MINUTES SENATE FINANCE COMMITTEE 3 March 1998 8:40 a.m. TAPES SFC-98, #59, Side A CALL TO ORDER Senator Bert Sharp, Co-chair, convened the meeting at approximately 8:40 a.m. PRESENT In addition to Co-chairman Sharp, Senators Phillips, Donley, Torgerson and Adams were present when the meeting was convened. Senators Parnell and Pearce arrived respectively thereafter. Also Attending: Senator Gary Wilken; Jim Baldwin, Assistant Attorney General, Department of Law; Richard Cross, Deputy Commissioner, Department of Education; Eddy Jeans, Manager, School Finance Section, Education Support Services, Department of Education; John Cyr, President, NEA-Alaska; Linda Frank, Carl Rose, Ashley Reed; Eric McDowell, Senior Partner, McDowell Group, Juneau; David Teal, Project Manager, McDowell Group, Juneau; Dave Tonkovich, Fiscal Analyst, Legislative Finance Division; aides to committee members and other Legislative members. Via Teleconference: Teleconference was "listen only" for the cities of Anchorage, Barrow, Cordova, Delta Junction, Fairbanks, Glennallen, Tok, Kenai, Valdez and Unalaska. SUMMARY INFORMATION SENATE BILL NO. 36 "An Act relating to transportation of public school students; relating to school construction grants; relating to the public school foundation program and to local aid for education; and providing for an effective date." (The beginning of this tape is distorted by interference from the teleconference equipment.) Co-chair Sharp introduced Eric McDowell, who provided the committee with the McDowell Group Study. He said he did not anticipate getting to any amendments this morning. He further advised that teleconference this morning was "listen only". He noted the cities of Anchorage, Barrow, Cordova, Delta Junction, Fairbanks, Glennallen, Tok, Kenai, Valdez and Unalaska were on line. Senator Phillips offered opening remarks and invited Eric McDowell to join the committee. He said the McDowell Group had provided a study of the schools within Alaska. This report dealt with the actual cost of the schools. He said Mr. McDowell was present to answer questions either previously submitted or those that would be asked today during the meeting. Co-chair Sharp asked that Mr. McDowell identify the questions earlier presented and answer those first. Senator Adams thanked the co-chair and committee for allowing him to submit questions on this study. He felt the study did not do justice to SB 36. There had been an increase in student population and the State therefore had to give more money. He asked that specific questions raised by him (contained in blue packet submitted to committee members) be answered. These were, in particular, about the study, information on teacher salaries and non-personal service costs. He noted the chart on page seven and page seventy-six. There was further concern of the number of disclaimers included in the study. It was repeatedly stated that the purpose of the study was to develop new adjustment factors for size and location and not to develop a model to allocate education aid to school districts. That means no robbing from one school district to give to another school district, or to perhaps tax unorganized boroughs by four percent and move that money into urban areas. He felt that the study was being used to reallocate funds which, along with other proposals rolled into SB 36, would have dire and he hoped unintended consequences in his district and most rural Alaska. He included comments and questions from the Northwest Arctic Borough, North Slope Borough, Lower Kuskokwim, Southeast Island School, Skagway School District and the SEAC Commissioner. These were contained in his memo of 28 February 1998 to Co-chair Sharp. He felt there were many questions and hoped they could be answered and worked through. He noted two addendum and hoped they could be gotten into later. Eric McDowell was invited to join the committee. He said he was the senior partner of the McDowell Group and the author or the Alaska School Operating Study. (Mr. McDowell moved to the front of the committee room and, making use of a flip chart, commenced his testimony.) He thanked Senator Adams for his questions and said they were questions they had asked themselves before and during the course of the study. He referred to the supplemental summary of 12 February 1998 and the draft report of 31 January 1998. A final report was due by the end of the week. It was important to recognize what the study was limited to. School operating costs rather than deferred maintenance, capital or school buses. The assignment was to look at the actual cost of operating schools, the influence of size and of geographic location and then to suggest an allocation based on those costs. They were not involved in any complication of local shares or Federal funding. He briefly reviewed previous school cost studies done in 1981; then in 1988 a household cost of living study. He noted that for some districts the size factor was more important. These districts paid their teachers substantially, even though there was a low cost of living. Another district, with the highest cost of living in the State, paid twenty percent less than Anchorage. However, they had one aide per seven children. That was a choice they made. In order to avoid rewarding overspenders and penalizing those who had been frugal, they indicated the real difference