Legislature(2013 - 2014)HOUSE FINANCE 519

03/24/2014 01:30 PM FINANCE

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01:35:15 PM Start
01:36:30 PM HB278
03:06:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Presentation: "Education Budgetary Impact" by TELECONFERENCED
Legislative Finance Division
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 278                                                                                                            
     "An Act increasing the base student allocation used in                                                                     
     the formula for state funding of public education;                                                                         
     repealing the secondary  student competency examination                                                                    
     and  related  requirements;  relating  to  high  school                                                                    
     course credit earned through  assessment; relating to a                                                                    
     college and  career readiness assessment  for secondary                                                                    
     students;  relating   to  charter   school  application                                                                    
     appeals  and program  budgets; relating  to residential                                                                    
     school   applications;  increasing   the  stipend   for                                                                    
     boarding   school   students;  extending   unemployment                                                                    
     contributions for  the Alaska technical  and vocational                                                                    
     education  program;  relating  to earning  high  school                                                                    
     credit for  completion of vocational  education courses                                                                    
     offered   by  institutions   receiving  technical   and                                                                    
     vocational  education  program   funding;  relating  to                                                                    
     education  tax credits;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
1:36:30 PM                                                                                                                    
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
provided  a PowerPoint  presentation titled  "Funding Public                                                                    
Education in  Alaska" dated March  24, 2014 (copy  on file).                                                                    
He discussed that  the Base Student Allocation  (BSA) was an                                                                    
important piece of public education  funding, but it was not                                                                    
the only  factor. More  complex issues  surrounded education                                                                    
funding. The BSA  was not the only determinant  for what the                                                                    
state spent on  K-12 education or for the  amount of funding                                                                    
a school district received. He  clarified that the amount of                                                                    
money that  the state spent  on education and the  amount of                                                                    
funding a school district received  were "two very different                                                                    
things."  The  difference  created  opposing  viewpoints  on                                                                    
education funding.  Some felt that  education had  been flat                                                                    
funded   and  some   legislators  believed   that  education                                                                    
received substantial increases over  the years. He addressed                                                                    
slide 2  titled, "Statutory Base Student  Allocation (BSA)."                                                                    
He stated that the BSA had  been flat at $5,680 for the last                                                                    
four  years but  that the  BSA could  not be  regarded as  a                                                                    
"standalone  measure for  education  funding."  He hoped  to                                                                    
illustrate the point in the next several slides.                                                                                
Mr. Teal turned to slide  3 titled "Converting Head Count to                                                                    
Students  that  are  Funded."   He  delineated  that  school                                                                    
funding was  not the BSA  multiplied per pupil.  The formula                                                                    
for  K-12  education  funding was  as  follows:  Basic  Need                                                                    
equaled  Student   Count  (ADM  Average   Daily  Membership)                                                                    
multiplied by  Adjustment Factors multiplied by  the BSA. He                                                                    
defined that  adjustment factors  were adjustments  made for                                                                    
school  size,  geographic  location, special  and  intensive                                                                    
needs  education, vocational  education and  correspondence.                                                                    
Funding was  based on the Adjusted  Average Daily Membership                                                                    
(AADM). The conversion  from the head count to  the AADM was                                                                    
a critical  component of determining funding.  He pointed to                                                                    
the graph  on slide  2 that  depicted a  decline in  the ADM                                                                    
from 131,623  students in  FY 04 to  129,322 students  in FY                                                                    
14. The  state funded education  based on the AADM  and that                                                                    
had risen  from 209,571  in FY  04 to 247,472  in FY  14. He                                                                    
restated  that the  adjustment  factors  determined how  the                                                                    
head count was converted to  the AADM and then multiplied by                                                                    
the BSA.                                                                                                                        
Mr.  Teal  voiced that  if  the  BSA had  remained  constant                                                                    
during the  past ten  years per  student funding  would have                                                                    
increased by  20 percent. He  moved to slide 4  titled, "BSA                                                                    
Adjusted for  Factor Changes." The  graph depicted  what the                                                                    
BSA would  have been  if the factors  for converting  ADM to                                                                    
AADM was applied. He  explained that mathematically applying                                                                    
adjustment  factors to  the student  count was  the same  as                                                                    
applying the  adjustment factors to the  BSA. He exemplified                                                                    
that in FY 13 the BSA  adjusted for factors was $5,680 which                                                                    
amounted to 130,000 multiplied by  1.9; equal to the student                                                                    
count  including   adjustment  factors.  Each   student  was                                                                    
counted as  1.9 students.  The calculation  was the  same as                                                                    
multiplying  the BSA  times 1.9  times 130,000.  The ADM  to                                                                    
AADM adjustment  factor was applied  to the BSA.  Instead of                                                                    
adjusting  the  student  count   the  BSA  was  adjusted  to                                                                    
illustrate  that education  funding  was not  flat over  the                                                                    
last ten  years, it had  increased by 63 percent  since 2004                                                                    
($3,482 in FY04  to $5,702 in FY14). He  qualified that over                                                                    
a ten  year time period  inflation had to be  considered. He                                                                    
