Legislature(2019 - 2020)SENATE FINANCE 532

03/26/2019 09:00 AM FINANCE

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09:00:37 AM Start
09:01:29 AM K-12 Education Funding Considerations
10:13:49 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ K-12 Education Funding Considerations TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 26, 2019                                                                                            
                         9:00 a.m.                                                                                              
                                                                                                                                
9:00:37 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:00 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
David Teal, Director,  Legislative Finance Division; Michael                                                                    
Partlow, Fiscal  Analyst for Education,  Legislative Finance                                                                    
Division;  Senator  Cathy  Giessel;  Senator  Mia  Costello;                                                                    
Senator Chris  Birch; Senator Gary Stevens;  Senator Shelley                                                                    
Hughes.                                                                                                                         
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^K-12 EDUCATION FUNDING CONSIDERATIONS                                                                                        
                                                                                                                                
9:01:29 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  relayed  that   the  committee  would  be                                                                    
discussing the governor's proposed  education budget and its                                                                    
effects  on school  districts. The  committee would  discuss                                                                    
the  local  contribution, the  cap  issue,  and the  federal                                                                    
funding issues.  He commented that the  education budget was                                                                    
complicated. He  thought it would  be beneficial to  go into                                                                    
more  detail  to  understand  the  federal  disparity  test,                                                                    
spending caps, and local contribution issues.                                                                                   
                                                                                                                                
Co-Chair  Stedman continued  his  introductory remarks.  Co-                                                                    
Chair von Imhof had been  working on different proposals and                                                                    
options  available  to  consider  as  a  committee.  Senator                                                                    
Hoffman   had  been   in  charge   of  the   Senate  Finance                                                                    
Subcommittee.  The  committee   had  asked  the  legislative                                                                    
budget director to present the governor's proposed budget.                                                                      
                                                                                                                                
9:04:07 AM                                                                                                                    
                                                                                                                                
DAVID TEAL,  DIRECTOR, LEGISLATIVE FINANCE  DIVISION, stated                                                                    
that the  slides were mostly  prepared by the  Department of                                                                    
Education  and  Early  Development (DEED).  He  thought  the                                                                    
issue being  considered was how  did the governor's  plan to                                                                    
prorate   the   K-12    formula   impact   voluntary   local                                                                    
contributions. He  reminded that  in addition to  state aid,                                                                    
school  districts   received  local  government   funds  and                                                                    
federal funds.                                                                                                                  
                                                                                                                                
Mr.  Teal  explained that  there  were  two types  of  local                                                                    
contributions: required  (based on property tax  values) and                                                                    
not  required.  His  presentation would  disregard  required                                                                    
local contributions,  which would remain the  same under any                                                                    
interpretation  of the  law.  He  discussed voluntary  local                                                                    
contributions, which normally were  limited to 23 percent of                                                                    
"basic  need."  He  clarified  that  "basic  need"  was  the                                                                    
formula for  the count of  students affected by a  number of                                                                    
multipliers   including    school   size    and   geographic                                                                    
differentials,  among  other  things. The  adjusted  student                                                                    
count was  multiplied by the Base  Student Allocation (BSA).                                                                    
He informed  that that  in order to  keep basic  need within                                                                    
the  federal disparity  test, voluntary  local contributions                                                                    
were limited to 23 percent of basic need.                                                                                       
                                                                                                                                
Mr.  Teal noted  that DEED  made it  clear that  it believed                                                                    
voluntary  local  contributions  must  be  prorated  if  the                                                                    
formula  itself  was  prorated. He  thought  the  idea  made                                                                    
sense, but it  was unfortunate that the law  wasn't clear on                                                                    
the  issue. Basic  need was  prorated,  and voluntary  local                                                                    
effort was less  clear. The Anchorage School  District had a                                                                    
legal opinion that said  voluntary local contributions would                                                                    
not be  prorated if the  formula was prorated. He  had asked                                                                    
for  a  legal  opinion  and  referenced  a  memorandum  from                                                                    
Legislative  Legal Services  (copy on  file). He  summarized                                                                    
that  legal  services  was   leaning  towards  opining  that                                                                    
voluntary legal contributions were not prorated.                                                                                
                                                                                                                                
9:08:13 AM                                                                                                                    
                                                                                                                                
Mr. Teal detailed noted that  federal funds came in the form                                                                    
of  impact   aid.  The  impact   aid  and   voluntary  local                                                                    
contributions were tied together  by a disparity test, which                                                                    
he would discuss further in the presentation.                                                                                   
                                                                                                                                
Mr. Teal spoke to the  document "Document 1: Governor's FY20                                                                    
K-12 Funding Proposal"  (copy on file). He  pointed out that                                                                    
the  formula would  have provided  $1.8  billion in  formula                                                                    
funding. Then  next column over showed  the governor's plan,                                                                    
which  would  use  prorating and  reduce  spending  by  $269                                                                    
million. He  noted that there  was another $30  million that                                                                    
was available as  additional formula-type aid on  top of the                                                                    
formula.  If  the  $30  million was  also  repealed  as  the                                                                    
governor had  requested, education funding would  be down by                                                                    
roughly $300 million.                                                                                                           
                                                                                                                                
