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Schools to pay millions to cover governor’s IOU

School districts statewide stand to lose $58 million in interest and reserve revenue over the next two years to cover Gov. Tim Pawlenty’s billion-dollar IOU. This is money Minnesota’s already cash-strapped schools can’t afford and didn’t account for before the governor’s June shift. According to calculations, this interest and reserve revenue could amount to $23 million in 2010 and $35 million in 2011, and that’s if interest rates stay low.

If today’s interest rates go back to traditional levels, 2011’s interest costs could jump as high as $79 million, one education finance expert calculated.

In an effort to balance Minnesota’s $6 billion deficit without increasing tax revenues, Pawlenty used an accounting trick known as a tax shift. In it, schools will not receive 100 percent of their state aid, but will receive a percentage at the beginning of the fiscal year and (theoretically) the rest later in the year.

Governor readjusted the shift
It’s not a new idea. Schools have been living with a 90 percent/10 percent shift for several years. But in a surprise to educators across the state, Pawlenty last June readjusted the shift to 73 percent/27 percent. This change will temporarily save the state approximately $1.07 billion in fiscal year 2010 and $1.17 billion in fiscal year 2011.

While the changes themselves are, on the surface, revenue-neutral, there will be a cost to school districts due to a negative cash flow. Chuck Herdegen, business manager at New Discoveries Montessori Academy in Glencoe and past president of the Minnesota Association of School Business Officials, calculated the tax shift will cost schools millions due to increases in interest payments or reduced interest income earnings on reserves.

“Although the use of payment shifts to balance the state budget is an alternative to reductions in school district funding formulas, school boards, administrators, and the public need to realize that there will be an impact on school district budgets,” Herdegen said.

The AMCPU
Schools determine finance by counting the number of students in the district, then weighing them by their grade. This is called Adjusted Marginal Cost Pupil Units, or AMCPU. Pawlenty’s shift means that on average, schools will see about $1,124 less per AMCPU in fiscal year 2010 and $1,856 in fiscal year 2011. To demonstrate the impact this change will have on school resources, Herdegen calculated that a district of approximately 1,000 AMCPU would receive $1.33 million less from state payments in 2010 and $2.18 million less in 2011.

“While this amount may vary for each school district based on funding formulas, the amounts are an average across the state and can be used by school administrators to calculate the impact that these shifts will have on their district’s cash flow,” Herdegen said.

To finance this cash flow deficit, districts will have to:

• Use additional cash reserves, which will result in reduced interest income earnings during the school year;

• Borrow funds to meet cash flow needs; or

• Use a combination of using resources and borrowing.

If the district has cash reserves, it will lose approximately $9 to $15 each year per AMCPU in interest earnings, assuming a .8 percent interest rate on investments. Statewide, this amounts to $8.5 million in reduced revenues for fiscal year 2010 and $14.3 million in fiscal year 2011, based on current interest rates.

If the district has to borrow money (interest and issuance costs), it will incur $15 to $22 in additional costs per AMCPU each year based on current rates. Statewide this could total $14.3 million in increased costs to schools in fiscal year 2010 and $21 million in fiscal year 2011.

If a combination of drawing on reserves and borrowing funds is used, the impact will be between $9 and $22 per AMCPU based on current interest rates. This will result in decreased revenues available, an increase in expenditures, or a combination of both depending on how the district is able to fund their cash flow needs.

The effect of interest rates
The costs of the shift are lower than expected due to the current low short-term interest rates. This has reduced the cost of borrowing for districts needing to borrow, and it has reduced the amount of interest earnings for districts with cash reserves. If short-term interest rates return to rates that are more typical of recent years, the cost to school districts of the payment shifts will increase proportionately. Costs to school districts could raise to $37 per AMCPU in lost interest earnings ($35.3 million statewide) or $46 per AMCPU for borrowing funds ($43.9 million statewide).

Charter schools have a different problem. These schools cannot access the same low-interest borrowing resources as traditional school districts and must borrow at regular rates. If they are able to secure financing, it is typically at a cost of 6 percent to 8 percent.

The direct losers in this move are Minnesota’s students, who will have fewer classroom resources, and taxpayers, who will be picking up a $58 million tab that won’t go toward educating our children. Minnesota’s economy has and always will depend on a highly educated workforce. We can’t afford to continue going down this road.

John Fitzgerald is a fellow at Minnesota 2020, a nonpartisan progressive think tank based in St. Paul.

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Comments (12)

  1. Submitted by Greg Kapphahn on 10/05/2009 - 08:40 am.

    Let’s underline that last paragraph. Since Tim Pawlenty, Grover Norquist, aka the club for [the growth of our own personal fortunes and the impoverishment of everyone else] and MN [don’t make me pay ANY taxes] league, to whom he has, quite literally, sold his soul (I’m sure there must have been a secret midnight ceremony akin to a “black mass”),…

    since these folks could not possibly care any less about the students in schools anywhere, have a visceral hatred of their teachers, and regard a well-educated populace as a detriment to their ability to keep playing the games by which they hope to get even richer…

    let’s focus on the fact that this will cost LOCAL property taxpayers a large amount of money.

