South Dakota Schools Brace for Freeze on State Aid

December 14, 2009

For 15 years, the formula used to calculate the yearly boost in per-pupil funding in South Dakota has hummed along on a sort of autopilot.

While critics of the formula have argued that it never has generated enough money for K-12 education in the state, it has served at least as a proven, reliable source of annual increases in state aid to school districts.

Until now.

With the state staring at a budget deficit of $32 million for fiscal year 2011, Gov. Mike Rounds will ask lawmakers in the legislative session that begins in January to change the formula in a way that includes no increase in state aid in next year’s budget.

The formula that has been seemingly sacrosanct for more than a decade needs only simple majorities in the House and Senate to be changed. If lawmakers agree to the plan, it would be the first time school districts haven’t received an increase since the mid-1990s when the formula became state law.

With the nation mired in a two-year economic slump, it is a proposal that hasn’t taken school administrators by total surprise. But that doesn’t mean it won’t be a difficult challenge for districts to deal with if it does pass.

The freeze in state aid as well as Rounds’ proposal to maintain current levies on property taxes would save the state more than $8 million in the 2011 fiscal year, part of the governor’s plan to balance the budget.

That loss of state funding translates to $57.64 per student for South Dakota’s public schools. But officials point out that loss isn’t limited to one year. It will compound in future years.

"If you miss a year with inflationary increases, essentially that $57 per student is lost forever," said Brian Aust, director of communications for the Associated School Boards of South Dakota.

Another fear among some school administrators is that if lawmakers change the formula this year by zeroing out increases, it will be easier to do it again in the future, with prospects for negative funding also possible.

"I’m greatly concerned for the future where all this is going," said Peter Wharton, superintendent of Rapid City Area Schools.

The formula is complex in that it includes pieces for small school districts, growing districts and other special calculations. But the base per-pupil funding revolves around annual increases equal to the lesser of 3 percent or the rate of inflation.

State Sen. Dave Knudson knows the formula well. He was its architect while serving as chief of staff for former Gov. Bill Janklow.

The Janklow administration realized the old state-aid formula was a "real wreck," Knudson said, because it was expenditure driven. The more a district spent, the more the state sent in aid. That led to disproportionate amounts of aid throughout the state, and officials wanted aid to be equal for students no matter where in the state they lived.

At the same time, voters in 1994 almost passed a statewide measure that would have prohibited property taxes from being used by school districts. That alarmed officials, and Janklow vowed to cut property taxes by 30 percent. Officials linked property tax reduction with the new state-aid formula.

Knudson plan: Link school aid, general fund

Knudson, the majority leader in the Senate, acknowledges the formula hasn’t generated enough money for school districts, so in the past three legislative sessions, he’s introduced proposals to tweak it. He wants funding to be the larger of 4 percent or the rate of inflation, but the percentage of school aid could not be larger than the rate of growth in state revenues.

The change, Knudson said, would "tie the fortunes" of school funding to revenue growth in the state general fund. It has not won legislative approval, but Knudson said he will introduce the measure again in the next session, with an effective date of July 1, 2011.

Last week, lawmakers still were considering the governor’s proposal to zero out state aid.

"It’s too early to tell," Knudson said of the outcome. "If we end up increasing the state’s spending by $50 million next year, which is what the governor’s budget does, I think people will be hard pressed to do that and zero out spending for schools."

Fearing an even worse deficit in 2012, some lawmakers want to make more aggressive cuts than those proposed by the governor, getting a head start on a deficit that is projected at more than $100 million. If more cuts are made, lawmakers probably would keep the increase for school aid at zero.

"We have a looming $100 million-plus deficit, and the governor doesn’t really move anywhere to tackle that," Knudson said.

Tax struct ure, failure to tap reserves criticized

District superintendents will be watching closely.

In Rapid City, officials weren’t surprised by the governor’s proposal, Wharton said. They’ve passed a budget that anticipated no increase. It’s a loss of about $700,000 for the district and it means no raises for employees next year.

Wharton said he understands that the state is in a difficult position: Lawmakers can’t spend more money when they don’t have it. But to him, the situation is emblematic of the state’s tax structure and the notion that there are too many small districts.

"At some point, somebody’s going to have to stand up and talk about responsible taxation."

Jim Holbeck, a former lawmaker who now serves as superintendent of the Harrisburg School District, said his district stands to lose almost $127,000 under Rounds’ plan. As a growing district, Harrisburg already isn’t fond of the state formula because there’s a lag in funding for children who enroll in the district after the annual count days that determine how much money districts get in state aid.

Harrisburg and other school districts will work through the tough economy, Holbeck said. But he also is worried. For one, he hopes the state doesn’t violate federal government rules for manipulating its funding formula. And two, he wonders why the state isn’t tapping the reserve funds that it has built over the years to give schools the inflationary increase of 1.2 percent.

The state has about $107 million in two major reserve funds, and Rounds wants to spend $31.8 million of that to balance next year’s budget.

"All through the good years, we heard that we’re saving up for a rainy day," Holbeck said. "It’s pouring out right now. I’m 51 years old and I’ve never seen a r ainier day."

Holbeck likes Knudson’s proposal of tying state funding to growth in the state’s general fund.

"We’ve got to take care of schools in good years if we’re going to sacrifice in bad years," he said.

In Mitchell, money lost equals three teachers

For Mitchell Public Schools, the loss of a 1.2 percent increase translates to about $140,000, Superintendent Joseph Graves said. That’s enough money to pay the salaries and benefits of almost three teachers.

Last year the district spent $14.2 million in general fund revenues. The district has $3.7 million in general fund reserves, but Graves said he would look for cuts or efficiencies before dipping into reserves.

School districts, he added, are much like the state when it comes to reserve funds. You don’t want to use them unless absolutely necessary, and then only for the short term. Graves said he’s sympathetic to the state’s plight when it comes to using reserves to prop up a budget.

"Once you start to use your reserves, the following year you tend to need more of your reserves to balance your budget," Graves said. "Fairly quickly, you exhaust your reserves."

Mitchell has another option to raise money that some districts don’t. Several years ago, voters approved a permanent opt out. That enabled the district to access up to $700,000 a year. The district hasn’t collected opt-out dollars in the past three fiscal years, Graves said, and it would be a last resort for next year.