SB 94-EDUCATION FUNDING  SENATOR ROBIN TAYLOR, prime sponsor of SB 94, thanked Chairwoman Green for her help on SB 94 and on education issues in general. He noted a committee substitute to SB 94 was prepared that makes major changes to accommodate concerns expressed at the last hearing. SENATOR DAVIS moved to adopt Version O as the working document before the committee. There being no objection, the motion carried. SENATOR TAYLOR explained that Section 1 of Version O changes the federal impact aid deduction from 100 to 95 percent. It adds a provision for a specific allocation for school nurses so that those districts without a school nurse will have one in the future. It also adds funding for vocational education but changes it from 3 percent of specific allocation multiplied against the formula to 2 percent, with the other 1 percent allocated for school nurses. He stated he has no objection to changing those numbers, but he believes that vocational education has been on the short end of the stick and needs to be emphasized and improved. In addition, he pointed out none of the schools within his Senate district have a school nurse. Number 2334 VICE-CHAIR LEMAN referred to page 3, line 3, and asked about the special needs factor change from 1.20 to .20. SENATOR TAYLOR deferred to the drafters for an explanation. He said that Section 2 merely makes the language changes necessary to encompass Section 1. A portion of Section 1 that was of concern to many is that it would require the North Slope Borough to pay the same four mil minimum level that other school districts in the state currently pay before they receive any funding from the State of Alaska. This would have allowed for significant additional revenues to be redistributed throughout the formula to assist other districts. Based on conversations and testimony, he reduced that from a four mil levy maximum requirement to four mils or 100 percent of the local cost of education, whichever is less. Existing law provides that the local community would have to pay 45 percent of the total cost of education. He stated: So we've changed it from 45 to the full 100 percent, but not taken any additional funds that would have been generated. This leaves you short on the numbers within these bills for education funding by about $21 million of additional funding that would have been available to help make sure no children were left behind any place else in the state. As I said, Section 2 makes the changes necessary to comply with Section 1. Section 3 merely adds the changes necessary to provide for a specific allocation for nurses. Section 4 accommodates both the nursing and vocational education and changes the words from 'product' to 'number.' I assume that's a linguistic change that was necessary for the computation... Section 5 requires a biennial study by the Department of Education that will be submitted to the legislature and establishes parameters from which the study must be done. It says the Department of Education already has significant auditing and numbers before it on what the cost of education is and that they should use then specific aspects of consumer price indexes and it lists four or five different methods of determining that information. In other words, do you have to go out and find out what it costs to do business in that district? What is the cost of living, the cost of food, utilities, transportation? Once they have done that and achieved those objective numbers, they then establish the amount of area cost differential for each community using Anchorage as the base. It's the way our current formula works but our current formula's never been adjusted in 14 years so, as a consequence, even though prices may change, go up or go down in a given community, we have no way of tracking that and every time we're told they're going to do something about it - we've sat now as a legislature for three years waiting for an adequacy study to be completed. Well they completed the adequacy study and the Governor's Task Force reported to this committee at a very recent hearing - and all of the comments on area cost differential were, we can't figure it out and we don't know what it is, but the current system is totally broke on area cost differential and, as a consequence, we should do another study. That will be the fifth study since I've been in the legislature with no changes." CHAIRWOMAN GREEN asked Senator Taylor if the kind of study he envisions can be derived at by gathering information that is currently available. SENATOR TAYLOR said that is correct. He noted that most of the information is available through Alaska's Department of Labor and is currently used for labor contracts and other state government areas that require a level of objectivity in the way funds are allocated for geographic differentials. SENATOR LEMAN pointed out the Consumer Price Index (CPI) is not referenced in the bill and that he prefers the replacement language because the CPI tends to overstate the actual increase in costs by as much as 1.1 percent, according to the Michael Boskin (ph) study. Part of the reason is that it does not account for changes in the way people live that are more efficient. He felt if the CPI is used, that increase will be institutionalized. SENATOR TAYLOR said DOEED has very good numbers; it audits every single school district every year. It also has, through the Department of Labor and federal entities, significant objective evidence to turn to. He agreed that the CPI can overstate the increase, but it is only 1 percent. If that is balanced against the actual expenditures, he believes DOEED can come up with a truer number of the actual cost that would not require an increase in general funds but, instead, would require a reallocation of funds. He felt the shifts would be subtle, depending on the costs in each community, and would be readjusted every two years. He pointed out that he selected two year intervals to provide stability for budgeting purposes in case dramatic shifts occurred. He stated this approach is better than one that was politically set 14 years ago and has not been changed since. Number 2075 SENATOR WILKEN disagreed that the area cost differentials (ACD) have not been changed in 14 years. He stated: Senator Taylor now, twice, has discussed the fact that the DCF - ACDs haven't been changed in 14 years. That's not correct. They were changed under SB 36, under the McDowell study. The McDowell study was brought about by the fact that the prior ACDs that Senator Taylor is speaking of were built in 1984. They were done for a Department of Labor study. They sampled 19 of our 40 election districts. That 1984 study - the Legislature was then under pressure in '85, '86, and '87, and when the Legislature in '87 came up with the formula that we changed three years ago, they needed - what Senator Taylor is talking about - and that was some sort of differential of living - cost of living across Alaska. It took that Labor study in 1984 and they brought it to the bill that changed the formula and made it an instruction unit formula in 1987. They then went further than that and they made another adjustment at the committee table, politically, to gerrymander