HOUSE BILL NO. 273 "An Act relating to education; increasing the base student allocation; and providing for an effective date." 10:15:48 AM REPRESENTATIVE ANDI STORY, SPONSOR, thanked the committee for hearing the bill. She provided a PowerPoint presentation titled "HB 273: Increasing the Base Student Allocation and Accounting for Inflation" (copy on file). She explained that the bill would help maintain stability in the school system to allow for districts to focus on the more substantial work, such as educating students, rather than focusing on the following year's budget and potential required cuts. 10:18:09 AM Representative Story began the presentation with slide 2. She reminded the committee that there was a constitutional obligation to maintain the school system. The bill proposed inflation-proofing the Base Student Allocation (BSA), which would help ensure strong schools and protect important programs. She mentioned the importance of knowing future costs when designing a budget, whether it be a personal budget or governmental. The bill would implement a "wise educational policy," which related to the importance of working together. Representative Story indicated that district budgets were assembled in November and were often due to municipalities in March. However, the legislative process was often not completed before the budget due date, which meant adjusting the budget and making the applicable reductions based on budget numbers. The district would often plan for cuts, and the community would have to come together and decide which services to cut. She noted that these cuts often undermined public confidence. Working together as policy makers was very important. The legislature had heard from school board members for a number of years that the ability to determine a fixed portion of the budget was favored. She mentioned that in order to receive federal funding, the state had to abide by federal laws, and there were accountability plans in place that must be followed. Every school was given a star rating out of five, and schools were required to have a plan to increase their star rating. 10:23:35 AM Representative Story continued to slide 3 to discuss the increment of inflation proofing. She explained that by introducing inflation proofing to the BSA formula, the bill provided fair and steady revenue that would be tied directly to Alaska's economy. This would be done by using the Consumer Price Index (CPI) for urban Alaska from the United States Borough of Labor Statistics. She relayed that Legislative Finance Division (LFD) recommended using the CPI because it was more reflective of Alaska's economy rather than national trends. She reminded the committee of a study by the Institute for Social and Economic Research (ISER) that had been shared in a previous meeting that found, based on the CPI, that Alaska was just below average when it came to school funding. 10:24:44 AM Co-Chair Foster noted Co-Chair Merrick and Representative Rasmussen were online. Representative Wool asked if she had considered using core inflation for the formula instead, which represented CPI minus energy and food. He believed that it was what the federal government used. Representative Story responded that she had not. She explained that the formula would be discussed in more detail later in the presentation. Co-Chair Foster commented that the inflation proofing would be tied to CPI in urban Alaska. He wondered if there was a CPI for rural Alaska. Representative Story indicated that LFD had recommended using CPI, and the term "urban Alaska" related simply to the name. She differed to Alexei Painter from LFD to explain the choice in more detail. Co-Chair Foster asked if there was a rural CPI for Alaska. ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION, responded that urban Alaska reflected Anchorage specifically, and that there was not a rural CPI or a CPI calculated for other communities in Alaska. There had been studies that looked at those costs, such as the aforementioned study by ISER, but there was not a formal CPI. Representative Story thought that was why Dr. Dayna DeFeo from ISER had adjusted for Anchorage and adjusted for other economic cost factors in the formula. The adjustment acknowledged the cost of doing business in more rural communities. ARIEL SVETLIK, STAFF, REPRESENTATIVE ANDI STORY, explained how inflation was used to calculate BSA for a fiscal year. The bill averaged three previous calendar years of inflation against the fiscal year used in Alaska as recommended by LFD. This smoothed out significant jumps and drops in inflation. She pointed out there was a gap year added into the formula which would allow school communities to know their allocation ahead of time. This would help the schools craft their budgets and better meet student needs. She addressed slide 4 which showed inflation in Alaska over the last decade. The chart was sourced from LFD. She pointed out that the headings included both calendar years (CY) and fiscal years (FY) and that the CPI data was provided by the Department of Labor and related only to Anchorage. Any price fluctuation in Anchorage would move out to other locations, and the BSA formula would help to adjust for the needs of other communities. 