    People in school districts all over the state, especially those that can least afford it, are going to be picking up the costs of borrowing money to cover for the fact that the state, under Gov Pawlenty’s leadership is acting like the kind of lazy person who just decides, at some point (when the deal for property tax shifts and upper bracket tax cuts was hammered out between former Gov Ventura, the Rebs and the Dems, for instance), that they don’t feel like working so hard anymore, are going to work only when they feel like it, and stop paying some of their bills.

    As always with Tim and those who own his soul, those with the most coast on “easy street,” while those with less are expected to work harder and harder just to try to stay alive, if they even can stay alive, (and to keep their schools alive),…

    because those with the most dysfunctional attachment to “their” money (or their presidential aspirations) are running the show and, although they’ve used the ladder of Minnesota’s formerly-excellent infrastructure and educational systems to climb the ladder of success for themselves and their business concerns, are now determined to use that power to dismantle that ladder so no one, no matter how bright, or able, or hard working, or creative they might be,…

    so that no one else can follow them up that ladder.

    But remember, it’s only a “budget shift.”

    I think I’ll call up my credit card companies and my mortgage company and explain to them that I don’t feel like working so hard anymore myself, so I’m just going to shift what I should pay them in the last three months of this year to the summer of the year after next.

    After all, if the governor of the state can do that to our schools, why can’t I do that to my banks (or the state department of revenue, for that matter)? If the governor can just abrogate the state’s duly-enacted financial commitments, why can’t the rest of us do the same? (By the way, to any bankers reading this, that was an ironic joke.)

  2. Submitted by Thomas Swift on 10/05/2009 - 10:45 am.

    At the risk of completely removing myself from contention in MinnPost’s “say the least with the most words” competition, allow me to propose the following shockingly succinct question.

    From 1984 to 2004, K-12 spending increased (when adjusted for inflation of course), 78%, from $2.7 billion to $4.8 billion.

    That’s an average increase of 4% per year, every year for 20 years.

    http://www.house.leg.state.mn.us/fiscal/files/06edrevhist.pdf

    How much is enough?

  3. Submitted by myles spicer on 10/05/2009 - 11:46 am.

    Tom Swifts comments are so far off the mark I would not even know where to begin. Let’s start with the fact that Minnesota ranks 22 in per pupil spending. Additionally, the only reason we do not rank lower is that the legislature fought Pawlenty’s cuts tooth and nail. Face it, we are on the DECLINE in education.

    But what grinds on me most, with the Swifts of the world, is that my daughter teaches in the Minneapolis School system, and he and others have no idea what these teachers face now! Larger classes, less resources, fewer support staff (like counselors in a system that needs them), buildings and labs that need updating. But worst of all, are the puny salaries our teachers get — AND MINISCULE IF ANY RAISES. They are tiny compared to occupations that have far less responsiblity and far less relevance to our society’s future.

    I talked with my daughter over the weekend, and Mr Swift should contact some teachers as well before he spouts off about “enough money is being spent”. Incidentally, I noted his analysis only goes to 2004 — the years before Pawlenty disassembled our previously vaunted education system.

  4. Anonymous Submitted by Anonymous on 10/05/2009 - 12:38 pm.

    Why anyone even reads the likes of TS and Katherine Kersten is a mystery to me. Oh, yeah, we should know how “the other half” thinks, but that knowledge is sickening. Are they truly so misinformed? Should we collectively yell, “You lie!” on reading their comments? The chasm between the right and left seems unbridgeable and we are doomed to live with the results of those who believe the garbage put out by the far-righties.

    Those who oppose KK and TS reference the real world, but the latter are immune to reality.

  5. Submitted by Nick Coleman on 10/05/2009 - 12:44 pm.

    The ironically named Mr Swift (an erstwhile candidate for the St Paul School Board) proves his education remains incomplete:
    According to inflation calculators, if Mr Swift had $100 in 1984, he would need $204 (as of 2008) to retain the same purchasing power (a 104-percent increase). Point being: The 78 percent increase he cites in K-12 school spending since 1984 would mean that schools are running at about 26 percent less than they were when he was flunking Math.

  6. Submitted by Thomas Swift on 10/05/2009 - 01:05 pm.

    “Let’s start with the fact that Minnesota ranks 22 in per pupil spending.”

    I never fail to note that when leftists discuss public education, spending is always trotted out, but academic ranking is never, ever brought up.

    To leftists, it’s all about the money, isn’t it?

    “But worst of all, are the puny salaries our teachers get — AND MINISCULE [sic] IF ANY RAISES. They are tiny compared to occupations that have far less responsiblity [sic] and far less relevance to our society’s future.”

    Occupations that “have far less responsibility and far less relevance to our society’s future” in the private sector pay exactly what the market will bear, in direct relation to the employee’s skill, background and record of success or failure.

    If your daughter is exceptionally skilled, she is suffering the unfair results of her union’s socialist “one salary fits all” contracts.

