Legislature(1997 - 1998)
03/25/1998 03:05 PM House HES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CSSB 36(FIN) am - PUBLIC SCHOOL FUNDING Number 0037 CHAIRMAN BUNDE announced the committee would be hearing CSSB 36(FIN) am, "An Act relating to public schools; relating to the definition of a school district, to the transportation of students, to employment of chief school administrators, to school district layoff plans, to the special education service agency, and to the child care grant program; and providing for an effective date." He said the committee had received an overview of the legislation at the last meeting, and today the Department of Education would be presenting their comments. He asked Richard Cross and Eddy Jeans to come forward and present the department's comments. Number 0089 RICHARD CROSS, Deputy Commissioner, Department of Education, said he and Mr. Jeans would like to go through the bill line-by-line, discuss the technical areas of concern, and explain the updated spreadsheets. Their comments would be based on Version 0- LS0070\R.a, CSSB 36(FIN)am; he and Mr. Jeans had identified 16 areas to discuss with the committee. Number 0244 EDDY JEANS, Manager, School Finance Section, Education Support Services, Department of Education, said the first issue is the terms "state support" and state share" are similar and therefore confusing, so the department has recommended changes as follows: Page 2, line 9, delete "funding", insert "aid" Page 2, line 14, delete "state share", insert "basic need" Page 2, line 17, delete "state funding", insert "basic need" Page 2, line 22, delete "share and a", insert "aid, the required" Page 2, line 23, insert before determination, "and deductible Impact Aid" Page 2, line 24, delete "state share", insert "state aid" Page 2, line 24, delete "state support", insert "basic aid" Page 2, line 24, delete "a", insert "the required" Page 2, line 25, delete "state support", insert "basic need" Page 3, line 7, insert after, (2) the "required" These recommended changes are to clarify the calculations of basic need and state support. He said that other sections of the bill may need to be amended for consistency. Number 0376 MR. JEANS said the department's second issue is on page 3. Under the current foundation law when a newly formed borough is created, there's a transition period to the four mill required local effort occurring over a three year period. The department suggests that transition language, similar to the current law, be inserted in the proposed bill. MR. JEANS said the next item was on page 4, line 5, and the department recommends "ADM" be deleted and insert "intensive student count." Number 0421 MR. JEANS explained page 4, lines 6 - 9 of the proposed legislation requires districts to have on file with the department a plan of service for special education, gifted and talented education, vocational education, and bilingual service education. He pointed out there are currently a number of school districts that do not have at least one of these plans on file with the department. Under the proposed language, if all three plans are not on file, the district would not qualify for the 20 percent special needs adjustment. CHAIRMAN BUNDE assumed if a district doesn't have a gifted and talented education plan on file, it means the district doesn't have gifted and talented programs. MR. JEANS verified that. For example, the Southeast Island School District in Skagway doesn't have bilingual programs in place. Number 0549 REPRESENTATIVE JOE GREEN inquired if the bilingual education was the plan most often not on file or was it varied so a general change couldn't be made to the language. MR. JEANS said the department has listed the school districts that do not have their plans on file; the two categories appear to be gifted and talented, and bilingual. Currently, Aleutian Region, Hydaburg, Mt. Edgecumbe and Tanana do not have gifted and talented plans on file with the department. Mt. Edgecumbe, Skagway and Southeast Island districts do not have bilingual education plans on file. Number 0592 CHAIRMAN BUNDE asked Mr. Jeans if his interpretation of the proposed legislation was that the total 20 percent special needs allocation could go to special education, bilingual or any combination thereof. MR. JEANS said his understanding is that it's an allocation for special needs; it's discretionary funds. Number 0627 MR. JEANS referred to page 5 and said under the current foundation program, if a school district experiences a 10 percent loss in K-12 instructional units from one year to the next, there's a hold harmless provision which softens the loss of revenue over a three year period. There is no hold harmless provision in the proposed legislation so when a district experiences a loss, it's immediate. CHAIRMAN BUNDE noted he had just received a letter from Superintendent Griffith, Southeast Island School District, expressing concern about transition language for the purpose of determining a school size factor and that students in small schools and ten average daily membership (ADM) should be included in the larger schools in the district. MR. JEANS added he believed Superintendent Griffith was requesting a one-year hold harmless for schools that fall below the threshold of ten ADM. Number 0720 CHAIRMAN BUNDE commented he thought Senator Wilken, in his presentation of the bill at the previous meeting, had indicated there was not a cutoff at ten students. SENATOR GARY WILKEN responded it does cut off at ten. The proposed bill does not recognize a school for less than ten ADM. Number 0745 MR. CROSS said he would now discuss the school size factor. He referred to the table on page 5, lines 10 - 18, and said this is really the heart of this bill; it's an important and significant departure from the way the current formula provides for fixed costs or create a means to make sure that small schools have sufficient resources to operate. He pointed out the table begins with a student count in a school of at least 1 but less than 20, but the transition language on page 21 clearly states that if a school has 10 ADM or less, it gets counted in the largest school in the district. Therefore, it is the department's belief that 1 should be changed to 10 in the table on page 5, to make it clear that a school with less than 10 students would not participate in this part of the table. Number 0846 MR. CROSS said the second issue is on page 21, line 4, the Department of Education has been given privilege of defining the term "school". He wanted to point out how changes to that definition could have significant influence on the amount of revenue that schools will receive as applied to the table on page 5. The first observation about the table is that it's very aggressive. He referred to page 5, line 15, and said, "You see that schools of less than 250 are the only schools that receive an adjusted ADM for each additional student that is greater than 1.0. And that after 250 students, you start to lose adjusted ADMs by 3 percent in the first line, and then 8 percent and then 16 percent if you're over 750." He said it's important to realize that rather soon as a school starts to grow, the multiplier starts going below 1.0 rather quickly. What that teaches us is that at some point in time a school is actually going to have a lower adjusted ADM than it does an ADM; the adjusted ADM will be lower than the exact number of students. According to the department's calculations, that starts to occur at 1,023 students. Under this table, the adjusted ADMs for a high school of 1,500 or 1,600 students will be less than the actual number of students. Number 0982 MR. CROSS said that is important to note because this legislation provides $3,944 for every adjusted ADM plus other factors that are added in depending on district cost factor. Adjusted ADMs are very important; the more you have, the more you're going get. He referred to the table on page 5 and said smaller schools do well in