10:29:40 AM Representative Wool asked Ms. Svetlik to explain the CPI data in more detail. Ms. Svetlik deferred to Mr. Painter. 10:30:16 AM Mr. Painter explained that CPI calculation had an index year, which was set at 100. He believed the number was set during the 1980s. The CPI was calculated as an increase to the index and represented the full index going back to the reference year. 10:30:45 AM Representative Wool asked for more information on when the index year was set. Mr. Painter did not remember the exact year, but it was in the 1980s. Representative Wool shared his understanding that if the CPI was at 220, that would mean that it was a little more than double the price it was when it was initiated considering that 100 was the index. He asked if LFD ever used core inflation or just CPI. Mr. Painter indicated that CPI was used because it was the most easily found and available number. He thought it would be a policy call if the legislature wanted to pull additional costs. During the last district cost study in 2005, costs specific to the school district were studied and a new index was formed based on those costs. He noted that would be more time consuming, but it was a policy decision. 10:32:16 AM Ms. Svetlik pointed to the numbers in the side bars on slide 4. She explained that the numbers referred to what the percentage of growth would be per fiscal year based on the preceding calendar years. For FY 22, the increase would be 1.11 percent, which resulted from averaging CY 18 through CY 20. The idea was to make these numbers available prior to the finalization of the following year's budget. Ms. Svetlik advanced to slide 5 and relayed that the example on the slide related to FY 23. The reason she was using FY 23 was because the numbers were currently available in order to make accurate projections. If the legislature were to increase the BSA, there would be a $66 increase in the BSA. She reiterated that by averaging 3 years together, the formula would smooth out significant swings and dips in inflation. 10:35:05 AM Representative Story addressed slide 6 which highlighted that school funding was a fundamental statewide economic issue. She surmised that the best way to attract new residents, build a skilled workforce, and maintain a strong economy was ensure the quality of schools in the area. It was a way to provide a solid base and a way of providing some stability. She indicated there was invited testimony. Co-Chair Foster asked if the bill had been heard by the House Education Committee. He wondered if she had heard from rural schools about the Anchorage CPI being used. He noted the costs in rural Alaska were higher. He asked if $66 per student would be enough for rural schools and whether rural schools thought the formula would work for them. Representative Story reminded the committee that the $66 BSA increase would be adjusted for school size and the applicable multipliers. 10:38:58 AM Representative Carpenter referred to slide 4. He averaged the 3 years together, which were the percentages highlighted in yellow on the slide. He calculted it was a 1.58 or 1.6 percent average inflation over the 3 years. He suggested that 6 out of the 10 years were less than what the average was, and in only 3 out of the 10 years was there inflation that was greater than the average. He wondered what the bill's goal was. He thought if the state was covering cost increases and fluctuations from year to year, then it would be looking at a cost adjustment every year that would reflect the inflation change for every year. He drew attention to CY 20 [FY 22] on the slide and pointed out that the CPI percent change was negative. In a year like CY 20, an increase would not be needed. He wondered why the legislature would not just raise the budget. Representative Story responded that she averaged 3 years of data for the purpose of preventing large swings. She noted that the invited testifiers later in the meeting would attest to the importance of an average. Also, she wanted to leave room for the legislature to adjust the BSA to allow for other targeted funding for things like investment in reading programs. These adjustments were reflective of the Alaska economy rather than the national economy. She was not trying to solve all of the problems with education funding, but she was simply acknowledging that there were fixed costs, and the costs could rise. 10:42:58 AM Representative Carpenter agreed that costs increased due to inflation. He was trying to explain that the rising costs for inflation were sometimes less than a single percentage point, as seen on slide 4 from CY 15 to CY 17. However, the budget would be increased by an average of 1.5 percent for CY 15 through CY 17 because there was a desire to grow the budget as opposed to covering the cost increase in a given year. Representative Story deferred to Ms. Svetlik because she understood that Ms. Svetlik did the math on the slide. Ms. Svetlik clarified that LFD did the math on the slide. She explained that the 1.5 percent average was for CY 18 through CY 22. Representative Carpenter was talking about CY 15 through CY 17. She agreed that the average that would come from CY 15 through CY 17 would be much smaller. In FY20 [CY18], there would only be about 0.5 percent increase of the BSA even though there was a 3 percent increase in CPI. There was a slight lag in the rate of growth as compared to the rate of inflation because she was used real number to make projections rather than making up the numbers. It was not a perfect system, and the sponsor was open to other suggestions. However, budget growth was not always necessarily a 1.5 percent average as that average reflected only 3 years of data. She suggested that he could ask LFD to create a projection for all of the years for extended clarity. 