1. How will we know if the k-12 funding changes made this past legislative session are working?
Researched and presented by SD Budget & Policy Institute, a non-partisan SD non-profit with the mission to “promote responsible and equitable fiscal policy through research and education” website Sdbpi.org
Presented by Joy Smolnisky
SD Budget & Policy Institute
SD Budget & Policy Institute is a non-partisan SD non-profit with the mission to:
“promote responsible and equitable fiscal policy through research and education”

2. Funding formula 1997 per-student allocation (PSA) $3,350
equalize dollars per student
annual increase— lesser of 3% or rate of inflation
FLASHBACK – Let’s review where we were last year when I had the privilege of addressing you.
Back in the 1990s, there was growing voter unrest with the rising cost of property values and related property taxes. Funding for schools was seen as an area to be addressed through voter lead initiative reforms freezing taxes, such as CA’s proposition 13. South Dakota did not pass an initiated measure to freeze taxes but the legislature implemented a funding formula that used recently enacted video lottery revenues that increase general revenues and balance revenues for schools between property tax and general fund revenue.
Under the funding formula, a per student allocation was determined, which was to increases each year by an index factor equal to the lesser of 3% or inflation. When the funding formula first started – the per student allocation was $3,350. for FY 15 it is $4,781.
This graphic shows actual PSA increases vs to what it would have been had it been increased by CPI each year.

3. Problem with formula (slide from 2015 ASASB Convention presentation)
INEQUALITY: Formula doesn’t result in equal funding, it only creates a floor of funding per student under which no district will drop.
NO REAL GROWTH: The growth in the funding formula is not adjusted for the labor market cost of educators in the region. It is based on the lesser of 3% or CPI-W.
It is important to note that:
CLICK: Formula doesn’t result in equal funding, it only creates a floor of funding per student under which no district will drop.
CLICK: The growth in the funding formula is not adjusted for the labor market cost of educators in the region.
Because the majority of expenses in education are the cost of personnel – when those costs go up faster than the Urban Consumer Price Index or 3%, which ever is less, South Dakota teacher pay scale can’t stay competitive.
Let’s look what has happened since the onset of the formula.

4. SD Funding formula stalls k-12 investment growth rate
SD Funding formula stalls k-12 investment growth rate
I’d like to walk you through the data to clarify the basis for that statement.
Nationally, the average spending per K-12 student has about doubled since 1997 (about the time we began using our current funding formula).
Wow- you think – no wonder South Dakota couldn’t keep up with other states!
Analysis and Graphic by SD BPI
Data Sources: US Census Bureau; SD Blue Book 2011; SD Budget Summaries 2005 to 2015; SD Department of Education

5. SD Funding formula stalls k-12 investment growth rate
Well – interestingly, SD total general fund expenditures have MORE THAN DOUBLED during that time period – up 119%.
If we had increased k-12 funding to match the national market place – k-12 would not have taken any greater percentage of the expenditures than it had at the beginning of the formula.
And other programs still could have grown at the same revenue growth rate.
Analysis and Graphic by SD BPI
Data Sources: US Census Bureau; SD Blue Book 2011; SD Budget Summaries 2005 to 2015; SD Department of Education

6. SD Funding formula stalls k-12 investment growth rate
But, SD’s funding formula didn’t prioritize keeping up with the national education market place, only tracking the urban rate of inflation (or 3%, whichever was less). Our SD k-12 Per Student Allocation is only up 46%.
Analysis and Graphic by SD BPI
Data Sources: US Census Bureau; SD Blue Book 2011; SD Budget Summaries 2005 to 2015; SD Department of Education

7. K-12 spending as % of SD personal income down 25% since funding formula
Nationally, for the past 20 years, states have been spending about 5% of the total personal income in their state for k-12 education (that is the green line on the graph). You can see that South Dakota invested at the same rate as the rest of nation – until the funding formula was implemented.
CLICK: Then, you see a “bend in the trend” with South Dakota progressively spending less and less of the personal income available in the state on k-12 education, while nationally the support for k-12 education stayed between 4.5 and slightly above 5%.
From a long term perspective – what does this tell us about South Dakota?
South Dakota kids who went to school before the funding formula was implemented received a higher percentage of the state resources committed to their education than do South Dakota kids today. And the % of state resources they do get, is dropping faster than it is in regional states.