the first part of the table; for example, a school with 20 students receives nearly twice the adjusted ADM. He explained this comes from the McDowell Study which is a departure from funding communities to school level and it's important to understand why the McDowell Group made that recommendation and on what set of principals they thought it would work. The most significant objection the McDowell Group had to funding communities was the way funding communities are distributed in the state doesn't make sense; in other words, they can't do an analysis of a funding community structure and get any kind of normalized data. Because of that, the McDowell Group abandoned funding communities; however, their study recognizes there are some reasons to think that funding communities might be a reasonable approach. MR. CROSS further stated the McDowell Study states, "The funding community concept clearly has merit; however, the advantages of the concept may be more theoretical than real. And because one of the advantages is obviously it would create a disincentive to have a lot of really small schools because small schools do so well in this table and you don't want to create an environment where you're generating a lot of really small schools. And so funding communities, properly applied, kind of fix that because they deal with an area of where education is going on and if you have one school, two schools or three schools, it really doesn't make any difference, where clearly in this table it does." MR. CROSS continued, "They say that funding communities aren't the only safeguard against inefficiently sized school, that we have control of construction - that meaning the department - and some level of fiscal responsibility should be assumed. Also, if adjustment factors are accurate - meaning this table - the increased cost of operating small schools should be significant enough where it really - even though you're getting more money, it doesn't make any sense to go ahead and build them because it's going to cost you that much more money in order to be able to operate them. So, it was on that belief and on this statement, the lack of a consistent definition of funding community was also a factor in the decision to adopt schools as the revenue generating units." The department understands that and in fact, believes the study is important in that it's analyzing school costs, which is really important; however, the department's problem is in the application of this table. Number 1188 MR. CROSS said the Department of Education has never collected school enrollment data by school and verified it in an audit. The reason is because the current foundation formula generates money based on funding communities; therefore, the data collected by the department is funding community level data. Actually, the only school information the department has collected is for the purpose of compiling the Alaska Education Directory, which simply states where all the schools are in a district, the principal, and information of that sort. This information has been self-reported data. The only other data available in the department is facility data for each district; some are schools, others are tank farms, warehouses, et cetera. Number 1247 MR. CROSS explained that current regulation defines school as a program and doesn't give any guidelines in specifying what a program is. A program of instruction could be an alternative program, it could be a high school, it could be a middle school or it could be many different structures. He said, "So that's looking at it from how you teach the kid - to how you teach the kid perspective as opposed to looking at the facility. The opposite end of that would be to look at just if it's a facility, it's a school and if it's a school, then it gets counted into the table." Number 1292 MR. CROSS said in the first spreadsheets runs done for the Senate, the department used the data primarily collected in the department and is really the data reflected in producing the Alaska Education Directory. Since this legislation has been in the public eye and school districts have started their review, it hasn't taken them long to figure out the definition of "school" will be incredibly important. The districts are challenging the department's data in terms in whether or not all the schools are being appropriately reported. He's looked to find some practical applications of some of the problems the department is experiencing in applying this table. For example, Petersburg, as a district, does quite well under the new formula table. The reason for that isn't because their area cost differential changed; it was 1.0 before and it remains 1.0 under the new table. The reason is that Petersburg is a rather small community - 700+ students - but it has three schools; an elementary school, a middle school and a high school. So Petersburg can take those 700 students, split them into three pieces and run them through the table three times. The same thing would occur for the Wrangell which also has three schools. He continued, "So I said let's do a comparison because remember what McDowell was saying that these adjustment factors - any increased costs should offset any difference in this table. So I went to my old district because I know it pretty well, up in Fairbanks and I looked at Ben Eielsen Junior/Senior High School, but Ben Eielsen Junior/Senior High School has about 600 kids in it and it has two wings; it has a wing that goes off to the junior high kids and it has a wing that goes off for the senior high kids and it has three administrators in it. It has a principal in it and it has two vice principals and one of the vice principals assumes responsibility for the junior high or middle school program. But there's 600 kids getting run through this table once for that 600 kid junior high program. When we go to Petersburg, we find that 500 kids -- a little under 500 kids are being run through the table twice and the question that you have to look at between those two schools is there really increased costs in Petersburg that justify that differential. So I was looking at our school facilities table and I noticed that Petersburg had a project on our list and it was for a roof for the junior/senior high school. So I said to myself, now we have a community that is reporting that it has two schools, yet they're asking for one roof for both, so I called Mary Francis, the superintendent because I know her and obviously she's not up to any shenanigans - this is a condition that's existed for years and years down there. And in fact the facility in Petersburg is one building; it is connected and there is a hallway in between and what she explained to me is she has two principals - she has separate principals for each side - and in fact they have different colored carpet. The kids in the middle school are taught that they can't go on the high school carpet and vis a versa because they want to keep the grades separate." Number 1495 MR. CROSS said the question now becomes is Fairbanks now going to take the position to promote one of the vice principals to a principal. They would have the very same argument that it's really two separate programs and should therefore be run through the table twice. A better way of putting it is not that there would be advantage taken in this situation, but rather is this a legitimate issue; is there really an increased cost in this situation where the facilities are similar but one facility makes the decision to have two principals while the other facility decides to have a principal and two vice principals. He doesn't think the answer justifies it. He said, "Let me tell you how big the number is. If we took Petersburg and we took the position that that was one facility and therefore, we're only going to run it through the table once - it's $309,000 that that district would lose as a result of that. And if you look at the size of the district and the size of its budget, you'd see that $309,000 is not chunk change to them. And by the same token if Fairbanks took the position that they wanted to claim that Ben Eielsen Junior/Senior High School -- and just to complicate things, this year they're in a construction period and they actually have their middle school kids in Taylor, so there really is a separate facility -- and if they wanted to take the position that that's two schools and they want them run through the table twice, then they generate over $400,000 additional by being able to go through the table twice." MR. CROSS said the department argues strongly with McDowell's conclusion that the funding community concept has merit, but it's only theoretical; it's anything but theoretical and going to the school size table is posing some real serious problems. Number 1589 MR. CROSS remarked one other thing is the legislature is interested in having school districts adopt prototypical schools and create more efficient size. If Petersburg was going to replace their schools in the future, perhaps the best and most efficient solution would be to replace their school with a prototypical school divided into wings, with one roof, one boiler et cetera. However, the impact of that for Petersburg is enormous. They're a winner now, but would become a significant loser if all of a sudden the district's construction program came into one school as opposed to the three. Number 1640 CHAIRMAN BUNDE said one of the most often heard criticisms from the smaller schools is that the urban areas have an economy of scale, so there should be less money per student. He asked if Mr. Cross was arguing against that. MR. CROSS replied no. He understands the argument and he's not arguing there wouldn't be an economy of scale in a larger school; there is an economy of scale in a larger school. The question he was trying to raise is does the table in the proposed legislation appropriately address it. In his opinion, the answer is clearly no. MR. CROSS said another issue the department has dealt with in coming up with a definition of "school" is the department is now getting calls from superintendents saying a couple of different things. First, they've got two schools connected by a covered walkway and they are perfectly willing to tear the walkway down and create two schools. The other is the number of programs in this state that may fall into a definition of school, but really don't have the cost that McDowell analyzed in developing the table. Those are programs such as teaching 17 or 18 kids in a jail or teaching kids in Charter North. He said, "And is it kind of an appropriate structure and appropriate task to perform to go ahead and say that those are schools and they ought to be run through the school size table and if you've got less than 20 of them you ought to get 39.6 kids." Number 1731 CHAIRMAN BUNDE pointed out that kids in state custody are paid for by the state and are certainly not going to be considered in school. MR. CROSS countered that is one of the things the department has been struggling with over the last few days because districts are assuming those programs absolutely are schools and must be run through the table. CHAIRMAN BUNDE noted the legislature would certainly give the districts strong guidance in the determination as to whether those programs are schools or not. MR. CROSS said the department will certainly appreciate guidance in defining a school but for the committee's information the department spreadsheets have taken a situation like the 19 or 20 kids in Charter North, treated them as a school and ran them through the table as a school. He had been curious what the impact would be if those programs were defined as auxiliary programs and the kids were included in the school count in their attendance area. He said, "And therefore they didn't run through the table -- we counted the kids but we didn't count them in that program -- we counted them in the table in accordance with the school that they would attend where they resided in Anchorage. Do you know what the difference would be for Anchorage if we did that? Three million dollars - Anchorage would lose $3 million if we took that definition." The point is it would make a very significant difference in terms of the amount of revenue. Number 1822 REPRESENTATIVE GREEN said, "You have talked about this $300,000 or $400,000 swing and if I look at the multipliers here between say a 750 or 2 schools that would make that up, you're going from a 0.97 to 0.92 - 5 percent. Am I right then that you're talking about $300,000 or $400,000 out of a $2 million or more ...." MR. CROSS said no, the table is loaded at the front end. REPRESENTATIVE GREEN said, "If I go from somewhere -- from line 16 to line 17, if I understand you're between one or two schools and 750 student population, you're bouncing between those two lines and the multiplier difference between the 400 that you have on line 16 and the 750 in a single school would be 5 percent, but up to that point, it's 400. I mean, it's the same -- it's the .97." MR. CROSS thought it would be a lot more aggressive than 5 percent, but he'd have to actually sit down and figure it out. REPRESENTATIVE GREEN stated, "Well, if I was on line 16 -- we've got two schools now -- I'm going to be somewhere on -- two schools within that line 16 -- in a 750 school population." MR. CROSS responded if there's a 750 student school, both schools would fall within line 16. REPRESENTATIVE GREEN said if he understands correctly, it's 0.97 times 250 on up to 400 and then anything beyond that for a single school would drop to 0.92 for the same population of students. MR. CROSS noted that what Representative Green said was right, but what actually happens is the kids between 375 and 450 go back down to the bottom of the table and go through the table again; so they go through line 11, line 12, line 13. It isn't the difference between 0.97 and 0.92, it's much more than 5 percent. REPRESENTATIVE GREEN asked what the percentage would be. MR. CROSS said he would have to calculate it. REPRESENTATIVE GREEN commented the number may not be so significant when looking at the total budget for the school. MR. CROSS said in the case of Petersburg, for example, with a total budget of $3.8 million, a $300,000 drop in funding is significant. He added, "Right now Petersburg is showing a gain of $600,000 which is 19.93 percent, so you take half of that out of it, and that's 10 percent of their district budget, not that school's budget." Number 1989 CHAIRMAN BUNDE surmised the cutoff at 250 school population would be approximately half the schools in Alaska. MR. CROSS said he believed that was correct. Number 2007 MR. CROSS said he would next like to address the district cost factor. The proposed legislation requires the department to adjust district cost factors by the Anchorage Consumer Price Index (CPI) and submit proposed district cost factors to the legislature every other year. The transition language states the first time this has to be done is in the year 2001. The McDowell Study in the executive summary states, "Our recommendation is to compensate districts for their actual costs incurred. This is an unsatisfactory run solution, but basing the district cost factors is an improvement over the current method." As an aside, he pointed out it would be the area cost differentials instead of the district cost factors because the McDowell Study is different from the proposed legislation. He said basically these cost factors are a representation of what districts are spending, not what they should spend and the McDowell Study says, "You ought to do something about that prospectively - you know you really ought start to get things put together." The department, in preparing for this testimony, didn't know what to do with this, so they called David Teal at the McDowell Group and said basically someone must have errored by stating the district cost factors were to be adjusted based on the Anchorage CPI; the Anchorage