Revisiting “How Much is Enough?”

The adequacy of education aid is once again a major issue in the 2022 session.  A look back at our 2015 report on education finance labor costs and its relevance for today’s debate. 

Despite last year’s bump in the state’s Basic Education Aid formula – the largest in 15 years –  plus the roughly $2.1 billion in one time money from waves of federal COVID and ARPA support over the past couple of years, many school districts are again looking at the prospect of budget cuts in 2022-2023.  For example, a survey by the Association of Metropolitan School Districts found their membership collectively face a $230 million budget shortfall for the next school year if no additional funding is provided in the 2022 legislative session.

The roots of the problem appear to be a combination of something old and something new.   Something old is the chronic challenge of general education resources needing to be diverted to support special education program needs like special education and English learners.  The “something new” is the accelerated declines in enrollment during COVID and its aftermath.  When a system built on pupil counts collides with the relatively fixed cost structures of educational delivery, funding challenges materialize.    A loss, for example, of 50 pupils spread equally over 13 grade levels translates into slightly less than four fewer children per grade – unlikely to trigger restructuring.  Yet those lost pupils translate into a $336,000 financial hit for a district.

As a result, the sufficiency of state support for public schools is again in the spotlight.  The most commonly offered analysis looks at trends in school resources adjusted for inflation.  However, such an analysis can communicate pretty much any message based on the starting point for analysis, the inflation measure used, and what revenues are included.  For example, according to data published by the Minnesota Department of Education, using a starting date of 2003, adjusting revenues using the Implicit Price Deflator for State and Local Government, and focusing solely on state aid, the percent change in real revenue per pupil has declined by 16.8%.  However, choosing 2006 as the starting date, adjusting revenues with the Consumer Price Index, and including all school revenues (not just state aid) the percent change in real revenue per pupil increased by nearly 20% – prior to COVID.  Keeping up with inflation is in the eye of the beholder.

A better understanding comes from examining the relationship between revenues and the costs districts incur in delivering educational services.  This requires a focus on the relationship between trends in revenues and trends in labor costs for several reasons.  School spending on compensation and benefits comprises just under 80% of all school district general fund spending (which finances most day-to-day school operations).  Decisions around collective bargaining agreements give districts some ability to manage inflationary pressures in what is by far their largest purchased input.  And all our current educational spending and support debates – eliminating cross subsidies, mental health and counseling supports, in-classroom supports, class sizes, etc. – are at their core labor expenditures. 

Findings on the Implications of Labor Cost Trends for State Education Aid

In 2015 we took a close look at how district labor cost trends over time matched up with state support for K-12 education.  We focused primarily on Basic Education revenue (now $6,728 per pupil in FY 22) which constitutes about 78% of total state general education revenue. 

What we found, unsurprisingly, was tremendous diversity among school districts.  Providing uniform amounts of per pupil formula aid to all districts did not result in anything resembling similar district compensation trends or patterns.  The relationship between a district’s employment changes (driving costs) and its enrollment changes (driving revenue) was highly variable and, in a quarter of school districts, counterintuitive (increasing student counts with declining staff or in rare cases declining student counts with growing staff).  Most notably, the labor purchasing power of new basic education revenue varied tremendously from district to district.  We compared the revenue growth from the 2% per year increase in Basic Revenue enacted in the 2015 session with projected per pupil district labor cost increases over the coming biennium based a continuation of multi-year trends in district compensation costs.   We found in 3 out of 4 districts the projected growth in per pupil compensation costs would exceed the per pupil increase in Basic Education Aid with a median shortfall of $225 per pupil.

We also estimated how large the annual growth in the Basic Education formula would have to be to fund projected compensation growth into future years.  (Historical trends have proven, at least so far, to be remarkably reliable in determining future compensation cost – our statewide projection back then for FY2019 was off by only $170 million.)  We concluded that, if recent trends continued and the system remained otherwise unchanged, an average formula increase of around 4% per year would be required to finance 100% of expected compensation growth.  Some of that increase could, of course, be paid for by other state education revenue programs or additional local property tax effort.  On the other hand, our 4% annual estimate did not account for price inflation in the approximately 20% of non-labor school general fund spending, various reserve requirements, or potential future district contributions for underfunded pensions.

What do these findings mean for today?  For starters, sufficiency of state support for education needs to be recognized as an intensely district specific condition.  K-12 funding acknowledges this which is why we have 13 other general education aid programs as well as special education revenue to compensate for factors that are largely outside of a district’s control but which also create higher costs for educational services.  Higher cost educational environments are typically higher labor cost environments.  The state needs to more effectively distribute these aids to districts based on an empirically rigorous understanding of how these factors and conditions influence direct labor costs through staffing needs and prices paid.  Adjustments to declining enrollment aid in particular continues to be topic worthy of investigation.

At the same time, it’s no less essential to recognize sufficiency of state support for education is also an intensely district influenced condition.  Whether the state provides “enough” additional money each year depends in no small part on the outcomes of the agreements districts collectively bargain with their employees.  Even modest increases in wages or fringe benefits can appropriate most if not all (and then some) of the new resources the state makes available to districts.  This is not a criticism of collective bargaining in the public sector; but is simply a result of how that process works.  

That being said, this indicates an urgent need for far greater public transparency of the financial impacts of school districts’ collective bargaining agreements.  For example, upon the ratification of a collective bargaining agreement, districts should provide the estimated increase in the total labor cost on a per pupil basis, and for each individual negotiated labor cost component – COLAs, steps, lanes, and fringe benefits, so that taxpayers can have a better sense of what drives cost increases.  All this should then be reported alongside the estimated general and special education revenue per pupil the district projects to receive from the state over the life of the contract. 

The traditional unified salary schedule has been the staple of education compensation for decades. Teachers appreciate its simplicity and understandability.  Administrators appreciate the fact it is easy to administer.  Although many interpret proposals to move away from the traditional unified salary schedule as a thinly-disguised attack on teachers and teacher unions, support for this idea can be found within the educational profession, progressive interests, and even union membership.  Many intriguing models exist which redesign compensation and repurpose existing compensation resources for greater effect and professional satisfaction.   In our report we generated a rough estimate that $1.3 billion in current compensation elements could be repurposed for a career-oriented compensation system built on the acquisition of knowledge, skills, and development of human capital.

These efforts are becoming increasingly urgent to complement state per pupil aid to ensure sustainability of state education finance.  Demographics alone will make it increasingly difficult for education appropriations to generate the type of per pupil formula increases our estimates suggest.  In addition, as the number of empty nester households grow, support for operating referenda may become even more challenging. 

Alternative strategies are politically contentious and can be challenging to design responsibly without creating other unintended consequences.  But as we concluded several years ago, the push for alternative compensation design is rapidly evolving from a debatable policy discussion to an undebatable fiscal necessity.