in instruction is in size and there was lots of compensation for that. They also researched salaries in all other fields, going through some 230,000 state employment records, twenty-five sample occupations from engineers to secretaries and did not find any actual cost differential paid and the answer was no. If anything, it was in the reverse. Other states surveyed tended to pay less in rural than in urban, but Alaska was different because our rural was remote and costs were higher. Even though the costs are higher in Senator Adams' district as related to property and household, but it is not known to operate school districts. The Federal government does pay an "Alaska differential" but it does not pay one for being in Nome as opposed to Anchorage. They concluded that no one had severe recruitment and retention problems. Smaller districts had teachers that averaged nine years experience; larger districts had teachers that averaged twelve years of experience. He further explained that there was not a lot of relationship between costs in areas and what people were actually getting paid there. They decided the salary should be the same because everyone else pays the same or less in the rest of the economy with the sole exception being State government employees because they get the old loaf of bread differential. That was the basis for their recommendation there. However, it is only a blanket recommendation. In reviewing all the numbers such as teachers' salaries, cost of oil, etcetera did not make a whole lot of difference. He explained the curve in compensating the schools for size. He felt that their study was more favourable to smaller schools that the only size factor system. He explained non personal services (NPS) and how they were different from personnel costs. They felt that whatever it was costing the schools they must be spending. But how the monies were spent was left up to the individual school districts. This study told exactly where cost really were. He said there should be a transitional period for districts that may get less funding. At the conclusion of his presentation he offered to answer questions from committee members. Senator Phillips asked about the how and where of the data that was used. Mr. McDowell said the information was gathered from the Department of Education. They took each district's report, crunched in every number and then making use of three different methods of NPS costs they came up with their recommendations. Senator Adams referred to page one of the study and asked where the data was obtained from and how did it compare to the existing formula? The second question was that school size had an enormous influence on operating costs per students. On page thirty-four, using the efficiency curve, what was the basis used for providing the same front-loading for small schools and large schools alike? Mr. McDowell asked that Mr. David Teal, Project Manager, McDowell Group assist in the response to these two questions. Mr. McDowell reiterated that all school districts have to report annually to the Department of Education and it was from these reports they obtained their information. They were able to come up with average figures using these reports. Senator Torgerson requested Mr. McDowell to walk the committee through the calculation used for small, medium and large schools. Senator Adams also asked Mr. McDowell to explain data used showing the small and large schools would not be hurt so much, but the middle schools would be hurt as shown on his chart. Mr. McDowell deferred to Mr. Teal for this response. David Teal, Project Manager, McDowell Group responded. He said the lines on the chart could not be compared because one was a funding community concept, which was the current law, and the new one operated under school concept. He said a funding community would always be at least as large as the school and could even be much larger. However, it would never be smaller. Therefore, the position of the lines on the chart did not necessarily indicate hurt and help. He explained a school of 71 and how it would be converted running it through the formula they used. There may be certain points as regards to the chart that one would be better or worse off than under the current formula, but precisely where those points were was hard to tell. It was true that every school, even the large ones, get front- loaded. They get the benefit of being small and climbing up the curve. He noted that the only way one could avoid a loss of funding as schools got additional students was to front load every school. Senator Adams asked if it could be guaranteed that they would not lose any money, community versus a school concept, considering three buildings in a community. Mr. McDowell responded and explained how the adjusted student count would work. Senator Phillips referred to the Skagway school system. Mr. McDowell said that with all the students in one building they would still be on the same basis as before. They would not benefit from multiple schools. Previously, districts were penalized for having multiple schools under one funded community. Now, it was on the same basis as everyone else regardless of the school size. Senator Torgerson commented on three schools of two hundred students as compared to one school of six hundred students. He noted there was a substantial amount of