the ACDs to the benefit of certain areas of the state and then we lived under that system until we changed the formula in 1997 or 1998. So, to suggest that we haven't done anything in 14 years is not quite correct. When the Department went out, under the McDowell study, the Department went out to study the cost of living. What they found was that across our 53 school districts there simply was a basic requirement of accounting missing and that was a chart of accounts that's uniform across the state of Alaska. That surprised the McDowell study and they expressed their surprise in the study and that has since launched an effort over the last three years for the Department to go out and, under regulation now, to have in place a chart of accounts so that we can start to compare across districts so that we can do what the Senator wants, and that is to figure out what is the cost of education so we can fairly compare 53 districts across the state. That process isn't ongoing and I certainly support that and I know Senator Taylor does too. I want to make sure that - we haven't forsaken this issue of ACDs but we have certainly found that we couldn't rely on the data we had, nor could we rely on the accounting system that was in place since 1987 and we're certainly trying to correct that. SENATOR TAYLOR said he agrees with Senator Wilken except that he disagrees that this was a beneficial change to every district in the state. He believes that with a new chart of accounts that will be audited annually and plowing in the additional factors, DOEED can determine what the numbers should be. SENATOR WILKEN said, as everyone knows from what was done with SB 36, that this isn't that big of a project but it has to be valid. He reminded Senator Taylor that the McDowell study verified that 80 percent of the budgets of school districts across the state was used for wages, salaries, and benefits so that it is the 20 percent that has to be quantified. He pointed out there is a difference between the cost of living and providing education in an area. For example, some towns have 30 miles of road so gas costs are low compared to a town with 4,000 miles of road. SENATOR TAYLOR responded: And I think all we're really talking about is providing within the formula a mechanized way of accomplishing this and having it done by the professionals and not done by the politicians. It shouldn't wait for us to make a decision here and then have that decision get structured politically. These are kids. They shouldn't be left behind and they're going to continue to be left behind if we leave it up to the legislature to do this. That's why my suggestion is, de-politicize this. Give us some objective numbers. And I really don't care what the formula is as long as it's a fair formula, and [indisc.] accordingly. That's what we've provided in this bill.... Number 1838 CHAIRWOMAN GREEN asked, "...are both of these ideas - the part that went on in SB 36 and this type of (indisc.) - are they both impacted by the same idea that we're not measuring necessarily what it costs to live there but we're measuring what we have to spend when we're there?" SENATOR TAYLOR said it is both and that, in essence, they have to look at what is truly the cost of education within that community. He pointed out there are costs that are unique to education and they need to be tracked. He informed the committee that Commissioner of Education Marshall Lind ordered all school districts to use the same chart of accounts in 1978 but we are just now getting there. SENATOR LEMAN asked how to compare what is being delivered in one district with another because different districts do things differently. He pointed out that some districts offer smaller class sizes while others offer a computer station for each student. He asked Senator Taylor if it is his intent that when comparing from area to area, equivalent delivery of education is compared. SENATOR TAYLOR said it is. He repeated that he firmly believes DOEED has the expertise to do that today because the department has specialists who know what it should cost in a given community. He said he has worked with the Department of Labor and DOEED to try to come up with a series of qualifiers that would provide objective numbers from which to create a worksheet. Number 1623 SENATOR LEMAN pointed out another concern is that one school district may have a different policy when it comes to negotiating employee contracts. For example, if employee contracts account for 80 to 85 percent of district costs, would there be some standardization or oversight of that percentage. He cautioned that if a district wanted to increase its area cost differential, it could just negotiate higher contracts. SENATOR TAYLOR said he has not attempted to address that because those decisions are left to local control. SENATOR TAYLOR continued describing SB 94. Section 6 provides for a declining fund adjustment to allow for a gentle slope to compensate for declining enrollments in school districts that are suffering from a reduction in student population. He maintained that the foundation formula provides well for increases in student population but districts "fall off of cliffs" if their enrollment declines. The legislature attempted to set percentiles - a school had to lose more than 10 percent of its population before it got help. That number was then reduced to five or seven percent. He replaced the percentage with language that says if school enrollment is declining, the school will receive 75 percent for that phantom child the first year, 50 percent the second year, and 25 percent the third. That would provide three full years to adjust contracts with educators. He indicated that he is flexible on those numbers but his goal is to make a gentler transition for schools. Number 1450 SENATOR LEMAN asked if that mechanism will kick in if any decline in enrollment occurs because the bill says the decline must be 4 percent or more. SENATOR TAYLOR said his preference is to go to zero percent. He continued explaining the bill. Section 7 sets the base student allocation. His original bill included a $210 increase. Because Senator Wilken, in SB 1, had a $145 increase he inserted $145 in the committee substitute, but at one point he was going to leave it blank and let the committee decide the best number. The Governor's bill increases the allocation by $115. He added that the fiscal notes increase the cost by $30 million if no revenues are collected by requiring a higher percentage of pay from the rich tax-base districts. He explained that if the federal aid impact deduction was at 100 percent, about $12 to $13 million would be added back into the formula and reduce the fiscal note to about $20 million. He hoped for a $50 million increase but because of the emotion surrounding the North Slope Borough issue, he modified that amount for the sake of agreement. SENATOR TAYLOR then explained that Section 8 contains the same language. It changes the threshold level on what was called the single site argument - it only impacts two districts, Wrangell and Petersburg. He noted that is an arbitrary number and there should probably be a better way of handling declining enrollments.