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Education Budget Shifts: Buying Time to Get By

June 15, 2009 By Laura Huiras, Undergraduate Research Fellow

Now is the time to buy time.

In keeping with his "no new taxes" pledge to conservative groups, Gov. Tim Pawlenty plans to buy time during the state's next budget cycle by shifting school district state aid payments from one year to the next. This financial slight-of-hand forces the job of balancing the budget off the state and on school districts by requiring them to fund the shift by tapping into reserves or borrowing money, and, subsequently, paying off interest.

Pawlenty's potential fund shift comes after the passage of a bill which freezes education funds at $13.7 billion over the next two years. Since this doesn't account for inflation, the freeze amounts to a budget cut for schools.

Here's how the shift works: Pawlenty has proposed delaying more than $1 billion in aid to school districts from the FY 2010-11 biennium to the FY 2012-13 biennium budget. Districts then use their cash reserves or use short-term borrowing to pay bills usually funded by state aid. This forces schools to take on additional debt to pay off interest on the short term loans.

In the past, schools have received "metered" payments, receiving 90 percent of state aid in the current fiscal year and 10 percent the following fiscal year. This is known as the 90/10 shift. However, more draconian shifts were discussed during the 2009 legislative session. Schools are in a state of suspense until Pawlenty reveals if the 90/10 shift will change.

Some districts have crunched potential numbers. Scott Croonquist, executive director of the Association of Metropolitan School Districts, anticipates schools will lose an average of thirty dollars per student in revenue if the funding shift is increased to 80/20. This number also accounts for lost interest income from reduction in reserves. If the funding shift is larger than the governor's original proposal of $1.3 billion, the loss in revenue per pupil will increase. 

Hutchinson Public Schools considers itself one of the lucky ones. "We are fortunate because we don't have to borrow money for this year," said Donna Luhring, the Director of Business and Finance and President of the Minnesota Association of Business Officials. Hutchinson passed a levy referendum five years ago that provides them with this relative financial stability. While Luhring is optimistic about the district's finances for the next two years, depending on metering and potential tax shifts, it could see more financial difficulties because of potential borrowing costs and the budget freeze that fails to adjust for inflation.

For New Ulm Schools, the financial impact for each percentage change would be approximately $150,000 for the school district. If funds are shifted more drastically, such as 73/27, the district would see an impact of more than $2 million. "We are borderline in cash flow to manage that," says New Ulm Superintendent Harold Remme.

Both Hutchinson and New Ulm have to deal with the unknown until Pawlenty makes his shifts known. While the numbers are currently up in the air, both schools have to deal with unknown enrollment numbers that also affect the funding they receive and the necessary staffing. "We never know what enrollment is until the first day of school," Remme said.

Declining enrollment, especially in rural areas, means less money for schools since state aid payments are funded on a per-pupil basis. If the cash flow is inadequate for a district's costs, short term borrowing is the next step. While the Department of Education does not need to approve specific loan amounts, it must give a district permission to borrow.

K-12 education funding shifts could also rely on property tax shifts. This allows a district to recognize current year refunds that have come in to fund the following year in property taxes. Since property taxes are collected on April 15th of each year, school districts usually receive funds shortly afterwards. According the Barb Anderson, the Assistant Director for Finance and Budgeting for Roseville Area Schools, if there is a shift in property taxes that allows school districts to receive the revenue sooner, the state can withhold state aid longer because funds are received on a cash flow basis.

While the magnitude of the shift has yet to be decided and the unknown is still lingering, one thing is for certain: districts will have to struggle with flat funding and rising costs. Paying the bills will become more difficult. Cuts will have to be made. The extent of the funding shifts will determine the extent of a district's cash flow and need for borrowing. For now, education funding shifts will buy time, but the costs will hit home for Minnesota school districts and its students in the near future.
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