILL CHANGE Currently, take minimum salary off of what is called the salary allocation model (SAM) and multiply it by what’s called a mix factor (that’s a composite factor at the experience and education of the district’s certificated staff, varies from district to district). This is the amount per eligible full-time equivalent that the state funds currently. That changes next fiscal year… No SAM, a single state-wide average has been calculated, this is the amount, adjusted for inflation and regionalization, that will be multiplied by FTE. It’s a significant increase for Pasco over current allocation rates (SEP) $11,151. Just for the cert (860)in Basic Ed this is about $9.6 M in cert instructional salaries alone. This is the source of most of the increased revenue the districts will receive, some receive lots less than others, depending on the difference between their current average salary calculated using the mix-factor and the new single statewide average.

Accountability and Transparency Starting in fiscal year 2018-19: 4-year budgets are required with 4-year enrollment projections Budget must show salary amounts and FTEs by type (certificated, classified and administration) and source of funding (state or local) FIRST LETS LOOK AT HOW STATE FUNDING WILL CHANGE Currently, take minimum salary off of what is called the salary allocation model (SAM) and multiply it by what’s called a mix factor (that’s a composite factor at the experience and education of the district’s certificated staff, varies from district to district). This is the amount per eligible full-time equivalent that the state funds currently. That changes next fiscal year… No SAM, a single state-wide average has been calculated, this is the amount, adjusted for inflation and regionalization, that will be multiplied by FTE. It’s a significant increase for Pasco over current allocation rates (SEP) $11,151. Just for the cert (860)in Basic Ed this is about $9.6 M in cert instructional salaries alone. This is the source of most of the increased revenue the districts will receive, some receive lots less than others, depending on the difference between their current average salary calculated using the mix-factor and the new single statewide average.

State and Local Funding: How does it net out for PSD? Net increase in total revenue Why? Increased salary allocations/taxes and benefits CTE, LAP, bilingual and highly capable increases Professional learning days Offsets losses in levy and equalization Lower % of local funds Importance of maximizing remaining local funds So we’re getting a lot more money in state allocations but taking a $15M/year hit in local-generated revenue – where does that leave the district? Increase in salary and benefit allocation for state-funded employees. Counting on additional money from the state so we can reduce reliance on local levy for Basic Education staff compensation, allowing us to work within the reduced $1.50/thousand levy limit. The increased allocation for salary/benefits, programs like CTE, additions to professional learning days should more than offset the loss in levy and local effort assistance. It will transfer more funding responsibility to the state; flip side is less % is local dollars. And the local dollars raised must meet the criteria of enhancement. Strings attached.

Estimated Impact of HB 2242 All General Fund Revenue (Source: OSPI Multi-Year Tool -10/3/2107) 2017-18 2018-19 2019-20 2020-21 Compensation-Related 2,996,053 12,419,705 24,357,632 24,601,257 Categorical and Programs 5,388,323 10,157,909 15,902,578 16,694,121 Local Effort Assistance -650,337 -1,278,448 -1,545,084 M&O/Enhancement Levy -8,445,899 -15,703,313 -15,140,854 Net Change in State/Local Funding 8,384,376 13,481,378 23,278,449 24,609,440 Using OSPI’s latest estimator tool, released earlier in October. There are a number of tools out there, using various assumptions and focusing on different parts of the funding changes. OSPI’s seems to be the most comprehensive approach. Here’s the estimated increase or decrease in key categories of revenue over the next three years. The numbers represent the change in each school year brought about by the passage of 2242 over the status quo. The revenues represented are on the left side. Compensation & benefits, increased state funding to pick up more of the actual wage/benefit cost being paid by districts. Categorical and programs: LAP, bilingual and CTE primarily. The next line shows the estimated change in LEA and finally, the last shows the transition from M&O levy to the capped Enhancement levy. Assumes district levies at $1.50. Remember, levy and local effort assistance are based on calendar year, so they are spread across two fiscal years, more estimation! 2017-18 saw COLA adjustment and major increases in funding for program, targeted revenue 2018-19 compensation-related revenue up (first year of increase in salary allocation). Drop in LEA and levy as new levy rate cap goes into effect January of 2019 after four months of the current levy. Up $13.4M. 2019-20 new average compensation in full effect (came up with $19M through current FTE only, rest is COLA). Levy cap in full effect. Up $23.3M. 2020-21 marginal increase, inflation adjustment, stabilizes You’ve heard $82 million (total of net changes accumulated over four years) as if it’s a one-year windfall. Not so, as you can see in the graph the most the district sees in net increase to revenues is less than $25 million and that’s out three years. Also bear in mind that a large portion of the increase is restricted for categorical or program purposes which grows significantly every year. To $24.6M in compensation-related by 2020-21: $ 3.0M in 2.3% cola for 2017-18 $15.1M in increased salary allocations by 2019-20 $ 3.8M in increased tax/benefit allocations by 2019-20 $ 2.7M future COLA on IPD basis + associated tax/benefits $24.6M

