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January 31, 2007

School Finance: K-12 Tax & Spending Climate

School spending has always been a puzzle, both from a state and federal government perspective as well as local property taxpayers. In an effort to shed some light on the vagaries of K-12 finance, I've summarized below a number of local, state and federal articles and links.

The 2007 Statistical Abstract offers a great deal of information about education and many other topics. A few tidbits:

US K-12 Enrollment [.xls file]40,878,00041,216,00047,203,00047,671,00048,183,00048,540,000NA
US K-12 Deflated Public K-12 Spending - Billions [.xls file]$230B311.8B$419.7B$436.6B$454.6B$464.8B$475.5B
Avg. Per Student Spending$5,627$7,565$8,892$9,159$9,436$9,576NA
US Defense Spending (constant yr2000 billion dollars) [.xls file]$267.1B$382.7B$294.5B$297.2B$329.4B$365.3B$397.3B
US Health Care Spending (Billions of non-adjusted dollars) [.xls file]$255B$717B$1,359B$1,474B$1,608B$1,741B$1,878B
US Gross Domestic Product - Billions [.xls file]5,1617,1129,8179,89010,04810,32010,755

Related Federal Spending Links:

  • A recent book: Taxes, Spending, and the U.S. Government's March Towards Bankruptcy by NYU's Daniel Shaviro:
    The United States is moving toward a possible catastrophic fiscal collapse. The country may not get there, but the risk is unmistakable and growing. The "fiscal language" of taxes, spending, and deficits has played a huge and underappreciated role in the decisions that have pushed the nation in this dangerous direction. This book proposes a better fiscal language for U.S. budgetary policy, rooted in economic fundamentals such as wealth distribution and resource allocation in lieu of "taxes" and "spending" and in the use of multiple measures (such as the fiscal gap and generational accounting) to replace misguided reliance on annual budget deficits.
  • Fed Chairman Bernanke's recent speech on the national debt problem:
    The large projected increases in future entitlement spending have two principal sources. First, like many other industrial countries, the United States has entered what is likely to be a long period of demographic transition, the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Longer life expectancies are certainly to be welcomed. But they are likely to lead to longer periods of retirement in the future, even as the growth rate of the workforce declines. As a consequence of the demographic trends, the number of people of retirement age will grow relative both to the population as a whole and to the number of potential workers. Currently, people 65 years and older make up about 12 percent of the U.S. population, and there are about five people between the ages of 20 and 64 for each person 65 and older. According to the intermediate projections of the Social Security Trustees, in 2030 Americans 65 and older will constitute about 19 percent of the U.S. population, and the ratio of those between the ages of 20 and 64 to those 65 and older will have fallen to about 3.
  • Washington Post:
    Bernanke noted that the federal deficit has declined in the past two years but said that was "the calm before the storm" of skyrocketing expenses for an aging population. He cited Congressional Budget Office projections that spending on the big entitlement programs -- Social Security, Medicare and Medicaid -- will equal 15 percent of the nation's gross domestic product by 2030, double last year's level.
  • and the debt spiral.
  • "The Budget Illusion" NY Times editorial.
  • Competing in the Global Economy by Michael Porter:
    When I was working on The Competitive Advantage of Nations, it became clear to me that seeing economic and social issues as separate agendas was not only wrong but counterproductive. To have a productive economy, you need people who feel safe at work, who are healthy, and who have a sense that if they work hard, they'll have the opportunity to do better. Productivity is also consistent with a clean environment. Environmental pollution normally is a sign of inefficient and unproductive use of resources and is almost always a reflection of inadequate technology. Countries with toughening environmental regulations, then, are not necessarily at an economic disadvantage; in fact, the opposite can be true. Finally, an independent national organization has grown out of my 1995 HBR article "The Competitive Advantage of the Inner City," which is included in this collection. I find that the only sustainable solution to our distressed communities is to improve their economic competitiveness by building on their competitive advantage. We must shift from a poverty-reduction mentality to one of creating income and wealth through the market economy.

Wisconsin Spending Links:

Jerry Eykholt:

Madison is not alone in seeing large increases in public school funding in the last 10-15 years, and one reason is relaxed federal supports to the states. Another reason is inflation on elements that hit schools harder than most other sectors of the economy (school costs are primarily staffing, health insurance, energy, and building/construction costs - all have seen higher rates of increase than the CPI).

Rising school costs were considered to be the design of greedy and inefficient school districts - and the property tax revolt did little to advance an understanding of why costs were increasing in the first place. However, during that period, Wisconsin schools were regarded very well by national experts in education. Several anti-tax legislators got elected primarily for their stated anger over property taxes. Tommy Thompson's popularity was buoyed by anti-tax rhetoric. That we are pretty much at the same point with the legislature (in terms of understanding) is no surprise to me.  We should also understand that the revenue caps were designed to fail at a certain point. If we lead by the sound bite, we are bitten.

