There is nothing quite like Iowa school finance, and this blog attempts to explain a few key concepts. The goal is to make the complex more understandable, so this blog will not attempt to address every nuance of school budgeting. Future installments can dive deeper or cast a broader net. By the end of this blog, I hope readers have three key understandings:
1. School budgets are enrollment-driven.
2. Cash and spending authority are two separate and important concepts.
3. There are different funding streams that can only be used for certain purposes.
These three things provide a good place to start understanding Iowa school finance.
First, school budgets are enrollment-driven. In 1971 the Legislature adopted a pupil-driven funding formula in an attempt to have equitable funding for schools across the state. The district cost per pupil, or amount of state funding that Indianola CSD receives for each resident student, is $6,591 this school year.
Each school year districts have student count day October 1 (October 3 this year since October 1 was a Saturday). The resident students enrolled in a school district on count day determine the certified enrollment, which is then multiplied by the district cost per pupil to determine the amount of state aid a school district will receive the following school year. Last school year, October 1, 2015, Indianola CSD’s certified enrollment was 3,471 students (an increase of 41 students from the prior year), which is multiplied by $6,591 to give the district its General Fund dollars to pay staff, buy curriculum, pay the electric and water bills, buy fuel for buses, etc. This fall district certified enrollment decreased 28 students as a result of an unusually small kindergarten class. Multiplying 28 by the district cost per pupil of $6,591, we can see a negative impact on our budget of $184,548 for next year. This does not factor in increased costs (staffing, energy, etc.) or any increase in the district cost per pupil that the Legislature may approve as state supplemental aid. In other words, we don’t know yet what the budget requirements will be for next year and we don’t know yet what money the Legislature will allocate to schools, but we do know that our enrollment dip will have a negative impact on our school budget. Fortunately, Indianola CSD has had enrollment growth through the years, and this impact will hopefully be short-term. School districts that have declining enrollment year after year are caught in a vicious financial cycle.
Next, every school budget official and board member understands that districts need to track both cash and spending authority. The Legislature determines the maximum that a school district can spend. That number is a school district’s spending authority. Think of spending authority as a credit card limit. It would not be wise to max out your credit cards just like it would not be wise for a school district to spend every penny of its authority. In fact, if a district overspends its authority (usually as a result of declining enrollment and not making adjustments to address it), district officials have to appear before the State School Budget Review Committee and present a workout plan to correct the problem. If a district overspends its authority two years in a row, the law states that school district could be shut down. This is obviously extreme and likely would not happen after two consecutive years, but on rare occasions districts have been forced to dissolve. Indianola CSD officials monitor spending authority closely, tracking our unspent balance ratio, which is the percentage of authority we don’t have to use (like the amount you have remaining unused on your credit card limit). In times of limited state aid and/or declining enrollment, schools need to reduce General Fund expenditures to avoid overspending their authority.
Cash is a little more easily understood than spending authority. If spending authority is like a credit card limit, cash is like money in the bank. Schools track these numbers as ending fund balances. School officials report how much money is in each fund at the end of each month and each fiscal year. It is possible that school districts have cash in the bank that they cannot spend because they lack spending authority. It is also possible that school districts have the authority to spend money that they do not have. This is where taxes come into play. If a district has spending authority, cash can be raised within statutory limits through taxes (i.e. cash reserve levy). Districts use this cash reserve levy to make sure fund balances are sufficient for cash flow purposes. For example, a district should have enough cash on hand to be able to meet payroll and other expenses without borrowing money. A district’s cash position is tracked by a measure called solvency ratio, which measures cash on hand against required expenditures.
The bottom line is that school districts need to budget to ensure that adequate cash is available to pay the bills, and they need to spend at levels that do not exceed their authority.
Our final goal for today is to understand that there are different funding streams that can only be used for specific purposes. Our earlier conversations about enrollment, cash, and authority all pertained to the General Fund, which is where state aid is deposited. Salaries and benefits, curriculum, and daily operating costs are paid from this fund. There are other funds that are used for different expenses. The graphic below helps illustrate the sources of revenue, different funds, and allowable purchases:
We have discussed the General Fund in some detail. The “ISL” in the graphic stands for Instructional Support Levy, which is also property tax that supports school operations. The Management Fund is property tax funded as well and pays for the district’s liability and worker’s compensation insurance as well as periodic early retirement offerings. The PPEL funds (Physical Plant and Equipment Levy) are a combination of property tax and income surtax, and locally we use them to purchase buses and technology as well as covering maintenance costs. Debt Service refers to bond issues that the community has passed. For example, in 2013, a $29 million bond issue was passed to make many facility improvements throughout the district. These funds are totally separate from the General Fund, and sometimes people do not understand that. This can lead to questions like, “How come we are spending all of this money on facilities, but we can’t add a curriculum program or staff position that I think we should?” Facilities and staff are totally different funding streams and those funds can only be spent certain ways. SAVE, or State Penny, refers to the statewide sales tax that helps fund school infrastructure needs. Currently the sales tax sunsets in 2029 although districts across the state have benefited greatly from it and come to rely on it. Locally we use SAVE funds for major maintenance, like roof work and HVAC systems. We also funded the baseball and tennis court projects, which were not contained in the bond issue, with SAVE funds.
I hope this blog has been helpful and has led to readers wanting to learn more about school finance rather than confusing people and turning them away. Please feel free to reach out to me with questions. My email is art.sathoff@indianola.k12.ia.us and my office is at 1304 E. 2nd Avenue. My office phone is 515-961-9500.
If people seem to have an interest in this topic, I can address other aspects of school finance in future blogs. Thank you for your support of the school, and thanks for reading!