8. House Bill 1182 NEW FUNDING SOURCE ½ cent sales tax increase:
63% for teacher salaries in k-12 Education ($67 million)
3% for instructor salaries at technical institutes. ($3 million)
34% for reduction of property tax levies for general education for all classes
of properties ($36 million)
IF STATE BEGINS COLLECTING REMOTE SALES TAX, the net revenue from that obligation will be used to reduce the rate of the ½ cent sales tax by one-tenth percent each July following the calendar year when any additional $20 million is collected.
Dept. of Ed will collect annual data statistical data on teacher salaries
Penalties for Districts who don’t use 85% of increase for raising teacher salaries
Waiver of penalties considered for special circumstances by school finance accountability board which will promulgate rules, subject to approval by JCA.
To address this ongoing erosion of funding for k-12 education, especially evident in low teacher salaries, the legislature passed House Bill 1182 during the 2016 legislative session. It does the following:
NEW FUNDING SOURCE ½ cent sales tax increase:
CLICK: 63% for teacher salaries in k-12 Education ($67 million)
CLICK 3% for instructor salaries at technical institutes. ($3 million)
CLICK 34% for reduction of property tax levies for general education for all classes of properties ($36 million)
CLICK
IF STATE BEGINS COLLECTING REMOTE SALES TAX, the net revenue from that obligation will be used to reduce the rate of the ½ cent sales tax by one-tenth percent each July following the calendar year when any additional $20 million is collected.
III. Dept. of Ed will collect annual data statistical data on teacher salaries
IV. Penalties for Districts who don’t use 85% of increase for raising teacher salaries
V. Waiver of penalties considered for special circumstances by school finance accountability board which will promulgate rules, subject to approval by JCA.

9. Senate Bill 131 I. New Formula Adjusts distribution factor
Target Salary – target for FY17 $48,500.
# of teachers needed (based on target class sizes using fall enrollment plus 0.35 times # LEP students) (12-15 students per teacher depending on size)
+ Benefits (29%) and
+Overhead (31%)
When calculating local need at the statewide level, include amounts set aside for
Technology
Student assessment and
Sparse school district benefits.
Maintains annual growth at lesser of 3% or inflation.
Allows triannual re-evaluation of target teacher salary to stay competitive in the region.
Senate Bill 131
A New Formula (Click through elements)
The second piece of legislation passed during the 2016 legislative session was Senate Bill It does the following:
Adjusts distribution factor
Target Salary – target for FY17 $48,500.
# of teachers needed (based on target class sizes using fall enrollment plus 0.35 times # LEP students)
+ Benefits (29%) and
+Overhead (31%) which will be adjusted own in FY18 to take into account the sum of the amounts that districts exceed the “Other Revenue Base Amount”.
When calculating local need at the statewide level, include amounts set aside for
Technology
Student assessment and
Sparse school district benefits.
Maintains annual growth at lesser of 3% or inflation.
Allows triannual re-evaluation of target teacher salary to stay competitive in the region target
WAIT – that’s not all. SB 131 also tackled the legislature’s concerns about funding inequity among the districts and excess fund balances.

10. Pension Levy the $19.2 million currently collected by the levy rolls into the formula and counts against local need. Districts have five years to spend down any existing funds so it doesn’t count against reserve caps.
Other Revenues (gross receipts tax on utilities, local revenue in lieu of taxes, county apportionment of revenue from traffic fines, county revenue in lieu of taxes, wind farm tax and bank franchise tax.)
establishes a “base amount” equal to greatest amount collected during FY13, FY4 or Fy15).
In FY18, the overhead rate shall be adjusted to take into account the sum of the amounts that districts exceed the other revenue base amount.
In FY19-23 the base amount will be stepped down by 20% each year so by FY23 all of these other revenues would be recognized as local effort.
Senate Bill 131
It Adjusts: (Click through each element)
Pension levy (the $19.2 million currently collected by the levy rolls into the formula and counts against local need. Districts have five years to spend down any existing funds so it doesn’t count against reserve caps.
Other Revenues (gross receipts tax on utilities, local revenue in lieu of taxes, county apportionment of revenue from traffic fines, county revenue in lieu of taxes, wind farm tax and bank franchise tax.)
establishes a “base amount” equal to greatest amount collected during FY13, FY4 or Fy15).
In FY18, the overhead rate shall be adjusted to take into account the sum of the amounts that districts exceed the other revenue base amount.
In FY19-23 the base amount will be stepped down by 20% each year so by FY23 all of these other revenues would be recognized as local effort.
New wind energy tax revenue coming from production first beginning after ,will be retained by 100 by local district for 5 years, 80% 6th year, 60% 7th year, 40% 8th year and 20% ninth year and zero thereafter.
(Districts can elect “alternative local need calculation” – only three have done so – Harding County,