pointed to slide 6 titled,  "Adjusted BSA in FY 13 Dollars."                                                                    
The  numbers depicted  on  the graph  were  adjusted by  the                                                                    
Consumer  Price Index  (CPI).  The BSA  had  lost ground  to                                                                    
inflation since FY 2011. He  qualified that the BSA could be                                                                    
significantly increased  yet still result in  a reduction in                                                                    
basic  need.  He  discussed   the  funding  that  originated                                                                    
outside of formula  funding in the following  slides. All of                                                                    
the  following graphs  contained inflation  adjusted funding                                                                    
converted to the BSA.                                                                                                           
Mr. Teal  addressed pupil transportation  on slide  6 titled                                                                    
"K-12 Expenditures per AADM (in FY  13 $)." In FY 07, FY 13,                                                                    
and FY  14 pupil transportation  funding was reflected  as a                                                                    
BSA  of $300.  He detailed  that $75  million was  funded as                                                                    
pupil  transportation   but  at   the  conversion   rate  of                                                                    
approximately $25  million in costs for  every $100 increase                                                                    
in the  BSA the  $75 million translated  into the  $300 BSA.                                                                    
Pupil transportation funding had  declined from 2004 through                                                                    
2012. The  formula was increased  and inflation  adjusted in                                                                    
2012.  He examined  slide 7  titled  "K-12 Expenditures  per                                                                    
AADM (in FY 13 $)."  The graph portrayed funding provided as                                                                    
one-time items  outside of  formula funding  but distributed                                                                    
according  to the  foundation formula.  A  district may  not                                                                    
choose to count  any funding distributed for  use outside of                                                                    
the  classroom, as  education spending  but the  legislature                                                                    
considered all  general fund  expenditures for  education as                                                                    
education  funding.  He  moved  to  slide  8  titled,  "K-12                                                                    
Expenditures  per AADM  (in FY13$)."  He expounded  that the                                                                    
graph included Capital Budget grants,  which were grants for                                                                    
items  that  would  normally be  paid  for  through  formula                                                                    
1:47:44 PM                                                                                                                    
Mr. Teal  turned to slide  9 titled, "K-12  Expenditures per                                                                    
AADM  (in FY13$)"  that included  operating expenditures  of                                                                    
the Department  of Education  and Early  Development (DEED).                                                                    
[The operating  expenditures for  K-12 included  state funds                                                                    
awarded  as grants  to school  districts.] He  restated that                                                                    
the funds  were not  designated for  classroom use  but were                                                                    
expended for education.  He pointed to slide  10 titled, "K-                                                                    
12  Expenditures   per  AADM   (in  FY13$)"   that  included                                                                    
"substantial" retirement costs.  The graph depicted unfunded                                                                    
liability costs  beginning in FY  08 amounting  to currently                                                                    
over $350  million for school  districts. He  commented that                                                                    
liability  converted  into  the BSA  was  "significant."  He                                                                    
reiterated  that  some may  argue  that  the money  was  not                                                                    
directly  spent   in  the   classroom  and   not  considered                                                                    
education  funding. But  some share  the viewpoint  that the                                                                    
funding was  a "cost  of doing  business" and  therefore, an                                                                    
educational  expense. He  turned to  slide 11  titled, "K-12                                                                    
Expenditures  per  AADM  (in  FY13$)."  The  graph  depicted                                                                    
capital   costs   which   included  debt   service,   school                                                                    
construction, and major maintenance costs.                                                                                      
Mr.  Teal observed  that     the shape  of  the graphs  from                                                                    
slides  7  through 11  had  not  changed even  after  adding                                                                    
retirement funding. The  curve rose and peaked  in FY13 with                                                                    
a slight  decrease in FY14. He  pointed to a chart  on slide                                                                    
12.   He  asserted   that  examining   the  same   education                                                                    
expenditures simply  in terms of  money, not  converted into                                                                    
the  BSA had  continually  increased  in inflation  adjusted                                                                    
dollars  in the  same  time period.  He  recounted that  the                                                                    
student  count declined  steadily  over the  same period  of                                                                    
time. He noted  that the chart "understated  the per student                                                                    
spending." He referred  to slide 5 and noted  that the graph                                                                    
illustrated  that  education  funding  had  kept  pace  with                                                                    
inflation. The BSA alone had  not kept up with inflation. He                                                                    
reiterated  that there  was much  more to  education funding                                                                    
than the BSA.  He felt that education funding  was a complex                                                                    
Mr.  Teal  discussed  other  informational  items  had  been                                                                    
requested by  the committee.  He mentioned  that information                                                                    
on  district by  district funding  comparisons for  the last                                                                    
three years and district  costs categorized by fuel, travel,                                                                    
etc., was available from DEED.  He addressed the committee's                                                                    
information   requests  about   how   the  formula   worked,                                                                    
municipal  versus  state  versus federal  funding,  and  the                                                                    
effects  of  education  funding  increases  on  the  state's                                                                    
budget.  He  developed   an  interactive  Excel  spreadsheet                                                                    
titled, "FY  14 Projections - Converting  Student Head Count                                                                    
to  Adjusted Average  Daily Membership  by District  (static                                                                    
copy on  file). The  formula converted a  head count  to the                                                                    
AADM, which  was multiplied  by the  BSA to  determine basic                                                                    
