In order to pay its bills this spring, the state is holding out its hat to school districts. It will borrow $423 million from 221 school districts’ cash reserves by delaying regularly scheduled March and April state aid payments.
But first the state had to dust off an old statute allowing it to do so. It’s not that the state particularly wants to borrow schools’ cash, but if it plans to borrow money, the state is required by law to look to schools first. The districts affected are those with more than $700 per pupil unit in their reserve funds.
The use of the obscure mechanism highlights a snowballing problem with avalanche potential. The long-term effect of how the state is juggling to pay its bills could impact the fiscal health of schools, said Rep. Mindy Greiling (DFL-Roseville), the House K-12 Education Finance Division chairwoman. The move sets a bad precedent, and compounds the burden of a poorly designed funding formula already failing to meet schools’ rising expenses in the face of growing demands, she said.
“The snowball is rolling faster and faster with bad financial management practices. We have to raise taxes, make cuts, look for reforms,” Greiling said.
Rep. Larry Howes (R-Walker) agrees the system is broken. “The Legislature should be able to balance their budget and not have that impact on school districts,” he said.
Avoid borrowing at all costs
In the early 1980s, the administrations of governors Al Quie and Rudy Perpich used short-term borrowing to resolve temporary shortfalls, but after several years of double-digit interest rates, “the political climate in 1985 was that short-term borrowing was to be avoided at any cost,” said House Chief Fiscal Analyst Bill Marx.
The law requiring delayed school payments as an alternative was enacted in 1986, effective for one year, and made permanent in 1987. It has never been used, even in other years the state’s faced fiscal crunches.
School administrators understand the weight of the state’s $1.2 billion deficit this biennium and projected $5.4 billion deficit in the next biennium, and definitely prefer shifts to cuts. But neither they nor legislators like penalizing districts that have, through thrift, property tax levies or both, built up their own cash reserves for a rainy day-or a snowy one.
Snow day woes
Late last year, the Albany Area Schools bus shelter roof collapsed under the weight of a huge Christmas Day snowfall, damaging seven buses and three vans. Repair and replacement expenses were partially covered by insurance, but the incident cost the district $65,000, covered by its reserve fund balance, according to Scott Thielman, superintendent of the district about 20 miles west of St. Cloud.
That’s exactly the sort of unforeseen expense school districts should use their reserves for, say lawmakers.
“If there are bad times, we shouldn’t take the money from the schools,” Howes said. He sponsors HF2783 that would repeal the statute effective Aug. 1. Greiling sponsors HF2645, a bill nearly identical to Howes’s except for its effective date.
“If it was a one-time episode and it wasn’t used again for 20 years, I wouldn’t say much about it, but I see it happening again next Sept.1, which is the next time they can use it, and then the money would be kept by the state the whole school year,” Greiling said.
Both bills were laid over Feb. 17 by the House K-12 Education Finance Division for possible omnibus inclusion.
The Pequot Lakes Public Schools in Howes’s district will lend the state about $1.3 million this spring. Supt. Rick Linnell said his district has “worked very, very hard” to maintain two and a half months of operating expenses in its reserve balance, for example, by trimming $400,000 from its 2010 budget and eliminating its German language program next year. Now the district will lose interest income and incur penalties for early withdrawal of savings certificates of deposit.
“We are going to lose money in that deal and we shouldn’t have to do that. If you lose a boiler or buses go bad, we have to have that,” Linnell said.
An avalanche of consequences
Howes and Greiling worry about the long term consequences of delayed payments and the routine use of accounting shifts on students, teachers and communities.
Howes points out the ripple effect of employment uncertainty on school employees and their families. “Every year we lay off 30 teachers,” Howes said, referring to Pequot Lakes. Many are rehired once funding is secure, but “if you have 30 teachers in limbo, you have other people who are in limbo. You’re laid off, what are you going to do, pick up the family and move somewhere else?”
Greiling is worried about the state’s declining bond ratings, the possible decline of school districts’ credit ratings as they’re forced to borrow money to cover their own operating expenses, and that the districts will see the continual borrowing from their reserves as disincentive to keep those reserves full.
“Meanwhile, we kill the golden egg and then we kill the goose too,” Greiling said.
But taking – or at least borrowing – from schools has become the norm. Many districts scrambled to accommodate the accounting shifts the governor authorized last May. Such shifts are common, and the amount withheld is typically repaid in subsequent years, but the 27 percent shift imposed this year left schools with 17 percent less operating funding this year. Albany Area Schools borrowed $1.745 million to cover the larger-than-usual shift. (When a shift is used, it’s normally 10 percent.) That loan cost the district about $35,000 between lost interest and the cost of putting an aid anticipation certificate out for sale, said Thielman. “You can hire a paraprofessional or even a teacher for that amount,” he said-or buy two used vans.
Worse, said Thielman, he and his fellow superintendents worry shifts won’t be repaid, or that cuts to K-12 education are inevitable.
Lawmakers are also concerned about that possibility.
HF2683 sponsored by Rep. Denise Dittrich (DFL-Champlin), and HF2508, sponsored by Rep. Pat Garofalo (R-Farmington), would codify the shifts made last year by the governor, which mimic Legislature-approved shifts but do not bind future lawmakers.
“Members of this committee know I am not a fan of shifts,” Garofalo told the House K-12 Education Finance Division Feb. 17. “When we shift we mask the problems from the public.” Still, he sponsors the bill because he believes it’s possible “that when we elect a new Legislature and governor, they would have the choice to decide the current unallotments were a cut and not a shift. Or maybe in a lesser degree, maybe of the $1.7 billion in shifts he mimicked, maybe $200 million or $300 million of those would be cuts instead of shifts.” He thinks such a sudden decrease would be too much for schools to bear.
The division approved both bills and held them over for possible inclusion in an omnibus bill, but the conversation isn’t over.