9:09:43 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  for greater  detail with  regard to                                                                    
the status of the proposed FY 20 budget.                                                                                        
                                                                                                                                
Mr.  Teal   thought  it  was  well   worth  explaining  that                                                                    
normally,  FY   20  funding  would   be  in  front   of  the                                                                    
legislature while  going through  the FY 20  budget process.                                                                    
He  recounted that  the previous  year, the  legislature had                                                                    
funded FY  20 education  and added  $30 million,  which many                                                                    
people  referred   to  as  "forward-funding."  It   was  not                                                                    
technically  forward-funding, which  would imply  that funds                                                                    
from FY  19 were set  aside for  spending in FY  20. Rather,                                                                    
the $30 million  was funding with a  delayed effective date.                                                                    
The legislature  passed the  law, and used  FY 20  money for                                                                    
education, not FY 19 money.                                                                                                     
                                                                                                                                
Mr.  Teal  continued  his remarks.  He  recounted  that  the                                                                    
governor  had  not vetoed  the  funding,  and the  time  for                                                                    
vetoes  was long  past. Unless  the legislature  revised the                                                                    
previous year's  law, the funding  for FY 20 would  stand at                                                                    
the  full formula  funding plus  $30  million. The  governor                                                                    
requested  that the  full  funding and  the  $30 million  in                                                                    
forward  funding  be repealed  and  replaced  by roughly  75                                                                    
percent of the formula with zero additional funding.                                                                            
                                                                                                                                
Mr.  Teal considered  how it  would  affect voluntary  local                                                                    
contributions  if the  legislature  accepted the  governor's                                                                    
proposal,  repealed   the  previous   year's  appropriation,                                                                    
opened education  back up, and  prorated. He made  the point                                                                    
that school  districts may  get a  double whammy  when state                                                                    
funding   was   cut,   which   could   also   reduce   local                                                                    
contributions. At  a time when local  communities would step                                                                    
up to  replace lost  state funds,  the communities  would be                                                                    
limited in the ability to do so.                                                                                                
                                                                                                                                
9:13:09 AM                                                                                                                    
                                                                                                                                
Senator  Olson  referenced  Mr. Teal's  comments  about  the                                                                    
limitation  of local  government to  increase contributions.                                                                    
He asked if local governments would be limited or barred.                                                                       
                                                                                                                                
Mr.  Teal  did not  know  if  local contributions  would  be                                                                    
prorated.   If  the   contributions   were  prorated,   DEED                                                                    
indicated $51.5 million could be  lost district by district.                                                                    
He  referenced the  document "Document  2: Projected  FY2020                                                                    
Local Effort" (copy  on file). He noted that  the amount was                                                                    
the  maximum  that  all  communities   could  lose.  It  was                                                                    
unlikely that voluntary local contributions  would be at the                                                                    
maximum.                                                                                                                        
                                                                                                                                
Mr.  Teal  used  the  example of  Anchorage,  which  had  an                                                                    
allowable  voluntary contribution  of $102  million. If  the                                                                    
formula  and  the  voluntary  contributions  were  prorated,                                                                    
Anchorage would  only be allowed to  contribute $82 million.                                                                    
He  explained that  Anchorage  was funding  to  the cap;  if                                                                    
voluntary contributions were  prorated, the school districts                                                                    
would not receive the same amount of funds.                                                                                     
                                                                                                                                
Co-Chair Stedman  asked if there were  school districts that                                                                    
were so far under the cap as to not be affected.                                                                                
                                                                                                                                
Mr.  Teal affirmed  that there  were a  number of  districts                                                                    
that  were way  under the  cap. He  noted that  the Regional                                                                    
Educational Attendance  Areas (REAAs) did not  contribute at                                                                    
all locally and would be unaffected.                                                                                            
                                                                                                                                
Co-Chair Stedman asked about the meaning of REAA.                                                                               
                                                                                                                                
Mr. Teal  explained that  an REAA  was a  Regional Education                                                                    
Attendance Area, which was essentially  a school district in                                                                    
an unorganized  borough that  was also  not in  an organized                                                                    
community.                                                                                                                      
                                                                                                                                
Co-Chair Stedman thought there  was a significant difference                                                                    
between organized regions that  payed property tax and areas                                                                    
that did not.                                                                                                                   
                                                                                                                                
9:17:08 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman  commented  on  the  three  appropriations,                                                                    
which if  kept in the  budget, were  not subject to  veto by                                                                    
the governor.  He asked  about the  $30 million  in one-time                                                                    
funding, and asked Mr. Teal's  opinion on if the legislature                                                                    
decided the  reduce the amount  to $20 million.  He wondered                                                                    
if  a   changed  appropriation  would  be   subject  to  the                                                                    
governor's   veto   and   asked  about   options   for   the                                                                    
legislature.                                                                                                                    
                                                                                                                                