need  (total  funding).  He  explained  that  the  math  was                                                                    
simple,   but  every   factor   affected  school   districts                                                                    
differently, which  made the policy choices  associated with                                                                    
the formula  complex. School districts could  distribute its                                                                    
funding  "in any  way it  saw  fit," regardless  of how  the                                                                    
funding was originally appropriated.                                                                                            
Mr. Teal  cautioned that the  adjustment factors  all worked                                                                    
together and any  changes to the formula had  to be holistic                                                                    
as opposed  to piecemeal.  He examined  the size  factor for                                                                    
the Aleutian  Region School District that  had 26.5 students                                                                    
and grew to  52.7 due to the size factor  which totaled 79.2                                                                    
students.  The size  factor was  adjusted for  "economies or                                                                    
diseconomies of scale" for each  school in a school district                                                                    
and  changed  yearly. He  detailed  that  "the economies  or                                                                    
diseconomies were…  massive." In small schools  each student                                                                    
could be  counted as  four students and  as the  school size                                                                    
increased  the  count  went  down  to  .84  percent  of  one                                                                    
student. The  conversion table was contained  in statute. He                                                                    
exemplified that a school with  32 students was converted to                                                                    
a  base of  55 students,  which would  be multiplied  by the                                                                    
$5,680  BSA. He  pointed out  that a  larger school  with 64                                                                    
students grew  to 106 students  when adjusting for  the size                                                                    
1:56:51 PM                                                                                                                    
Mr.  Teal  continued that  a  school  size of  106  students                                                                    
amounted to  190 students after the  size factor adjustment.                                                                    
As  the  size  of  the  school  increased  the  size  factor                                                                    
decreased. A school  of 1,200 received a count  of less than                                                                    
1,200.  He stated  that "the  size factor  had a  tremendous                                                                    
impact."  The  conversion  table  was devised  in  1997.  He                                                                    
thought  that at  the time  the table  was accurate  and was                                                                    
still appropriate for small schools,  but was inaccurate for                                                                    
large  schools and  should be  increased. He  felt that  the                                                                    
formula should be  "dynamic." He moved on  to the geographic                                                                    
factor that was meant to  account for differing costs across                                                                    
the  state. The  Anchorage student  population was  the base                                                                    
for the  geographic factor and  had a  factor of one  so the                                                                    
school district  did not  gain an  extra student  count. The                                                                    
geographic  factor   varied  from  one  to   over  two.  The                                                                    
geographic  factor took  the ADM  and multiplied  it by  the                                                                    
geographic  differential  which  was 1.94  percent  for  the                                                                    
Aleutian  Region   School  District.  The   district's  26.5                                                                    
students increased to 153.6 students.                                                                                           
Mr.  Teal  demonstrated that  the  factors  had an  enormous                                                                    
impact.  He calculated  that an  increase of  25,000 to  the                                                                    
student  count cost  $145  million and  an  increase in  the                                                                    
geographic factor  of 28,000 students cost  $163 million. He                                                                    
identified the special needs factor  of 20 percent for every                                                                    
school  district. He  felt that  that was  illogical because                                                                    
the intent  of the education  funding formula was  to adjust                                                                    
for  differences.  When  the   intensive  needs  factor  was                                                                    
developed  the  special needs  factor  was  flat funded.  He                                                                    
moved  to the  career and  technical education  factor which                                                                    
was 1.5 percent for every  school district. At this point in                                                                    
the  factors  the  Aleutian  Region AADM  was  now  187.  He                                                                    
highlighted  that  the  intensive  needs factor  was  not  a                                                                    
multiplier but  was an add-on. Each  intensive needs student                                                                    
was  counted as  13 students  and  was also  counted in  the                                                                    
regular  BSA. He  exemplified that  in  the Aleutian  Region                                                                    
School District which  began at 26.5 and grew  to 187 before                                                                    
the intensive  needs add-on, the intensive  need student was                                                                    
already counted as 7 students.  With the intensive need add-                                                                    
on of 13, an intensive  needs student in the Aleutian Region                                                                    
School District  counted as 20. Contrasted  by the Anchorage                                                                    
school  district that  has lower  multipliers  for size  and                                                                    
geographic factors, the student  count was only increased by                                                                    
1.3 therefore,  an intensive need  student in  Anchorage was                                                                    
counted as 14.3 students. The  impact of the intensive needs                                                                    
factor amounted  to approximately  28,000 students  and cost                                                                    
the  state   another  $162  million.   He  added   that  the                                                                    
correspondence factor  was also  a head  count add-on  of .8                                                                    
per student and  was added to the AADM,  which completed the                                                                    
list of adjustment factors. All  of the factors were totaled                                                                    
and  counted as  the  AADM  then multiplied  by  the BSA  of                                                                    
$5680,  which  totaled  $1.4  billion   in  basic  need.  He                                                                    
computed that  the effective BSA  divided the basic  need by                                                                    
the  head count  which  determined the  per  pupil cost.  He                                                                    
noted  a  "tremendous variation"  in  the  costs per  school                                                                    
district. He  pointed out that  the per student cost  in the                                                                    
