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K-12 school funding needs underestimated, district officials say

Differences in how the state and local school business officials estimate future budgets have created a $380 million gap for K-12 schools in the next biennium.

The per-student funding formula for Oregon schools is built from local revenues and the State School Fund, which is a combination of general and Lottery funds appropriated by the Legislature. The Oregon Association of School Business Officials says the state has underestimated how much costs will grow and 
overestimated how much schools will get from local revenue.

The Legislature’s budget is built with the “current service level” calculation as a reference point, while also taking into account available funds and competing priorities. To maintain services at current levels, the Legislature must accurately predict factors including how many more students will enter the system, the increase in pay and benefits for staff, and the maintenance and facility needs of schools. Senate Bill 5517, the appropriations bill for the State School Fund, calls for $8.02 billion, which the state calculates would keep schools at their current level of class sizes, staffing and course options.

But district business officials say the statewide system needs at least $8.4 billion from the Legislature just to stand still. District business managers calculate school expenses will grow by about $330 million more than the state estimates. OASBO agrees with the estimates from the state on most cost factors for the 2017-19 budget period, but it sharply differs on the estimates for salaries and health care costs.

The Joint Ways and Means Subcommittee on Education is holding hearings on SB 5517. Public testimony on the State School Fund is expected to be Thursday.

The state projects that salaries will rise 2.1 percent in each of the next two years. The state’s wage estimates use Oregon Department of Education historical salary data as well as looking at wage trends and supply and demand factors.

OASBO expects a 3 percent increase in wages each year, driven in part by higher wage demands. In addition to the 3 percent cost-of-living increase, many teachers will also get step increases based on years of service and additional education or certifications.  OASBO used current contract numbers from districts for its projections, access that the fiscal office didn’t have.

“Ours is based on actual negotiated salary increases,” said Adam Stewart, chief financial officer for the Hillsboro School District.

Doug Wilson, legislative analyst for education at the Legislative Fiscal Office, pointed out that the state doesn’t have a say in district salary negotiations and so must rely on past data.

“We look at it over time more than the immediate amount,” Wilson said. “The difference is mostly a different set of assumptions.”

Calculating salaries is about more than past trends. Schools want to attract and retain the best, most qualified and most experienced teachers. If salaries continue at the past rate of growth even as national wage averages are increasing, schools will lose staff to other districts or even other fields.

Short budgets don’t hit salaries first, though. Stewart said that schools do all they can to retain teachers and keep class sizes down, so often other areas of the budget are cut when schools don’t get enough money to meet regular salary increases.

For health insurance costs, OASBO calculated a 5 percent increase based on current contracts as well as recent data from the Oregon Educators Benefit Board.

Budget gap graphicThe state estimated the cost to schools would increase 3.4 percent, while the actual cost of insurance will likely go up more. The OEBB has raised rates an average of 6.4 percent over the past four years, but not all of that gets absorbed by schools.

Many districts have hard caps on how much of health insurance premiums they will pay, according to OASBO Executive Director Angie Peterman. When the insurance rates go up, employees have to pick up some of the difference. But when negotiating time comes around, those cost increases then come into play again.
“OASBO’s estimates are based on our best guess for future costs where districts are bargaining at this time,” Peterman said.

Differences on salary and health insurance, combined with some other smaller differences, add up to $330 million that OASBO says schools need but the state isn’t budgeting for.

The other piece of the budget gap is local revenue, the money schools get from property taxes, timber payments, county school funds and the Common School Fund. When the Oregon Department of Education was drawing up its budget request, it expected to get $3.98 billion from local revenue. OASBO says that’s about $50 million too high.

OASBO is less optimistic than even the more recent fiscal office estimate about whether the run-up on property values will continue. OASBO’s lower expectation for property tax revenue would produce $3.93 billion in local revenue. That creates the $50 million difference between what OASBO says it needs and what it expects to get if the state budget goes through as proposed by Gov. Kate Brown.

OASBO’s no-cuts state budget estimate does not necessarily mean no cuts at the district level. Although $8.4 billion covers the expected rise in the system in general, once the state equalization formula parcels out the per-student funding, some districts may still find themselves short of what they need to pay all their staff and continue all their programs.

Stewart said the Legislature’s budget of $8.02 billion would work out to about $9 million less than what Hillsboro needs to meet its contracts and continue its operations at present level.

“The stories are somewhat startling,” said Jim Green, OSBA executive director and a member of the Salem-Keizer School Board. “There are still many school districts that are going to have make cuts at the level identified as ‘hold harmless.’ In my school district, Salem-Keizer, that is still a reduction of $18 million from current service level, which is the equivalent of 200 teachers or 15 school days.”

- Jake Arnold, OSBA

To tell your legislators what you think about the State School Fund, go to Oregon Rising.