Mr.  Teal  thought  a  legal opinion  might  be  needed.  He                                                                    
thought if  the previous  year's statute was  repealed, then                                                                    
any changes  would be  subject to veto.  He pondered  that a                                                                    
new appropriation  for a different  amount would  be subject                                                                    
to  veto. He  thought that  if the  legislature changed  the                                                                    
previous year's  statute, then the  governor could  not veto                                                                    
the  entire  line,  as  it  would return  the  line  to  $30                                                                    
million. He  suggested the legislature  get a  legal opinion                                                                    
if it  wanted to  do something other  than the  governor had                                                                    
done.                                                                                                                           
                                                                                                                                
Mr. Teal  discussed the document "Document  6: LFD Projected                                                                    
Local  Effort"  (copy  on   file).  He  referenced  Co-Chair                                                                    
Stedman's question  about some  districts exceeding  the cap                                                                    
and pointed out the column "DISTRICTS EXCEEDING Cap."                                                                           
                                                                                                                                
9:20:47 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:21:12 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Mr. Teal  continued to  discuss Document  6. He  pointed out                                                                    
that  the   previous  slide  had  shown   that  the  maximum                                                                    
voluntary local  contribution (if  prorated) would  be about                                                                    
$51 million.  The second column  of the document  showed the                                                                    
amount that  would be  affect by the  cap. The  bold numbers                                                                    
showed which  cities were at  or near the cap.  He discussed                                                                    
the   amounts  districts   could   have   to  reduce   local                                                                    
contributions.   He   reminded   that   the   numbers   were                                                                    
approximations.  If state  funding  were to  be reduced  and                                                                    
local entities had to  increase funding, local contributions                                                                    
would bump up against a newly decreased cap.                                                                                    
                                                                                                                                
Co-Chair Stedman  considered Sitka  and thought  the numeric                                                                    
did not  change. He thought  Mr. Teal was saying  that Sitka                                                                    
couldn't  make  up  the funding  difference,  since  it  was                                                                    
already funding to the cap.                                                                                                     
                                                                                                                                
Mr. Teal  stated that  Sitka would  be unable  to contribute                                                                    
its  current  contribution  if  the  formula  was  prorated.                                                                    
Ketchikan  had  some  headroom and  would  not  be  affected                                                                    
unless  it  wanted to  make  up  for  lost state  money  and                                                                    
contribute more  than $1.6 million.  He reiterated  that the                                                                    
numbers were  approximations since the documents  used FY 19                                                                    
numbers and  it was  unknown what districts  would do  in FY                                                                    
20.                                                                                                                             
                                                                                                                                
9:25:19 AM                                                                                                                    
                                                                                                                                
Co-Chair von  Imhof thought that  Document 6  was important.                                                                    
She  looked at  the  second column  of  numbers and  thought                                                                    
there  was about  $56.4 million  of available  headroom. She                                                                    
thought   that   theoretically   there   was   headroom   to                                                                    
accommodate some type of reduction.  She estimated that $100                                                                    
for the  BSA equated  to about $30  million in  funding. She                                                                    
asked about how to translate the $56 million into the BSA.                                                                      
                                                                                                                                
Mr.  Teal  stated  that Co-Chair  von  Imhof  had  estimated                                                                    
correctly. He stated  it was not the BSA that  was at issue.                                                                    
If the BSA  increased, local contributions went  up; and the                                                                    
inverse was  also true.  He thought the  problem came  in as                                                                    
several districts  were at  the cap. He  noted that  the $56                                                                    
million total in  the second column was the  sum of negative                                                                    
and  positive  numbers and  included  about  $21 million  of                                                                    
funds that  were projected  to be  capped. He  observed that                                                                    
Fairbanks was  highly unlikely to  be affected  by prorating                                                                    
and could  be contributing substantially more  to the school                                                                    
district,  as could  anyone in  the column  with a  positive                                                                    
number. He  expressed that the  headroom calculation  on the                                                                    
document was not as clear as one might wish.                                                                                    
                                                                                                                                
9:28:53 AM                                                                                                                    
                                                                                                                                
Co-Chair  von  Imhof  asked if  the  cap  could  potentially                                                                    
remain unaffected if the BSA  remained intact in statute but                                                                    
education   was   simply   underfunded.  She   thought   the                                                                    
administration had suggested underfunding.                                                                                      
                                                                                                                                
Mr.  Teal stated  that Co-Chair  von Imhof's  scenario would                                                                    
make a big  difference. If the BSA was reduced  there was no                                                                    
question that  voluntary local  contributions would  also be                                                                    
reduced. There  would be no  risk of breaking  the disparity                                                                    
test. He thought that DEED  was assuming that reducing state                                                                    
contributions would  result in a proration  of local effort,                                                                    
which he  did not think  was clear.  He thought that  if you                                                                    
prorated  the  formula and  it  turned  out voluntary  local                                                                    
contributions  were not  prorated, then  the disparity  test                                                                    
would be examined.                                                                                                              
                                                                                                                                