Aleutian Region  School District  was $48,451 and  $8,896 in                                                                    
the Anchorage  School District.  The aggregate  average cost                                                                    
per  pupil was  $11,845. He  proposed that  in effect  there                                                                    
were  multiple BSA's  which  varied  tremendously by  school                                                                    
2:05:21 PM                                                                                                                    
Mr.  Teal  discussed the  proportion  of  state, local,  and                                                                    
federal  government's education  costs.  He elucidated  that                                                                    
state, local,  and federal governments  cost were  split. He                                                                    
defined the  split as:  state aid  equaled basic  need minus                                                                    
required  local  effort  (RLE)  minus  federal  funding.  He                                                                    
explained  that required  local effort  was simply  property                                                                    
tax multiplied by  the mil rate set at  .0265 percent, which                                                                    
totaled 15.8  percent of  basic need.  The RLE  was recently                                                                    
reduced from 0.04  percent. He stated that  local effort was                                                                    
important because  every dollar of local  effort was off-set                                                                    
by one  dollar of state aid.  If the local mil  rate was set                                                                    
at 0.04  percent, similar  to previous  years the  RLE would                                                                    
have amounted  to $334  million instead  of $222  million; a                                                                    
savings to the state of $113  million. When the mil rate was                                                                    
reduced the state  became responsible for a  larger share of                                                                    
the costs. He ascertained that  the mil rate savings of $113                                                                    
million could  have been reinvested  into a BSA  increase of                                                                    
$450   without  reducing   the  general   fund.  The   local                                                                    
government  would   have  contributed  an   additional  $113                                                                    
million to  the school  districts. He  pointed out  that the                                                                    
above scenario was  an example of how  the state contributed                                                                    
to education funding  outside of the BSA and  noted that the                                                                    
impact  of the  $113 million  was  not included  in the  BSA                                                                    
charts and  understated the contribution from  the state for                                                                    
education funding.                                                                                                              
Mr. Teal  mentioned federal impact  aid. The  state received                                                                    
$99,797,886 million  in federal aid. The  federal government                                                                    
determined  eligibility through  a  complicated formula  and                                                                    
paid  90   percent  of  the  eligible   amount.  The  school                                                                    
districts retained approximately $31  million of federal aid                                                                    
without  reduction  in  state   aid  and  approximately  $67                                                                    
million was deductible and  reduced the state's contribution                                                                    
to  education funding.  He directed  attention to  the final                                                                    
piece of the  formula related to voluntary  local effort. He                                                                    
elaborated that  the local  allowable contribution  rate was                                                                    
limited to 23  percent of basic need for most  of the school                                                                    
districts. Some school districts  were allowed to contribute                                                                    
a  higher amount  and  Regional  Education Attendance  Areas                                                                    
(REAA) was not  allowed to contribute at  all. He calculated                                                                    
that when  adding the required  and voluntary  local efforts                                                                    
together  the  maximum  effort was  determined.  In  FY  14,                                                                    
communities  could   have  contributed  an   additional  $66                                                                    
million  voluntary local  effort.  However, communities  had                                                                    
contributed  $231   million  or  78  percent   of  allowable                                                                    
voluntary  local effort.  He restated  that voluntary  local                                                                    
effort was  limited and explained that  the phrase, "funding                                                                    
to the cap"  meant that a school  district's voluntary local                                                                    
effort was at the 23 percent limit.                                                                                             
2:13:20 PM                                                                                                                    
Mr. Teal  returned to  slide 12  that displayed  the formula                                                                    
for  education  funding   from  FY  2000  to  FY   14  on  a                                                                    
spreadsheet.  He  reminded  the  committee  that  state  aid                                                                    
equaled  basic need  minus required  local  effort minus  90                                                                    
percent of  deductible Federal Impact  Aid. He  examined the                                                                    
components of basic  need. The ADM decreased  by 3.9 percent                                                                    
from the FY  2000 to FY 14. Correspondence  ADM increased by                                                                    
30 percent during  the same time period.  Added together the                                                                    
ADM still declined by approximately  2 percent. The AADM had                                                                    
increased over 18  percent since FY 2000.  The BSA increased                                                                    
44  percent since  FY  2000. Basic  need  increased by  70.9                                                                    
percent since FY  2000.  Required local  effort increased by                                                                    
53.6  percent since  FY 2000.  Federal Impact  Aid increased                                                                    
from $49 million  in FY2000 to approximately  $67 million in                                                                    
FY 14, an  increase of 35 percent. State  aid increased from                                                                    
approximately $655 million in FY  2000 to $1.1 billion in FY                                                                    
14 which was  an increase of 70 percent.  The required local                                                                    
effort rose 53.6 percent, even  with the reduction, over the                                                                    
same  time period.  Higher property  taxes more  than offset                                                                    
the reduction in required local  effort. He pointed out that                                                                    
the voluntary  local effort  climbed to  87 percent  from FY                                                                    
2000 to FY  14. Overall, the total  local contributions rose                                                                    
69.1 percent.  He continued that  in FY 2000 the  state paid                                                                    
65  percent  of total  school  district  funds and  paid  66                                                                    
