Wednesday, October 15, 2014

Tax Choices Shape Education Funding

Educational funding continues to be a major theme in this fall’s election campaigns. It is worth noting how school funding has historically been affected by economic trends and tax policy choices.

Over the past 25 years, the Legislature has generally allowed state aid for K-12 education to grow at the same rate as the Kansas economy, even if it required tax increases.  Following the Great Recession, however, Governor Brownback and the Legislative majority passed significant income tax cuts with the goal of boosting the state economy.  Although total state school aid has increased, the income tax cuts have also lowered state education funding relative to Kansans' personal income.

KASB has released a new report showing that states with the highest student achievement levels tend to spend more money per pupil, raising concerns that less funding for education will make it harder to prepare students for successful postsecondary education and careers.

History of State General Fund Budget and School Funding

The chart below shows 25 years of historical data, and future projections through 2019.  In 1990, total State General Fund spending (red line) was about $2.4 billion, slightly more than SGF revenues (green line).  Total state aid to school districts (which excludes federal aid and local revenues) was just under $1 billion, or less than 40% of the state general fund (blue line).

In 1992, the Legislature raised state sales and income taxes to increase school state aid by over 50%.  Part of this increase resulted in higher school spending, but part of the increase was to “equalize” local property taxes for schools by reducing tax rates in lower wealth districts through more state aid.  As a result, K-12 state aid increased to about 50% of state general fund expenditures, where it has generally remained ever since.

During the healthy state and national economy of the 1990s, state tax revenue and spending grew steadily.  State school aid also increased significantly, although as in the early 1990s, not all of the increases went to higher school budgets.  Hundreds of million of dollars were used to further reduce property taxes, dropping the statewide levy from 35 to 20 mills.

After a decade of solid growth, state revenues dropped in 2002 during the post-9/11 recession, resulting in a cut in school aid in 2003. To avoid further cuts, the Legislature increased certain taxes in 2002.  Combined with a strong economic recovery, state revenues grew from $4.1 billion in 2002 to $5.8 billion in 2007.  This allowed the Legislature to comply with the Supreme Court’s 2005 Montoy decision without raising additional taxes.  K-12 aid increased approximately 50% between 2003 and 2009, from $2.2 billion to $3.2 billion.

There trends changed dramatically as a result of the Great Recession.  From 2007 to 2010, SGF revenues dropped $600 million, or over 10%.  General fund expenditures dropped even more, from nearly $6.2 billion in 2009 to $5.3 billion in 2010. To avoid even deeper cuts in state programs, the 2010 Legislature passed a one-cent increase in the state sales tax for a three-year period.  The additional sales tax revenue, combined with a recovering state and national economy, allowed general fund revenues to rebound to $6.4 billion in 2012.

During these gyrations in the state general fund, K-12 school aid dropped $130 million from 2009 to 2010, but the reduction would have been much greater without $477 million in federal stimulus funding spread over 2010 and 2011.  (These federal dollars are included in K-12 state aid in the chart above, but not in the state general fund.)  Total K-12 state aid remained relatively flat during from 2009 through 2013, averaging about $3.2 billion.  During this period, inflation and student enrollment increased, and funding for KPERS pension payments and bond and interest payments rose, while funding for general operating costs declined.

Based on previous history, state school aid would have risen as the economy improved.  However, in 2012, the Legislature approved and the Governor signed a major income tax rate reduction that cut state revenues by an estimated $231 million in 2013 and $495 in FY 2014.  (The 2014 reduction would have been over $800 million if the Legislature had not approved an extension of the higher sales tax rate and other revenue changes.) The Governor and Legislature also supplemented school funding by using state highway fund dollars for school transportation aid and expanded lottery revenues for KPERS funding.

Projections for Future Years

State general fund revenues and expenditures for 2015 through 2019 on the previous chart are based on projections from the Kansas Legislative Research Department, and assume both “normal” economic growth and the impact of future tax cuts already approved by the Legislature.  Under these assumptions, state general fund revenues will continue to grow, but more slowly than the overall state economy.  (That is the whole point of the tax cuts - to collect a smaller share of income for governmental programs and allow individuals and business to keep and spend more.)