CPI has nothing to do with the cost factors - these factors are differentials and if adjustments were going to be made for inflation, it should probably be done in the per student allocation. The department asked Mr. Teal if he agreed with that and his response was absolutely, the Anchorage CPI has nothing to do with adjusting these factors prospectively. When Mr. Cross asked how the department should do that, Mr. Teal responded you can't: You can't use methodology that we used to determine these factors two years from now in order to come up with additional cost factors. Mr. Cross said the McDowell Group used reverse engineering to develop the cost factors and two years from now there won't be anything to reverse engineer it to and therefore, as Mr. Teal had indicated, the department couldn't use McDowell's methodology two years from now to adjust these numbers. The McDowell Group had no suggestions when asked what to do in adjusting these cost factors. He said, "I want to leave that by saying that their recommendation is that it is very important -- I mean, we have to understand that these are based on how people are spending their money right now; not how they should be spending their money, and therefore, to leave these things in here in perpetuity would be inappropriate and contrary to what the study recommends. And so the only issue we're leaving with you here is we have not been given any advice from the people who developed these factors of how we will update them and they have told us we couldn't do it the way that they did it." Number 2174 MR. JEANS continued explaining the department's next technical issue on page 9, line 2, which sets the minimum expenditure for instruction. Most districts cannot meet this requirement; only school districts with large student populations and large schools can meet this requirement and that's because those costs are spread over such a large population. He understands the bill includes an appeal provision. CHAIRMAN BUNDE verified that Mr. Jeans was addressing the requirement that a minimum of 70 percent be spent on the instructional unit after the transition period and because it costs more to heat a building in rural Alaska, the department is contending it can't be done. MR. JEANS said that school districts that have small schools will have a very difficult time meeting this requirement because there are fewer students to spread the fixed costs across. Number 2240 REPRESENTATIVE TOM BRICE expressed his concern about districts with smaller schools meeting the 70 percent requirement and inquired what the department's expectation was on requests for waivers. MR. CROSS said the department knows there are only about five districts in the state that would meet the 70 percent requirement. He added the department has some questions about the definition used in the bill, because it can't be tied to anything in the department's chart of accounts. He said, "Let's assume and concede that there does need to be administrative efficiencies - that there may be ways to save some money out there - so let's say you get your number up to 10 or 12 but because of the increased cost per student you know, there will be quite a number of districts that are going to have to be applying for the waiver every year." MR. JEANS pointed out in the past there had been a minimum expenditure requirement on instruction; it was set at 55 percent. The North Slope Borough could not meet that on an annual basis, so their waiver was prepared for them in advance. CHAIRMAN BUNDE wanted to clarify that the department supports spending the majority of educational funds on children, not on administrative costs. MR. CROSS responded absolutely. The goal of any district should be to direct as much of its resources as possible to the teaching/learning environment, to the classroom, to communication between the parent and the classroom. TAPE 98-33, SIDE B Number 0001 MR. CROSS continued " ... to the extent that districts aren't doing that and there are good business practices that could enable them to direct more money in that direction and there are efficiencies that could be created where they could decrease administrative costs, build more efficient schools to take less of their money out of the light and heat, of course they ought to be doing that." CHAIRMAN BUNDE said he thought those operation costs could be separated out. MR. CROSS commented he had been reviewing data from the state of Texas, which has the second largest number of school children, and statewide 51 percent of their expenditure is in instruction. The question is do we want a target so aggressive that no district will be able to meet it. REPRESENTATIVE PORTER asked assuming there are efficiencies to be had throughout the state on administrative costs, isn't it a step in the right direction perhaps with some refinement, to establish a percentage that's higher than it is now and then going school-by- school for allotment rather than by community. MR. CROSS said based on the way this is set up, it's more than trying to improve efficiency in administrative costs. He said the McDowell Study illustrates what the range of administrative cost is in current expenditures and no amount of good business practices or increased efficiency is going to save enough to redirect that resource into a classroom. Number 0099 MR. JEANS said the next issue on page 9, line 30, definition of "instructional component", is a continuation of the issue previously discussed. The definition of "instructional component" includes expenditures for teachers and for pupil support services. He noted the department has had problems administering this definition because it does not conform to the chart of accounts. Pupil support services is a function identified in the chart of accounts and he assumed the phrase "includes expenditures for teachers" meant the instructional component; regular instruction, bilingual, special ed, vocational education and all costs associated with providing those services. This definition, however, is very narrow. Number 0148 MR. JEANS referred to the next issue on page 12, line 4, and said the department recommends a definition be included for "eligible Impact Aid." The current foundation formula has a definition for eligible Impact Aid and he is in the process of updating the terminology. Number 0170 MR. JEANS said the next item pertains to page 17, lines 6 - 12, Funding for Special Education Service Agency (SESA). This section cannot be applied as CSSB 36(FIN)am is currently written. The funding formula no longer requires that special education students be identified nor does it make a specific allocation for special education. He noted the statute for allocating the funds is $85 per child or 2 percent of the special education funds. Number 0195 REPRESENTATIVE GREEN inquired if there was a change that could be accomplished to provide for that. He asked if it could be done as it's written in the proposed legislation or would it require additional work somewhere else; i.e., some other accounting procedure. MR. JEANS responded there are any number of changes that could be done to accomplish that. He added, "This language was developed and applied to the current foundation formula where we identify students - we have a separate allocation for special education. This language needs to be amended to come up with a new formula for determining what the allocation will be for SESA." Number 0234 SENATOR WILKEN acknowledged the language needs to be added and his office will be working with the department to develop that language. MR. JEANS said Mr. Cross would address the next issue, the requirement to employ a chief school administrator. Number 0262 MR. CROSS said page 14, line 14, addresses whether or not a school district has to have a chief school administrator which means under current statute, a licensed superintendent. First he wanted to clarify the comment made at the previous hearing that it made no sense for the Aleutian