Tuesday, July 24, 2018

State Board proposal would adjust Legislature's school funding for inflation

The Kansas Supreme Court’s latest Gannon decision said the Legislature’s most recent plan to provide constitutional school finance is acceptable if funding is added for future inflation. In July, the Kansas State Board of Education laid out a plan to do that.

State attorneys told the Court the 2018 Legislature’s plan was based on the amount that should have been appropriated in 2010 – after action to address the earlier Montoy case but before budget cuts caused by the national recession. This method, called the “Montoy safe harbor,” adjusted for inflation between 2010 and 2017 and showed actual school funding was $763 million short in 2017.

The state argued increased funding approved by the 2017 and 2018 legislatures would close that gap. Much of the additional funding would be phased in through 2023.

The Supreme Court basically accepted that approach; however, the court said its approval was conditioned on the Legislature adjusting for inflationary increases as that funding level is phased in. In developing its budget request for the next state budget cycle, the State Board voted to recommend additional state aid increases over the next four years to comply with the court, adding $90 million per year to funding already approved. (The State Board is also requesting other increases as well).

The following chart shows how the State Board’s request would close the gap between the Legislature’s action so far and an inflation-adjusted “safe harbor” calculation. The solid orange line is the state’s estimate of funding required to maintain the constitutional level approved in the Montoy case, adjusted for inflation through 2017. The solid blue line is the actual level of general fund support. The dotted blue line shows funding approved by the Legislature to close the gap in 2023. However, if the top line is adjusted for 1.44 percent inflation, the gap does not close. The red line indicates the State Board’s proposal for additional funding to close the gap in 2013.

State revenues and budget. School funding already approved for 2020 through 2023 will require more than $100 million per year. The State Board’s request would increase that amount to approximately $200 million per year. Total state general fund revenue for the fiscal year just ended, 2017-18, was just under $7.3 billion. To add $200 million in state funding would require revenue growth of over 2.7 percent. However, there are expected to be many other funding demands on the state, including human service caseloads, increased funding for KPERS contribution, restoring transportation and higher education.

Since 1994, K-12 funding has been about 50 percent of the state general fund budget. To keep K-12 funding at that percentage of the SGF, state revenues will have to increase by double the rate of education funding, or about 5.5 percent. That is much faster than revenue growth in most recent years. However, tax revenues were over $300 million higher than projected in April. The next official revenue forecast, which will cover the rest of the current Fiscal Year as well as FY 2019-20 and 2020-21, will be released in November.

How was the “safe harbor” and inflation adjustment calculated?

Column 2 shows actual school district general fund amounts (not including special education) from 2009 to 2017, the approved general fund levels for 2018 (last school year); the amount of additional base and special education aid approved for 2019 (upcoming school year), and the estimated general fund from 2020 through 2023 under base state aid increases approved in 2018 SB 61.

Column 3 shows the annual change in the Consumer Price Index-Midwest from 2011 to 2017, as noted in the court's Gannon VI decision, based on a memo from the Kansas Legislative Research Department, and a projected 1.44 percent inflation rate from 2018 through 2023. There is no actual CPI-M data past 2017 (the current year, 2018, is only about half over). The court's concern is that no inflation adjustment was made in the state's approved funding for 2018 and 2019, or the for the "phase in" of the plan from 2020 to 2023. The court seemed to suggest a 1.44 percent adjustment might be applied in future years. The State Board used this percent in developing its budget request.

Column 4 is taken from a Kansas Legislative Research Department memo cited by the court, which showed what the general fund total would have been in 2010 under the Montoy decision, which was presumed to be constitutionally suitable. That level is then adjusted by the CPI-M through 2017 to the level of $3.44 billion. The state argued this is the target it needs to reach under the "safe harbor" concept. The state did not discuss any change in this amount for 2018 to 2023.

Note that in 2023, the estimated level of general fund support is $3.38 billion, compared to the 2017 safe harbor amount of $3.44 billion, which indicates that Legislature’s five-year plan would be about $56 million short even without adjusting for inflation. The court may have accepted this because of other funding the Legislature said it was providing, including increases in special education, early childhood and other programs.

Column 5 shows an increase in the “safe harbor” level based on 1.44 percent inflationary adjustment from 2018 through 2023, the period of the Legislature’s phase-in. The safe harbor amount increases from $3.44 billion in 2017 to $3.74 billion in 20023.

Column 6 shows the difference between the actual funding from 2010 through 2017 and the Legislature’s safe harbor calculation for the same years, and between the estimated amounts under Legislative action and the inflation-adjusted safe harbor from 2018 through 2023. The shortfall increased from $533 million in 2010 to $763 million in 2017. It began dropping in 2018 with legislative action, but after adding 1.44 percent for inflation annually from 2018 through 2023, the gap remains $364 million in 2023. That was the Supreme Court’s major concern.

Column 7 shows the amount proposed by the State Board to add about $90 million more each year from 2020 through 2023. These increases are cumulative, so by 2023, the additional funding requested by the board is $364 million.

Column 8 shows the estimated foundation amount for 2020 through 2023 if the State Board’s request is added, under which the state aid level finally matches the safe harbor level, adjusted for inflation, in 2023. That means state foundation aid would have been below the state’s proposed calculation of adequate funding for 14 years – an entire class of students from kindergarten through grade 12.

There are three big issues with the board’s proposal to comply with Supreme Court’s decision.

Inflation rate. The State Board used a 1.44 percent inflation rate for a phase-in through 2023, which the court observed is “the average of all the years of inflation shown in the State’s chart from its April 23 memo (SY 2010-11 through SY 2016-17).” However, the actual rate could be higher (as many observers expect), as well as lower. Currently, inflation is running higher than 1.44 percent.  The April Consensus Revenue Estimate projected the national consumer price index to increase more than 2 percent in 2018 and 2019. (The national CPI tends to increase slightly faster than the Midwest CPI.)
Would the court accept an inflation adjustment for 2018 through 2023 based in the average inflation rate from 2011 through 2017?

What funding “counts” toward the safe harbor? The “safe harbor” calculation was based on the total of school district general fund budgets, essentially the base or foundational state aid per pupil multiplied by actual enrollment and student weightings under the school finance formula. However, in determining the amount of additional funding to meet the inflation-adjusted safe harbor, the State Board appears to have included $44.4 million in additional special education aid in 2019. For 2020 through 2023, the board only considered the increase in base state aid which the Legislature approved and proposed additional base aid of approximately $90 million per year.

It is not clear if the Supreme Court would expect all additional funding to meet inflation to be base state aid, or whether it would consider other funding, such as special education, pre-school funding, transportation weighting changes, mental health programs, local option budget changes and even KPERS funding attributable to increased aid.

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