Tuesday, November 22, 2016

New Revenue Estimates Part 3: Declining investment in School Funding

The latest official consensus revenue estimates for the Kansas state general fund were released Nov. 10. Much of the attention has focused on a $345 million drop in expected revenues in the current year, as well projections for significant budget deficits in the next two years. KASB takes a more detailed look at how the new projections compare to longer term economic and budget trends in Kansas, and what it means for education funding.

The first part shows how Kansas personal income has consistently fallen below projections and trails the national average. The second part shows how state tax revenues have not kept up with income growth since the major income tax cuts of 2012 have decreased revenue to the state, resulting a lower percent of economic growth invested in education and public services. The third part shows how the failure of the Kansas economy to recover from the Great Recession and the failure of the tax cuts to stimulate the economy have squeezed state spending, including education.

Part 3: Slow economic growth and tax policies have an impact on school funding.

Slow income growth and lower tax revenue growth almost inevitably mean less growth in school finance, which relies on state aid for two-thirds of its funding. (Kansas is higher than most states in this regard. The trade-off for a higher share of state funding is that it allows lower property taxes and less funding disparity due to major differences in local tax resources.)

Using the best records available, total school district funding in Kansas has averaged a 5.6 percent increase per year since 1975, or 1.8 percent after adjusting for inflation. When considering general operating funding (general fund budgets, special education state aid and local option budgets) the average annual increase since 1975 has been 5.3 percent, or 1.6 percent after inflation, slightly below total funding.

Since 2008, however, total funding has increased an average of 1.3 percent, and after adjusting for inflation, actually declined an average of less than 0.1 percent per year. However, since 2008 most of the growth in school funding has been in areas set by local voters, such as bond issues, or higher contribution rates for the Kansas Public Employees Retirement System.

These expenditures are not part of general operations. As a result, general operating expenditures (defined as school district general fund, local option budget and special education state aid) increased an average of just 0.71 percent per year since 2008, and actually declined an average of 0.7 percent per year after inflation. This is why school boards, staff, parents and communities see “cuts” in personnel and programs even though total funding may be higher - because dollars available for general operations have lagged behind inflation.

As a result, school funding has been declining as a percent of personal income. Total K-12 funding has averaged 4.6 percent of Kansas personal income since 1975 and topped at 5.0 percent in 2009 and 2010, but is estimated to be 4.4 percent in 2016 - the lowest level in 30 years. General operating funds averaged 3.5 percent of personal income but are estimated to be less than 3.1 percent in 2016 - the lowest level recorded.

In other words, Kansans are providing the lowest share of income to K-12 in decades for this generation of students, even as school district expectations for student performance have continued to increase.

Kansas funding has also fallen behind the nation. Kansas total revenue per pupil was 97.5 percent of the U.S. average in 2009 but declined to 93.7 percent in 2013, the most recent year available. It is likely Kansas has fallen further behind since then because the U.S. economy has been growing faster than Kansas, but official data on state school funding lags several years behind.

The most immediate issue for the Governor and Legislature is the reduction of $346 million in anticipated revenues for the current year (FIscal 2017). Because the Legislature built a budget with a very small ending balance - and because actual tax revenues for 2016 were over $100 million less than expected - the Legislature will have to make almost $350 million in “adjustments” to avoid a deficit in the state general fund.

That equals over 5.5 percent of approved expenditures in a budget year that will be more than half over when the Legislature returns in January. Adjustments could mean spending cuts, payment delays, or new revenues (raising taxes).

One part of the problem is that the Governor delayed an additional $75 million in state aid due to be paid to schools in at the end of June. That delay saved the state $75 million and helped avoid a deficit, but adds $75 million in FY 2017. An option likely under serious consideration is to make a similar delay - or even larger - from June 2017 to July of 2018.

Such a delay could be even larger because the 20 mill statewide levy and mineral production fund will raise less than expected in current year FY 17. There is no revenue to make this up in the state general fund profile, which would make the deficit even larger if included. That could be added to the delay (pushing into next year), or school district funding could be reduced.

If a similar delay in state school aid was made again (and perhaps increased to $100 million), the Governor and Legislature will still face a projected $250 million gap, equal to over 4.0 percent. Even if the Legislature (and Governor) agreed to increase taxes at some level, it is extremely difficult to do so in time to raise much revenue for 2017.