9:31:15 AM                                                                                                                    
                                                                                                                                
Senator  Micciche asked  if it  was fair  to say  that if  a                                                                    
district  contributed 75  percent or  less of  the cap,  the                                                                    
local   contribution   would    not   be   affected;   while                                                                    
contributing  75 percent  or more  of the  cap would  mean a                                                                    
district was  affected. He cautioned that  the document only                                                                    
included  cash contributions;  and did  not include  in-kind                                                                    
contributions, which  were also  included under the  cap. He                                                                    
mentioned   the  $11   million   in  building   maintenance,                                                                    
insurance,  custodial services,  utilities, and  audits that                                                                    
Kenai Peninsula Borough contributed to the school district.                                                                     
                                                                                                                                
MICHAEL PARTLOW,  FISCAL ANALYST FOR  EDUCATION, LEGISLATIVE                                                                    
FINANCE  DIVISION,  agreed  that  the  calculations  on  the                                                                    
document did  not include in-kind contributions.  He thought                                                                    
it was worth  mentioning that the calculations  on the sheet                                                                    
were  done  at  a  time when  the  contribution  for  school                                                                    
district was not finally set.  Later in the slide deck there                                                                    
was more up to date material.                                                                                                   
                                                                                                                                
Senator Micciche thought it was  important to note that many                                                                    
local  communities  contributed  in-kind, and  it  might  be                                                                    
possible that the in-kind contribution would hit the cap.                                                                       
                                                                                                                                
Mr.  Teal  showed  the  document  "Document  3:  FY19  Local                                                                    
Effort" (copy on file). He  thought that the material on the                                                                    
slides had already been covered.                                                                                                
                                                                                                                                
9:35:14 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:35:36 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Stedman  thought the slide was  representing the FY                                                                    
19 budget  if the $20  million proposed in  the supplemental                                                                    
budget was taken out.                                                                                                           
                                                                                                                                
9:36:20 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:36:35 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Mr. Teal noted  that there were two slides  that looked much                                                                    
the  same: one  with the  $20 million,  and one  without. He                                                                    
noted that  the amount of voluntary  local contributions was                                                                    
determined  in  part by  the  amount  of basic  need,  which                                                                    
included money that  was distributed in the same  way as the                                                                    
formula even though it was outside the formula.                                                                                 
                                                                                                                                
Co-Chair von  Imhof thought there  was good reason  to focus                                                                    
on  Document  3.  She  stated   that  districts  aside  from                                                                    
Anchorage,  Denali,  Juneau,  and   Skagway  were  shown  as                                                                    
funding under the  cap (especially as shown  without the $20                                                                    
million  in page  2). She  noted that  she had  constituents                                                                    
advocating  for  increased  education   funding  and  a  BSA                                                                    
increase.  She pondered  the local  and state  options if  a                                                                    
district was looking for more  money. She saw there was room                                                                    
under the funding  cap under the "no $20  million" option on                                                                    
page 2 of  the document. She emphasized that  the matter was                                                                    
a  policy issue.  She acknowledged  there  could be  unknown                                                                    
challenges  within   school  districts.  She   pondered  the                                                                    
choices  that  would  have  to be  considered  in  a  school                                                                    
district if  a BSA was  reduced (whether through  statute or                                                                    
un-allocation).                                                                                                                 
                                                                                                                                
Senator  Bishop emphasized  Co-Chair von  Imhof's point  and                                                                    
did not  believe that some  rural communities could  make up                                                                    
the funding difference because of lack of a tax base.                                                                           
                                                                                                                                
9:40:23 AM                                                                                                                    
                                                                                                                                
Senator Micciche  did not disagree that  districts needed to                                                                    
weigh  options   if  there  was  a   funding  reduction.  He                                                                    
reiterated that the  committee needed to consider  a list of                                                                    
school   funding   including   in-kind   contributions.   He                                                                    
discussed  the   portion  of  funding  below   the  cap  and                                                                    
considered a  25 percent reduction  in the BSA  payment; and                                                                    
thought mathematically it did not work out.                                                                                     
                                                                                                                                
Co-Chair Stedman asked for DEED  to provide another document                                                                    
with an additional column with in-kind expenses.                                                                                
                                                                                                                                
Mr.  Teal thought  that  members had  made  good points.  He                                                                    
pointed out  that while some communities  had headroom under                                                                    
the cap,  the remainder of  the governor's budget  needed to                                                                    
be considered.  One part of  the governors' proposal  was to                                                                    
eliminate  school debt  reimbursement. If  the reimbursement                                                                    
was  eliminated,  school  districts  would  have  difficulty                                                                    
keeping funding  stable without even increasing  the funding                                                                    
below the cap.                                                                                                                  
                                                                                                                                
