State Board proposal would adjust Legislature’s school funding for inflation

State Board proposal would adjust Legislature’s school funding for inflation

The Kansas Supreme Court’s latest Gannon decision
said the Legislature’s most recent plan to provide constitutional school
finance is acceptable if funding is added for future inflation. In July, the Kansas
State Board of Education laid out a plan to do that.
State attorneys told the Court the 2018 Legislature’s plan was
based on the amount that should have been appropriated in 2010 – after action
to address the earlier Montoy case but before budget cuts caused by the
national recession. This method, called the “Montoy safe harbor,” adjusted for
inflation between 2010 and 2017 and showed actual school funding was $763
million short in 2017.
The state argued increased funding approved by the 2017 and
2018 legislatures would close that gap. Much of the additional funding would be
phased in through 2023.
The Supreme Court basically accepted that approach; however,
the court said its approval was conditioned on the Legislature adjusting for
inflationary increases as that funding level is phased in. In developing its
budget request for the next state budget cycle, the State Board voted to
recommend additional state aid increases over the next four years to comply
with the court, adding $90 million per year to funding already approved. (The
State Board is also requesting other increases as well).
The following chart shows how the State Board’s request
would close the gap between the Legislature’s action so far and an
inflation-adjusted “safe harbor” calculation. The solid orange line is the
state’s estimate of funding required to maintain the constitutional level
approved in the Montoy case, adjusted for inflation through 2017. The
solid blue line is the actual level of general fund support. The dotted blue
line shows funding approved by the Legislature to close the gap in 2023.
However, if the top line is adjusted for 1.44 percent inflation, the gap does
not close. The red line indicates the State Board’s proposal for additional
funding to close the gap in 2013.

State revenues and budget. School funding already
approved for 2020 through 2023 will require more than $100 million per year.
The State Board’s request would increase that amount to approximately $200
million per year. Total state general fund revenue for the fiscal year just
ended, 2017-18, was just under $7.3 billion. To add $200 million in state
funding would require revenue growth of over 2.7 percent. However, there are
expected to be many other funding demands on the state, including human service
caseloads, increased funding for KPERS contribution, restoring transportation
and higher education.
Since 1994, K-12 funding has been about 50 percent of the
state general fund budget. To keep K-12 funding at that percentage of the SGF,
state revenues will have to increase by double the rate of education funding,
or about 5.5 percent. That is much faster than revenue growth in most recent
years. However, tax revenues were over $300 million higher than projected in
April. The next official revenue forecast, which will cover the rest of the
current Fiscal Year as well as FY 2019-20 and 2020-21, will be released in
November.
How was the “safe
harbor” and inflation adjustment calculated?

Column 2 shows actual school district general fund amounts
(not including special education) from 2009 to 2017, the approved general fund
levels for 2018 (last school year); the amount of additional base and special
education aid approved for 2019 (upcoming school year), and the estimated
general fund from 2020 through 2023 under base state aid increases approved in 2018
SB 61.
Column 3 shows the annual change in the Consumer Price
Index-Midwest from 2011 to 2017, as noted in the court’s Gannon VI decision,
based on a memo from the Kansas Legislative Research Department, and a
projected 1.44 percent inflation rate from 2018 through 2023. There is no
actual CPI-M data past 2017 (the current year, 2018, is only about half over).
The court’s concern is that no inflation adjustment was made in the state’s approved
funding for 2018 and 2019, or the for the “phase in” of the plan from
2020 to 2023. The court seemed to suggest a 1.44 percent adjustment might be
applied in future years. The State Board used this percent in developing its
budget request.
Column 4 is taken from a Kansas Legislative Research
Department memo cited by the court, which showed what the general fund total
would have been in 2010 under the Montoy decision, which was presumed to
be constitutionally suitable. That level is then adjusted by the CPI-M through
2017 to the level of $3.44 billion. The state argued this is the target it
needs to reach under the “safe harbor” concept. The state did not
discuss any change in this amount for 2018 to 2023.
Note that in 2023, the estimated level of general fund
support is $3.38 billion, compared to the 2017 safe harbor amount of $3.44
billion, which indicates that Legislature’s five-year plan would be about $56
million short even without adjusting for inflation. The court may have accepted
this because of other funding the Legislature said it was providing, including
increases in special education, early childhood and other programs.
Column 5 shows an increase in the “safe harbor” level based
on 1.44 percent inflationary adjustment from 2018 through 2023, the period of
the Legislature’s phase-in. The safe harbor amount increases from $3.44 billion
in 2017 to $3.74 billion in 20023.
Column 6 shows the difference between the actual funding
from 2010 through 2017 and the Legislature’s safe harbor calculation for the
same years, and between the estimated amounts under Legislative action and the
inflation-adjusted safe harbor from 2018 through 2023. The shortfall increased
from $533 million in 2010 to $763 million in 2017. It began dropping in 2018
with legislative action, but after adding 1.44 percent for inflation annually from
2018 through 2023, the gap remains $364 million in 2023. That was the Supreme
Court’s major concern.
Column 7 shows the amount proposed by the State Board to add
about $90 million more each year from 2020 through 2023. These increases are
cumulative, so by 2023, the additional funding requested by the board is $364
million.
Column 8 shows the estimated foundation amount for 2020
through 2023 if the State Board’s request is added, under which the state aid
level finally matches the safe harbor level, adjusted for inflation, in 2023. That
means state foundation aid would have been below the state’s proposed
calculation of adequate funding for 14 years – an entire class of students from
kindergarten through grade 12.
There are three big issues with the board’s proposal to
comply with Supreme Court’s decision.
Inflation rate. The State Board used a 1.44 percent
inflation rate for a phase-in through 2023, which the court observed is “the
average of all the years of inflation shown in the State’s chart from its April
23 memo (SY 2010-11 through SY 2016-17).” However, the actual rate could be
higher (as many observers expect), as well as lower. Currently, inflation is
running higher than 1.44 percent.  The
April Consensus Revenue Estimate projected the national consumer price index to
increase more than 2 percent in 2018 and 2019. (The national CPI tends to
increase slightly faster than the Midwest CPI.)
Would the court accept an inflation adjustment for 2018
through 2023 based in the average inflation rate from 2011 through 2017?
What funding “counts”
toward the safe harbor?
The “safe harbor” calculation was based on the total
of school district general fund budgets, essentially the base or foundational state
aid per pupil multiplied by actual enrollment and student weightings under the
school finance formula. However, in determining the amount of additional
funding to meet the inflation-adjusted safe harbor, the State Board appears to
have included $44.4 million in additional special education aid in 2019. For 2020
through 2023, the board only considered the increase in base state aid which the
Legislature approved and proposed additional base aid of approximately $90
million per year.
It is not clear if the Supreme Court would expect all
additional funding to meet inflation to be base state aid, or whether it would
consider other funding, such as special education, pre-school funding,
transportation weighting changes, mental health programs, local option budget
changes and even KPERS funding attributable to increased aid.