percent in FY  14 and local communities now  paid 26 percent                                                                    
in FY  2000 and paid  27 percent  in FY 14.  Federal funding                                                                    
fell from 9 percent in FY 2000 to 7 percent in FY 14.                                                                           
Mr.  Teal referenced  another fiscal  projection model  that                                                                    
predicted when  the state's reserves  would be  depleted. He                                                                    
summarized that  the base scenario demonstrated  that at the                                                                    
state  of  Alaska's  budget; a  flat  capital  budget,  zero                                                                    
growth  in  the  operating  budget and  status  quo  in  the                                                                    
retirement  plans; the  reserves will  be depleted  in 2024.                                                                    
The  governor's  proposed  $85 increase  in  the  BSA  would                                                                    
increase education  funding $50  million per year  and would                                                                    
further diminish the  reserves $500 million over  a ten year                                                                    
Representative  Gara relayed  that according  to Legislative                                                                    
Research the six largest school  districts in the state lost                                                                    
over 600 full-time  staff since 2011. He listed  five of the                                                                    
largest districts; Juneau,  Anchorage, Fairbanks, Matanuska-                                                                    
Susitna,  and  Kodiak. He  asked  what  "attributed" to  the                                                                    
staff losses given the conclusions  of the education funding                                                                    
Mr.  Teal   emphasized  that  the  charts   addressed  state                                                                    
spending on  education and not necessarily  the funding that                                                                    
the  school  districts  actually received.  He  acknowledged                                                                    
that the districts had not  received enough funding to carry                                                                    
out  the same  level  of  services as  they  had before.  He                                                                    
stated that the  "counter argument was that  the state could                                                                    
not continue to spend more and more money on education."                                                                        
Representative  Gara  requested  an  analysis  of  inflation                                                                    
adjusted   per  student   school  funding   exclusively  for                                                                    
classroom  expenses   since  2011.  He   requested  removing                                                                    
PRS/TRS, school debt  reimbursement, student transportation,                                                                    
and DEED department operations from the equation.                                                                               
2:22:14 PM                                                                                                                    
Co-Chair Stoltze interjected that  if variables were removed                                                                    
the information would not be accurate.                                                                                          
Mr. Teal replied that the  information was depicted on chart                                                                    
7 of  the presentation. He  reminded the committee  that the                                                                    
figures  were  inflation  adjusted  and that  based  on  the                                                                    
factors  mentioned  by  Representative  Gara  education  had                                                                    
"outpaced"  inflation from  FY  2004 until  FY  14 when  the                                                                    
funding had not kept up with inflation.                                                                                         
Representative Gara  requested more clarification  about the                                                                    
chart. He wondered what capital  budget grants for education                                                                    
Mr. Teal replied that the  grants were "classroom items." He                                                                    
defined  that capital  grants was  funding  included in  the                                                                    
Capitol  Budget  the  legislature had  given  to  individual                                                                    
school districts for items that  would normally be funded by                                                                    
formula funds.  When traditional funding was  reduced, other                                                                    
sources  were  sought.  The  capital  grants  had  increased                                                                    
substantially since 2004.                                                                                                       
Representative Gara asked if the  grants included items like                                                                    
sports  utility   upgrades.  Mr.   Teal  responded   in  the                                                                    
Representative Wilson  pointed out that capital  grant funds                                                                    
could be utilized for classroom materials. Mr. Teal agreed.                                                                     
Representative  Wilson asked  whether the  education formula                                                                    
historically included factors like curriculum or energy.                                                                        
Mr. Teal  answered that did  not know. He was  familiar with                                                                    
the formula since 1997.                                                                                                         
Representative  Wilson wondered  whether federal  grants for                                                                    
special education was included in slide 8.                                                                                      
Mr.  Teal answered  that the  grants were  not included.  He                                                                    
explained that the chart only  included impact aid, which he                                                                    
described as  "payments on behalf  or in lieu of  taxes." He                                                                    
exemplified a  military base with tax  exempt property where                                                                    
a number of base children  attended the local public school.                                                                    
In   the   described   scenario,  the   federal   government                                                                    
contributed  educational  funding  on behalf  of  the  local                                                                    
Representative  Wilson  asked  whether the  formula  applied                                                                    
equally to charter schools.                                                                                                     
Mr.  Teal  responded  that   charter  schools  were  counted                                                                    
against  the  regular  formula   but  were  not  counted  as                                                                    
independent  schools.  A  charter   school  was  not  always                                                                    
counted  as an  independent  school and  received a  reduced                                                                    
Representative  Wilson  asked  for clarification  about  the                                                                    
correspondence factor. She  observed that the correspondence                                                                    
factor  was a  headcount that  was  added to  the number  of                                                                    
students  multiplied by  80  percent of  the  BSA. Mr.  Teal                                                                    
answered in the affirmative.                                                                                                    
Representative  Costello  addressed  Mr. Teal's  point  that                                                                    
students were  not all counted  equally. She  wondered about                                                                    
