School aid delay comes with some extra costs

In using a budget solution that delays an additional $700 million in funding to Minnesota schools, the state is once again treating the districts like a favorite lender -- with schools incurring costs that go well beyond simply waiting for their money.

Districts must tap cash reserves or take out short-term loans to make their day-to-day expenses until the delayed money arrives months later. The new state budget does add $50 to the per-pupil funding formula, which will offset the costs of borrowing. However, the $700 million shift also comes on top of a previous delay of $1.4 billion that has yet to be repaid.

Minnesota's largest district, Anoka-Hennepin, figures it will need to borrow as much as $73 million for the coming school year, after borrowing $59 million for 2010-11 to cover the previous shift. Chief financial officer Michelle Vargas estimates interest and other financing costs will be as much as $400,000 to $500,000 for the two years combined.

The St. Paul School District will borrow $55 million now and probably another $30 million in January to cover the shift, officials say. The financing costs will be an estimated $450,000, which the district plans to pay by using the increase in the state funding formula. Last year, the St. Paul schools took out $80 million in loans.

Minneapolis schools, which used cash reserves to cover the previous shift, will borrow money this year; just how much hasn't been determined.

Of just as much concern for some officials is the uncertainty the funding shifts create.

"If we have to do short-term borrowing for cash flow, that's a problem and we don't want to have to do that," said Sarah Snapp, the Minneapolis district's finance director. "But, really, it's this long-term instability and unpredictability that make it harder for us to make long-term plans. That's the real cost to this."

The state has long held back a portion of per-pupil school aid, a practice that originated as a kind of fiscal safety valve. Starting in 1971, the state would withhold 10 percent of funding until the next fiscal year in order to deal with fluctuations in student numbers. If a district had more students at the end of the school year than originally projected, the state had money on hand to pay the difference. If a district wound up with fewer students, the state held on to whatever it no longer owed the district.

In 1983, as the government grappled with red ink, it used a school funding shift as a budget-balancing tool, something it has done intermittently in the years since. That year, it held back 15 percent of school funding, a shift that took 15 years to repay in full.

In 2003 and 2004, with the state again confronting budget deficits, it shifted 17 percent and 20 percent of school aid payments, respectively, into the next year.

In the past two years, the shift has mushroomed. Twenty-seven percent of school funding was held back in the 2010 budget year, and 30 percent in 2011 as the state dealt with a multi-billion-dollar budget gap.

Now, under the new budget that ended the 20-day state government shutdown, 40 percent of the appropriated funds will be withheld until next year.

Some educators wonder whether the current shift will stretch out for many years or be paid at all.

"The prospects of the shift being paid back in the near future are very dim," said Scott Croonquist, executive director of the Association of Metropolitan School Districts.

There is a law on the books that requires that payment of the shift, said former state Education Commissioner Alice Seagren, but only after the economy improves enough to allow it.

"That's always the variable," said Seagren, who also is a former state representative and an educator. "If we continue to have a slow recovery, yes, it will take longer."

Seagren defends the shift as a necessary evil: better for schools to get the money late than not at all.

In Minneapolis, Snapp estimates that $344 million in state aid will be ticketed for the district in the budget year that began July 1. But, with this year's heightened funding shift, the state will pay the district only about $309 million, including $102 million that was shifted forward from last year.

"Meaning we are loaning the state $35 million," Snapp said.

What concerns some is that, if and when the Legislature pays back the shift, that money will be treated as a funding bonanza.

"That's one of our big concerns," Croonquist said. "When they do start to pay it back, it often gets characterized as new money for schools. It's not. It's simply money schools loaned to the state."