Region Rural Education Attendance Area (REAA) to have a superintendent because of their small size. He said the Aleutian Regional REAA, in fact, does not have a superintendent; their superintendent services are contracted with Unalaska. So they do have a superintendent, a licensed administrator, but they contract with another district for that service. Also, there had been some frustration expressed at the previous meeting with the situation in Adak. He appreciated Representative Brice's accolades to the commissioner for doing something about the situation and he wanted to discuss just what it was she did. She filed a complaint for that administrator with the Professional Teaching Practices Commission (PTPC), and eventually entered into an agreement whereby the administrator's license was revoked. He noted complaints to that commission are restricted to certificated administrators. MR. CROSS said that if provisions in the proposed legislation with respect to removing the requirement to employ a chief school administrator were to become law, turning a certificated administrator into the PTPC would have no effect. The PTPC could revoke the license but there would be nothing to bar the person from continuing to serve as the chief operating officer because this language eliminates the only requirement for any kind of licensure for the chief school official. He said the PTPC is the only avenue available; the police and the courts aren't too interested in pursuing these issues because the amount of effort it takes to resolve it exceeds the efficiency factor. In the Adak situation, the department went to the state police and other agencies seeking assistance, and while there was sympathy, the amount of effort required was more than they were willing to provide. So really, the department had only the PTPC to fall back on. If the district's chief school official is not required to be licensed, there is very little the state could do about misconduct. CHAIRMAN BUNDE inquired if the department was able to withholding funding to a district. MR. CROSS responded he would be willing to discuss this issue at great length, but in the Adak case, the only thing the department had was to go after the license. The department had been advised by legal counsel that funds could not be withheld, et cetera. Number 0430 CHAIRMAN BUNDE understood the proposed legislation changes the proviso that a district "shall" have a chief school administrator to "may" have one and doesn't say anything about whether the person is no longer licensed. MR. CROSS said if the person loses their license, it has no consequence because there's no requirement that a district have a licensed administrator as its chief officer. Number 0447 SENATOR WILKEN commented that Fairbanks is in the process of hiring a superintendent and thinking perhaps of going outside the ranks and hiring someone who wouldn't have a certificate. He offered to work with the department on this issue. Number 0470 MR. CROSS commented he would next like to explain the three sets of spreadsheets prepared by the department which represent the three years of implementation of the proposed legislation. He pointed out these spreadsheets are different from the last set, even though the bill hasn't changed. The most significant percentage impact is in the Southeast Island District which now shows a loss of $17,000 or 17 percent and on the previous spreadsheet showed a gain. He said the department made an error - there are four schools in the Southeast Island District that have a student count of less than 10 and were run through the table instead of including them in the largest school in the district and the result is a very significant swing for that district. There were other schools the department erroneously ran through the table, correspondence students were included in the school count rather than separating them out, and other errors that needed to be cleaned up. He said the department is in the process of trying to define a "school." CHAIRMAN BUNDE asked how schools were defined in terms of the spreadsheet. MR. CROSS said for purposes of the spreadsheet, schools were defined as self-reported data. In other words, the information reported by the districts is what was used. CHAIRMAN BUNDE inquired if Charter North and/or McLaughlin Youth Center had been defined as a school. MR. CROSS said yes; it was listed in the data provided to the department by the Anchorage School District. He said the department would furnish the committee with what information was and wasn't run through the spreadsheet. He reiterated that as the term "school" is defined, either together or independently, there will be substantial changes to the spreadsheets. He emphasized it is the department's opinion that the table in the proposed legislation is not the way to do it and there is not a definition of school that can be arrived at that won't be able to be taken advantage of. He believed the McDowell Study was wrong, not necessarily in the methodology, but in the conclusion that this school table was a practical way to go. He was of the opinion that some sort of funding community will have to be the solution. Number 0669 CHAIRMAN BUNDE observed the vast majority of the districts that would lose money under the proposed table have no local contribution and if there was a local contribution, they wouldn't be losing that amount of money. MR. CROSS replied, "If they made a local contribution in order for them -- and it was based on some kind of four mill equivalency, in order for them to get more money, they would have to contribute more than that because you would take that away from them in their state aid and if they were an REAA -- we went through this in the Senate -- if they're an REAA, you have to give it back them, but it's the zero sum game. What they get back is what their share of what gets put on the table because they're making a local effort, if that's making any sense. And to use an example, when we apply the table to the situation in Anchorage, it would be about $3 million, actually it's $3.6 million. But that puts $3.6 million on the table; Anchorage gets some of that back, so that drops the actual loss to them probably to around $3 million. When you require an REAA to have a local contribution of a four mill equivalency, it gets nothing for that; it stays even. What happens is that they get some money because there's more money on the table to distribute through the state dollars." Number 0748 REPRESENTATIVE BRICE observed that an ideal size of a charter school would be 29 students. MR. CROSS responded that charter schools are an interesting issue because the department's interpretation of the law is that charter schools must be treated as a school and therefore, in any definition of school that's reached, of course law is more important than regulation and therefore, that definition will be controlling. So whether a charter school is housed in a school facility such as a high school, the department believes the current definition of a charter school will require that it be treated as a school and run through the table, even if it's a correspondence school. MR. CROSS said in conclusion, the department strongly opposes CSSB 36(FIN)am. The department believes the distribution of wealth in this legislation leaves school districts without the capacity to continue the education program and without respect to the rhetoric and debate, gives them no ability to make up the loss. He commented there were many things discussed on Saturday that had nothing to do with this legislation, which is why the department wanted to explain line-by-line what this bill does, not what some other theoretical construct does, and the department believes this bill denies 20,000 school children in the state and keeps them from getting a fair opportunity to get an education. He concluded the Governor has said he would veto this bill in its current form. Number 0859 REPRESENTATIVE BRICE understood the