the  rationale  that  had  gone  into  the  current  funding                                                                    
formula calculations.                                                                                                           
Mr. Teal provided  a hypothetical example. If the  cost of a                                                                    
superintendent  was  $200 thousand  per  year,  in a  school                                                                    
district with 50 thousand students  the per student cost was                                                                    
$4. The  cost was  $2,000 per student  in a  school district                                                                    
with 100 students.  He noted the "tremendous  range of fixed                                                                    
costs spread over large districts  and small districts." The                                                                    
factors  were "intended  to adjust  for  the differences  in                                                                    
costs."  He expounded  that whether  fixed costs  were being                                                                    
spread out  over few versus  many students, paying  for fuel                                                                    
that was  $8 to $10 per  gallon versus $3 to  $4 per gallon,                                                                    
shipping  school  supplies,  size  of a  school,  etc.;  the                                                                    
factors were  developed to  "equalize funding"  and adjusted                                                                    
for the actual costs  of providing education under disparate                                                                    
circumstances.    He  believed  that  it  was  difficult  to                                                                    
compensate  for  some of  the  variables  between rural  and                                                                    
urban  schools.   The  calculations  attempted   to  provide                                                                    
Representative   Costello  asked   about   the  measure   of                                                                    
flexibility districts had to spend its allocated funds.                                                                         
2:32:29 PM                                                                                                                    
Mr. Teal  replied that districts had  total discretion about                                                                    
how  to  spend its  funding.  He  exemplified the  intensive                                                                    
needs  factor which  allotted 13  or 14  times the  BSA. The                                                                    
school district did  not have to spend the  entire amount on                                                                    
special  needs services.  There  was no  mandate that  money                                                                    
generated  by  a  certain  factor  had  to  be  spent  in  a                                                                    
definitive way.                                                                                                                 
Representative  Costello pointed  to  the interactive  Excel                                                                    
spreadsheet. She wondered what  effect increasing the BSA to                                                                    
$200 and  $400 would have  on the state's  reserve accounts.                                                                    
She asked when the state would run out of savings.                                                                              
Mr. Teal  replied that a  $200 BSA would  cost approximately                                                                    
$50  million. The  scenario was  currently built  in to  the                                                                    
spreadsheet. The  governor had  proposed an increase  of $85                                                                    
which would raise the BSA  to approximately $200. If the BSA                                                                    
was doubled the impact was doubled.                                                                                             
Representative   Guttenberg    pointed   to    the   various                                                                    
differentials and  cost factors. He wondered  whether anyone                                                                    
evaluated the formulas  on an ongoing basis for  the cost of                                                                    
doing business in various communities.                                                                                          
Mr. Teal replied that there  was no scheduled review; it was                                                                    
up to  the legislature to  make the changes to  the factors.                                                                    
He  informed  the  committee that  the  McDowell  Group  was                                                                    
commissioned to  perform a study  in 1997. He  reported that                                                                    
the study  concluded that the geographic  factors were weak.                                                                    
The  legislature  subsequently   engaged  the  Institute  of                                                                    
Social  and  Economic  Research (ISER)  to  perform  another                                                                    
study  on the  funding factors.  He believed  that ISER  had                                                                    
done  a  good job  examining  components  of the  geographic                                                                    
factors that the McDowell Group  report did not contain. The                                                                    
institutes  study  recommended   some  significantly  higher                                                                    
geographic   factors.   He   believed  that   although   its                                                                    
geographic  factors  were  low,  the  McDowell  Group  study                                                                    
utilized other  factors that worked  together well.  He felt                                                                    
that  ISER's geographic  factors  did not  work  as well  in                                                                    
combination with size and other  factors. The argument could                                                                    
be  made that  ISER's  geographic factor  favored rural  and                                                                    
small districts  over larger urban  ones. He  suggested that                                                                    
the legislature  should consider readjusting  the geographic                                                                    
factor  formula when  necessary. The  way to  determine when                                                                    
readjustment  was necessary  was to  determine which  school                                                                    
districts  were  experiencing  more fiscal  difficulty  than                                                                    
others. The  size factor  could be  adjusted when  the urban                                                                    
school districts were struggling  more than rural districts.                                                                    
He  exemplified that  if the  larger  school districts  size                                                                    
factor was adjusted up the  funding increase would total $13                                                                    
million;  the  increase  for Anchorage  alone  would  be  $9                                                                    
Mr.  Teal   deduced  that  adjusting  factors   was  a  more                                                                    
efficient  and  less  expensive way  to  assist  financially                                                                    
struggling districts.  In order  to increase the  BSA enough                                                                    
for Anchorage to  receive a $9 million increase  the BSA had                                                                    
to  be increased  by approximately  $40 million.  He thought                                                                    
that  school district  operations  were dynamic;  therefore,                                                                    
the funding formula  should be "as dynamic  as the operating                                                                    
costs." He  advised that the legislature  adjust the factors                                                                    
on  an  as  needed  basis to  "change  the  distribution  of                                                                    
funding"  rather   than  simply   increasing  the   BSA.  He                                                                    
