School Funding: The unintended consequence of LD 1

(from Maine Townsman, March 2005)
By Michael Starn, Editor

Perhaps the most apt way of describing LD 1 as it relates to K-12 education funding is “the law of unintended consequences.”

LD 1 establishes a four-year phase-in of education funding to get the State to providing 55% of the cost of K-12 according to the new funding model called Essential Programs and Services (EPS). The EPS school funding distribution model was put into law in 2004 when the Maine Legislature enacted LD 1924. LD 1 recognizes the EPS funding model for distributing state General Purpose Aid (GPA) for education, makes significant changes to the EPS model as it applies to special ed and transportation costs, and adds sections of law that establish a spending limitation process for school systems. Many of LD 1’s “unintended consequences” are directly related to legislative changes made last year in LD 1924.

Under LD 1, the legislature increases the state’s level of funding for K-12 education in FY 06 by $96 million. The state’s contribution to education funding will rise from $740 million in FY 05 to $836 million in FY 06.

Politics of School Funding

Even though the legislature has made a significant increase in the state’s share of education funding, LD 1 does not float everyone’s boat. While some school systems benefit significantly, others benefit modestly and some see no benefit at all under LD 1.

For example, Lewiston, Sanford and Windham will get over $3 million in additional state aid for education in FY 06. Bangor, Brunswick, Gorham and Westbrook will receive over $2 million of additional state funds. On the other side of the coin, the small Washington County communities of Jonesboro and Eastport will get slightly less in FY 06 than they received in FY 05, as will the Hancock County towns of Trenton and Franklin. To be fair, it should be noted that the legislature was sensitive to the idea of there being no “education aid losers” and the reductions that Jonesboro, Eastport, Trenton and Franklin will see are partially attributable to factors other than LD 1 changes.

The dramatic swings in GPA in FY 06 are mostly caused by the EPS school funding model contained in LD 1924. However, the legislature decided not to fully-fund the citizens’ initiative – Question 1A – enacted on June 8, 2004 and that was also a factor. Had the state met its 55% funding obligation in FY 06, many of the problems associated with implementing EPS would have diminished in magnitude.

MMA sees Essential Programs and Services as an improvement over the current school funding system, although we recognize that not everyone views it that way. The historical support for EPS is broad-based and includes MMA’s Legislative Policy Committee with various supporting votes as EPS was being developed.

Despite having long known about the costs associated with implementing EPS, legislators seemed shell-shocked when they discovered that LD 1 produced winners and losers in school funding.

When the first set of spreadsheets that showed how K-12 education funding would flow under LD 1 was presented to the Joint Select Committee for Property Tax Reform, there was a look of disbelief from the legislators serving on the committee. Most could not comprehend how the state could put 83 million more dollars into education funding and still have about 85 school systems (almost a third of them) that were going to get less state money than they received in the prior fiscal year.

It should not have been that surprising. In the early years of EPS development, then-chairman of the State Board of Education, Jim Rier (who is now on the DOE staff) told Education Committee members and other legislators that fully implementing the EPS system came with a $200 million pricetag — compared to the then-current state funding level for K-12 education.

Rier made an interesting observation at the time that may have made its way into the Administration’s political thinking around LD 1. Rier said that “total” education spending (state and all local) was almost equal to EPS spending under a fully implemented model. In a subjective mathematical calculation, state officials now say that under LD 1, the EPS goal of bringing up the under-EPS education spenders to the EPS-suggested level can be achieved while, at the same time, significant property tax relief can be given as all over-EPS spenders adjust their school budgets downward to the EPS-suggested level.

That seems to be unrealistic and wishful thinking, especially if one thinks this will all take place in FY 06. Of 287 school systems in Maine, over 200 are currently spending more than 100% EPS. Maine Revenue Services claims that Maine property taxpayers (on average) can expect to receive $328 in property tax relief this year under LD 1. MRS appears to base its property tax relief claim on the theory that the legislative body in all the school systems currently spending over 100% EPS will reduce their school budgets to the EPS level.

The question is now being asked, was EPS a new school funding model or a roundabout way for the state to control education costs?