department has a list of schools that are under average or having problems and he wondered if the department had done a comparison of that information with the departmental spreadsheets. MR. CROSS advised those lists were put out as part of the federal Title 1 requirements and do identify certain schools that aren't performing, but a correlation of the impact of this bill has not been done. He pointed out those statistics are important, but are misleading because they leave the impression that students in the schools not falling within that definition are doing well, which is not the case. Problems are easy to identify in small schools whereas in large schools, kids just get lost in the statistics. Number 0925 SENATE WILKEN thanked Mr. Cross and Mr. Jeans for their constructive comments. Number 1006 REPRESENTATIVE BRICE asked if any discussion had taken place with the Department of Community and Regional Affairs relating to consistent application of property value assessments across the state. CHAIRMAN BUNDE was not aware of any discussions. He asked Eric McDowell and David Teal to come forward to the witness table. CHAIRMAN BUNDE said inasmuch as the area cost differential study has not been viewed with great favor in some areas of the state, Mr. McDowell and Mr. Teal would have an opportunity to defend the validity of the study. He pointed out the McDowell Group had been hired by Legislative Budget and Audit. Number 1310 ERIC MCDOWELL, Senior Partner, McDowell Group, commented the McDowell Group has been in business for 25 years, done many studies and stay in business because they are objective and down the middle. He said all the questions presented are good questions and they wrestled endlessly with all the questions that came up today. First, he felt it was important to clarify the role of the school cost study in the universe of school funding. The study is a piece, but it's not everything. It deals with what the cost implications were of school size and of geographic location in Alaska. Federal aid, local contributions, and things of that nature were outside the work of the McDowell Group; the only relationship between the work of the group and this legislation is that numbers were set out for school size and geographic location. The policy issues in terms of special education, local contribution wrestled with by the legislature are outside the perimeters of the study. This gave him a chance to make a comparison because 13 years ago, the group completed a cost of living study for communities around the state. Unfortunately, that study was used as a proxy for the cost of funding a school, which in most cases are unrelated. He said this time the group had the opportunity, for the first time since statehood, to do a study on what it actually costs to operate the schools. That is the basis of the group's work and he believes it's a vast improvement over what has been in place for the last 13 years. Number 1217 REPRESENTATIVE GREEN asked Mr. McDowell to comment on the earlier remarks that the formula couldn't be duplicated or updated because of reverse engineering. MR. MCDOWELL said that leads into what he considers some of the most important questions that came up. Basically, there are three large components of school costs. First is instructional and he defends the school size curve; it's both statistically validated by the work done by the McDowell Group and by the team of four school experts with 100 years cumulative experience. That curve which determines essentially most of the cost of education in Alaska is a very good one. Second is the administrative component. He noted the Department of Education had very good data on staffing by school and a lot of that data was used in the study. On the other hand, the administration piece has definition problems which the group wrestled with and "is administration $500 or $5,000 per kid, who knows?" The third component is the nonpersonnel costs; i.e., fuel used for heating the building, et cetera. A review of the data revealed a variation among districts in terms of administration costs to such a degree that a good, sound curve couldn't be developed. He said, "So that's where we said okay, for now let's say you get what you're spending in that area and the same with nonpersonnel costs where the variation was quite wide as well." The study recommends more detailed reporting from the districts about administration and nonpersonnel costs, with better definitions. If the department were to receive data in that way, two years from now typical curves for school districts could start being plotted. For now, however, the group was unable to develop a good, sound curve. In terms of reverse engineering, he wasn't sure what was meant by that, but they did a very simple exercise on administrative and nonpersonnel costs which was "here's the per student amount that you're spending, you get that; you're not penalized." He said that one of the important findings of the study is that in a lot of rural areas, the nonpersonnel costs are higher than the old formula permitted and the area cost factor compensates for that. Number 1377 DAVID TEAL, Senior Analyst, McDowell Group, said, "I guess in response to the department's issue that we can't duplicate the methodology, that's the final methodology - the reverse engineering - because we looked at it in three pieces and because the Senators who put the bill together wanted simplification and it was very clear that three pieces and requirements to put things - divide things first - was not simplification and (indisc.) please put these back together. That process of putting things back together really amounts to saying, well we know what this detailed analysis gave us, so we know what the answer is. Now if you want to slam them all together, you're going to lose that detail and all we're doing is taking where we are and where we need to be and saying, you need to multiply by this number to get there. So, the methodology cannot be used by DOE; they will have to repeat this process. They can't just go to the chart of accounts, grab some new numbers and plug it into the formula. They're going to have to say, what are these pieces, let's define these things, let's draw curves, let's redo this administrative study; not simply take two days and plug something in. I guess what I'm saying there is if you want DOE to redo this study, it's not a matter of a two-day process; it's almost going to be a full-time job to have someone there defining and monitoring expenditures by the districts - internal auditors or whatever they are, but in a friendly sense - and actually having to redo this study on an ongoing basis. I don't think the right way to do it is to suddenly jump at it." Number 1499 REPRESENTATIVE PORTER asked if it was a function of perhaps not having the appropriate data listed on the chart of accounts. MR. TEAL said the data are complete and accurate; the problem is consistency. For example, a superintendent in a small school district may be both superintendent and principal and in one district he will charge in the chart of accounts as a full-time superintendent and in another district, may charge himself 75 percent to principal and 25 percent to central office administration. Principals go under instructional costs and superintendents go under district costs, so the data is garbage. It's difficult to tell if the books are being kept consistently without going back to individual districts and reviewing information. REPRESENTATIVE PORTER said he had been speaking more in terms of some consistent standard for reporting. MR. TEAL responded yes, and that's what he's viewing as the full- time job; defining what's wanted in the chart of accounts and making sure the districts follow it consistently. Number 1685 MR. MCDOWELL said he and Mr. Teal were not implying the district's reporting isn't good, because all the statements are audited. The question arises when the data is categorized as to whether there's