concluded  that the  legislature should  determine how  much                                                                    
money  to  appropriate  for  education  and  for  "the  most                                                                    
efficient way" to spend where the funds were needed.                                                                            
Representative Guttenberg noted that  there were quite a few                                                                    
school districts in  the state. He asked Mr. Teal  if he met                                                                    
with  DEED to  determine  what factors  like dropout  rates,                                                                    
graduation rates, etc. made a significant difference.                                                                           
Mr.  Teal replied  that  he only  dealt  with the  financial                                                                    
aspect of education funding.                                                                                                    
Co-Chair Stoltze stated that the  current fiscal year budget                                                                    
appropriated $25  million for safety and  security which was                                                                    
"used in any  way possible" for classroom  support and other                                                                    
$25 million  was appropriated for  energy. He  wondered what                                                                    
the two appropriations equaled as a BSA increase.                                                                               
Mr.  Teal  responded that  $25  million  equated to  a  $100                                                                    
increase  in the  BSA  and  $50 million  equated  to a  $200                                                                    
Co-Chair Stoltze  requested that  Mr. Teal explain  what the                                                                    
difference was between the ways the funding was increased.                                                                      
Mr. Teal  answered that when  money was  distributed outside                                                                    
of the formula the districts  did not receive the same money                                                                    
as they  would have if  it was  included in the  formula. He                                                                    
exemplified the  correspondence factor  which was  an add-on                                                                    
and  not a  multiplier. Simply  increasing the  BSA by  $100                                                                    
would cost  more than the  $25 million  appropriated outside                                                                    
of  the formula.  In addition,  an appropriation  outside of                                                                    
the  formula was  not considered  basic need.  When included                                                                    
inside the formulas basic need  was increased by $25 million                                                                    
therefore,  voluntary  local  effort  was  increased  by  23                                                                    
percent of  the amount  and the districts  at the  cap could                                                                    
contribute more.  He stated that  the matter was  not simple                                                                    
and  increases outside  of the  BSA  were not  equal to  BSA                                                                    
2:45:26 PM                                                                                                                    
Co-Chair Stoltze  addressed federal funds. He  discussed the                                                                    
federal American Recovery and  Reinvestment Act (ARRA) funds                                                                    
provided  to states  for education  in  2009. He  remembered                                                                    
that the  funding was appropriated  as "one time  money" and                                                                    
was not  to be "integrated  into school growth."  Some large                                                                    
school districts  used the  funds for  reoccurring expenses.                                                                    
He wondered what the ARRA  funding repercussions were on the                                                                    
state  now that  the  absence  of the  funds  was viewed  as                                                                    
"underfunding" in some school districts.                                                                                        
Mr. Teal replied that most  of the ARRA funding was expended                                                                    
by  2013.   He  thought   that  the  situation   could  have                                                                    
contributed to some of the  school districts recent layoffs.                                                                    
The layoffs should  be examined against the  number of staff                                                                    
hired in 2009 based on  the ARRA funds. He acknowledged that                                                                    
the legislature  clearly advised districts not  to spend the                                                                    
federal funds on recurring items,  but some of the districts                                                                    
had not followed the advice.                                                                                                    
Co-Chair  Stoltze indicated  that an  increased BSA  to $400                                                                    
translated  into  a $200  million  budget  increase for  the                                                                    
current year  when counting the forward  funding mandate. He                                                                    
wondered  how  the  expenditure   would  erode  the  state's                                                                    
savings over  time. He wondered  how quick it would  put the                                                                    
state  in the  position of  spending the  permanent fund  or                                                                    
implementing an income tax.                                                                                                     
Mr. Teal  stated that the  fiscal model depicted the  BSA at                                                                    
$400 which increased education funding by $100 million.                                                                         
Co-Chair   Stoltze  asked   whether   his  forward   funding                                                                    
assumption of $200 million was correct.                                                                                         
Mr.  Teal replied  in the  affirmative and  stated that  the                                                                    
doubling only applied for the first year.                                                                                       
Representative   Edgmon  appreciated   the   value  of   the                                                                    
discussion.  He  asked  whether  the  size  factor  and  the                                                                    
geographical differential compensated  small rural districts                                                                    
for the cost structure in  rural Alaska versus the Anchorage                                                                    
school district  that benefited from  its economy  of scale.                                                                    
He wondered  if the  factors adequately compensated  for the                                                                    
higher costs in rural Alaska.                                                                                                   
Mr.  Teal  believed the  ISER  study  was comprehensive.  He                                                                    
thought that the  factors were adequate. He  stated that the                                                                    
information had  to be provided  by districts.  He qualified                                                                    
that  he  wasn't familiar  with  the  financial problems  in                                                                    
rural parts  of the state.  He thought that his  opinion was                                                                    
biased  based on  the  information he  had  access to  which                                                                    
suggested  that urban  districts  were  suffering but  rural                                                                    
districts  were not.  Analysis of  each district's  spending                                                                    
information would  determine whether the districts  were all                                                                    