Estimated Impact of HB 2242 Non-Program Revenue Only (Source: OSPI Multi-Year Tool -10/3/2107) 2018-19 2019-20 2020-21 Compensation-Related 9,423,652 21,361,579 21,605,204 Local Effort Assistance -650,337 -1,278,448 -1,545,084 M&O/Enhancement Levy -8,445,899 -15,703,313 -15,140,854 Net Change in State/Local Funding 327,416 4,379,818 4,919,266 Same chart. The numbers represent the change in each school year brought about by the passage of 2242 over the status quo. Still derived from OSPI’s model. Subtracted out two revenue pieces because they are not available for general purposes Wanted to get at what I call general Use, more flexible dollars, like levy dollars were. First, revenue targeted, restricted to programs (certain student populations, programs, available for basic ed). Second, compensation-related $ received in 2017-18 as its restricted for COLA increases and district already has in budget. Take out those two pieces and you see a net increase of $4.9 million in general purpose revenue over the next three years. That’s about 2% (2.16%) of this year’s general fund revenue. Even with the increase in state funding there are not a lot of additional dollars that would be flexible in use.

State and Local Funding Impact to Pasco Taxpayer*- Revised (2) State Levy Local Levy Existing Bonds Estimated Combined Rate CY 2017 2.09 4.27 2.25 8.61 CY 2018 2.98 3.95 2.01 8.94 9.50 CY 2019 1.50 6.49 6.73 Revised estimate, 2nd revision. This version differs from the one you received in your packet in two ways: it does not include debt service from a successful 2017 bond election and there is a correction, noted in red for the existing bond rate in 2019. If you look in the last column, the estimated combined rate for state and school levy is lower for both 2018 and 2019. So, although this chart is full of estimates, the taxpayer can expect to see an overall drop in taxes paid for schools. Why the drop? The County Assessor’s preliminary estimate for 2018 AV is much higher than the 6% I used last time. Actually, the increase from 2017 is estimated at 11.86%. Across all sectors: largest increase in new construction in at least 8 years, existing residential and commercial increasing about 10-12% this year. No slowdown foreseen in the near future Not only lower rates, but also less dramatic swing around CY 2018. The additional .89 in state levy is offset by the .32 decrease in levy rate and the .24 decrease in existing bonds rate, so the 2018 rate is estimated to increase by only .33. The substantial increase in assessed value increase in assessed value came at a great time as far as decreasing the overall rate and smoothing out the impact of the increased state levy. in Pasco of $2.12 from around $8.61 to $6.49. (2.77) + .89 + (.24)AV Increase *Based on best information available as of 11/7/2017. Assumes .89 increase in State levy beginning 1/1/2018, local levy at $1.50 beginning 1/1/2019. Incorporates preliminary 2018 AV provided by Franklin County.