consistency in the categorizing. If there's consistency in the categorizing, then the curve can begin to be developed and get a better understanding of why fuel costs $8 per student in some districts and $.50 per student in others. Number 1695 CHAIRMAN BUNDE asked Mr. McDowell to comment on the use of the Anchorage CPI to adjust district cost factors. MR. MCDOWELL said it's important to understand the CPI is a measure of inflation; it doesn't measure the difference in cost between Nome and Anchorage; it says that inflation went up 2 percent this year in Anchorage. Assuming that's true for all Alaska, then 2 percent is added to the budget to cover inflation. CHAIRMAN BUNDE remarked the current formula is not inflation proofed, and there's no reason an inflation proof factor would need to be written in this legislation; it could be adjusted by adding more money when available, without taking inflation into account. Number 1717 REPRESENTATIVE FRED DYSON said, "I was told that in the midst of your calculations that, in essence, instead of considering Anchorage costs as unity, you ended up deciding that Anchorage costs were .85 of unity and then going back and making Anchorage 1.0 and then upping everybody else." He asked Mr. McDowell to comment. MR. MCDOWELL said it doesn't matter where the starting point is; it's the relationship between all the districts that matters. The starting place of 1.00 doesn't mean anything, but the accuracy in the relationships between districts is what's important. MR. TEAL added, "In the draft, when we did not, what I would say normalize it, make Anchorage 1.0 or make the lowest cost district 1.0, Jerry Burnett who is the project director said, 'You're going to change that though aren't you because no one will understand it unless it starts at 1.0 because it's going to be real different and confusing. So I guess it's confusing whatever way it's presented, but I think that setting those lower districts to 1.0 is less confusing." Number 1852 REPRESENTATIVE DYSON asked if he had heard the average costs for all the districts was 1.0? MR. MCDOWELL said it was done that way in the first draft, and it was suggested it be done the way people are used to seeing it, which is the way it was done in the final. MR. TEAL interjected that it doesn't change the results. REPRESENTATIVE DYSON asked for an explanation on the major components that had the Lower Kuskokwim and Lake and Penn Districts appear as though they were getting disproportionately high amounts of money from the foundation formula before. MR. MCDOWELL said, "First of all, we don't make any judgments about if anybody had too much or anybody had too little; as far as we're concerned there wasn't anyone that was getting too much because education is such an important issue. The part of the change in their allocation that had to do with our study was a lot smaller than what ultimately came out in the bill. Because again this is where our study did one thing - I think it might have been 11 percent or something in those districts - whereas the other programs that were policy decisions on the part of the bill drafters and what related to our study had enormous impacts. For example, in one of those districts I think nearly half of their funding was from special programs - bilingual - and so something like a 20 percent rule which wasn't related to our study at all would have a dramatic effect. Local contribution would have a dramatic effect and all the policy type legislation not related to the McDowell Study had the largest impact on the potential losses that those districts experienced." Number 1987 REPRESENTATIVE DYSON asked if he understood correctly that the results of the McDowell research had an 11 percent or less impact on the distribution of funds under SB 36. MR. MCDOWELL said overall their recommendations ended up with a redistribution of $16 million among districts. Number 2036 MR. TEAL said, "Specifically, the districts that have every school as a funding community, and many of the rural districts are like that, end up losing and they do lose 11 percent and that's because of the way we count, as Rick Cross mentioned, you know, you run them through the formula again -- well, in every district in which a funding community and a school are the same thing, they weren't affected by this formula. But when you get to communities -- all of Southeast and particularly Anchorage and Fairbanks, where for Anchorage, for instance, there's three funding communities, and one of them has roughly 40,000 students in it. Those 40,000 students in a single funding community are now treated as 80 different schools and instead of coming up with a count of roughly 40,000 they come up with a count of 46,000 or something like that. So, what you end up with is a whole lot more adjusted students and that's the way the money is allocated - it's based on the adjusted student count not the real student count. So, the count in the rural districts stayed the same, but the count in the urban and Southeast districts went up because of the way we were counting - by school instead of funding community - leaving a smaller share. If you had added more money in there - 11 percent more money - to account for the different way of counting, then everyone would have come out even, but the rule was here that we're to reallocate money, not to determine the amount that's needed." Number 2190 REPRESENTATIVE DYSON said he was confused about how 40,000 students becomes 47,000 students. MR. MCDOWELL replied, "Let's take the example, we're talking about the curve for school size - just small schools are inefficient, you need more teachers per kid and so forth - no question about it. So you saw on the scale there where if you have 20 kids in your school, you get credit for 39.6, but if you have 250 kids in your school, you only get credit for 250 kids. What happened was when we recommended the shift from funding community to schools, you already had a lot of districts that were getting credit for every school - if I have a little school over here and a little school over here - chances are you're already getting credit for each of those schools rather than being forced to combine them together - call that a funding community and you only get to count once, so your count is lower. What happened is now everyone, including the communities that had to throw their schools together even though they were operating several of them, are now given credit for the extra cost of operating schools of different sizes. That's where most of cost suffering in our work came from; it wasn't so much in the actual cost of operating schools, although some of it was. But a lot of it had to do with shifting because of that. So now everybody's on an equal basis; if you've got a school you get counted for it." TAPE 98-34, SIDE A Number 0001 REPRESENTATIVE KEMPLEN referred to the section on minimum expenditure for instruction and asked if Mr. McDowell felt, based on the analysis completed by the McDowell Group, the 70 percent figure was achievable. Number 0086 MR. MCDOWELL replied, "Mr. Chairman, that's an excellent case in point about the difference between our cost study and SB 36; they are two different things. Our cost study identified the proportion of every district's budget that would be spent on instruction and that varied anywhere from 50 percent to 91, I think in the highest district - great variation. Another finding in the study is in rural areas, it really does cost a lot to heat a building and you don't have some very good buildings and a lot of maintenance and so forth. And so clearly there's areas where the nonpersonnel costs are very high. And that was our finding and we didn't make any recommendations as all districts should do "x" as far as some proportion. That is a policy decision that apparently the bill writers settled on and wanted to shoot for a target of 70 percent. I think that the motive for that appeared to be an effort to cap administration because