School Aid Shifts Offer a Shortsighted Solution

By Tyler Hanson, Undergraduate Research Fellow, July 8, 2011 at 3:30 pm

With the state government now shut down after weeks of fruitless negotiations, the need to bridge the budget divide between Governor Dayton and conservative legislators has increased. To help solve the $5 billion budget shortfall, they have already agreed to continue shifts to school funding that were enacted in 2009 and more shifts have been put on the table. But how exactly do these shifts work and how do they save money?

When the state delays education aid payments, it shifts some of the money that schools are expected to receive from one year to the next. Typically the state has shifted at a 90%/10% ratio, meaning that for a given year schools will receive 90% of their funds that year and 10% of their funds the next year. Splitting school funds this way is actually a good idea, since it allows the final 10% of payments to reflect more accurate enrollment data.

In 2009, in order to balance the budget for the 2010-2011 biennium, the state changed this 90%/10% split to a 70%/30% one. This saved money because during the 2010 fiscal year the state paid out 10% of 2009 aid but only 70% of 2010 aid, so it saved 20% on 2010’s education bill of approximately $7 billion. The next fiscal year, the state paid out 30% of 2010 aid and 70% of 2011 aid, so spending levels were back to normal.

As the above example shows, shifting aid payments only creates savings in one year. In all subsequent years, education entitlements are paid in full. Eventually, if the state wants to return to a more sensible 90%/10% split, it will have to pay extra money to make up for the savings in the 2010 fiscal year. This was the original plan for the 2012-2013 biennium; in fiscal year 2012 the state would pay out 30% of 2011 aid and 90% of 2012 aid, totaling an additional $1.4 billion over normal spending. Governor Dayton and the legislature agreed to continue with the 70%/30% split instead, keeping entitlement spending at the normal amount and saving $1.4 billion.

With budget negotiations in gridlock, a new proposal was brought forward that would enact a 60%/40% split to aid payments. This would create 10% savings in the fiscal year 2012, as the state would pay out 30% of 2011 aid but only 60% of 2012 aid. This would save $700 million, but Governor Dayton has requested that further shifts be accompanied by a $50 increase in the per-pupil funding formula. This would increase total aid payments by $164 million for the biennium. Overall, this would cost the state about $131 million (because of the shift), bringing total savings to about $569 million.

Dramatic shifts like the current 70%/30% and proposed 60%/40% ratios cause significant problems for school districts because they are forced to borrow in order to have sufficient funds. The state eventually pays out 100% of entitlements, but having to pay interest drives costs for schools up. That’s one reason why the governor is insisting on an overall funding increase. These additional funds would be more than enough to cover interest payments, but the money would be better spent elsewhere.

In addition, further shifts to school aid do nothing to address the budget in the long term. The state will eventually need to revert to the 90%/10% ratio; otherwise, schools will have to borrow money year after year. If the state adopts a 60%/40% ratio, the costs of changing back in the 2014-2015 biennium would be upwards of $2 billion. If the state wants to avoid shutting down every two years, it would be wise to consider sustainable sources of revenue that will help reduce future deficits in addition to the current one.