The situation in 2018 and 2019, the upcoming two-year budget the Governor will propose and the Legislature will adopt, is less clear. Legislative Research Department budget profiles show budget gaps of $582.6 million in 2018 and $172.3 million in 2019. However, those numbers assume the Legislature returns to “current law” on transfers into and out of the state general fund. That means the Legislature would stop transferring money from the state highway fund and early children revenues; and start sending money to programs that have not been funded for years.

Even if the Legislature continues current transfers (which has been extremely controversial), tax revenues are expected to grow just 1.4 percent in 2017 and 2.4 percent in 2018. If school district state aid grew at the same rate, the current roughly $4 billion in state aid would increase by $56 million in 2018 and $97 million in 2019. The KPERS contribution for school districts is scheduled to increase $78.6 million in 2018 and $45.5 million in 2019. In additional, bond and interest state aid is expected to increase enough to use up any new revenues at those rates.

In other words, any increase in school district operating budgets would require continuing current transfers AND either increasing school spending more than other programs or raising taxes - unless state revenues begin growing much more rapidly. (Not addressed is how or when the state would be repay approximately $100 million in KPERS payments that were not paid last year.)

To put this all in perspective: if you, your children or grandchildren attended Kansas public schools between 1975 and 2008, Kansas taxpayers spent on average of 4.6 percent of total income on K-12 education, and increased spending an average of 1.8 percent more than inflation every year, allowing school districts to hire more teachers and support staff, offer more programs and services and keep salaries and benefits competitive.

However, since 2009 - the entire time that current eighth graders have been schools - the share of income going to K-12 education has been declining, and annual funding increases have averaged less than the rate of inflation. While education funding in most states has recovered since the Great Recession, Kansas lagged behind. Over this same period, indicators of student success - test scores, graduation rates, preparation for and participation in postsecondary education - have slipped for Kansas students.

The 2017 Legislature will have to decide whether to allow these trends to continue, or take steps to change course.

New Revenue Estimates Part 2: Tax revenue lagging behind income

The latest official consensus revenue estimates for the Kansas state general fund were released Nov. 10. Much of the attention has focused on a $345 million drop in expected revenues in the current year, as well projections for significant budget deficits in the next two years. KASB takes a more detailed look at how the new projections compare to longer term economic and budget trends in Kansas, and what it means for education funding.

The first part shows how Kansas personal income has consistently fallen below projections and trails the national average. The second part shows how state tax revenues have not kept up with income growth since the major income tax cuts of 2012 have decreased revenue to the state, resulting a lower percent of economic growth invested in education and public services. The third part shows how the failure of the Kansas economy to recover from the Great Recession and the failure of the tax cuts to stimulate the economy have squeezed state spending, including education.

Part 2: State tax revenue has not kept up with state personal income growth.

Part 1 of this post discussed how the Kansas economy, measured by Kansas personal income, has grown much more slowly since the Great Recession of 2008 than it has over the past 20 years, and has also lagged behind the rest of the United States. With income growth lagging, what has happened to state tax revenue?

Kansans pay two major state taxes: income taxes (both individual and corporate) and sales taxes. Most - but not all - of the revenue from these taxes goes into the state general fund (SGF). Almost all of the SGF comes from these two sources, with some additional revenue from cigarette, liquor, severance (oil and gas) taxes and insurance premiums making up about 5 percent.

The state general fund is typically about half of the state “all funds” budget. The all funds budget contains all other state revenues, most significantly, federal aid. Except for the general fund, the all funds budget revenues must be spent on specific purposes. These include all federal funds, revenues from gas taxes for highway construction, state university tuition and other income. In other words, the all funds budget includes not only taxes but fees and other revenues.

(Kansas lottery money does not go into the state general fund. It goes into something called the Economic Development Initiatives Fund and mostly spent for programs in the Department of Commerce and a few higher education and tourism programs. It does not support K-12 education and never has.)

The state general fund receives and spends general state taxes; the state all funds budget receives and spends restricted state taxes and fees and federal aid. Not included in either are local taxes raised and spent by cities, counties and, of course, school districts.

During the 1970’s, 1980’s and 1990’s, the state of Kansas took over more responsibility for many government functions, whether to provide more uniform and coordinated services, to reduce local property taxes, or both.

