HOUSE BILL NO. 273 An Act relating to school funding, the base student allocation, district cost factors, and the adjustments for intensive services and average daily membership calculations; and providing for an effective date. 1:46:56 PM Representative Mike Hawker, MOVED to ADOPT Amendment 1, 25- LS0148\M.1, Mischel, 1/25/08. Co-Chair Meyer OBJECTED for discussion purposes. Representative Hawker explained that the amendment adds essential information on financing components & recommendations made by the Joint Legislative Education Funding Task Force. At the time the bill was drafted, the information was not available to be included, addressing recalibration of the pupil transportation costs. The contracts were rewritten last summer and then renegotiated. Amendment 1 reflects those contracts, adding them to the bill. 1:48:01 PM Co-Chair Meyer WITHDREW his OBJECTION. There being NO further OBJECTTION, Amendment 1 was ADOPTED. 1:48:32 PM DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, provided members a handout: "K-12 Foundation Formula Funding-State of Alaska FY2002 through FY2011". (Copy on File). He explained that the information resulted from requests to identify the numbers representing inflationary costs and basic education funding. He highlighted the three various scenarios: · Method 1 - The amount of State spending for education increased since FY2002 · Method 2 - Increases to the Base Student Allocation (BSA) · Method 3 - Numbers including retirement costs Mr. Teal explained there is "no clear way" to determine what education funding actually is or how it has changed. The easiest way to understand education funding is to observe the total amount appropriated for the foundation formula. In FY02, the General Fund formula spending for the foundation formula required $643 million dollars; FY09, General Fund spending, not including debt reimbursement, will amount to $1.214 billion dollars, which includes Task Force recommendations not included in the BSA. The increase from FY02 to FY09 is anticipated to be $570 million dollars, an increase of 89% during the seven years or a 9.5% annual increased spending. Representative Gara inquired the location of that information on the handout. Mr. Teal said the cream colored area listed under Method 1. He noted an objection to the comparison of total spending and the number of items affecting it includes the student count. On a per student base, the average daily membership (ADM) in FY02 was $5 thousand dollars higher than it is currently. On a per student basis, funding was approximately $4.8 thousand dollars; in FY02 & FY09, it has increased 95% to $9.4 thousand dollars. To adjust that number for inflation, the spending would be boosted by inflation to match FY09 equivalent dollars, placing the increase up to 62% per student funding. 1:51:44 PM Representative Gara pointed out that a large dollar increase went into funding the retirement shortfall. That account was placed into the BSA for a few years. He asked if those funds had been backed out, would there still be an adjusted inflation amount increase to education funding. Mr. Teal pointed out that information was indicated on the Method 2 chart. Method 2 identifies the increase to the BSA, a more traditional method at looking at education funding. Education funding tends to be a mix of State and local contributions, which can be affected by property values. He commented, the BSA is the "cleanest way" to look at the amount of money going toward education in the classroom. Mr. Teal referenced handouts from previous meetings, which he had modified to reflect the Task Force recommendations amounting to a $100 dollar increase from that proposed for FY09-FY11, $200 dollars. Mr. Teal referenced Handout 2: "Alaska K-12 Funding, Base Student Allocation with Adjustments". (Copy on File). The pencils on that chart do not show an increase quite as rapidly, highlighting a 49% increase from FY02-FY09. However, with the indicated changes, what is actually being proposed is a 45% increase. The BSA does not reflect what the State has spent for K-12 because of inclusion of the early opportunity grants, district cost factors, school improvement grants and intensive needs. 1:54:02 PM Representative Gara pointed out that the increases show the upward flow to the BSA but do not indicate outside funding such as the learning opportunity grants. Consequently, the increases were actually higher. He noted that a large portion of the BSA increases for a few years had gone into the retirement shortfall. He requested more information indicating the exclusion of money to the retirement shortfall. He maintained that those dollars never go into the classroom. Mr. Teal advised that he had not tracked those numbers because retirement was funded through the BSA; in order for it to be tracked, there must be a conversion of the district cost factors and the learning opportunity grants to a BSA equivalent. He understood why Representative Gara would want to do that for the retirement numbers because, basically, that too is a reduction to the BSA. He noted those numbers were only tracked for FY09; he added, retirement costs could be ignored from the FY02-FY09 comparison. The State now has returned to the FY02 contribution rate and retirement costs have been corrected in the FY02-FY09 comparison. 1:56:09 PM Representative Gara understood that in FY09, the contribution rate would be 12.5%; he asked if that was the rate in FY02. Mr. Teal replied it was approximately 12.5%. Representative Gara asked the change between FY02 and FY09 to per student funding. Mr. Teal referenced the chart with the bars next to the pencils, Handout 2. The bars represent the adjustments to the BSA. He described the process for determining the difference between the graphed numbers, pointing out that in FY05 & FY06, there was no funding outside the formula. The BSA and the adjusted BSA was the same in FY07, including the district cost factors; in FY09 & later, intensive needs and district cost factors (DCF) add a substantial amount of funding outside the BSA. Mr. Teal continued, the Governor's proposed increase of $200 dollars to the BSA, would cost $44.8 million dollars in FY09. Therefore, the $90 million dollars added for intensive needs and DCF equals a $402 dollar increase to the BSA. 1:59:28 PM Mr. Teal stated those numbers include what the Department of Education has indicated in the footnote with the $35 million & the $70 million dollars outside the formula, converting it to an equivalent BSA and then indicating the number. The inflation adjustment does not include retirement costs, but instead addresses dollars within the classroom. The increase is approximately 45%, with an average increase of about 5.4%. The BSA is anticipated to increase to 5.8% n FY09, which will be a 45% increase since FY02. He reiterated that the average annual rate of growth is approximately 5.4% annually. Inflation has averaged 2.65% each year, which means that since FY02, K-12 funding has grown twice the rate of inflation. 