struggling  equally or  whether a  difference between  rural                                                                    
and  urban  existed.  He reiterated  that  he  examined  the                                                                    
funding on a large scale.                                                                                                       
2:55:01 PM                                                                                                                    
Representative  Edgmon believed  the  numbers  shown in  the                                                                    
presentation were indisputable and  the big picture analysis                                                                    
was educational.  He agreed that education  funding involved                                                                    
much  more  than  the BSA  including  teachers'  retirement,                                                                    
grants,  pupil  transportation, maintenance  funds,  capital                                                                    
funds  and other  funding  sources.  Rural school  districts                                                                    
were finding  it increasingly difficult to  provide required                                                                    
curriculum  needs.  The  presentation highlighted  that  the                                                                    
state was facing an "incredible  conundrum." He wondered how                                                                    
the state  could continue to adequately  fund public schools                                                                    
in light of  eroding cash reserves. He observed  that it was                                                                    
a  "tremendously complicated  policy issue."  He welcomed  a                                                                    
discussion regarding  education needs and spending  in rural                                                                    
Representative Gara  recounted that the  legislature reduced                                                                    
the required local  contribution mil rate from  4 percent to                                                                    
approximately  2.7 percent.  He deduced  that if  the amount                                                                    
that the  localities contributed  was reduced the  amount of                                                                    
state funding increased.                                                                                                        
Mr. Teal replied in the affirmative.                                                                                            
Representative Gara  asked if the  increase was on  a dollar                                                                    
for dollar amount.                                                                                                              
Mr. Teal answered in the affirmative.                                                                                           
Representative Gara  surmised that  the school  districts do                                                                    
not pay more; the increase shifted to the state.                                                                                
Mr.  Teal  answered  in the  affirmative.  He  reminded  the                                                                    
committee that an  increase in the BSA  increased basic need                                                                    
and allowable local contributions.                                                                                              
Representative Gara wondered  whether increasing the funding                                                                    
cap on  school districts  to allow a  higher mil  rate would                                                                    
increase  funding  for the  school  districts  or shift  the                                                                    
costs to the municipality.                                                                                                      
Mr. Teal  replied that  the example  would shift  the costs.                                                                    
He  used  Fairbanks as  an  example  because they  were  not                                                                    
currently funding  to the cap. If  the required contribution                                                                    
was raised  the school  district might reduce  the voluntary                                                                    
contributions by the  same amount in lieu  of raising taxes.                                                                    
A school district  would gain nothing and  even lose because                                                                    
the  state would  reduce its  contributions by  the required                                                                    
amount and the local tax payers would pay more.                                                                                 
Representative Munoz  discussed deducting 20 percent  of the                                                                    
special education factor and transferring  the amount into a                                                                    
BSA  increase. She  wondered whether  the increase  would be                                                                    
proportionately spread throughout the districts.                                                                                
Mr.  Teal responded  that because  the  intensive needs  and                                                                    
correspondence    factors    were     additive    and    not                                                                    
multiplicative,  the  increase would  not  be  the same  for                                                                    
every district. The funding would  be redistributed, but not                                                                    
necessarily in  the most effective way.  He exemplified that                                                                    
the  Galena school  district which  had 3000  correspondence                                                                    
students  and only  approximately 300  traditional students.                                                                    
Galena's correspondence  factor would rise by  80 percent of                                                                    
the  increase   which  would  essentially   double  Galena's                                                                    
correspondence  factor,  if  the 20  percent  special  needs                                                                    
factor  was reapportioned  into the  BSA. He  expounded that                                                                    
Galena's  funding  formula   was  driven  by  correspondence                                                                    
students.   The   correspondence   formula   would   double,                                                                    
regardless of need, at the  expense of the regular students.                                                                    
Other factors in the formula might  need to be adjusted if a                                                                    
factor  was  changed.  He cautioned  against  adjusting  the                                                                    
factors singularly because they all interact.                                                                                   
Co-Chair  Stoltze recalled  that  the  state's budget  three                                                                    
biggest cost drivers were  Medicaid, education spending, and                                                                    
retirement  and  would  use   95  percent  of  general  fund                                                                    
revenues  by 2023.  He requested  that Mr.  Teal update  the                                                                    
fiscal   projections   by   adding   in   higher   education                                                                    
expenditures.   He  observed   that   the  legislature   had                                                                    
increased education spending above the rate of inflation.                                                                       
Mr. Teal agreed but stipulated  that the conclusion would be                                                                    
the  same   and  that   education  funding,   Medicaid,  and                                                                    
retirement would consume all of the state's revenues if the                                                                     
state continued on the same path.                                                                                               

Document Name Date/Time Subjects
HB 278 LFD Budget Impact Presentation HFIN.pdf HFIN 3/24/2014 1:30:00 PM
HB 278
HJR 33 Opposition AK Court System Opposition Meade.pdf HFIN 3/24/2014 1:30:00 PM
HJR 33
Ak Jud Cncl HJR33 Info - Mar 20.pdf HFIN 3/24/2014 1:30:00 PM
HJR 33
HB 278 AK School District Cost Study 2005 Link.pdf HFIN 3/24/2014 1:30:00 PM
HB 278
HB 278 3 24 14 HFC FY14 ADM to AADM by district-4.pdf HFIN 3/24/2014 1:30:00 PM
HB 278