adjustment recognizing the inefficiencies of the smaller schools versus the larger school. Mr. McDowell concurred. Senator Torgerson referred to the single site schools. Mr. McDowell indicated that the single site school was beyond the scope of their study. Mr. Teal said they treated the single site schools the same as any other school. (Tape #59, Side A switched to Side B at log #590.) Mr. Teal continued in response to a question from Senator Adams as to why rural schools lost. He said it was not related to the size factor. He and the superintendents were surprised at how close size conversion was. The real issue, he felt, was the change from funding community count to school count. They were asked to allocate a fixed amount of basic need, which was influenced by the size factor, size and location adjustments. The real driver was the amount of money appropriated per unit per student. It was not the size factor but the way the students were counted. Senator Adams asked Mr. Teal to explain how to get a higher student count. Every Alaska student was entitled to get an education. Mr. McDowell responded saying the NPS count was critically important in this issue. The important thing was that districts with a high NPS count did the best job of accounting. He said the way to get a higher student count was to make sure they were getting credit for expenditures under NPS because the multiplier was four times as high. For example, he noted housing, which was an NPS cost. Senator Torgerson noted that his office had criticized Mr. McDowell for not visiting school sites. He asked if his report or their numbers would have changed had they actually visited the school sites? Mr. McDowell said he would have liked to visit all the sites. However, they had several conversations with a number of superintendents in addition to four experts working on their team. He felt they had enough information and were not doing things in ignorance of the school systems. Senator Phillips asked that the four experts be identified. Mr. McDowell said they were: Andy Warwick, Bob Weinstein, Jim Paul and Tom Freeman. Their job was to look at the financial reports. Senator Donley referred to the State Constitution, Article 7, section 1 and asked if there was any other section that applied to the duty of the State to provide education? Mr. Adams indicated that he would have to look at the lawsuit filed by Mat-Su vs. State of Alaska. The current formula was found to be constitutionally correct. Senator Donley felt that Senator Adams overstated his case. He said the Constitution only required that it be established by general law a system of public schools open to all children of the State. The system would also frequently require local contributions. That meant the State was not the only one responsible for providing education. Local people also assist in providing education for their children. Senator Adams said he concurred with that statement. He reminded the committee that the North Slope provided the second highest local contribution in the State. Therefore, everything should not be taken away from them and then try to steal from the balance of that, also. But he asked, how was area cost differential calculated in the study so the committee could understand it. Mr. McDowell said he would like to refer to the old area cost differential. The way the costs were incurred was the basis. The other difference was that in the old formula the area cost differential was applied to everything across the board. However, this study says that is not the way the costs are incurred. The differential they applied was only to the portion being spent on NPS statewide. For instance, in the Kenai district, the area cost differential was no longer based on the price of a loaf of bread, but rather on the per student cost being spent on the students in the NPS category. Senator Torgerson said the criticism regarding the area cost differential under the old study. However, in the draft report, there was a conflict noted that his district was having a difficult time understanding. He asked specifically about a 1.249 figure that was not reflected in the bill. That figure was 1.004 and Senator Torgerson wanted this explained on record. Mr. McDowell asked Mr. Teal to respond because he thought it involved the sites factor. Mr. Teal explained the numbers and said even though they were different they gave the same result. This work was done in consultation with the Legislative Budget and Audit committee. They felt if they separated the figures out they could get more information and be able to see the difference in administrative and NPS services. He referred to their report of 12 February 1998. They were then asked to work with Senator Gary Wilken to put together a simple bill. There was no way, however, to call the system simple. He explained it to the superintendent in Kenai and felt it was understood. Mr. McDowell further explained that included in the draft and the summary there were three reports: draft, summary and final. In the draft there were three cost factors: instructional, administration and NPS. After investigating these three factors, they found those three cost factors were wildly different in their behaviour based on school size and district size. That is why it was recommended to separate them. The second level in the summary, for simplicity, was