A good example was school finance. From mid-1970’s to the early 1990’s the School District Equalization Act used state aid to assist lower wealth districts and reduce tax rates, although the majority of school funding come from local property taxes. The 1992 school finance raised state income and sales taxes in order to increase education funding but also reduced local tax levies. For the first time, the state provided a majority a school funding.

(A more recent change concerns the 20 mill statewide school levy, which used to remain with local school districts. Starting in 2015, the 20 mill levy has been sent to the state, deposited in the “School District Finance Fund” - part of the all funds budget but not the state general fund - and then sent back to school districts as general state aid.)

Between 1975 and 1995, when the 1992 school finance law was fully implemented, state general fund expenditures, which are mostly financed by state sales and income taxes, grew from 4.2 percent to 5.8 percent of Kansas personal income. The all funds budget, which includes the state general fund, increased proportionately, from 9.3 percent in 1973, to 12.7 percent in 1995.

Between 1994 and 2012, state general fund spending averaged 5.3 percent of Kansas personal income, and all funds spending averaged 11.9 percent.

The growth in the state general and all funds budgets did not entirely results in a higher overall tax burden (compared to personal income). A report from the Tax Foundation shows that Kansas state and local tax budget as a percent of state personal income - which would include local taxes but not state federal aid and fees such as student tuition-  was 9.7 percent of personal income in 1977, 10.3 percent in 1995, and 9.5 percent in 2012 (the last year available).

In summary, state spending as a share of personal income has changed relatively little in the past 40 years, and much of the increase has been offset by lower local spending in education and other areas.

However, this relative stability began to change in 2012 when major state income tax cuts were passed. State general fund expenditures were 4.9 percent of personal income. Despite several major increases in sales and other excise taxes since then, state general expenditures have dropped to an estimated 4.5 percent of personal income in 2016.

The Legislatively  approved state general fund expenditures for the current year, 2017, would drop to 4.4 percent of personal income. But if the state has to cut spending by $349.1 million to avoid a deficit, as indicated by the Legislative Research Department, expenditures would drop to 4.3 percent of personal income - the lowest level since 1976.

All funds spending has also declined, from 11.8 percent in 2012 to an estimated 11.1 percent in 2017 - and the all funds spending is inflated by over $600 million from the statewide mill levy added in 2015.

These trends are expected to continue. The new CRE expects Kansas personal income to grow at 3.9 percent in both 2017 and 2018, but projects state general fund tax revenue to grow at just 1.4 percent in 2018 and 2.2 percent in 2019. In addition, the CRE expects inflation to increase by almost 2.0 percent each of the next two years, which means state tax revenue growth won’t keep up with inflation.

In  other words, not only is Kansas personal income growing at historically low rates, the current tax structure is generating a shrinking percentage of that income for state programs, such as education.

Why does this matter? It may sound good for the taxpayer to return state spending as a share of income to 1970’s levels. But are citizens willing to accept a 1970’s level of government services?

Consider some of the changes in education alone. Special education services really began in the 1970’s and costs have accelerated for children with high cost medical needs and autism. Preschool and all kindergarten have expanded to meet educational needs and parental demands. Graduation rates have increased and schools are expected to prepare far more students for college and technical programs as the share of jobs requiring advanced skills has doubled - which also has expanded the need for technical and community college and university programs.

Education at all levels is the state’s biggest expenditure, but social services are second. The cost of medical and related services today is far greater than in the 1970’s. Demands for public safety have expanded the pressure for correctional programs. Roads and infrastructure requirements have also increased.

An obvious reason for declining state revenues was the major reductions in income tax rates. However, Gov. Sam Brownback and some others have proposed shifting more of the tax burden to “consumption” taxes, which in Kansas is mainly the sales tax. But a growing share of sales transactions are exempt from tax, such as services, healthcare, and Internet sales. As a state expert explained when the November CRE was presented, people are spending more on things that are NOT taxed, and less on things that ARE taxed. As a result, the sales tax isn’t keeping up with economic growth.

Therefore, if it seems school funding and other public services are stretched more than ever and funding is not keeping up with costs and demands, it’s because it is true. Kansas has been experiencing historically low growth in its economy. At the same time, the state tax structure is providing a shrinking share of that growth for public services. For the next two years, tax revenue growth isn’t even expected to cover inflation, even with an uptick in the economy.