2:01:08 PM Representative Gara observed that those numbers did not include the cuts for funding. By excluding retirement costs and then including the outside allocated dollars within the formula, the increase will be 5.4% per year. He pointed out it is not calculated and in FY03, the Legislature cut the amount of pupil transportation funding and the formula. Additionally, the Legislature cut the pre-Kindergarten program, which had been included in the FY02 budget. Schools were required to make up the shortfalls from their BSA dollars; hence, classroom money had to be placed into the above listed items. Community school funding was cut in FY03. Representative Gara summarized, there are a number of funding sources K-12 education in FY02, which are not indicated in the itemization graph, which narrows the change between FY02-FY09. Mr. Teal agreed. 2:02:18 PM Mr. Teal admitted that many complications occur when making a comparison. The attached chart represents only three scenarios. Mr. Teal added that the items referred to by Representative Gara were relatively small and would not change the bottom line, which is that funding is increasing roughly twice the rate of inflation. 2:03:12 PM Co-Chair Meyer noted that references such as community schools are not considered education funding. He commented that pupil transportation had increased. Mr. Teal advised that pupil transportation had not been indicated, only the foundation formula and that pupil transportation has increased. Some consider that cost outside classroom money. There are numerous methods that could be considered in providing a valid comparison. Co-Chair Chenault noted that in FY03, the Legislature instituted a new pupil transportation funding arrangement, which he understood provided an increase. Currently, those dollars are no longer adequate to address the concerns. 2:04:49 PM Representative Hawker observed that the analysis had not included any funding for the major maintenance list, capital construction or debt reimbursement. Mr. Teal added, the included costs are strictly operational. Representative Hawker recalled that in FY03, pupil transportation was moved from a non-accountable to an accountable system. He acknowledged the difficulty of composing an analysis and applauded the efforts done by Legislative Finance Division (LFD). Representative Kelly noted appreciation for the work provided by the LFD breaking down specific funding information. He warned that there had not been enough information and research done for the choices being made. He pointed out the 89% increased educational funding for K- 12 over the past seven years, emphasizing his concern with the proposed budget. He stated the budget is unsustainable and does not provide adequate value for increases to the educational system. He pointed out that the retirement costs to the system will take twenty-five years to pay off. Representative Kelly urged that a more conservative approach be taken. He reiterated that the proposed costs are "out of control". Co-Chair Meyer agreed with concerns voiced by Representative Kelly. He had hoped that the Task Force would have adequate information for making recommendations. Representative Hawker noted that Mr. Jeans from the Department had provided extensive information regarding the financial consequences of the decisions being made. Co-Chair Meyer advised that the legislative appropriations have more than doubled in keeping up with inflation. Representative Gara remembered opposing the change to pupil transportation made in FY03. Until FY03, school districts received full compensation for transportation costs. Beginning in FY03, the communities were provided increased supplemental funding for fuel costs. In most school districts, the increase has been steep. The Legislature determined a formula providing a percentage that did not increase with the actual costs. Many districts have had to take money from their classroom funds to pay for the increased fuel costs, which has been a great concern since FY03. He acknowledged, the education debate has been frustrating. Education policy should be determining the balance between urban and rural areas. In many districts, class sizes are too big. He recommended that discussion occur on what the legislature can do to help reduce class size. Instead, discussion only compares funding from one year to the next. Representative Gara worried about basic education considerations. 2:12:33 PM Mr. Teal addressed Method 3, the model excluding retirement costs. Method 3 provides an analytic view of only the dollars in the classroom. State retirement contributions on behalf of school districts in FY09 will be $216 million dollars. If that money was distributed to the districts, the BSA would experience a 68% increase in K-12 funding since FY02, growing at 7.7% annually, tripling the rate of inflation. Retirement funding is costing the State more money, however, the teachers are not being paid more. There is no more available to the districts or the classrooms because the funds are paid directly to the Department of Education. Method 3 excludes retirement costs. Retirement costs are now $216 million dollars per year, which the State pays instead of increasing the BSA. If those dollars were paid to the districts, it would be the equivalent of having a BSA of $6.8 thousand dollars. He concluded that it grows triple the rate of inflation. Representative Gara discussed the amount of money currently placed into the education system. Costs to the schools are increasing faster than inflation. He questioned how much health insurance & fuel costs had superseded inflation. Those costs are eating away the district's ability to provide curriculum. Mr. Teal agreed, but did not have the numbers. The inflation indicator being used is the Consumer Price Index (CPI), which has no relationship to the costs of running schools but is the standard recommendation. 