instructional (based on size) and then they combined administration and NPS and came up with the area cost differential. The third level, which will be in the final, was down to one number, called district cost differential. Their recommendation was to continue to track data by these three factors so better decisions could be made on what the proper allocations for each district should be. Senator Adams referred again to the area cost differential. He said REAA's could not support extra funding in the same manner as boroughs and cities. He asked if the McDowell Study locked the inequity of the area cost differential into any future formula? Mr. McDowell said one of the biggest questions was what about a district that does not have the capability to generate a significant local share compared to someone else that has plenty to chip in. By allocating what one was really spending would that give them more? He felt that the answer was "no". It was not the amount that was spent but rather how it was spent. Senator Adams asked if money was being shifted from an area cost differential to school size? Mr. Teal said that cost differential was higher than it used to be. He agreed that size factor affected districts. However, he felt there was truth in both arguments that urban says rural gets more money and rural says urban gets more money. He could not answer further. Senator Adams asked, with that answer, would he work a foundation formula utilizing this study? Mr. Teal responded saying he did not get to vote on this matter, but said he would ask for a higher differential. He reiterated that rural districts do come out with higher district cost factors. He noted there were further provisions in SB 36 that the study did not address that affect the districts in Senator Adams' area. Senator Adams asked if the report was slanted because of the way the RFP was written to take in size and location rather than the basic need of funding education throughout the State of Alaska? Mr. Teal said he did not agree because they were not asked to determine basic need. Rather they were asked to reallocate basic need. This would make it appear as though the report would take from one district and give to another. He said they had nothing to do with the amount of money the legislature appropriated nor do they have anything to say about the local contributions and the treatment of PL874 or the way in which correspondence students and special education is funded. The RFP only told them to look at size and location, which are only two of the many factors that are included. It was their own look at funding communities that caused them to propose going to school level instead of funding community. Senator Adams asked for a definition of what the study said about "basic need". Mr. Teal said "basic need" was based on mathematical or legal terms. It has nothing to do with quality and how a student will be educated. In referring to the formula from the Department of Education he quoted: "Basic need equals instructional units times an area cost differential times sixty-one thousand dollars." That has nothing to do with the quality of education nor what it takes to educate a student. It only has to do with how much money is going to be appropriated. Senator Adams said "basic need" was the amount of money needed to provide education for all children in Alaska. He also said he differed with some of the disclaimers in the study. He said there was no equity or fairness. Mr. McDowell finalized his presentation. He said he was born, raised and educated in Haines, Alaska and had travelled the State of Alaska extensively during the past twenty-five years. This had been one of his most difficult assignments because they were the first to base a suggested allocation method on what it actually cost to operate schools. He thanked the committee for their cooperation and said he hoped they had been able to help take a giant step towards a soundly based system for allocating funds for public education. Co-chair Sharp thanked Mr. McDowell for the group's time and effort. He said the study was long overdue. (10:00 a.m. - 10:10 a.m. at ease) Co-chair Sharp gavelled the meeting back to order. Co-chair Sharp indicated that he would entertain amendments from members in his office no later than 3:00 p.m. today. If the calculation of the State distribution of school funds are changed they would ask the Department of Education to run the new CS as amended and then begin again tomorrow morning with the results of whatever the amendments might be. The meeting would continue again at 4:30 p.m. Richard Cross, Deputy Commissioner, Department of Education was invited to join the committee. In response to a question by Senator Phillips he said due to the complexity of the amendments he does not know how the figures may or may not change. They had not been asked to do a fiscal note yet to the new CS. Co-chair Sharp said he would make any amendments available to the department immediately after 3:00 p.m. and he would also distribute them to committee members. Senator Adams, noting disparity on PL874 asked for an opportunity to seek legal testimony. Mr. Cross thanked the co-chair and said they would make every effort to be ready for the 4:30 p.m. meeting. ADJOURNMENT Co-chair Sharp recessed the committee at 10:15 a.m. until 4:30 p.m. SFC-98 -9- 3 March 1998