Sunday, February 22, 2009

WI School Funding 101

Now that the guv's budget plan has been released, we keep hearing rumors that the QEO might be lifted, or that revenue caps might be eliminated. One thing is certain is that Gov. Doyle has spoken strongly of a commitment to education. [Has anyone ever heard of a Governor being OPPOSED to education?] The discussion of the QEO and revenue caps is always an interesting one because the average Joe (and a many school board members, we think) doesn't really understand how schools are funded. And with school funding, the devil is in the details.

Fair warning: We don't profess to be experts, but we'd at least like to take a crack at summarizing the key issues and then point out some places where you can obtain more detail. This is designed to be a view from about 20,000 feet up, not a doctoral dissertation on the subject. Phil Frei is correct when he says that there's a ton of detail involved in these calculations. We run the risk of over-simplifying by limiting the discussion to major points vs. the minutiae. But we think the risk is worth taking the plunge.

2/3 Funding
Basic premise is that the state funds 2/3 of education costs. In reality, typically amounts to a maximum of about 55% because the “2/3” includes the “School Levy Credit”
which is paid directly to property owners. In Sun Prairie, the property tax levy accounts for about 52% of the "General Fund", which actually funds tthe education process itself. That means that we obtain only about 48% of the annual education costs in the form of "equalized aid" from the state.

The 2008-09 budget for Sun Prairie is a whopping $111.3M--but about $32M is for current construction projects . Of that total, thye main piece, $65.2M, is for the "General" fund, and about $30M of that comes from equalized aid from the state. In addition to the $65M, two other principal components are: Debt Service (pay for buildings)-$8.7M, Food Service- $2.3M

Districts with lower than average property values actually can receive >2/3, while “property-rich” districts receive less. "Property rich" districts, of which Sun Prairie is one, will typically receive what is termed "negative" tertiary aid.

Revenue Limits
Designed to control property taxes by limiting the amount of the tax levied by a school district. Further broken down into primary (first $1000/pupil funding), secondary (funding per pupil up to ~$8,300, and tertiary aids. Property rich districts (those with property value per pupil in excess of state average) actually lose funding -- known as "negative"tertiary aid. Sun Prairie is a "negative tertiary aid" district.

The biggest factor in determining the revenue limit is the number of students enrolled (as with everything else, there is a complicated calculation to obtain this number) and the number uses a 3-year average. Therefore, if a district adds 400 new students in a year (like with the 4K program), the revenue limit will only be increased based on 1/3 of that in the first year.

You can see why districts with declining enrollment are in serious financial trouble. Declining enrollment means a reduction in the revenue cap, and students don't decline in a manner that an equivalent number of teacher positions could be cut. This frequently leads districts to increase class sizes. Sun Prairie, of course continues to enjoy a bit of a luxury with steadily increasing enrollment. At some point, however, that enrollment will level off and eventually may even decline.

A school district can exceed revenue limits temporarily or permanently through referendum.
Sun Prairie had a referendum to exceed the revenue cap for 4-5 years when Horizon was opened. The recent pool referendum will allow Sun Prairie to indefinitely exceed revenue limit by about $300,000 annually to cover pool operation costs. Establishes maximum per pupil revenue ($9,835 for 2008-09). This amount increases about 2.1-2.3% annually ( up $274.68 for 08-09). The revenue limit for Sun Prairie for 2008-09

QEO Qualified Economic Offer)
Established w/1993-95 biennial budget. If school districts offer a combined package annual increase of 3.8% (2.1% salary; 1.7% benefits), teachers union must accept without arbitration. The QEO was conceptually designed to control salaries and benefits—the largest part (~80-83%) of a school district’s budget.

You've likely heard people say school funding is a "3-legged stool" and that lifting the QEO or lifting Revenue Caps would effectively cut one of the legs out from under the stool causing the whole system to collapse. Another term frequently heard is "structural deficit" caused by the QEO. The structural deficit is a term used to describe the increasing squeeze that occurs when the revenue limit is only increased by about 2.0 to 2.5% annually, while the QEO provision calls for a minimum increase of 3.8% to the largest portion of a school district's budget.

The graphic at right shows a fictional school district with a $50M revenue limit and salaries and benefits ("fringes" account for 80% ($40M) of the budget. This scenario shows what happens if NO CHANGE occurs to the system (NO change in the number of students, no referenda to exceed the cap). In this example, 15 years down the line, salaries and benefits eat up the entire allowable revenue limit. That means that long before 15 years, the district would be forced to take drastic measures such as a referendum to permanently exceed the revenue cap, shut down, or merge with another district. Now certainly there are other factors involved, and no district has a 15 year steady number of students.

So...have revenue limits and the QEO helped keep property taxes down? Sure. Is change needed? Most definitely. The problem at this point is that neither the QEO nor revenue limits can simply be eliminated without fear of another property tax explosion. It's a complicated problem that needs some serious thought before tinkering with it. School funding reform is needed, but we have to get it right. Trial and error is not going to work.

A few excellent resources on the subject:

School Funding position paper April 2007

School Funding FAQ

WEAC- What is the QEO?

Alliance For Strong Mequon-Thiensville Schools- School funding FAQ

Wisconsin Legislator Briefing Book 2009-10 (Chapter D - Education, Elementary-Secondary )

Wisconsin Legislative Fiscal Bureau - January, 2009 --Dispute Resolution Procedures
for Municipal Employees