Co-Chair Stedman  asked Mr. Teal  to adjust the  document to                                                                    
include   in-kind  contributions   and  debt   reimbursement                                                                    
information.                                                                                                                    
                                                                                                                                
Senator Wielechowski noted that the  slide was for FY 19. He                                                                    
pointed out  that Anchorage  was taxing at  the cap,  and if                                                                    
the  $20 million  was  not  funded it  would  be short  $1.3                                                                    
million and  be faced with a  shortfall. He asked if  he was                                                                    
understanding the matter correctly.                                                                                             
                                                                                                                                
Mr. Teal answered in the affirmative.                                                                                           
                                                                                                                                
Co-Chair  Stedman asked  if  Senator  Wielechowski had  been                                                                    
referring to the $20 million in FY 19.                                                                                          
                                                                                                                                
Senator Wielechowski answered "yes."                                                                                            
                                                                                                                                
Mr.  Teal  pointed out  that  if  the  $20 million  was  not                                                                    
distributed,  a school  district would  be essentially  in a                                                                    
hole for its share.                                                                                                             
                                                                                                                                
Co-Chair Stedman  thought the  law of the  land was  for the                                                                    
money to be dispersed, unless the law was changed.                                                                              
                                                                                                                                
Mr. Teal agreed.                                                                                                                
                                                                                                                                
9:43:50 AM                                                                                                                    
                                                                                                                                
Senator Wielechowski noted  that it was the  middle of March                                                                    
and the  $20 million had  not been disbursed. He  said there                                                                    
appeared  to be  an Alaska  Supreme Court  case directly  on                                                                    
point  that  indicated  the governor  had  to  disburse  the                                                                    
funds. He asked  when the latest that Mr. Teal  had seen the                                                                    
state dispersed funds for education.                                                                                            
                                                                                                                                
Mr. Teal  stated that the  law of  the land (referred  to by                                                                    
Senator  Wielechowski)  was  a  court  case  that  said  the                                                                    
governor   could   not   withhold  money   that   had   been                                                                    
appropriated  by  the  legislature.  He  continued  that  in                                                                    
theory,  the funds  should have  been distributed  to school                                                                    
districts beginning July 1, 2018.  He thought the department                                                                    
withheld the  funds assuming there  would be a "true  up" at                                                                    
the end of  the fiscal year when there was  a second student                                                                    
count. He thought the Office  of Management and Budget (OMB)                                                                    
director  had stated  that the  school districts  should not                                                                    
have expected or  spent the funds. He  recalled that several                                                                    
school districts had testified  to having expected the money                                                                    
that was appropriated  and, in many cases,  having spent the                                                                    
funds.  He expanded  that  to not  receive  the funds  would                                                                    
cause many schools to spend reserves if they had them.                                                                          
                                                                                                                                
Mr.  Teal   continued  to  address   Senator  Wielechowski's                                                                    
question. He stated that some  schools did not have reserves                                                                    
and could be  in a position of over-spending  or of reducing                                                                    
spending  during the  last  couple months  of  the year.  He                                                                    
stated  that theoretically  the governor  had to  distribute                                                                    
the funds  during the current  fiscal year. He did  not know                                                                    
what the legislature  could do to urge the  governor to send                                                                    
out the funds as early  as possible. He suggested that there                                                                    
could be  intent added  to the  appropriations bill,  or the                                                                    
legislature could  talk to the  governor. He thought  if the                                                                    
legislature did not intend to  repeal the $20 million as the                                                                    
governor  had requested,  it  may want  to  request that  he                                                                    
distribute the funds as soon as possible.                                                                                       
                                                                                                                                
Co-Chair Stedman  thought that  unless the  legislature took                                                                    
affirmative action  in an appropriation bill,  the law would                                                                    
stand  and  the  governor  had  until the  end  of  June  to                                                                    
disburse the funds.                                                                                                             
                                                                                                                                
Mr. Teal agreed.                                                                                                                
                                                                                                                                
9:46:58 AM                                                                                                                    
                                                                                                                                
Senator  Wilson   asked  for  an  updated   list  of  school                                                                    
districts' fund balances.                                                                                                       
                                                                                                                                
Co-Chair  Stedman stated  that the  committee could  ask for                                                                    
help  with  the  information.  He  thought  there  had  been                                                                    
comments made  that there were significant  reserves in some                                                                    
districts. He thought each district would be different.                                                                         
                                                                                                                                
Mr.  Teal thought  he could  get  the requested  information                                                                    
from DEED. He  thought the committee might want  to have the                                                                    
department come  to committee and discuss  reserves, in-kind                                                                    
contributions, and  school debt;  and at  the same  time, it                                                                    
could  discuss why  voluntary local  contributions would  be                                                                    
prorated   when  legal   opinions  pointed   in  the   other                                                                    
direction.                                                                                                                      
                                                                                                                                