Monday, November 21, 2016

New revenue estimates reveal economic, tax and education funding issues (Part 1: historically weak economic growth)

The latest official consensus revenue estimates for the Kansas state general fund were released Nov. 10. Much of the attention has focused on a $345 million drop in expected revenues in the current year, as well projections for significant budget deficits in the next two years. KASB takes a more detailed look at how the new projections compare to longer term economic and budget trends in Kansas, and what it means for education funding.

The first part shows how Kansas personal income has consistently fallen below projections and trails the national average. The second part shows how state tax revenues have not kept up with income growth since the major income tax cuts of 2012 have decreased revenue to the state, resulting a lower percent of economic growth invested in education and public services. The third part shows how the failure of the Kansas economy to recover from the Great Recession and the failure of the tax cuts to stimulate the economy have squeezed state spending, including education.

Part I: Kansas economy continues to struggle.

A new consensus revenue estimate (CRE) is released each April and November by a group of state fiscal and tax experts and economists to predict tax and other revenues into the state general fund. A key factor in state revenue projection is growth in Kansas personal income, the total income of all residents in the state.

The U.S. Bureau of Economic Analysis defines personal income as “the income received by, or on behalf of, all persons from all sources: from participation as laborers in production, from owning a home or business, from the ownership of financial assets, and from government and business in the form of transfers. It includes income from domestic sources as well as the rest of world. It does not include realized or unrealized capital gains or losses.”

State personal income is important because it is the total income of the state population. Growth in personal income measures the economic well being of the state and how much people can spend, save and invest.

The CRE also includes estimates of inflation, measured by the Consumer Price Index. Subtracting annual changes in the CPI from changes in personal income shows to what extent the population is getting ahead of or falling behind the cost of living.

As has happened in almost every CRE in recent years, the estimated personal income growth for Kansas was lowered. For the current year (2016), the new estimate is 2.0 percent growth. The CRE also predicts that inflation will be 1.1 percent - so the “real” growth income after inflation is expected to be 0.9 one percent.

To put this in an historical context, the average annual growth in Kansas personal income since 1975 has been 5.7 percent. However, during much of that time, inflation has been higher than now. If adjusted for the average annual change in the consumer price index, average annual personal income growth has been 2.0 percent since 1975. This means the new estimate for 2016 is less than half the historical average for the past 40 years.

In fact, this low income growth has been the norm since the Great Recession began in 2008. Since then, average annual Kansas personal income growth has been 2.3 percent, or 1.0 percent if adjusted for inflation - slightly better than 2016 but far below the average since 1975.

The state’s slow economic growth has been even weaker following major state  income tax cuts in 2012. From 2009 to 2012, personal income grew 2.7 percent per year (1.0 percent after inflation); and from 2013 to 2016, growth was 1.9 percent per year (0.9 percent after inflation).

In addition, Kansas income growth has been noticeably worse than the U.S. average. U.S. personal income growth is now projected at 3.4 percent, compared to 2.0 percent in Kansas. Since 2008, U.S. income growth was 3.1 percent, compared to 1.8 percent in Kansas.

Between 2001 and 2008, between the post-911 recession and the Great Recession, Kansas personal income grew 5.0 percent - higher than the U.S. average of 4.7 percent.

In there any improvement on the horizon? The Bureau of Economic Analysis reports that Kansas personal income has risen more than the national average during the first two quarters of 2016, and the new CRE projects that Kansas personal income will increase 3.9 percent in both 2017 and 2018. However, it also projects that the U.S. average will increase at 4.1 percent and 4.0 percent.

In short, Kansas has experienced historically weak growth since the Great Recession, has recovered less than the nation as a whole; and the 2012 income tax cuts do not appear to have helped improve that trend.

Thursday, October 27, 2016

How do school district administrative costs compare to the private sector?

A recent report from the Harvard Business Review found that managers and administrators made up 17.6 percent of the U.S. workforce and received nearly 30 percent of total compensation, which works out to one manager and administrator for every 4.7 employees. The report suggested the U.S. economy could function more efficiently with one manager for over 10 employees.

Out of 68,372 school district positions last year, 4,096 were superintendents, assistant superintendents, principals, assistant principals, managers or directors. These management positions are 6.0 percent of the total school district workforce, or one manager for every 16.7 employees. In other words, school managers supervise almost four times as many employees as managers in the overall workforce.