2:16:09 PM Representative Kelly asked if K-12 education system used a similar index as that used by the University. Mr. Teal said no. Representative Kelly opined that the spreadsheet attachment provides a "great voucher proposal" for education. He reiterated concerns with the proposed budget. 2:17:30 PM EDDY JEANS, DIRECTOR, EDUCATION SUPPORT SERVICES, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, explained that he had just received the LFD analysis, which, he assumed originated from his testimony during the pervious hearing, identifying the Governor's request to move $100 dollars per student per year for each of the next three years. Mr. Jeans hoped he had not left the Committee with the impression that education funding had not substantially increased since FY02. That was not his intent. Mr. Jeans warned it is inappropriate, for the Legislature to consider formula adjustments in an inflation calculation. The Task Force made recommendations because they perceived deficiencies in the existing formula, to be adjusted. Mr. Jeans stated there should not be an adjustment, weighing in a cost of living factor. He understood that Anchorage's contract for their teachers would increase 4%-3%-3% over the next three years. The Governor's proposes a $200 dollar increase, which would be slightly below 4%. The Administration attempts to achieve sustainability and predictability for the school districts & municipalities so that they can plan ahead for the next four years. He commented that the $200 dollar increase will provide that predictability. 2:20:09 PM Representative Gara maintained that there must be a formula, protecting both urban and rural school districts. He noted his support for the proposal by the Administration, increase as recommended in the bill. He observed the increase for special needs funding is a fraction of the real costs. He asked how much the Anchorage School District receives for their special needs student versus the real costs for that student. Mr. Jeans replied that currently, Anchorage is spending $80 thousand dollars for a special needs child; they are actually funded $26 thousand dollars through the foundation program. He hoped that could be a formula correction recommended by the Task Force and to include it as an offset to inflation in the analysis would be inappropriate. Representative Gara warned that establishing a formula that leaves the majority of students in the State behind inflation, results in bigger class sizes & less curriculum. He hoped that the Committee could discuss ways to address those concerns. Representative Kelly disagreed with comments that Alaskan's only look at the cost of education. He believed that the public looks at the total costs, reiterating that the proposed costs are not sustainable. 2:23:32 PM Co-Chair Meyer interjected that on the State level, only the total costs should be addressed. It is up to the local school districts to determine which programs are offered in their location. The function of the Legislature is only to provide the necessary funding. Representative Gara advised he intends to offer an amendment on the House floor. He urged reconsideration of the proposed increase contained in the bill. He agreed with the Administration that $200 dollars per year does make more sense. Initially, the however, the Task Force members disagreed about the exact amount and decided that the Legislature should determine it. He requested further discussion on the increased levels of funding are and what it means in terms of class size and curriculum offered and it affects each student. 2:26:01 PM Representative Crawford noted frustration maintaining the status quo for Alaska's students. He urged a better investment in kids so that they can succeed in the competitive world. He supported the number proposed by the Administration. Representative Joule observed that the Education Funding Task Force had a narrowly defined mission and that the timeline was short for addressing such a large focus. He shared frustration as voiced by other members. 2:29:49 PM Co-Chair Chenault appreciated the work that the Task Force accomplished with the requested direction provided them. They did address some of the needs of Alaskan students. He did not agree that the proposed funding keeps districts at a status quo but thought, instead, it moves them forward. He indicated the short funding over the past ten years, and realized that Anchorage intensive needs are a huge issue. He mentioned the special needs in his own district and pointed out that statewide, there are over 800 children in that category. Smaller classrooms require more money in education and/or hiring more teachers. He agreed the topic should be discussed at greater length at a future time. Co-Chair Chenault acknowledged the system is not perfect. He indicated concern with the voucher criteria. He thought that the Task Force did an excellent job in forming legislation, maintaining that HB 273 improves the outlook of education in the State. 2:34:05 PM Co-Chair Meyer reiterated his appreciation for the work by the Task Force. He pointed out the three fiscal notes, with a new one by the Department of Education and Early Development. Representative the statistics on the number of kids actually graduating from high school & how Alaska ranks with the other states. 2:35:22 PM Representative Hawker acknowledged there had been a divergence of opinions brought forward in drafting HB 273. He acknowledged shared concerns voiced by Representative Kelly. Representative Hawker MOVED to REPORT CS HB 273 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Representative Kelly OBJECTED. A roll call vote was taken on the motion. IN FAVOR: Crawford, Gara, Hawker, Joule, Nelson, Stoltze, Thomas, Chenault, Meyer OPPOSED: Kelly Representative Foster was not present for the vote. The MOTION FAILED (9-1). CS HB 273(FIN) was reported out of Committee with a "do pass" recommendation and with two previously published fiscal notes by the Department of Education and Early Development and one new fiscal note by the Department of Education and Early Development. AT EASE: 2:38:12 PM RECONVENE: 2:44:03 PM