Early school-fund repayment carries a big cost for small benefit

MinnPost photo by James Nord
The DFL was swept to power in the Legislature partly on its promise to repay the entire K-12 school-aid shift.

It’s laudable that Minnesota House DFLers want to deliver on their campaign promises. However, it’s unfortunate that one of these promises has a cost so large for a benefit so small.

I’m referring  to their insistence that the Legislature buy back the entire K-12 school-aid shift that was enacted to help erase previous state budget shortfalls.

In the last election, DFL candidates for both the House and Senate made great use of this issue, suggesting that the school aid shift had effectively slashed state aid to schools and balanced the budget on the backs of school children. This was a gross exaggeration.

However, to make good on their campaign promise, House DFL leaders have persuaded Gov. Mark Dayton and Senate DFLers to impose $860 million in new taxes on Minnesota’s wealthiest residents to reverse the school aid shift in two years, rather than four, as Dayton had proposed.

Both parties have used shift

The facts are that such school aid shifts have been used multiple times, over the last several decades, under both Republicans and DFLers, to help plug holes in the state budget. For state government, such shifts are one-time gimmicks that postpone fiscal problems in hopes of an economic rebound and a surge in future state revenues.

However, school aid shifts are relatively painless for most school districts, as Minnetonka School Superintendent Dennis Peterson wrote in guest column in the Star Tribune earlier this year.

An important underlying fact is that when it comes to the state budget, K-12 education is the elephant in the room.  It accounts for more than 40 percent of the state’s general fund budget. During economic downturns, it’s tough to exempt schools from budgetary pain.

But that’s what governors and legislators try to do, often while slashing aid to cities, counties and other programs.

What they frequently have done is delayed a portion of the state’s school aid payment to  school districts, resulting in a one-time shift in part of the state’s obligation from one biennium into the next. “School districts have not had less money during these years than they would have had without the shift; they just received it somewhat later,” Peterson wrote.

Rather than seeing this as an “accounting gimmick” or a “trick,” Peterson called it “one of the most important tools used by legislators and governors of both parties to avoid deep cuts in school funding.

“It is likely that all school districts in the state would have suffered deep reductions, translating to serious staff and program cuts, without implementation of the payment shift,” he wrote. “Nearly every other state was forced to reduce education funding during the past five years. Because our leaders wisely used tools available to them, including the payment shift, Minnesota spared its schools and students that pain.”

Less pain than alternative

The payment delay may have forced some districts to dip into reserves or engage in short-term borrowing. But to Peterson and many others, it was far less painful for school districts than comparable reductions in state aid.

Peterson has some credentials to speak on the subject. He’s been superintendent of the Minnetonka school district since 2001, and in 2009 he was named Minnesota superintendent of the year by the Minnesota Association of School Administrators.

To pay for reversing the shift, the governor and legislative leaders have agreed to impose a temporary income-tax surcharge on the state’s wealthiest residents. This will come on top of a permanent income tax increase for these same folks, the revenues from which will be used to erase a $627 million state budget shortfall and pay for the DFL’s spending initiatives.

The details of these tax increases remain to be worked out in conference committee, but they are likely to vault Minnesota to the top of the charts in taxes on upper-income residents.

But that’s not likely to be mentioned on DFL campaign literature next year. Instead, it will loudly proclaim, “We repaid the school shift!”

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Comments (5)

  1. Submitted by Rachel Kahler on 05/16/2013 - 08:36 am.

    Minnetonka’s pain

    Relatively painless, eh? Maybe in Minnetonka. But in most districts, there have been cuts. Some of them before the shift, sure. But schools have had to look at every expense in a new light. Now, instead of asking whether the money should be best spent on this or that, schools are finding that neither this nor that are going to get purchased without debt service. Getting the money later certainly DOES cost money. Yes, getting the money later means you get less because you have to pay back a loan plus interest. Ask any individual who’s gotten a payday loan. Even ignoring that, let’s look at the claim made in this piece, as stated in the title:
    “Early school-fund repayment carries a big cost for small benefit”

    Let’s break that down into 2 parts–big cost, small benefit.

    Big cost: Where? This is money that was already promised. Taking it out of the hides of the rich isn’t terribly troubling to most people. I admit, I don’t see the big cost. That money has to be paid back, right? Someone’s going to pay for it, right? Who will it hurt least? People who can afford it. Of course it’s a big cost. But that’s like saying that you shouldn’t pay your mortgage because it’s expensive. Too bad.