Co-Chair Stedman  stated that the committee  had invited the                                                                    
department and  could encourage  attendance in  committee to                                                                    
help with budget scenarios. He  commented that the education                                                                    
budget,  along  with the  Department  of  Health and  Social                                                                    
Services, was one  of the biggest challenges  in the budget.                                                                    
He lamented  about the possibility of  making decisions with                                                                    
less information than could be had.                                                                                             
                                                                                                                                
9:49:18 AM                                                                                                                    
                                                                                                                                
Mr. Teal reviewed the document  "Document 4: Disparity Test"                                                                    
(copy on file):                                                                                                                 
                                                                                                                                
     https://education.alaska.gov/schoolfinance/foundationf                                                                     
     unding                                                                                                                     
                                                                                                                                
     The  disparity test  is an  annual  submittal from  the                                                                    
     State of Alaska to the U.S. Department of                                                                                  
     Education,  Impact Aid  Program,  under the  Elementary                                                                    
     and Secondary  Education Act (ESEA) of  1965 as amended                                                                    
     by Every  Student Succeeds Act (ESSA)  of 2015, section                                                                    
     7009  State  Consideration  of  Payments  in  Providing                                                                    
     State Aid.                                                                                                                 
                                                                                                                                
     In General?                                                                                                                
      A state may reduce state aid payments, as applicable                                                                   
        by law, when a district receives federal Impact Aid                                                                     
        revenues.                                                                                                               
      A state must apply for recertification annually, not                                                                   
        later than 120 days prior to the next fiscal year                                                                       
        (end of February).                                                                                                      
      In order to qualify  for this  provision the  state                                                                    
      must demonstrate an equalized funding formula:                                                                            
          1. the highest per revenue district versus the                                                                        
          lowest per revenue district;                                                                                          
          2. not more than a 25% disparity between                                                                              
          districts revenue per Adjusted Average Daily                                                                          
          Membership (AADM); and,                                                                                               
          3. disregard the revenue per AADM above the 95th                                                                      
          percentile and below the 5th percentile per AADM.                                                                     
                                                                                                                                
     Fiscal Year    Disparity percentage                                                                                        
     2012           19.31%                                                                                                      
     2013           19.37%                                                                                                      
     2014           21.40%                                                                                                      
     2015           22.58%                                                                                                      
     2016           22.40%                                                                                                      
     2017           22.32%                                                                                                      
                                                                                                                                
Mr. Teal noted  that the slide brought up  a complication in                                                                    
the formula.  The formula  was such  that state  aid equaled                                                                    
basic  need,  which was  the  BSA  times the  student  count                                                                    
multiplied by a  number of factors. He  continued that state                                                                    
aid  was  basic  need minus  required  local  contributions,                                                                    
minus 90 percent  of federal deductible impact  aid. He told                                                                    
the  committee to  disregard  required local  contributions,                                                                    
which  would  not change  in  any  way  due to  the  funding                                                                    
controversy.                                                                                                                    
                                                                                                                                
Mr. Teal continued his comments  on Document 4. He explained                                                                    
that the  formula clearly  said the  state could  reduce its                                                                    
state  aid by  the amount  of  federal impact  aid that  was                                                                    
deductible. The  state must  show that  it had  an equalized                                                                    
formula,  which was  demonstrated by  a disparity  test. The                                                                    
test ranked school  districts in the order in  the amount of                                                                    
aid  per AADM  (adjusted student  count). Without  voluntary                                                                    
local   contributions,  all   districts  would   get  nearly                                                                    
identical   amounts.    It   was   only    voluntary   local                                                                    
contributions (which varied from  district to district) that                                                                    
gave differences in funding at the local district level.                                                                        
                                                                                                                                
Mr. Teal continued  to address Document 4.  He discussed the                                                                    
parameters  of  the  disparity   test.  He  questioned  that                                                                    
voluntary local  contributions were pro-rated, there  was no                                                                    
additional risk of failing the  disparity test because local                                                                    
contributions would  be limited. If the  legal opinions were                                                                    
correct and voluntary local  contributions were not prorated                                                                    
along  with the  formula, the  state was  almost certain  to                                                                    
fail  the disparity  test. He  shared that  the state  would                                                                    
lose federal aid (of about $82 million) if the test failed.                                                                     
                                                                                                                                
9:53:17 AM                                                                                                                    
                                                                                                                                
Mr. Teal  showed the  document "Document  7: LFD  Impact Aid                                                                    
Percent of  State Aid"  (copy on file).  He stated  that the                                                                    
federal deductible  aid meant that  the state  formula could                                                                    
not deduct  the amount  of federal  money received  by local                                                                    
districts. He pointed  out the third column  from the right,                                                                    
"Eligible  Federal  Impact AID."  If  the  state failed  the                                                                    
disparity  test,  Anchorage  would  get  to  keep  the  $7.7                                                                    
million,  and  the state  would  have  to pay  Anchorage  $7                                                                    
million because  the federal impact  aid was  not deductible                                                                    
if the disparity test was  failed. In total, the state could                                                                    
have  to  pay  $82  million more  than  it  currently  paid.                                                                    
Potentially,  prorating the  formula  reduced  cost by  $300                                                                    
million, but also increased costs  by $82 million and did so                                                                    
in an unfair way.                                                                                                               
                                                                                                                                