10:45:02 AM Representative Carpenter thanked Ms. Svetlik for the correction. He did not mean to imply that the average would be 1.5 percent for all years and understood that it represented a 3-year average. He was using it as a demonstration that the bill would grow the BSA by an arbitrary percent that would not necessarily relate to the cost increase for that particular year. Instead, it represented a cost increase over multiple years. If in the 2 previous years the legislature had already spent the money, then budgeted costs may not be covered in the cost increase. He suggested that a conversation should be had to discuss a different mechanism to cover the costs. Representative Story appreciated the comments. She had talked to districts that reported that the large 4.88 percent CPI increase [in CY 21/FY 23] would be spread out and help the prior years as well. It was what the chief financial officers thought would work best as a predictable number. She hoped the committee would get to the invited testifiers in the present meeting. 10:46:49 AM CHRIS REITAN, SUPERINTENDENT CRAIG CITY SCHOOL DISTRICT (via teleconference), spoke in support of HB 273. He indicated that the bill would provide the mechanism for the State of Alaska to help address the annual inflation costs that Kindergarten through grade 12 schools endure for education. The BSA had not been addressed by the legislature since 2017. It was necessary to address the increasing fixed costs that were imbedded in school budgets that reduced the amount of funds that could be dedicated to classroom instruction and to improved educational content. He relayed that medical insurance was one of the most expensive fixed costs within school budgets, and it increased annually. It accounted for more than 12.5 percent of the Craig City School District's budget. Heating fuel oil had increased more than 25 percent since 2015, which represented an increase that occurred prior to the current oil increases. Since FY 21, heating oil costs had increased by 64 percent. Freight had increased by 6 percent [since FY 21]. He noted that these were only a few examples of fixed cost increases to which school districts must respond. He thought that HB 273 provided a consistent and reliable mechanism for the state to invest in the educational needs of children. He thanked members for the opportunity to testify in support of the bill. 10:49:40 AM Representative Josephson asked Mr. Reitan to restate some of the figures he had mentioned. 10:50:21 AM JIM ANDERSON, CHIEF FINANCIAL OFFICER, ANCHORAGE SCHOOL DISTRICT (via teleconference), spoke in support of HB 273. He referred to a graph titled, "ASD School Funding since 2017," which he had provided to the committee (copy on file). He hoped the visual would show how the "fiscal cliff" would affect Anchorage specifically, and why the fiscal cliff existed. He pointed out the red line at the top of the chart, which reflected the BSA's inflationary increase based on Anchorage's CPI from FY 17 through FY 22. He noted that the rates from January of FY 22 through January of FY 24 were estimates based on a 2 percent steady inflation rate, but it was likely that FY 22 might be significantly higher than estimated. Mr. Anderson continued by explaining that the grey, light blue, and gold bars showed BSA equivalent funds that helped offset structural deficits over the last several years. The Anchorage School District (ASD) had an applied fund balance for two years as well as federal relief money to maximize educational opportunities for the past five years. He indicated that FY 22 and FY 23 relied heavily on federal Elementary and Secondary School Emergency Relief Funds (ESSER), however there were not enough federal funds remaining to account for the structural deficit in FY 24. The inflationary costs for ASD had averaged around $10 million to $12 million dollars per year for the last 6 or 7 years. He explained that while one-time funds were helpful, those funds hid the structural deficit of more than $40 million. Mr. Anderson noted the district's liability insurance had increased by 100 percent in the last few years due to nationwide challenges. It had cost Anchorage $21,000 per school district employee per year to cover medical benefits. He compared this number to Seattle, Washington, which was $12,000 per year and Atlanta, Georgia, which was $11,000 per year. The red line on the graph showed gaps between the one-time funding that had been used by the district. Since 2017, the district implemented several measures to reduce the rate of increase for medical insurance costs. He emphasized that this did not reduce costs, but simply reduced the rate at which the costs increased. He explained that the inception