MMSD is one of the most expensive public school districts in the state (per pupil spending is highest among the largest school districts). It has been for decades. However, the annual rate of increase in per pupil spending has been very close to the Wisconsin average. While per pupil spending for the average Wisconsin public school district has increased at an annual rate of 5.10%, it has increased by an annual rate of 5.25% in MMSD (see table below).  That MMSD costs have risen more should be no surprise, because of cost of living, the loss of students to the growing suburbs (subsidized by state taxes), and the relative portion of special education needs and classroom support needs have risen significantly. The raw data indicate no significant fiscal mismanagement of the MMSD relative to the Wisconsin norm.  Like any large public institution, there are likely more efficient ways of doing things, however MMSD is investing a large fraction of its internal brain power on trimming budgets - the total cost of this on education (including the negative effects on learning by diverting talent away from teaching and stimulating creative learning environments) is much greater than the temporary budget savings, in my opinion.

One very important grounding point is that, while MMSD costs per pupil have increased significantly, the MMSD portion of school taxes has not increased that much for the average homeowner. Most of us are helped greatly by the large increase in property valuation in Madison. In our case, school property taxes on our near westside home went from $2229 in 1996 to $2435 in 2006.  This is less than a 10% increase in 10 years, although the value on our home has increased more than 65% in the same period.  For my wife and I, raising 3 kids, that's a pretty good value.

In my opinion, there are several factors we should be looking at when we consider MMSD's long-term budgeting:

  • the value to our economy from the perception (and continued demonstration) that we have one of the best public school districts for communities of our size.
  • the value that and staff to the Madison economy. This is the multiplier effect. Think about it - for every dollar spent on public education, a large fraction of that ($0.50 or more) comes back to the Madison area economy from what teachers spend. More comes back to support our health care infrastructure, more comes back to construction and other maintenance, transportation services.  The jobs we have through MMSD is a major boost to the local economy.
  • the rate of increase in per pupil spending is not likely to continue at the same rate. Woes in other state and national school districts are mounting, and there likely is to be some greater effort placed on reducing the factors leading to increased costs (health care reform, for one).
  • the rate of per pupil spending in our neighboring school districts (Verona, Middleton/Cross Plains, Sun Prairie, ...) is likely to increase at a greater rate than Madison - because the ratio of the rate of growth of students (a major factor in state support) and the demand for services is declining.  There may be greater economic forces in the area that promote a larger percentage of the student growth in Dane County to be within MMSD's boundaries
  • the rate of increase in special needs and bilingual services is declining - and benefits gained from services delivered in the past have lasting value. MMSD has done a stellar job addressing a large change in its demographics - it has adapted dynamically, with great energy and staff devotion to meeting early childhood and elementary education needs.  This will likely have a great benefit for the long term, and we should expect a declining rate of increase in the levels of need because we are doing a good job of addressing them early.
  • service to educational standards and national service. MMSD is seen as a leader nationally - it is referenced regularly by other school districts as one to emulate. We do an important service to the nation by doing things well here - and it is a national value.  We need to pay attention to the creation and stimulation of educational best practices and the effects it has nationally on public education.the nation will be experiencing some very difficult fiscal challenges in the near future, due to a retiring baby boom, large federal debt, declining rates of productivity growth, and a decline in personal savings to debt ratio. We should be seeing education now (as well as building community around the coming challenges) as a major preparation for the future.

Thanks for following my rather long note - and thanks to those who look at this carefully, advocate for strong public schools, and respond dynamically to the challenges.

According to the Wisconsin DPI, per student spending in Wisconsin has increased by 5.1% annually, since 1987. The Madison School District increased at a 5.25% rate during that time. Clearly, our public schools are attempting to address more issues than ever, from academics to breakfast, special education and health care.
Annual K-12 Per Student Spending: 1987 - 2005

YearWisconsin AverageMadison School District
Source: Wisconsin DPI.

The Wisconsin School Finance and Education System by Allen Odden [2.8MB PDF]:

In 2004–05, Wisconsin public schools educated 880,000 students in 425 districts. Wisconsin schools were funded with $7.9 billion from local and state sources (Wisconsin Department of Public Instruction [WDPI], 2005).

The state used a three-tiered guaranteed tax base (GTB) system of school finance. For the first tier of the system, the primary aid level, the state guaranteed a tax base of $1.93 million to all districts, allowing them to tax themselves as if their tax base were $1.93 million for revenues up to $1,000 per pupil. Just about every public school received some aid because the $1.93 million level was above almost every district’s property valuation per pupil. This tier required a local property tax rate of 0.52 mills.

The second tier, the secondary aid level, provided a GTB of $1,006,510, called the secondary guarantee, for spending from $1,000 to $7,782, the latter called the secondary cost ceiling. Fully accessing the $7,782 per pupil required an additional local property tax rate of 6.74 mills, for a Tier 1 plus Tier 2 tax rate of 7.26 mills.

For the third tier or tertiary level, the state guaranteed the statewide average property value per pupil, or $407,300. Districts with a tax base at or lower than this guarantee could use the guarantee to spend at any higher level they chose and still receive positive state aid. Districts with a tax base above this level could also spend at a higher level, but their state aid would be a
negative number, and that number would be subtracted from their Tier 2 aid until that tier was reduced to zero. This tier was designed to discourage spending above the secondary cost ceiling for high-wealth districts (WDPI, 2005).