clearly administration costs were real high in some places and low in others, and my guess is that's what that part of the bill is related to. It wasn't related to our study; our study simply found that statewide, on average, about 70 percent of all the school costs are instructional, but that district to district depending on circumstances and district policies and so forth, it varies enormously from 50 to 90 some percent. We made no recommendation in that regard." Number 0195 REPRESENTATIVE KEMPLEN commented that based on the McDowell Study the instructional costs vary significantly across the state and the 70 percent is an arbitrary number not based upon any quantitative, analytical work produced by the McDowell Study. MR. MCDOWELL said the only relationship is the overall average for the state is now 70 percent and based on the language of the proposed legislation, the conclusion is to have all districts aspire to at least the average. He thought districts would have a difficult time meeting the 70 percent. Number 0269 CHAIRMAN BUNDE thanked Mr. McDowell and Mr. Teal for their comments. He announced there were a couple of amendments he would like to address. Number 0289 CHAIRMAN BUNDE explained that Amendment 1 speaks to having one counting period per calendar year. Currently, the legislation allows for two counting periods. It does cost the districts money to conduct these counts and when the count goes up, the district submits it to the department for additional funding creating a double dipping situation, and if the count goes down, the district does nothing about it. Amendment 1 changes the legislation to one accounting period and funding would be based on that single counting period. Number 0343 REPRESENTATIVE PORTER made a motion to move Amendment 1 which reads: Page 10, lines 7 - 9: Delete "If it makes the district eligible for more state aid under the program, a district may transmit, within two weeks after the 20-school-day period ending the second Friday in February, a similar report for that counting period." Page 10, line 18: Delete "periods" Insert "period" CHAIRMAN BUNDE asked if there were objections. There being none, Amendment 1 was adopted. Number 0375 CHAIRMAN BUNDE explained Amendment 2 reinstates the 3 percent employment tax to provide a local contribution for schools which was deleted by the Senate Finance Committee. Number 0410 REPRESENTATIVE PORTER made a motion to move Amendment 2. Number 0413 REPRESENTATIVE KEMPLEN objected. He'd like to have a better understanding of the impact of the amendment. His understanding is, based on correspondence received in his office, there's not very much employment in the unorganized boroughs in many parts of the state. By the very nature of it being a rural area, there is opportunity for economic development and to a great extent, those areas rely heavily upon a subsistence based lifestyle. He questioned whether a 3 percent employment tax in the unorganized borough would produce a local contribution sufficient to meet the requirement. CHAIRMAN BUNDE responded if there isn't a great deal of employment in the area, the contribution would not be that great. However, the Department of Labor's study in 1996 shows $460 million in earned income in the REAAs in rural Alaska, which is a significant amount. In fact, it comes out to be an average of about $26,000 per year; the statewide average is $27,000 per year. He said there may be more of an economic opportunity in rural Alaska than most people realize. Number 0614 REPRESENTATIVE GREEN asked if there was some reason to change from allowing the unorganized boroughs as much flexibility to determine how the local contribution should be garnered to a requirement that unorganized boroughs impose this 3 percent employment tax. CHAIRMAN BUNDE noted that unorganized boroughs do not have the right for any tax and the legislature sits as the assembly for the unorganized boroughs. Another layer of government would have to be imposed on them so they could institute some other kind of tax or the legislature could choose some other form of contribution. The 3 percent employment tax seems to be the easiest and probably the most fair. Number 0730 REPRESENTATIVE DYSON referred to page 2 of the amendment, Determination of business situs, and asked if it is the intent of this paragraph to place a payroll tax on anybody who works any day in the unorganized borough. CHAIRMAN BUNDE said that employers have to do quarterly reports, so it may be a little more challenging in that a record would have to be kept of how many days a person worked in the organized area versus how many days in an unorganized area. He didn't have information on how many people would be impacted and how big of a problem it may be. Number 0815 REPRESENTATIVE DYSON said his interpretation was that it's not only how many days worked in an unorganized area, but which unorganized area. CHAIRMAN BUNDE replied, "As long as it's an REAA." Number 0839 REPRESENTATIVE KEMPLEN said Anchorage is a service center for the state and many of the engineering and architectural firms do a lot of work for the rural areas; e.g., design and engineering for schools, buildings, commercial facilities, et cetera. He wondered if, for example an architectural firm gets a contract for work in an REAA area, would that firm be required to pay a 3 percent tax on the compensation derived from that REAA. CHAIRMAN BUNDE said the next section of the amendment states the firm would get credit if its already making a contribution toward schools. REPRESENTATIVE KEMPLEN said that was just for the amount of taxes paid in their particular area. It appeared to him the credit would only be as high as the local property tax. Number 0946 CHAIRMAN BUNDE noted as the average in Anchorage is 9 mills, it's very likely the majority of that 3 percent would be covered; however, if an individual is extremely high salaried, perhaps it wouldn't be and the excess would go to the general fund to be used for schools. Number 0972 REPRESENTATIVE KEMPLEN inquired if it was possible that an Anchorage resident could end up paying taxes for both the Anchorage School District and a rural school district. CHAIRMAN BUNDE said he needed to look at the issue more closely. He called Jerry Burnett forward to the witness stand to explain the issue. Number 1027 JERRY BURNETT, Legislative Assistant to Senator Randy Phillips, Alaska State Legislature, said "If I read this amendment correctly and if it's the same as the bill was before, then the tax credit is the amount paid - it's a credit for the amount you paid and so, you could in fact, end up - the way this is written - paying taxes (indisc.) an REAA. And to further clarify there was someone else on the bookkeeping side that Representative Dyson asked a question, yes, they have to separately account by which REAA you're working in because it does require the Department of Labor and the state to deposit the money separately in an account for each REAA." Number 1078 REPRESENTATIVE BRICE asked how this would impact renters. MR. BURNETT said as written, a renter who worked in the REAA and lived in Fairbanks, would pay an employment tax in the REAA; there is no provision for a credit to that rent. Number 1109 CHAIRMAN BUNDE added that all those who live out of state would be paying in this particular case. Number 1131 REPRESENTATIVE BRICE cited an example of an electrical worker from Seattle working in an REAA who was paying school tax in Washington. The amendment doesn't necessarily state that he can't use that as a credit. CHAIRMAN BUNDE said he was hesitant to respond without further review. He inquired if the committee needed further perusal of the amendment. REPRESENTATIVE BRICE requested that Amendment 2 be held for further discussion. There was no objection from other committee members. CHAIRMAN BUNDE announced CSSB 36(FIN)(title am) would be heard again in committee on Wednesday, April 1.
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