Another issue that caught legislators with a haymaker is the negative funding impact that EPS has on small school systems. EPS is almost entirely student-based. If a school system has a declining student population, it is going to have a declining school budget recognized under the EPS funding model. Again, to be fair, there is a small school adjustment in the EPS formula. However, anyone who has looked at the distribution of state education aid under EPS in FY 06 will clearly see the correlation that exists between school size and the amount of state aid.

EPS vs. Foundation Allocation

Under the current “foundation allocation” system, distribution of school funds is primarily cost-driven for the so-called "program costs," and the amount of operational funds that gets distributed has been largely dependent on what the state felt it could afford to give schools. A comparison of EPS to the current system is analogous to comparing incremental budgeting to zero-based budgeting. Incremental budgeting uses the prior year’s spending and adds a percentage increase without much of an evaluation of existing programs. Zero-based budgeting builds a budget from the ground up attempting to match spending to need, without regard to prior expenditures. In the case of EPS, once that budget is determined, the costs are allocated based strictly on the number of students in the school system.

EPS is based on a modeling approach to school budgeting that attempts to identify “reasonable” K-12 education costs in order to achieve Learning Results. The Learning Results program was established in the mid-1990s by the Legislature as a statewide education goal whereby student achievement could be benchmarked to standards in eight subject areas. In theory, EPS and Learning Results would work in tandem so that every student in Maine’s public schools would be guaranteed a state/local financed, required curricula and thereby be given the opportunity to succeed academically, regardless of what public school system they were in.

The four major components of the EPS budgeting model are:

• A base per pupil amount that is calculated separately for each school unit based largely on modeled staffing levels;

• A weighted pupil count for certain categories of students determined to be more costly to educate (e.g., limited English, economically disadvantaged);

• Program cost components calculated separately from the base per pupil rate calculation, but also using student count in the factoring (e.g., special ed, transportation, voc ed, gifted and talented); and

• Targeted funds (e.g., technology costs, assessment costs, K-2 education investments).

For more information on how EPS works, see articles published in the May 2003 and March 2004 TOWNSMAN. Some changes that were made to the EPS model since those articles were written are covered in the last part of this article.

Cap on Mill Rate for Education

A key element of LD 1924 was the local mill rate cap for education. For legislators, it seemed like good politics to cap the amount of property taxes that could be used to fund the local share of education. This seemingly more equitable approach to school funding also has had unintended consequences.

Some of those unintended consequences are brought on by the mill rate cap, but other problems are the result of the legislature’s refusal to fully-fund and fully-implement the EPS model.

In FY 06, under LD 1, the state says it is paying 52.6 percent of the EPS-determined cost of education. In fact, that 52.6 percent claim is based on a formula where the state recognizes just 84% of EPS operating costs. The actual state share of education, if the state were to recognize all EPS costs, is 47%.

The publicized 8.26 mill rate cap on local spending for education under the EPS model is also a myth. That cap does not recognize the full EPS model either. In fact, the 8.26 mills applies only to the 84% of EPS that is recognized. The remaining 16% of EPS-determined education costs is borne by property taxpayers. Additionally, as stated above, over 200 school systems are currently spending over the 100% EPS model, and every dollar spent over 100% is a property tax dollar.

Funding just 84% of operational costs punishes many rural school systems where operational costs are the bulk of total education spending. During the transition to 100% EPS, program costs, except for special ed which is being phased-in, are being worked into the model at their full EPS projected amount. Had the Legislature fully-funded its 55% share of K-12 education and begun recognizing 100% of EPS costs in FY 06, the winner/loser problems would certainly have been less pronounced.

Another “unintended consequence” of the mill rate cap is its impact on local cost sharing arrangements in SADs and CSDs.

The mill rate cap overrides local cost sharing agreements. So, if under current law an SAD or CSD distributes its school costs to member-communities under a formula that is based entirely on valuation, there could be a major shift of burden caused by the state’s mill rate cap for education which bases each community’s share of the school district’s education costs on the number of students in that community.

In two SADs where this disruption was particularly severe, the Legislature chose to write an exemption from the education mill rate cap in LD 1. SAD 6, which includes Frye Island, and SAD 44, which includes Newry — home to Sunday River ski area, were exempted from the mill rate cap. There is a heavy concentration of out-of-state property owners in both Frye Island and Newry.