    Small benefit: I see absolutely no support for this claim in your article. Just because it makes a pretty title, doesn’t make it true. Why is there a small benefit? Because districts like Minnetonka (gosh, there’s a typical district) don’t feel the pain? So the benefit won’t be felt by Minnetonka. Fine. Minnetonka’s share can go elsewhere. They don’t need it. But it would certainly benefit other districts. And if there’s any positive cost:benefit to be found, it’s in education. But you can’t throw money at education problems, some might say. Of course. Simply throwing money is foolish. Wisely planning how it’s spent, on the other hand…

  2. Submitted by Ross Willits on 05/16/2013 - 09:54 am.

    No Pain? Ask Charter Schools!

    A single comment from a wealthy suburban school district does not excuse the whole enterprise. School districts across the state were forced to borrow the funds to pay salaries etc. That costs money.

    Then there are Charter Schools–the darlings of the right. They are prohibited by law from borrowing money to finance operations. So having 40% of their funds withheld and having no option to borrow has caused a great deal of pain to the schools, the children in them, and their families.

  3. Submitted by Ray Schoch on 05/16/2013 - 10:16 am.

    Just guessing here

    Admitting that I don’t know the details of each Twin Cities school district in terms of its finances, I’m going to guess that Minnetonka is… um… neither typical nor especially cash-strapped. That tends to undercut the credibility of its superintendent when arguing matters of school finance. Doesn’t destroy it, necessarily, but a wealthy district, if that’s an apt description of Minnetonka, seems likely to have reserves to draw upon when necessary that simply aren’t available to less affluent districts.

    Having only been here a few years, my sense of things was that the school shift had essentially gotten out of control, largely due to Mr. Pawlenty’s relentless pursuit of tax expenses for business, accompanied by tax cuts in other areas, all supported for a couple years by the Republican legislature. When the economy went into the tank, and precisely *because* school funding is the elephant in the room, shifting the fiscal burden to schools over the short term became the modus operandi, to the detriment of a whole bunch of school districts that don’t have Minnetonka’s financial wherewithal.

    Having to borrow money to keep a school district going — to pay staff, buy materials, fund extracurricular activities, etc. — strikes me as roughly in the same category as a payday loan. Only desperate (and often desperately poor) people resort to them, and then out of sheer necessity. To the degree that that’s the case, putting this burden on school districts strikes me as, to phrase it politely, egregiously bad public policy.

    There may be *some* cost to actually fulfilling a DFL campaign promise to repay the schools, and I’m not an accountant, so I won’t claim any expertise in that area, but I don’t see anything in the article to suggest that the cost is substantial. The money is already promised, and therefore already accounted for, isn’t it? Why would actually repaying that debt somehow be a big cost-driver?

    As for benefits, having worked for decades for a district in another state that was perpetually on the edge of fiscal disaster because it was not an affluent community, I’d argue that *any* benefit from repayment of state monies owed to a school district will be major, not minor. Once again, it’s only a guess, but my guess is that plenty of relatively poor suburban districts, and a good many rural districts that are equally poor, if not more so, in terms of financial resources, will be very pleased to see the DFL follow through on this particular campaign promise. Beyond that, of course, is that pesky provision in the state constitution (Article 13, Section 1) about providing an equitable education for children throughout the state…

  4. Submitted by Paul Udstrand on 05/17/2013 - 10:14 am.

    Very disappointing

    I have to say this is one of the most disappointing article I’ve seen on Minnpost. For one thing, the “Big Cost” is never actually described. The author implies that some kind of damage will result from paying this off but he doesn’t describe the damage. There’s an allusion to some notion that making the wealthy pay taxes is “costly”, but that’s actually an incoherent proposition. Writing 101: if you make a claim, you need to describe and clarify that claim.

    The “Cost” was determined by the delayed payment of $2.5 billion, paying it off doesn’t make “bigger”,on the contrary, paying if off sooner will save money on interest payments currently being made. Our “expert”, i.e. the Minnetonka School Superintendent apparently fails to understand that a delayed payment IS a cut in funding until it’s paid off. Maybe it didn’t cause problems in affluent districts like his, but elsewhere around the state school districts had to plug the holes by borrowing money and paying interest, asking taxpayers for more money, and reducing services and teachers.

    Just because an accounting gimmick has been used before doesn’t mean it’s a good idea, and the whole article fails to recognize that this was a manufactured crises in the first place. Republican tax cuts and the subsequent spending cuts only budget approaches created the deficits in the first place. Without increased revenue we would be stuck in a cycle of perpetual budget crises whereby this debt would never have been paid off. The idea that you either have to resort to an accounting gimmick or cut funding is a manufactured and false dilemma that ignores the fact that you could raise more revenue instead. Sure a lot of states cut education funding, states that refused raise additional revenue.

    • Submitted by Logan Foreman on 05/17/2013 - 01:59 pm.

      Agreed

      This article is pathetic. Taking from kids’ education funds to protect the wealth of the wealthy grown ups is lousy public policy.

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