According to the Bureau of Labor Statistics, the average pay for a chief executive officer in Kansas (both public and private organizations) last year was $185,850. The average salary for a Kansas school superintendent that year was $102,238. The average salary for superintendents in large districts (more than 5,000 students) last year was $174,921. (As in the private sector, executives of larger organizations tend to make substantially more.) KASB Report

Follow-up: Some say certain superintendents or administrators make $500,000 to $600,000 per year.

The highest salary reported to KASB for last year was $239,000. Reports featuring these larger amounts appear to be cases where superintendents received a one-time retention bonus based on longevity. School boards negotiate these contracts to reward administrators who stay in the district, using the same logic to retain talented managers as the private sector. KASB Report

It is also important to differentiate between salary and benefits. The amounts for board paid fringe benefits can vary based on what kinds of benefits were agreed upon in the superintendent’s contract. The average amount reported for board paid fringe benefits for superintendents last year was $10,615, but values ranged from less than $1,000 to over $100,000.  KASB Report

Have school districts hired more educators or administrators in recent years?

Out of nearly 8,000 school district positions added since 1998, 7,266 (82.8 percent) have been what a legislative study committee identified as “direct educators”; 1,171 (13.3 percent) have been positions not directly connected to instruction, such as bus drivers; and 341 (3.9 percent) have been in “core support,” which includes staff of central administrative offices (not necessarily superintendents and principals.) KASB report.

Since 1998, the number of superintendents has decreased by 27 (9.3 percent) and the number of principals dropped 76 (6.0 percent). The number of students, teachers and other support staff have increased, which means individual superintendents and principals are responsible for supervision and evaluation of more students and staff. KASB report.

Wednesday, October 26, 2016

What do school districts do with more (or less) money?

About 85 percent of school funding goes to school district salaries and benefits or to contracts for services that employ others receiving salaries and benefits. When operating funding increases, it generally goes to provide competitive salaries and benefits and to hire more people to provide additional services. KASB report.

From 2000 to 2005, total school employees increased by over 524 positions; from 2005 to 2019, employment increased an additional 6,415 following the Montoy funding, and as funding has fallen behind inflation since 2009, school district employment decreased by 1,719. KASB data tool.

Most of the rest of the funding increases in recent years have been for improving school district facilities for increased enrollment, expanded programs, energy efficiency, safety features and new technology.

Follow-up: Some say school districts have hired far more non-teachers than teachers in recent years. Is that true?

That is only true if not counting individuals who assist teachers in the classroom, but are not fully licensed teachers, such as special education paraprofessionals and regular classroom aides. Districts have hired more of these positions because licensed teachers may not be available, or because it is more efficient to hire these individuals to take over routine duties from regular teachers.

Tuesday, October 25, 2016

How has school funding changed compared to inflation and other cost indicators?

Since 2000, school funding increased somewhat more than inflation before the Supreme Court Montoy decision in 2005; increased significantly for four years as the Legislature responded to that decision which said school funding was too low; and has averaged less than inflation since the Great Recession in 2008-09.

From 2000 to 2005, total expenditures per pupil (using the full-time equivalent enrollment that does not count full-time kindergartners and district-funded preschoolers) increased an average of 2.0 percent more than inflation per year.

Looking only at general fund, special education state aid and local option budgets, spending per pupil increased just one-quarter of one percent more than inflation. (Total expenditures include building construction costs and payment of debt for construction bonds, as well as KPERS pension contributions, federal funds, food service and fees that are not included in general fund, special ed and LOB.)

From 2005 to 2009, following the Supreme Court order to increase K-12 funding after the Montoy decision, total funding increased an average of 4.5 percent per year more than inflation. General fund, special ed and LOB spending increased almost 5.0 percent more. During the period, the Legislature substantially increased funding for at-risk, bilingual and special education students, and increased local option budget authority.

From 2009 to 2016, total per pupil funding has decreased an average of 1.23 percent per year after adjusting for inflation. General fund, special ed and LOB funding decreased almost 2.0 percent more.  As a result, when adjusted for inflation to 2015 dollars, school funding is below 2009 levels, although unadjusted dollars are higher.

Follow-up: Some say because school funding is higher than inflation if you count increases in the 2000s, school districts should have enough money to operate.

School district costs are rising faster than inflation. From 2000 through 2015, the U.S. Employment Cost Index (a measure of changes of salaries and benefits for all public and private sector employees) increased an average of 0.5 percent more than inflation. From 2005 through 2015, the U.S. School Building Cost Index increased more than 2 percent more than inflation (this measure has only been available since 2005).