11. Fund Balance (Reserve) Caps In FY19, Caps will be imposed on fund balances based on the lowest enrollment from the current year or the previous 2 years:
< 200 students = 40% fund balance cap
students = 30% fund balance cap
>600 = % fund balance cap
Capital Outlay – uses and Growth Limit
Growth is lesser of 3% or inflation, plus new construction
In FY22 growth is capped at $2,800 per student – then will inflate at same rate as formula
45% of funds may be used for any general fund purpose.
Senate Bill 131
(Click through elements:
SB 131 also Adjusts the:
Fund Balance Levi. Beginning in FY19, caps will be imposed on fund balanced based on the lowest enrollment from the current year or previous two years.
< 200 students = 40% fund balance cap
students = % fund balance cap
>600 = 25% fund balance cap
Capital Outlay – uses and growth limits
Growth is lesser of 3% or inflation, plus new construction
In FY22 growth is capped at $2,800 per student – then will inflate at same rate as formula.
45% of funds may be used for any general fund purpose

12. Senate Bill 133 New Opportunities
Shared employee services grant program
Classroom innovation grant program for e-learning development
Certification reciprocity.
Mentoring for new teachers
Click through elements
House Bill 133 – the third and final component, address new opportunities for DOE to implement
Shared employee service grant program
Classroom innovation grant program for e-learning development
Certification reciprocity and
Mentoring for new teachers

13. Do the new statutes address the former problems?
INEQUALITY: Old formula didn’t result in equal funding, it only created a floor of funding per student under which no district could drop.
NO REAL GROWTH: The growth in the funding formula was not adjusted for the labor market cost of educators in the region. It is based on the lesser of 3% or CPI-W.
Do the new statutes address the former problems of
INEQUALITY and LACK of REAL GROWTH in the formula?
Lets go through those changes one more time and talk about it.

14. Do the new statutes address the former problems?
NEW DISTRIBUTION FORMULA?
New Distribution Formula
This legislation maintains the extra funding floor for:
Small Schools
Sparse Schools
While this may seem like inequity – it is a cancelling inequity.
Small and sparse school lack some of the economy of scale larger schools enjoy. Justice, in the words of Aristotle, means treating equals equally and unequals unequally. If there are legitimate differences that call for unequal solutions, then unequal distributions might be considered fair.
What challenges or opportunities do you see?

15. Do the new statutes address the former problems?
NEW Distribution Formula?
NEW ½ Cent Sales Tax?
NEW ½ cent sales tax?
Incredible one-time jump. Will you be able to hit the 85% salary commitment marks?
What challenges or opportunities do you see?

16. Do the new statutes address the former problems?
NEW Distribution Formula?
NEW ½ Cent Sales Tax?
NEW triannual re- evaluation of target teacher salary to stay competitive in the region.
NEW triannual re-evaluation of target teacher salaries to stay competitive in region. Here is our challenge.
CLICK
Our target FY17 salary of $48,500 is now 11% lower than the regional average was in 2016, and 4% lower than ND, our lowest competitive state.
It costs about $14.4 M for every $1,000 we raise teacher salaries. (because when salaries rise for 9,000 teachers, and 31% also rise).
The price tag to just catch up from our FY17 target salary ($48,500) to match ND’s FY 16 actual salary is about $2,000 per teacher or $28.8 Million.
With a 3 year wait until education is scheduled to re-evaluate market competitiveness, should education be thinking about ways to make sure the ensuing growth in the ½ cent of sales tax will remain available to adjust wages when the time comes? HB1182 says 63% of the revenue from ½ cent sales tax goes to improve teacher salaries? Does that mean the growth in FY17, FY18 and FY19 should be preserved (through one time appropriations or the Education Trust Fund) so the continue revenues will still remain unspent until the re-evaluation period?
What challenges or opportunities do you see?

17. Do the new statutes address the former problems?
NEW Distribution Formula?
NEW ½ Cent Sales Tax?
NEW triannual re-evaluation of target teacher salary to stay competitive in the region.
Equalize Other Monies?
Equalize other monies?
This portion of the Other Monies is worth about $50 million – or around $400 per student. It will reduce “winner” and “loser” districts over time, but will education also loose it’s historically higher growth rate under lower growth formulas? Will it be enough to help move salaries up to regional averages? And, without “other monies” will districts be able to nimbly adjust to new operating budgets?
What challenges or opportunities do you see?

