A Math Problem Called Education Finance

The balking and resistance to universal pre-K is symptomatic of a larger issue: the failure of state education aid to keep up with the rising costs of school district collective bargaining agreements.

For all the concern expressed over oil tanker cars and railroad crossings this session, education finance deserved to be policymakers’ chief derailment worry. The House/Senate agreement that neglected to fund the Governor’s top priority of universal pre-K sent the 2015 legislative session skidding off the tracks and helped trigger a mangled, ill-tempered mess that will require a special session to repair.

To some extent, this political drama over how to spend education money masked the bigger, never-ending debate about the adequacy of basic education funding. When each majority caucus (House GOP, Senate DFL) released their proposed increases in basic general education aid earlier in the year, school district officials expressed considerable frustration. News stories arose about the “fiscal cliff” looming for school districts and severe lay-offs already being implemented in spite of receiving a 3.5% increase in the per pupil formula this biennium. District officials’ arguments clearly made an impact. The conference committee agreement included an increase of 1.5% in FY 2016 and 2% in FY 2017 – $87 and $118 per student, respectively.

Is this enough? Is 3% or more per year needed? Should 1% be able to suffice? Answering this question is difficult because the cost structure of K-12 education delivery is unique to each of Minnesota’s 300+ school districts. State mandates and environmental factors have considerable influence over these cost structures. But so do decisions districts make themselves, especially with respect to what is by far their largest purchased expense – people. According to Department of Education data, nearly 80% of schools’ general fund spending pays for compensation in some form or another – most of which they negotiate through collective bargaining agreements that almost always include some sort of inflationary increases in wages and/or benefits. Since each school district independently manages most of its inflationary destiny through the collective bargaining process, applying even the commonly used litmus test of adequacy – “keeping up with education inflation” – is complicated.

Since labor costs represent such a large piece of school budgets, the relationship between district labor cost trends and revenue availability is a key determinant of school finance adequacy. How this relationship evolves over time is a key determinant of school finance sustainability. As part of a forthcoming MCFE report on the evolution of school district cost structures and the implications for education finance, we have taken a closer look at how labor compensation trends have compared to the provision of state aids.

We began by obtaining Minnesota School Board Association (MSBA) data on the settlements districts negotiated with their teachers over the past ten years (FY 2006 – FY 2015). These self-reported financial summaries project the increases in salary and benefits costs that districts expect the new two-year contract to necessitate. We converted these to per-full-time equivalent (FTE) costs using the employment counts provided with the contract data. It’s important to note that actual compensation growth changes over a contract period will vary from these forward-looking projections due to retirements, new hires, layoffs, and related teaching staff adjustments taking place during that time. Moreover, since these financial summaries deal only with teacher contract settlements and do not include settlements with other district employee unions, these reports can only serve as a proxy for district labor cost trends. Nevertheless, they present the most accurate snapshot available of how individual districts expected their compensation costs to change over each two-year contract period, and for which they would need to plan accordingly.

MSBA provided complete data (i.e., including all five contract periods) for 252 districts. Figure 1 describes the distribution in the average annual growth, by district, in the average per teacher (FTE basis) compensation costs these districts negotiated over this ten-year period. As the figure shows, compensation growth resulting from contract settlements is far from homogenous across the state. However, the majority of districts negotiated teacher contracts that provided, on average, 3% to 4% per year growth per FTE in salaries plus benefits over this ten year period.

How do these district-level cost trends match up with state aid over this period? After adjusting for changes in the way the state weights pupils, basic per pupil formula aid (which constitutes 80% of all general education aid the state provides to districts) increased at an average annual rate of only 1.63% over this same period – or about half the rate of average projected district compensation expense. It’s not difficult to understand the reports of staffing and education program cuts, growing classroom sizes, and the exceptionally well-documented rebound of school district property taxes in light of such numbers.

The challenge this presents to district finances can also be illustrated by examining the relationship between state aids and cost growth within a given contract period (Table 2). The median total compensation cost at the beginning of the most recent FY 2014-15 contract period for all districts for which MSBA provided data was $67,457. These districts projected a median per-FTE increase in compensation costs for the FY 2014-15 contract period of 3.77% per year – on the higher end of recent norms, but not particularly surprising coming out of the Great Recession. Columns 2 and 3 of the table highlight the resulting increase in district employment costs based on this median contract agreement and the median year on year change over the contract period.

Column 4 of the table shows the changes in the basic general education formula over the past two years, on a per pupil basis. Dividing the compensation cost change by the per pupil aid increase yields the number of students required to cover the additional compensation cost associated with one “median” teacher that these contracts impose (Column 5).

To put these 2014 and 2015 break-even totals in some perspective, data from the Minnesota Department of Education indicates that there are about 15.5 students per full-time equivalent teacher for 2014-15 school year – far fewer than would be needed to support this level of compensation growth.

Projecting forward using the K-12 education conference committee’s proposed basic formula increase and an historical 3.5% annual growth in compensation cost per FTE, we see modest improvement in the pupil teacher “coverage ratio.” But in the aggregate, these numbers suggest districts would continue to fall further behind.