In addition, the needs of students have changed. There are far more low income students, who have less family support; bilingual students, who need special assistance in other languages; and students with severe physical and emotional needs, who need high cost specialized services.

Monday, October 24, 2016

Key Facts: How have Kansas school district spending choices changed?

School districts have directed more operating dollars to teaching and to programs helping students, and reduced the percentage of operating spending on almost everything else. The total dollars available for operating costs are limited by the state and federal government. Capital expenditures for buildings and payments for school construction bonds, which are approved by local voters, have been increases more than operating costs.

According to data from the Kansas State Department of Education, in 2015 school districts spent 61.4 percent of operating funds on direct instruction (teachers, special education paraprofessionals, classroom aides, coaches and classroom materials), up from 56.7 percent 15 years ago.

Districts spent 5.4 percent of operating funds on student support programs (such as counselors, nurses, attendance officers, social workers and school psychologists); up from 5.1 percent in 2000, and 4.0 percent on teacher support (libraries, media centers and professional development); the same percent as in 2000.

Spending on school administration (principals and school office personnel) dropped from 6.2 percent to 5.5 percent. Central administration costs are 5.1 percent of operating costs, down from 5.4 percent.

Operations and maintenance costs, which include utilities, insurance, custodial services and security, make up 9.6 percent of operating expenditures, down from 11.1 percent. Transportation costs for students to and from school and activities is 4.3 percent, down from 5.4 percent. Non-instructional spending, which is mostly food service programs (breakfast and lunch) is 4.7 percent, down from 6.1 percent.

Operating expenditures dropped from 91.7 percent of total expenditures to 88.0 percent. This is primarily because local voters have approved school construction bonds at a faster rate than the Legislature has approved increases in general operating aid and local option budgets (which are limited by the state). Local boards and voters cannot shift funding from building and equipment funds to operating funds.

Follow-up: Some say only about half of student spending actually “gets to the classroom.”

That’s only true if you accept the idea that “instruction” is the only thing that matters “in the classroom.” However, student learning in the classroom would not be possible without the other areas of the budget - including buildings and operating the classroom, supervising and supporting teachers, and transporting, feeding and providing support services for students.

Friday, October 21, 2016

New study finds Kansas funding falling behind highest achieving states

A new study of K-12 education funding in the United States finds that Kansas had the eighth largest cut in per pupil funding between 2008 and 2014.

Only 14 states increased funding over that time after adjusting for inflation, and all nine states that outperform Kansas on KASB’s State Education Report Card are in that group. This means the nine highest performing states in the nation are all among the 14 states that increased per pupil spending the most since the Great Recession began in 2008.

KASB’s report card ranks states on 15 indicators of student success, including national test scores, graduation rates and postsecondary preparation, participation and completion, for students and subgroups. Only nine states have a higher overall ranking than Kansas. KASB identifies these as “aspiration states” because they exceed Kansas on overall education outcomes.

All nine aspiration states spend more per pupil than Kansas, and all nine increased state and local funding more than inflation since 2008, according to the study from the Center for Budget and Policy Priorities, a national think tank.

The CBPP study found Kansas per pupil funding declined by 14.2 percent since 2008 after adjusting for inflation. According to the KASB data from the Kansas State Department of Education, unadjusted per pupil funding in Kansas is higher than 2008, but those increases have been less than the total increase in the consumer price index over that period.

KASB’s education report card contains similar data, but does not adjust for inflation. It found that the “aspiration states” increased total funding for pupil much more than Kansas since 2008.

The report card found that although Kansas continues to rank high in achievement, has not been improving as fast as most other states on education measures over the past decade. Although most Kansas educational outcomes have improved, they have not improved as much as many other states. Over the same period, although Kansas school funding has increased in dollar amounts, it has not increased as much as most other states.

The CBPP report confirms these school funding trends, showing that Kansas per pupil funding has fallen behind both inflation and most other states.

Because jobs and income levels are increasingly linked to education levels, state with the best educational outcomes are likely to have the best economic outcomes. The data shows that the highest achieving states are also among the states that have invested in most in education.

Thursday, October 20, 2016

Key Facts: What determines the level of school district cash reserves?