Mr. Teal  pointed out  that Anchorage,  while it  received a                                                                    
lot of money, had impact aid  as 2 percent of the budget. He                                                                    
pointed  out $11  million  in Bering  Strait,  which was  36                                                                    
percent  of its  budget.  He explained  that some  districts                                                                    
received a  disproportionate amount  of federal  impact aid,                                                                    
which was  calculated by the  amount of exempt  property was                                                                    
in the  district. The  communities with  substantial federal                                                                    
deductible aid would  benefit a great deal  by the scenario.                                                                    
He noted that by in large the communities were rural.                                                                           
                                                                                                                                
Mr. Teal reiterated  that if the state  failed the disparity                                                                    
test, it  was for  a minimum  of three  years, and  it would                                                                    
cost  the state  $82 million  to $85  million each  year the                                                                    
test  was  failed.  The  cost  was one  of  the  dangers  of                                                                    
prorating  the  formula.  If  the  law  was  interpreted  so                                                                    
districts must prorate  voluntary local contributions, there                                                                    
was  no additional  risk. Legal  opinions suggested  that it                                                                    
was  not the  case  and a  district simply  may  be able  to                                                                    
increase  its  voluntary  local contributions,  causing  the                                                                    
entire state to fail the disparity test.                                                                                        
                                                                                                                                
9:57:30 AM                                                                                                                    
                                                                                                                                
Mr. Teal did  not know whether the  department could enforce                                                                    
a  voluntary  local  contribution  amount  by  approving  or                                                                    
failing to approve a school  district's budget. He closed by                                                                    
saying there  were other ways  to reduce school  funding. He                                                                    
thought if  reducing funding  was a  goal, prorating  may be                                                                    
the least  desirable option because of  the potential impact                                                                    
on the federal deductible aid.                                                                                                  
                                                                                                                                
Co-Chair  Stedman  asked  Mr. Teal  to  elaborate  on  other                                                                    
options for reducing school funding.                                                                                            
                                                                                                                                
Mr. Teal  discussed reduction of school  debt reimbursement,                                                                    
which  had  a  disproportionate impact  on  rural  districts                                                                    
because only urban districts  had school debt reimbursement.                                                                    
The  mill  rate could  be  increased,  which would  increase                                                                    
required  local contributions,  but  again  it would  impact                                                                    
urban  areas.  He  thought  the   fairest  option  would  be                                                                    
reducing the retirement aid paid  on behalf of districts. He                                                                    
reminded that the state payed  everything over 12.56 percent                                                                    
in  the Teachers  Retirement System  (TRS),  and the  actual                                                                    
contribution  exceeded 30  percent. He  did not  suggest the                                                                    
legislature should  do so, but if  the goal was to  cut $100                                                                    
million  from education  spending,  reducing  the state  TRS                                                                    
contribution  would  be  much   fairer  than  prorating.  He                                                                    
thought there could be other options.                                                                                           
                                                                                                                                
Co-Chair  Stedman  commented  on the  complexity  of  Public                                                                    
Employees' Retirement System (PERS) and TRS issues.                                                                             
                                                                                                                                
10:00:15 AM                                                                                                                   
                                                                                                                                
Senator  Micciche asked  if school  bond debt  reimbursement                                                                    
counted as a local contribution under  the cap, or if it was                                                                    
disregarded.                                                                                                                    
                                                                                                                                
Mr. Teal stated  that the two issues  were unrelated. School                                                                    
bond  debt reimbursement  affected local  contributions only                                                                    
in the  sense that if  the state didn't  reimburse districts                                                                    
for  school debt  reimbursement,  the  local government  had                                                                    
less   money  available   and  then   may  have   to  reduce                                                                    
contributions to school districts.                                                                                              
                                                                                                                                
Co-Chair  Stedman mentioned  defaults by  bond-owners, which                                                                    
could create complexities.                                                                                                      
                                                                                                                                
Co-Chair   Stedman  reiterated   that  the   Senate  Finance                                                                    
Subcommittee on DEED  was being led by  Senator Hoffman, who                                                                    
was  working on  the K-12  and University  budgets. Co-Chair                                                                    
von  Imhof  had  been  working on  some  other  options  for                                                                    
consideration  by the  committee.  He thought  the next  two                                                                    
weeks would  solidify the subcommittee. The  committee would                                                                    
be hearing presentations the following  week on some options                                                                    
being considered.                                                                                                               
                                                                                                                                