How Much Revenue will Levy Generate? Estimate for 2019 calendar year (revised AV): Levy $9,450,273 $10,537,658 Levy Equalization $16,633,227 $15,804,352 TOTAL $26,083,500 $26,342,010 If levy is not passed, no levy equalization revenue either If levy is passed at less than $1.50, levy equalization will be reduced by a prorated amount (about $175,000 per .01) An estimate of the local levy generated revenue for 2019. $26 M. If you levy nothing or fail the levy, you do not receive equalization. If you levy less than $1.50 max, you decrease your levy revenue and the levy equalization by a prorata amount (the difference between the per student at max vs. per student actually levied)

Formulated Staffing Units October 2017 Apportionment A. School Generated 1. Principals 52.648 2. Classroom Teachers 867.998 3. Teacher Librarians 23.614 4. Guidance Counselors 36.484 5. Health And Social Services a. School Nurses 2.94 b. Social Workers 1.213 c. Psychologists 0.494 6. Teaching Assistance 32.581 7. Office Support 87.088 8. Custodians 73.640 9. Student & Staff Safety 3.504 10. Family Involvement Coordinators 2.121 Make sure to have calculation of actual over apportionment with you.

Uses of Levy Considered Enrichment ($s in millions) Staffing beyond prototypical model Psychologists, counselors $ 1.6 Nurses $ 1.2 Facilitators, coaches, specialists $ 4.9 Teachers and teaching assistants $ 7.9 Extra curricular activities Visual/Performing arts $ 6.1 Athletic/Academic competition $ 3.5 Professional development $ .9 Total $26.1 Some potential uses that the district spends now that would seem to qualify as enrichment per the definitions laid out in #2242.

Uses of Levy Not Considered Enrichment ($s in millions) Start up costs for new buildings: Principal/Assistant Principal Office staff Counselor, nurse, librarian, library clerk Art, PE and music teacher Custodial Supplies Utilities, other Elementary $1.3 Middle School $2.7 Other items that the district has historically asked as part of levy funding that are most likely not considered enrichment. By end of levy cycle in 2022 with all three buildings up it will cost the district an additional $4.2M. New buildings do not generate new state allocation $s. New building, but same amount of students, doesn’t generate new revenue, yet all these start up costs. One-of staffing and utilities. Historically, district has used levy dollars to pay for these. No more. These will have to come from general revenues. Displace other items that use general. Also, in past portables, other capital, intervention. As long as district is in building mode I would be hesitant to reduce any revenue that goes into the general fund, including levy and local effort assistance. that’s why historically, the district has us

Length of Levy Levy Term: 4 years Levy rate unchanged Levy elections cost ~$110,000/each 4 year budget plan beginning with 2018-19 budget What would four year look like? A new question brought about by the $1.50 levy rate restriction: how long should the levy’s term be? Pros As rate will remain unchanged, and rate is focus of levy discussions, why spend the election money more frequently than once in four years Also seems to align with new 4-year budgeting plan. Cons Not consistent with previous practice A lot of uncertainty out there

Estimated Levy and LEA Revenue Year Estimated Assessed Value Levy Rate Levy Amount LEA Amount Total Levy and LEA 2019 7,025,105,613 $1.50 $10,537,658 $15,804,352 $26,342,010 2020 7,868,118,287 $11,802,177 $15,066,673 $26,868,850 2021 8,812,292,481 $13,218,439 $14,187,788 $27,406,227 2022 9,869,767,579 $14,804,651 $13,149,700 $27,954,352 Staff’s recommendation is a four year levy, using the $1.50 rate, resulting in the levy amounts for each year. I have added in columns for estimated local effort assistance revenue and the total estimated levy and local effort assistance revenue for each calendar year. Even though the AV is up substantially, the increase in total levy and AV is from increasing the enrollment from 1% to 2%. (About $258k increase in 19, $524k in 20, $798 in 21 and $1,080 in 22). The yellow highlighted numbers are the ones that will appear in the resolution. Assumptions: Assessed value 12% growth; enrollment 2% growth.

Thank You Intention was to give a brief background in the major changes to school funding in Washington state. Set the stage for how new enrichment levy and local effort assistance fit into the picture. The expenditure program for the district remains the same, changes in funding make-up. Less pressure on local tax-payer, less local dollars. More net dollars for district, much of it targeted. Getting you this information is an important first step for levy planning. Equally important is the consideration of how these new developments are communicated to the public as a ballot question. To help with that discussion I’ll ask Jim McNeil of Foster Pepper to step in here. Next time – Come back with answers to questions. Four year levy? Amounts?