K-12 state aid for 2015 through 2019 is also based on the KLRD projections.  It assumes the Legislature will fully fund the appropriated school aid budget levels for 2015, add $50 million each year for state and school district KPERS pension contributions, and add over $50 million each year for general state school aid for enrollment increases or other costs.  In addition, KLRD estimates also show that the state will have to add between approximately $70 million and $80 million each year for human service caseloads.

Based on projected revenue available, after making the additions previously listed, the Legislature will have to REDUCE spending by nearly $250 million in 2016, $25 million in 2017, $38 million in 2018, and $181 million in 2019 to avoid an unconstitutional deficit in the state general fund.  If any of these reductions are applied to school finance programs, the level of state aid shown above will drop.

The current KLRD projection indicates that state spending and school district aid will continue to increase, but at a slower rate.  However, the school funding increase will only occur IF the state can deal with anticipated overall SGF funding shortfalls WITHOUT reducing school aid.

State Spending and K-12 State Aid Compared to Kansas economic growth

Another way to look at the impact of state budget choices is to compare these trends to the overall in the Kansas economy.  Kansas personal income is a widely accepted economic measure of the total income of all residents from all sources.  Comparing state general fund revenues and expenditures and state aid to total Kansas personal income shows the percentage total taxpayer income going to state programs funded by the SGF, as well as to state aid for public schools.  (Note: the chart below does not include federal and local school revenues.)

This chart indicates the state general fund and state aid to K-12 schools increased relative to total personal income income in 1993 and 1994 as the school finance system was changed, then remained quite constant until the 2002 recession.  After declining compared to Kansas personal income in 2003 and 2004, both the state general fund and K-12 state aid gradually climbed back up to 1990s levels.  Since 2009, however, both the state general fund and K-12 state aid have dropped significantly compared to the overall state economy.

This shows Governor Brownback and the current Legislature have made a very different choice than has been done in the past.  Instead of increasing state general fund revenues to allow K-12 education funding to keep up with the overall state economy, current projections indicate the share of state income going to state education aid will drop to the lowest level in at least 20 years, and will continue to fall for the foreseeable future.

Consequences of tax and budget policy on school funding

The Governor and his supporters note that total state aid for K-12 education has increased since his first budget, and is projected to continue to rise - although he has offered no specific plan to deal with projected SGF deficits.  However, state aid would be much higher if Kansas had continued to provide the same level of support compared to taxpayer income as has been done in the past two decades.

Specifically, had state aid been funded at 2.7% of personal income (the average since 1994) rather the projected 2.4%, school districts would be receiving over $400 million more in state aid this school year.  That is enough to raise the base per pupil by nearly $600.  In program terms, it could entirely fund the Governor’s all-day kindergarten program, expand other early childhood programs, restore teaching positions that have not been replaced since 2009, add school career counselors and other services, and expand technical education programs.

Governor Brownback says the income tax cuts will cause a significant improvement in the state’s economic growth.  The income tax cuts have reduced the revenue available for education, especially in operating budgets.  As noted earlier, KASB has released a new report showing that states spending more on education tend to have higher student achievement - and that Kansas is already an “overachiever” in terms of results for the money spent.

The Governor and his supporters say the tax cuts will create more jobs and economic opportunity for Kansans when they leave the school system. They indicate school funding has increased in recent years, if not as much as most school leaders would like, and that an improving economy will ultimately allow graduates to find jobs in Kansas and provide additional revenue to fund schools.

The Governor’s opponents say the tax cuts have not caused any more economic growth than the state experienced under the previous tax structure, but have hurt the ability of school districts to ensure high school graduates leave school with the skills to take advantage of economic opportunities.  They fear the state’s budget situation will require either further reductions in school funding and quality or higher local property taxes - or both.

Which of these visions most voters believe will likely determine their choice for Governor and their Legislators.

Friday, October 10, 2014

The Gannon Decision: Funding and Student Achievement

At some point in the next few weeks or months, a three-judge panel is expected to rule on the “adequacy” of Kansas school funding. It is worth reviewing the standards the Kansas Supreme Court established for that decision, and what it might mean. There is strong evidence reaching the standards for adequacy set by the court will require additional funding.