18. Do the new statutes address the former problems?
NEW Distribution Formula?
NEW ½ Cent Sales Tax?
NEW triannual re-evaluation of target teacher salary to stay competitive in the region.
Equalize Other Monies?
Capital Outlay capped at $2,800 per student in FY21, future growth at lesser of 3% or CPI. 45% flexible spending.
Capping Capital Outlay
Here you see a trade – education gains flexible spending options on 45% of Capital Outlay Dollars but accepts a cap at $2,800 per student and a slower growth rate there-after (lesser of 3%/inflation) in FY21.
What challenges or opportunities do you see?

19. Do the new statutes address the former problems?
NEW Distribution Formula?
NEW ½ Cent Sales Tax?
NEW triannual re-evaluation of target teacher salary to stay competitive in the region.
Equalize Other Monies?
Lowering Capitol Outlay to lesser of 3% or CPI and then capping at $2,800.
Pension Fund
Rolling Pension Funds into the general Levy
Not all districts collect pension funds now. But the current statewide total of $19.2 million will be redistributed across all districts inside the general funding formula where they will be help fund the 29% “benefits distribution.” Once inside the general fund – their growth rate is capped by the formula.
What challenges or opportunities do you see?

20. Do the new statutes address the former problems?
NEW Distribution Formula?
NEW ½ Cent Sales Tax?
NEW triannual re-evaluation of target teacher salary to stay competitive in the region.
Equalize Other Monies?
Lowering Capitol Outlay to lesser of 3% or CPI and then capping at $2,800.
Pension Fund
Capping Fund Balances
Capping Fund Balances
With a more reliable funding formula and much higher base-line funding, will you feel comfortable at a lower fund balance?
What challenges or opportunities do you see?

21. Do the new statutes address the former problems?
NEW Distribution Formula?
NEW ½ Cent Sales Tax?
NEW triannual re-evaluation of target teacher salary to stay competitive in the region.
Equalize Other Monies?
Lowering Capitol Outlay to lesser of 3% or CPI and then capping at $2,800.
Pension Fund
Capping Fund Balances
Exchanging ½ cent sales tax for a capped $100 million if the internet tax bill goes through the supreme court.
SWAP – ½ cent sales tax income for fixed $100 M.
This would be much worse that current concerns for funding source that is growing at a market rate – under this scenario teacher salary dollars are permanently capped at 6% less than the FY17 starting point.
What challenges or opportunities do you see?

22. Monitoring Education’s State Aid funding sources.
GROWTH RATE = FORMULA
$512 MILLION OLD DOLLARS
$448,404,255 (FY16 State Aid to Education)
$ 63,646, (FY16 State Aid to Special Education)
$135 MILLION NEW SOURCES
$67,000,000 Dedicated ½ Cent Sales Tax
$49,000,000 Other monies” moving to State Formula
$19,000,000 Pension Funds moving to state formula
So, how will you Monitor your State Aid Funding Sources?
In recent years the school funding formula rate of the lesser of inflation or 3% has been very low – and is projected to stay low, around 1.5% for next year.
That means about 80% of your funding isn’t growing very fast under the formula.

23. HOW to monitor your State Aid funding sources?
$512 MILLION OLD DOLLARS
$448,404,255 (FY16 State Aid to Education)
$ 63,646, (FY16 State Aid to Special Education)
$135 MILLION NEW SOURCES
$67,000,000 Dedicated ½ Cent Sales Tax
$49,000,000 Other monies” moving to State Formula
$19,000,000 Pension Funds moving to state formula
GROWTH RATE = was HIGHER than formula
BUT
About 20% of your new funding comes from sources that have been growing faster than the formula. You know from the statutory language that some of these funds are not going to be able to retain their higher growth rate (pension and capital outlay funds)
But staying aware of the real growth rate of any remaining funds helps you think about their potential impact to retain or regain some of their historic growth potential to help education continue its journey to a market-based teacher salaries.
Capital outlay tax collections have increased by an average of 9% a year for the past 12 years. So, if they keep growing at that rate, their total annual revenue would be over $80 Million when they are capped in FY21. However, they go to individual districts and aren’t part of the funding formula.
Sales Tax growth rates drifts between 4 and 5% most of the time – so think about ways to “harvest” this growth to help keep salaries up to date. The $67 million in sales tax growth (at 4.5%) will generate about $2 million MORE per year than a typical formula growth rate of 1.5%. While $2 million does sound like much, when you capture it as cumulative growth year over year,
you would go into the FY19 re-evaluation of salaries with $6 million more in continuing appropriations if this growth is dedicated to teacher salaries as suggested in the statute.

24. You’ve come a long way on Education Funding But the Game is not over
HANG ON TO YOUR GOALS: Maintain EQUALITY in funding and ENOUGH REAL GROWTH to stay competitive in the teacher salary market.