of the Alaska Middle College School had a low overhead and cost the district about $10,000 per student. He compared this cost to the district's 8 brick and mortar high schools which cost an average of $13,000 to $18,000 per student, depending on the other forms of money that were dedicated to those schools. The Alaska Middle College School helped increase revenue as well as reduce costs for over 200 students. Mr. Anderson indicated that the district had built a relationship with the Lower Yukon School District's (LYSD) Kusilvak Career Academy, which benefited students from both districts. The LYSD allowed ASD students to take courses and get certifications for a quarter of a school year at a time. It opened up many slots for ASD students, so both districts benefited from the relationship. The reality was the school district had been hiding a growing structural deficit and there had to be measures taken in order to move forward and allow the district to enact multi-year plans. It typically took at least 3 years to see changes in student outcomes from a new program. The first year involved training school district employees, the second year was when students started to get consistent instruction through the new program, and the third year was generally when improvement could be seen. When only one year of money was provided, it did not allow for the implementation of three-year programs because it was too uncertain. He hoped Alaska would implement an inflation- proof BSA so that districts could implement multi-year strategies for improved student outcomes. He concluded that HB 273 and HB 272 would help accomplish the necessary first steps. 10:57:59 AM HEIDI TESHNER, DIRECTOR, FINANCE AND SUPPORT SERVICES, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT (via teleconference), reviewed the two fiscal notes for HB 273 by the Department of Education and Early Development. The first was a zero fiscal note with the control code vICxU. The fiscal note was for informational purposes only and showed a general fund transfer to the Public Education Fund (PEF). Ms. Teshner reviewed the second fiscal note, also by the Department of Education and Early Development, which had the control code RIhvb. The fiscal note used the CPI for urban Alaska as prepared by the United State Department of Labor for 2019 through 2021 and arrived at an average percentage difference of 1.72 percent. The average percentage difference was applied to the BSA for FY 23 and totaled $5,930, which resulted in a CPI of $6,032. Using the FY 23 projected average daily membership counts and the CPI adjusted BSA of $6,032, the new estimated total state entitlement would increase by approximately $26.1 million. The effective date of this bill would be July 1, 2024 in FY 25. She added that the third page of the fiscal note showed the projected fiscal breakdown by school district. Representative Story noted there were a couple of other handouts in member packets. Ms. Svetlik indicated that LFD had provided a theoretical fiscal note for the committee's review, titled, "K-12 Foundation Formula BSA Adjusted for Inflation - 3 Year Average" (copy on file). She explained that the handout showed what the growth would look like if HB 273 were to be combined with HB 272. She noted that it was an incremental increase, and that the chart showed the projected ways in which the increments would grow. 11:02:00 AM Representative Wool shared his understanding that HB 273 added an inflation formula using CPI and 3 previous years' averages. He compared this to HB 272, which he thought proposed an adjustment to the BSA starting in 2017 and using a similar formula. He asked if his understanding was correct. Representative Story suggested that he refer to the packet for HB 272 (copy on file) which showed how the numbers were determined. She explained that she did not go back to 2017. She started in FY 20, which included around $30 million that was outside of the formula. However, this was vetoed by the governor, so the $30 million was inserted back into the formula when doing the calculations. The increments showed about a $30 million increase when inflation proofing. The $30 million being inserted back into the formula allowed for inflation proofing for FY 21 and FY 22. She explained that that is how the $232 BSA increase projection came about. Then, three years were averaged to arrive at the $14 million projected increment for the FY 24 BSA with inflation. The chart showed a minus inflation year as well, which meant that there was a $71 million cumulative increase. She hoped to forward fund education within the formula by $57 million. The bills complimented one another and gave an idea of what it might look like to inflation proof. It was important to note that some members wanted to see certain programs funded, and by doing a modest adjustment it left room for strategic funding for the programs in which members might be particularly invested. She thought it was important to think about educational policy and how the bodies affect one another. Co-Chair Foster thanked the presenters and reviewed the agenda for the afternoon. He reminded members of the amendment deadline for the operating budget. HB 273 was HEARD and HELD in committee for further consideration.