A March 12 memo on the Gannon case prepared by the Legislature’s own legal staff, in the Office of Revisor of Statutes, reads in part:

….[T]he Court reaffirmed its prior decision that Article 6 of the Constitution of the State of Kansas (Article 6) contains an adequacy component with respect to determining whether the Legislature has met its constitutional obligation to “make suitable provision for finance of the educational interests of the state.” The “adequacy component is met when the public education financing system provided by the legislature for grades K-12-through structure and implementation-is reasonably calculated to have all Kansas public education students meet or exceed the standards set out in Rose [v. Council for Better Educ., Inc., 790 S.W.2d 186 (Ky. 1989)] and presently codified in K.S.A. 2013 Supp. 72-1127.” These standards now form the basis for the test to determine whether the Legislature has adequately provided funding for education. The Court then remanded the case back to the district court with directions to apply the newly established adequacy test to the facts of the case.

The Court clearly stated funding provided for schools must be adequate to give students a reasonable chance to meet the Rose Standards adopted by the Legislature. Those standards refer to seven “capacities” for students to be successful, including communications skills, understanding political and economic systems, physical and mental health, appreciation of arts and cultural heritage, and preparation for success in academics, vocational-technical training and the workforce.

Is the school finance system currently giving all students a chance to meet these standards? While there are many aspects of the Rose Capacities that are not uniformly assessed, there is clear and consistent information on basic reading and math skills, preparation for postsecondary education and high school completion, which is an indicator of both preparation for postsecondary education and employment. Consider the following:

  • About 80 percent of Kansas students scored at basic and 40 percent at proficient on the National Assessment of Educational Progress (NAEP) reading and math tests, the highest ever and ranking Kansas in the top 15 states. However, that means one in five students still falls below a basic standard indicating the student is likely to graduate high school, and 60 percent fall below a proficiency standard that indicates progress to “college ready.”
  • Thirty-one percent of students meet all four college-ready benchmarks on the ACT test as juniors or seniors, the highest percentage ever and one of the top marks for states where most students take the ACT. However, over 60 percent of future jobs are expected to require some kind of postsecondary credential, technical or academic.
  • Eighty-five percent of Kansas students graduate from high school in four years, but 15 percent may never finish. Failure to complete high school means dramatically higher unemployment and lower income.
These statistics indicate that while Kansas does very well compared to most other states, too many Kansas students are NOT reaching the capacities defined by the Rose standards. The question is: will more money make a difference? There are at least three reasons to think it will.

First, remember each of these achievement levels is at an all-time high. Kansas has never had better results spending less money and has never had more high need, low income students.

Second, as funding increased in recent years, student achievement increased at a similar or higher rate after adjusting for inflation, employee compensation and enrollment growth, as described in a previous post. Moreover, the last comprehensive educational cost study on student outcomes conducted by the Legislative Post Audit Division found a nearly one-to-one correlation between funding and outcomes.

Third, KASB research shows no other states get consistently better results unless they spend more money, have fewer low income students, or both. On virtually every measure of state education achievement, higher state spending has a positive correlation with student outcomes related to the Rose Capacities. In fact, Kansas is already an “over achiever,” with better student outcomes than expected for the amount of spending per pupil (below the U.S. average or median) and the percentage of low income students (just below the U.S. average, higher than median).

Wednesday, October 8, 2014

Inflation and School Funding: Why Do Districts Need More Money?

In an blog post from August, I presented information from the Governor’s Budget Division and Kansas State Department of Education indicating that while K-12 education funding has increased since Governor Brownback took office and is higher than the pre-recession year of 2009, when adjusted for inflation funding has been flat for the past four years and educational operating budgets, which exclude pensions contributions, capital cost, debt service and food service programs, have been declining since 2009.

This has prompted several questions. Why use 2009 as a base year? How has school funding compared to inflation over a longer term? If school funding over the long-term has increased more than inflation, why do so many school leaders believe funding is inadequate?

First, I used 2009 as the base year because that was the earliest year referenced in new documents from the Kansas Division of the Budget.

Second, choosing a different year will give a different result. Another analysis using the same methodology used in my blog indicates school funding has increased at least $339 million MORE than inflation since 2005, using my definition of educational program budgets.