    I heartily encourage her, and her comparatively skilled colleagues to break free of the artificially inserted salary cap the teachers union has imposed and stand on her own merits.

    Myles, before you, or anyone else decides to spout off about our “previously vaunted education system”, I suggest spending a few minutes reading the facts….despite that reliable 4% increase in spending each year, we haven’t been entitled to “vaunting rights” for 30 years; not that it has stopped the defenders of the status quo from saying so anyway.

    As to the sad lack of equipment…shhhh, the districts have been telling the voters all those excess levy referendums were buying new stuff…iksnay on the apcray uffstay.

    My analysis only goes to 2004 because that is as far as the report I cited went. I’m not in the habit of making unsupported statements, shocking I know.

    So, how much is enough?

  7. Submitted by dan buechler on 10/05/2009 - 01:40 pm.

    One of the BIG cost drivers is special education. I definitely do not have the answers but I will let my fellow commentators hash it out.

  8. Submitted by Joe Musich on 10/05/2009 - 09:22 pm.

    As a Minneapolis Pubic School teacher I repest Mr. Swift’s right to an opinion. As as citizen having an opinion one needs to remember having a thought and having the facts are two different things. Mr Swift you do not have the facts. You only have swil. Futhermore if you don’t challenge yourself to some sort of reflection or evaluation may just may drown in your own swill. If you like to take the time to find out what life is like for a public school teacher I am accesible and I me glad to let you buy me a cup of coffee.

    Thank you !

  9. Submitted by Thomas Swift on 10/06/2009 - 08:47 am.

    I shared this fact from the Minnesota Dept of Education: “From 1984 to 2004, K-12 spending increased (when adjusted for inflation of course), 78%, from $2.7 billion to $4.8 billion.

    Nick Coleman, his razor sharp powers of observation on the fritz, was confused by the parenthesis…allow me to increase his opportunity to snag a clue.

    Look right here, Nick–> When adjusted for inflation of course…

    That means the figures have already been adjusted for inflation, using those good ol’ inflation calculators; they are pre-mixed and ready to use.

    And by the way, Nick; the “ironically named” thing was only mildly amusing the first time you used it; it hasn’t gotten any better with constant use, and my erstwhile school board candidacy has been thoroughly examined at least half a dozen times at this forum as well.

    As for the rest of the assembled defenders of the status quo, well there’s just not much to respond to, is there? Inchoate ad hominem is a tough act to follow for a fellow that prefers substantiated and sourced points of issue and thoughtful debate.

    I guess I’ll just toss out that simple, succinct question again in hopes there is someone out there willing to answer it.

    How much is enough?

  10. Submitted by Thomas Swift on 10/06/2009 - 09:48 am.

    Joe Musich offered:

    “As a Minneapolis Pubic School teacher I repest [sic] Mr. Swift’s right to an opinion. As as [sic] citizen having an opinion one needs to remember having a thought and having the facts are two different things. Mr Swift you do not have the facts. You only have swil [sic]. Futhermore [sic] if you don’t challenge yourself to some sort of reflection or evaluation may just may drown in your own swill. If you like to take the time to find out what life is like for a public school teacher I am accesible [sic] and I me [sic] glad to let you buy me a cup of coffee.”

    Thank you for the offer, Joe, but I have had the opportunity to read your vigorous defense of your right to join a union on several occasions, at several forums.

    You might have noticed that several of your like minded commentators have pointed out that I was a candidate for Saint Paul School Board.

    It didn’t go well, thanks in large part to your union, in fact. However I did have the opportunity to speak with, and listen to, dozens of public school teachers.

    I’ve seen the chaos that reigns supreme in many classrooms….and teacher’s lounges. I’ve heard from highly skilled, enthusiastic teaching professionals and taken abuse from jaded, cynical hacks warming a chair until retirement offers itself.

    I’ve spent ten years in classrooms as a volunteer, Joe. Although I had long since removed my own kids to private schools, I graded tests; I tutored; I coached kids in public schools and charters.

    I may not have all the facts, Joe, but I have more than enough to know that the public education system is broken beyond repair. And I know that people that defend the status quo, like our author, Mr. Fitzgerald, and I’m sorry, yourself Joe, are most often motivated by things far removed from the best interests of the students.

  11. Submitted by Virginia Martin on 10/06/2009 - 11:26 am.

    How much is enough is a meaningless question. The issue is, what do Minnesotans want to accomplish?

  12. Submitted by Tom Miller on 10/06/2009 - 09:47 pm.

    “How much is enough?”
    Gov. Pawlenty commissioned a blue ribbon panel of education experts to answer this question. Whey the panel’s investigations pointed to the obvious answer “more than we’re spending now,” the governor disbanded the panel before its work was complete. Children won’t learn when the adults keep their head in the sand.

    “I may not have all the facts, Joe, but I have more than enough to know that the public education system is broken beyond repair.”
    Here is a peer-reviewed study based on the National Assessment of Educational Progress, often called the nation’s report card. Look at how public schools stack up against private schools.
    http://www.ncspe.org/publications_files/OP111.pdf

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