School payment shifts have been used as budget balancing tool for decades
By T.W. Budig – ECM Publishers
The current $2.4 billion K-12 school funding shift is the largest in state history, but it’s not the first.
Lawmakers, in response to ailing state budgets, have delayed school funding payments before.
In the early 1980s and in response to the budget crunch awaiting former Republican Gov. Tim Pawlenty in 2003, legislators have altered the usual 90/10 school funding payment schedule to provide the state with one-time cost savings.
The tactic is often labeled an accounting gimmick but can help balance the books in the state’s two-year budget cycle as, for example, 90 percent of state aid to schools is paid in one year and the remainder when lawmakers deem it has the funds available to pay the entire amount.
The 2012 school funding shift has been used as a political football this election season as Democrats accuse Republican lawmakers of voting for the shift and Republicans have accused Democratic Gov. Mark Dayton for proposing an even more dramatic shift and also his veto of a bill that would have paid a greater percentage of funds to school districts this year.
Dayton and the Republican-controlled Legislature crafted school funding payments shifts starting in 2010.
Because of the state budget surplus, the current payment shift was more of an issue and is currently at 64.3 to 35.7.
In terms of aid payments, this results in a shift of about $1.9 billion to the following budget year. The total owed to schools in the biennium is over $6 billion.
A property tax shift, which follows the same general philosophy as governing aid payment shifts, was also exacted by lawmakers. This allowed the state an additional one-time savings of about $562 million.
Added to the aid payment shift, this places the total funding shift at about $2.4 billion.
A proposal by Republicans in the 2012 session would have paid districts an additional $430 million from budget reserves. This would have sped up the payment shift by a few percentage points.
Democrats proposed closing perceived tax loopholes relating to off-shore corporate assets as a means of restoring the school funding shifts.
Democratic Gov. Mark Dayton suggested that using the budget reserves to pay back the shifts was irresponsible.
Shifts can force school district into short-term borrowing, but many districts currently are able to short-term borrow at interest rates under half of a percent.
Lawmakers increased K-12 funding by about 1 percent for 2012-13, or about $50 per student each year, and this should cover the costs of the borrowing, explained Tom Melcher, Minnesota Department of Education director of school finance.
Charter schools, because they’re not backed by state loan payback guarantees and can go out of business, are viewed as bigger credit risks by lenders and consequently forced to pay higher interest rates.
Minnesota has about 150 charter schools, schooling about 5 percent of student enrollment.
According to Ehlers and Associates Inc., a financial advisory company, the Rosemount-Apple Valley-Eagan school district in June borrowed $15 million at a 0.32 percent interest rate.
Lakeville, $9 million at about a 0.39 percent interest rate.
Fridley, $9.3 million at about 0.40 percent.
Big Lake, $2 million at about 0.5 percent.
Edina, $15 million at about a 0.35 percent interest rate.
History suggests it can it take years for the state to restore a school payment shift to its usual 90/10 schedule.
The 85/15 payment scheduled crafted by lawmakers in the early 1980s persisted for more than a decade until an infusion of $157 million restored the 90/10 payment schedule in 1997.
In 2003, an 83/17 payment schedule was put into place – the shift saved the state $462 million – with the payment schedule being tinkered with the subsequent years.
But that round of shifts ended in four years, with the 90/10 payment model restored in 2006.
School officials, in general, view school payment shifts as preferable to budget cuts, Melcher explained, but then interest rates are low.
School districts, for various reasons, borrow money in years even without payment shifts.
In 2008, school districts short-term borrowed about $197 million.
This fiscal year, school districts have borrowed about $792 million.
There is no set time by which the state must pay the second part of a school funding shift.
Letting shifts linger means one fewer budgeting tool in future years to tame unruly budgets – there’s a point where you realistically can’t shift more payments, Melcher explained.
Though interest rates for school districts are currently low, this does not mean they’ll remain so.
Because school payment shifts involve one-time dollars, they do not correct underlying structural budget problems, Melcher noted.
In terms of overall school funding, 40 years ago Minnesota was “significantly above” the national average, Melcher said.
Starting about 25 years ago, Minnesota investments in schools began to reflect the national average, he noted.
Currently, Wisconsin funds its school more than Minnesota.
Minnesota funds its schools at a higher level than Iowa and South Dakota, Melcher said.
North Dakota funds its schools at a higher rate than Minnesota.
T.W. Budig is the Capitol reporter for ECM Publishers. He can be reached at firstname.lastname@example.org.