A $339 million increase on a $3.3 billion base is about 10 percent. Spread over 10 years, that is an average of about 1 percent per year more than inflation. In fact, I have found that the annual per pupil district operating budgets (general funding, special education state aid, local option budgets and federal aid, but excluding KPERS pensions, buildings, equipment, debt service and other local revenues) have averaged about 1 percent more than inflation all the way back to 1990.

The key word, however, is averaged. I suspect most families who experienced a jump in income between 2005 and 2009 but took a pay cut for several years during the recession and haven’t had a pay increase that exceeded inflation in three or four years would not feel like they were getting ahead, especially if they have more family members to care for. This is exactly the situation of Kansas school districts.

School funding did increase significantly between 2005 and 2009. Remember, 2005 was the one point in the history of the state when the Kansas Supreme Court ruled that school funding was too low to provide constitutionally suitable education. If 2009 funding was unusually high, 2005 funding was constitutionally too low. But school operating budgets were cut in 2010, 2011 and 2012, and have been essentially flat every year since. (I also note in the blog that other parts of school districts budgets, i.e. retirement contributions, building and equipment costs and food service, have gone up in recent years, which contributes significantly to total funding increases.)

Why do school leaders believe more money is needed, if over a 10-year period school funding is still ahead of inflation? To answer that question, we need to consider changes in educational costs.

First, by far the largest part of school operating expenditures is salaries and benefits, which tend to increase faster than inflation. According to the U.S. Bureau of Labor Statistics, private sector annual compensation has increased on average about 0.25 percent more than the consumer price index annual for the past 10 years. Districts have to increase salaries more than inflation simply to remain competitive with private sector employers.

Second, districts are educating more students. The number of full-time equivalent students increased from 441,868 to 460,848 since 2005, or 0.43 percent per year on average. Adding 0.25 percent for salaries and 0.43 percent for enrollment growth leaves just about one-third of 1 percent budget growth annually for “improvements” in operating education programs.

Third, “inflation” implies the change in the cost of getting the same product. For example, how does the cost today compare to cost 10 years ago for the same gallon of gas or a loaf of bread? Kansans are getting a better “product” from their public schools. Key educational indicators have increased at a rate equal to or higher than the 0.3 percent average funding growth left after subtracting inflation, net salary increases and enrollment growth.
  • The percent of students scoring at basic for Grades 4 and 8 reading and math on the National Assessment of Educational Progress increased from 76.0 to 79.4 between 2003 and 2013 - an average of 0.34 percent per year.

  • The percent of students scoring at proficient on the National Assessment of Educational Progress increased from 35.8 to 40.4 - 0.46 percent per year.

  • Percent of students tested by ACT meeting all four college-ready benchmarks (English, Math, Reading and Science) increased from 26 percent to 31 percent between 2006 and 2014: - an average of 0.6 percent per year.

  • The percent of students graduating “on time” from high school increased from 76.9 to 85.0 between 2003 and 2012 - an average increase of 0.9 percent per year.
On each of these indicators, the average annual growth improvement in student performance - though less than 1 percent per year - was equal to or greater than the average increase in educational program funding after adjusting for inflation, comparable private sector salary growth, and student enrollment growth. Remember, most of the funding increase occurred when this year’s high school seniors were in elementary schools. Yet it is often argued that Kansas educational performance has not increased fast enough to meet student needs or justify additional funding.

Not only have the outcomes changed, the students that are striving to achieve these outcomes have changed even more dramatically. For example, the percentage of school-aged children living below the poverty line increased from 12.7 percent in 2007 to 17.2 percent in 2013. The number of Hispanic student increased from 12.0 percent in 2007 to 17.8 percent in 2013. In both cases, this was a 50 percent increase in the number of students.

The percentage of students requiring English Language Learner programs increased even more, almost doubling from 5.5 percent in 2005 to 10.0 percent in 2013; and the percent of students on free or reduced meals increased from 38.5 percent in 2005 to 49.6 percent in 2013. Numerous state and national studies have found these students have more difficulties meeting academic standards for success.

Why do Kansas schools need more money if funding has exceeded inflation? Because employment costs, total enrollment and special needs students and student achievement goals are all increasing more than inflation.