In 1993, the Wisconsin Legislature enacted a revenue cap on spending to thwart the continuous increases in education spending that had occurred during the previous decade. Allowed to increase generally at a rate of inflation, the revenue limit recently has been set at a fixed level; in 2004–05, the limit was $241 per pupil (Reschovsky, 2002; WDPI, 2005). Districts can exceed the revenue caps through a local referendum. There is no cap on the top amount a district can choose to spend.

Simultaneously, the state also eliminated binding arbitration, made teacher strikes illegal, and adopted the Qualified Economic Offer (QEO). The QEO was adopted to ensure that bargained agreements could be financed within the allowable cost increases. Districts can bargain with unions over salaries and benefits, but if the two sides cannot agree, the district can impose a settlement if it offers a QEO, which is defined as an offer that increases salaries and benefits by at least 3.8%. Over the past several years, we conclude that the QEO has been responsible at least in part for reducing the rate of teacher salary increases.

Additionally, in fiscal year 1997, the state made a commitment to pay two thirds of school funding—a figure that does not include federal revenue but does include $469 million in property tax relief each year (Norman, 2002). In 2003–04, state funds, excluding the property tax relief, accounted for about 61.6 percent of district revenues, and during the 2003 legislative session, the two-thirds guarantee was reduced to 65 percent.
A longer explanation and analysis can be found in Andrew Reschovsky's policy primer [350K PDF]

Thanks to Peter Gascoyne for these links.

Illinois thinks about cashing in their future lottery revenues today - shades of Wisconsin's trade of future tobacco settlement proceeds for money today (2001).

NY Governor Spitzer Ties Increased School Funds to Performance:

Gov. Eliot Spitzer of New York said today that he would allocate more money to the state’s public education system in his 2008 budget proposal, but he said the increased spending would be tied to better results from schools, educators and students.

“There will be no more excuses for failure,” Mr. Spitzer said. “The debate will no longer be about money, but about performance.”
The governor, in office for less than a month, did not tip his hand today on how much the public school system will get in the budget that he will submit to the state Legislature on Wednesday. But in an address to school leaders and legislators, he said that every school district that receives at least $15 million more this year in his new budget, or 10 percent more than in the previous year, would be subject to a new “contract for excellence” that will dictate how they can spend those funds.
Schools that do not perform well, he said, would be shut down. Educators who do not meet performance goals would be dismissed. A new accountability system would monitor how schools are performing academically and whether they are making the best use of their money, he said. Also, the schools will be judged on whether their academic programming is helping students perform better.

  • James Wigderson on the QEO:
    That number is growing, not shrinking. School aids, school tax credits and Medicaid have all been growing as a percentage of the state budget, while the next eight of the top 10 budget items have all been shrinking as a percentage of the budget.

    Given how much of the state budget is consumed by education spending and how almost all of the local school districts are claiming to be short the necessary funding, taxpayers should be outraged that the state is seriously considering eliminating the largest cost control for local districts, the qualified economic offer.

    The QEO means that school districts can avoid going to binding arbitration in labor negotiations with the teachers’ unions if the districts offered wage and benefit increases that total 3.8 percent per year.

    It’s not a perfect system. As the Waukesha Taxpayers League showed last year with their study of the Waukesha School District, the actual average salary increases the last three years were 6.8 percent, 4.6 percent and 6.9 percent.

  • Amy Hetzner has more on the Waukesha School District's budget.
  • New Jersey considers a Property Tax annual increase "cap".
  • Wisconsin's $2.15B structural deficit.
  • Wisconsin Governor Jim Doyle's State of the State Address:
    Called for a mandatory third year of math and science for high school graduation.

    Announced he will triple funding to give kids access to the school breakfast program. Right now, Wisconsin ranks 50th in school breakfast participation.

    Urged the Legislature to approve a major investment to reduce class sizes from kindergarten to grade three.

    "Smaller classes, higher standards, good nutrition, a strong start in life, and a ticket to college for every kid willing to work for it," Governor Doyle said. "That's our education agenda, an agenda of opportunity."

  • Wisconsin Senator Scott Fitzgerald's response noted the State's $2B deficit.
  • Andy Hall's Wisconsin School Finance Series:

Madison (Property Tax) spending links:

Locally, city school property taxes have been relatively stable while overall school spending continues to grow. In other words, state and federal income and sales tax and fee redistribution are paying a growing percentage of local K-12 budgets. In addition, the dramatic growth in new construction in and around Madison over the past decade has softened the spending growth by spreading the costs across more parcels. A new construction slowdown will have an affect on property taxes, and assessments. Paul Soglin's January, 2006 article on Madison's tax base is well worth reading. Fred Mohs notes that there is a growing number of tax exempt parcels in Madison.

A 5 Year Approach to the Madison School District's Budget Challenges; or what is the best quality of education that can be purchased for our district for $280 million a year? by Peter Gascoyne and 2007/2008 Madison School District Budget Outlook: Half Empty or Half Full?

Former Madison Mayor Paul Soglin suggests a .25% increase in the sales tax to grow K-12 funding along with another .25% for cities.

Posted by Jim Zellmer at January 31, 2007 6:10 AM
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