As the 2018-2019 school year comes to close, Independent School District 110 remains in statutory operating debt and will implement a $1 million-plus package of budget cuts effective July 1, according to district officials.

Officials maintain that the condition is driven by a number of factors, including inadequate state and federal funding for mandated programs and lower than projected student enrollment in recent years. But, district Superintendent Pat Devine said, an insufficient and inequitable special education state funding formula is hitting Waconia schools particularly hard.

The factors came to a head early this year during an audit where the district discovered the negative fund balance. That led to the development of a budget reduction plan to address the issue, which was approved by the school board in March. (March 8, 2019, Waconia Patriot).

The Minnesota Legislature changed the special education funding formula in 2016, but there is a lag time of 24 months for school districts to receive their reimbursements from the state, so only now are Waconia and other school districts realizing the real impacts and negative consequences, Devine explains. There’s also a cap on how much the state provides each district for special education services.

In short, what it means in many school districts is general education funds are subsidizing mandated special education programming that is not funded by the state.

Only two state independent school districts are currently in statutory operating debt, according to the Minnesota Department of Education. However, several others have been weighing teacher layoffs, program cuts and/or possible operating levies to address the funding issue, reports the Minneapolis Star Tribune.

In Waconia’s case, cross-subsidy costs have nearly doubled over the past four years, from $687 to $1,210 per student. The result is that nearly $5 million a year that is meant to be spent on all students for educational programming is being diverted to cover costs for special education mandates that are not being funded by the state.

For the past few years, the district has been tapping into its fund balance to fund its operations, hoping to gain some financial relief from the state and capture additional funding through growth in its student population.

“We really landed on the perfect storm,” Devine said. “We had a strategy of not going out to voters until we really had to. But while we were spending down our fund balance, this boulder came from the special education funding program.”

Last fall, the school district did go before voters and got an operating levy approved that was supposed maintain existing school programming in the face of the state general education funding shortage. The levy increased general education revenues by $525 per pupil, or about $2.2 million per year; however, the special education cross-subsidy is chewing into those funds, too, officials said.

During this past legislative session, Minnesota lawmakers did authorize an increase in school funding, but it amounts to only about two percent in each of the next two years -- and lawmakers didn’t tackle the special education funding formula.

The additional dollars will help, and the district is “anxiously awaiting” state funding runs 2-3 weeks from now to know the true dollar impacts for next school year, Devine said. Still, he notes that the latest state allocation doesn’t keep up with the costs of education or shortfalls in state funding over the past several years.

Meanwhile, there is no action at the federal level, with the feds financing only about two percent of its programming mandates, according to Devine.

Growth in the local student population would help generate additional funding; however, student growth in District 110 has slowed over the past several years from a rate of about 100 students a year to an average of 60 students a year.

The district’s current financial condition puts school administrators, teachers, and staff in a complicated position as contract negotiations get under way because there will be little money for salary increases, officials said. The current staff contract is up this year.

It also could affect the district’s investment position. In April, for example, Moody’s investor service slightly downgraded District 110’s general obligation tax rating from A2 to Aa3.

“Statutory operating debt is a scary thing, but it’s not a huge detriment to our school district and we do have a plan to address it,” Devine said.

However, the cross-subsidy issue remains, and depending on what happens over the next several months, District 110 administrators and school board members could be looking at another round of budget cuts in March 2020.

“This is not a general education versus special education issue; it’s a special education funding issue,” Devine has said on several occasions. And he has become somewhat of a spokesman on the issue, testifying before the Legislature twice and reaching out to lawmakers on multiple occasions. Devine has also been the focus of state-wide media interviews on the topic.

“We are proud of our special education programs and should not be punished for taking care of the most needy kids,” Devine said. He also has admonished both state and federal lawmakers, saying they “shouldn’t be turning school districts into tax collectors.”

Devine views the latest legislative session action as a kind of stop-gap on school funding and hopes the governor will appoint a task force to address the special education funding issue.

“It seems like lawmakers understand the issue, they just don’t know how to deal with it,” he said.

In the meantime, this summer, while school is out, the school board will be in session for long-range planning encompassing the next 5-10 years.

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