A new report from the Kansas State Department of Education shows school district ending balances for operating funds increased $50 million over last year. Why would district balances increase at a time many school leaders believe they are being underfunded? In other words, why put more money in the bank if you believe you aren’t able to spend enough on student programs, teacher salaries and other needs?

A closer look shows that school district cash reserves are reasonable for the state’s fiscal condition and other factors. Here are eight facts about district cash balances or reserves.

First, delayed state aid payments distort actual cash balances.

It’s important to recognize that the July 1 ending balance report is inflated every year because of delayed state aid payments. Since 2003, the state of Kansas has regularly delayed paying a portion of the final state aid installment of the fiscal year ending June 30 until some time in July.

By law, school districts are required to account for the money as having been received in June, but do not actually get the money until sometime in early July. That means the July 1 ending balance report is always inflated, usually by around $200 million. Last June (2015), the delay was $193 million.

This June (2016), with state tax revenues running far behind expectations, the delayed payment was increased to $260 million. Therefore, while the July 1 balances in district operating funds are about $50 million more than last year, the amount of money delayed (and not yet actually received by districts on July 1) is $75 million more than the previous year.

Second, some districts increased reserves in June because of fear that districts would not receive funding in July.

This June was a unique situation as Kansas school faced a possible shut-down order due to the Gannon school finance case. Without timely action by the Legislature, funding after July 1 could have been blocked by the Supreme Court. Districts may have delayed expenditures that normally fall in June or added to reserves to try to fund essential maintenance services during a shut-down.

Third, a big part of operating reserves really aren’t for regular operations.

Total school operating fund reserves, which exclude funds for capital outlay, bond payments and small revenues from certain local mill levies, are $920.9 million this year. However, that amount does include $242.3 million in funds restricted from general operating purposes.

These funds include $24.4 million in federal funds, which must be spent on specific purposes; $35.5 million in gifts and grants, which are usually restricted by the donor, such as for scholarships; $117.9 million for district insurance reserves; and $64 million for textbook and material purchases. Almost one-third of the $75 million increase was in federal funds, in part due to a change in the schedule of federal impact aid.

Fourth, cash balances are appropriate for the state’s financial climate.

When these restricted funds are subtracted, the remaining balance of about $680 million equals approximately 16 percent of school district operating budgets (general fund, local option budgets and special education state aid), or about two month’s operating costs, or about 1 percent more than last year.

The Legislature’s own efficiency report from last session cites the Government Finance Officers Association (GFOA) recommendation that school districts maintain a balance of between 10 percent and 15 percent for “low to moderate risk” conditions; between 15 percent and 25 percent for “moderate to high risk;” and greater than 25 percent for “high risk.” On average, Kansas school boards - who approved budgets that include cash reserves - appear to believe the Kansas fiscal situation is at least “moderately” risky, given years of revenue shortfalls, credit downgrades, budget reductions and disappearing ending balances.

Cash reserves were slightly over 10 percent in 2006; increased to about 18 percent during and following the Great Recession; and have been declining since 2012 - until this year.

Fifth, many school leaders believe the state fiscal situation is at a higher level of risk.

The additional $75 million in payments was delayed to avoid a state general fund deficit. That comes on top of nearly $100 million in delayed school district aid for the Kansas Public Employees Retirement System. The state general fund has essentially no projected reserves. Some districts added to their reserves in anticipation of possible state funding cuts during the current school year if state tax revenues continue to lag.

Sixth, school district bond ratings are based in part on district reserves.

District bond advisers encourage districts to keep balances at levels recommended for financial, rather than political, reasons, which saves local and state taxpayers interest costs.

Seventh, district balances are high in July to provide cash flow for the rest of the year.

School district revenues and expenditures do not happen in tandem. For example, school districts had almost $200 million in special education balances last July 1, but that dropped below $60 million by March as special education costs outpaced special education state aid.

Eighth, like school districts, the State of Kansas cannot operate with reserves.

Although the state of Kansas frequently ignores its own 7.5 percent ending balance requirement for the state general fund, it is forced to borrow from other state funds through “certificates of indebtedness” to manage its own cash flow needs. The combination of ending balance and internal borrowing since 2007 has consistently been around 15 percent or higher.

The state’s borrowing would need to be even higher if not for the $200 million or more delay in school district aid payments. In other words, school district reserves help the state manage its own cash flow.

As these reasons explain, school district cash balances are determined by a number of factors, but there are rational, fiscally sound reasons for the way districts have been managing them.