Department of Education officials are working with about 10 other SADs/CSDs that also have a significant shifting of cost within the school district brought on by the state’s new approach to determining how those costs will be shared. A four-year transition to the state mill rate cap is how the DOE-mediated agreements are being structured. The Legislature’s Education Committee gave DOE until March 31, 2005 to work out these agreements.

Still Tinkering With EPS Model

Those education expenditures known as program costs, such as special education and transportation, have been difficult to work into the EPS model, despite the efforts of the DOE staff and the legislature's Education Committee.

Even after enactment of LD 1, which integrated most of the program costs into the EPS model, the Education Committee continued to tinker with program cost identification under EPS.

How transportation costs are recognized under the EPS model has been particularly vexing. Under LD 1, transportation costs were built into the model by using miles of roads and number of students with a percentage of actual cost as a default. The EPS model takes a statewide average transportation expenditure per pupil and multiplies that by the lane miles that school buses cover. Under LD 1, the EPS model uses the higher of two costs: (1) students-to-road miles; or (2) 75% of the prior year’s actual transportation costs.

After getting some heat from rural school officials and rural legislators, the Education Committee has been considering bumping up the actual cost percentage to 90 percent. Moving the “actual cost” default up to 90 percent will cost the state about $1.1 million.

Special education has also been a conundrum for the DOE staff and the Education Committee. Finding a way to integrate special ed into EPS was not easy, particularly when the DOE staff was trying to comply with the citizen initiative directive (Question 1A) that required the state to pay 100% of special ed costs.

With changes incorporated in LD 1, special education costs have been put into the EPS model in the following way:

The concept goal of the EPS modeling of special ed is that each school unit is presumed to identify 15 percent of its student population as receiving special education services. An overall identification rate of 15 percent would put Maine pretty close to the national average for state special ed identification rates.

The legislature adopted a modeling procedure that went farther than an across the board 15 percent allowance. The special ed allocation model has three components: a base allocation, high identification allocation and extreme identification allocation.

Base Special Ed Allocation: The EPS model would provide communities with base funding for each special ed student, up to the presumed 15% level, at 220% of the EPS allocation for regular education students. Assume that EPS allocation is $6,000 for normal students. Each district would get $13,200 for 15% of its total student population as its base special ed allocation. If a school system is below the 15% allowance, that percentage of students is used in the EPS model.

High Identification Allocation: For any school system whose actual special ed population is greater than 15%, the EPS allocation for each student above 15% would be 138% of the regular allocation. Using $6,000 as the presumed regular allocation, the additional “high ID” allocation would be $8,280.

Extreme Case Allocation. For any individual special ed student who presents an extreme case requiring far higher than normal services the state will cover 100% of the actual costs. Extreme cases are those where the actual service costs are 300% of the EPS model special ed allocation (400% if it is an out-of-district case). Using the $13,200 base allocation example, an extreme case would be any special ed student whose cost to the school unit exceeds $39,600.

Another issue that state education officials have had problems deciding how to treat under EPS is school debt.

State supported debt has been worked into the EPS model; however, non-state supported school debt is outside the model.

Non-state-funded, major capital school construction projects fall into two categories. In the first, a community decides to go ahead with a school construction project without going through the state approval process. In the second, a community goes through the state approval process but elects to build a school that in some of its specifications goes beyond the design guidelines that the state recognizes as necessary.

In the first example, the entire school construction project is non-state-funded. In the second example, a portion of the total debt service of the project is non-state-funded.

Under LD 1, the debt service obligations related to non-state-funded major capital school construction do not fall within the school or municipal spending limit system. They are considered school expenditures, approved by the school’s legislative body under the terms of a specially-worded article, but are not classified as municipal or school spending for purposes of the spending limitations systems established under LD 1.

Because of the way LD 1 was constructed, the non-state-funded debt service appropriations are not included in the “additional local appropriations” article in the school budget adoption process. This is the article that requires a secret ballot vote if the total school budget is over 100% EPS.

It is not clear whether that result was intended or not, but the appropriations related to non-state-funded school construction debt are orphaned from both the municipal and school spending limitation system.