10:02:35 AM                                                                                                                   
                                                                                                                                
Co-Chair von  Imhof summarized the conversation  and thought                                                                    
there  were several  questions being  generated by  members.                                                                    
She thought  the purpose  of the committee  was to  bring up                                                                    
questions  to  ponder.  She referenced  Mr.  Teal's  remarks                                                                    
about  a legal  opinion  that was  unclear.  She wanted  the                                                                    
committee   to   avoid   unintended  consequences   of   its                                                                    
decisions. The  following week the committee  would consider                                                                    
a presentation  by Mr.  Mark Foster, a  board member  of the                                                                    
Anchorage School District  who had also served  as the chief                                                                    
financial  officer. Mr.  Foster had  been doing  research on                                                                    
education looking  at state and  national data and  would be                                                                    
presenting his findings.                                                                                                        
                                                                                                                                
Co-Chair  von   Imhof  continued  that  the   committee  was                                                                    
considering   research   supporting   small   class   sizes,                                                                    
supporting   effective   teachers,  encouraging   home   and                                                                    
community support, and early  and intermediate literacy. She                                                                    
discussed three bills being considered  by the committee: SB                                                                    
79  pertaining to  virtual education,  SB  74 pertaining  to                                                                    
broadband, and  SB 30 pertaining  to a middle  school model.                                                                    
She   emphasized  the   committee's   aspiration  to   avoid                                                                    
unintended  fiscal consequences  while supporting  education                                                                    
to increase student achievement across the state.                                                                               
                                                                                                                                
10:05:58 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman  thought that  it  was  fortunate that  the                                                                    
legislature  had passed  education  funding legislation  the                                                                    
previous year. He noted that  the opportunity to address the                                                                    
$10 million  in additional funding  in 2019 was  signed into                                                                    
law. The appropriation  for education in 2020  had also been                                                                    
signed into law. The $30  million increase for 2020 had also                                                                    
been signed  into law.  He commented  that the  control (for                                                                    
the most  part) of  the appropriations was  in the  hands of                                                                    
the legislature  and the  involvement of  the administration                                                                    
had  been bypassed  by the  signing  of the  three bills  by                                                                    
former Governor Bill Walker. He  expressed concern about the                                                                    
difficulty  of  budgeting  for   2021  and  considered  that                                                                    
whatever the legislature  passed would be subject  to a veto                                                                    
pen. He thought a veto  override was almost impossible as it                                                                    
required 45 of 60 members to agree.                                                                                             
                                                                                                                                
10:08:07 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman thought  Co-Chair  von  Imhof and  Senator                                                                    
Hoffman  had   made  good  comments.  He   stated  that  the                                                                    
legislature would  be considering  the effects (not  only in                                                                    
education) of  a step-down approach.  He pondered if  it was                                                                    
better  to take  large  budget reductions  in  one year,  or                                                                    
phase it  in over three  or four  years when trying  to have                                                                    
revenues match  expenditures. He thought if  the legislature                                                                    
did not deal with the $30  million, there might be a steeper                                                                    
decline in funds the following year.                                                                                            
                                                                                                                                
Co-Chair  Stedman discussed  increasing student  performance                                                                    
while reducing  spending. He considered if  reductions could                                                                    
be tied to achievement goals or net benefit.                                                                                    
                                                                                                                                
Senator  Bishop  recounted  that  he had  made  a  concerted                                                                    
effort to  bring back career  and technical  education (CTE)                                                                    
when he  served as commissioner  of the Department  of Labor                                                                    
and  Workforce Development.  He  had worked  with DEED,  the                                                                    
University, and  school districts.  He discussed  working to                                                                    
improve graduation  rates. He was  concerned that  CTE might                                                                    
have to be cut.                                                                                                                 
                                                                                                                                
10:11:21 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:11:30 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Stedman remarked on how  many members of the Senate                                                                    
were in the meeting.                                                                                                            
                                                                                                                                
Co-Chair  Stedman discussed  the  agenda  for the  following                                                                    
day.                                                                                                                            
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:13:49 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:13 a.m.                                                                                         

Document Name Date/Time Subjects
032619_Doc1_FY2020GovAmdK-12FundingReductions.pdf SFIN 3/26/2019 9:00:00 AM
Education
032619_Doc2_ProjectedFY2020LocalEffort.pdf SFIN 3/26/2019 9:00:00 AM
Education
032619_Doc3_Local2019BudgetCap.pdf SFIN 3/26/2019 9:00:00 AM
Education
032619_Doc4_1page slide Federal Disparity Test.pdf SFIN 3/26/2019 9:00:00 AM
Education
032619_Doc5_LegLegal_LocalContribution.pdf SFIN 3/26/2019 9:00:00 AM
Education
032619_Doc7_LFD_ImpactAid%ofStateAid.pdf SFIN 3/26/2019 9:00:00 AM
Education
032619_Doc6_LFD_FY20LocalEffort.pdf SFIN 3/26/2019 9:00:00 AM
Education