The second meeting of the interim School Finance Study Committee was called to order by Representative Orville Smidt, Chair, at 9:00 a.m. on Wednesday, July 31, 2002, in the Library at Brandon Valley Middle School in Brandon, South Dakota.

A quorum was established with the following members answering the roll call: Senators Ed Olson and H. Paul Dennert, and Representatives Jim Bradford, B. Michael Broderick, Art Fryslie, Phyllis Heineman, Jeff Monroe, William Napoli, Bill Peterson, Jim Peterson, Larry Rhoden, Dale Slaughter, Orville Smidt, Duane Sutton, and JohnTeupel.

Legislative Research Council staff member present was Mark Zickrick, Principal Fiscal Analyst.

(All documents presented are on file with the master minutes.)

As this meeting was being broadcast to 10 of the 11 state-owned Dakota Digital Network (DDN) sites (the Lake Area Technical Institute Site in Watertown was not operating) and Shannon County School, Chair Smidt asked the sites to log in and state whether anyone was attending the session. Site coordinators at the following sites responded and indicated attendance: South Dakota State University, no participants; Dakota State University, no participants; Southeast Technical Institute, no participants; University of South Dakota, no participants; and Black Hills State University, no participants. The morning portion of the meeting was taped by DDN.

Chair Smidt welcomed the committee and audience to Brandon Valley and thanked Brandon Valley in advance for agreeing to host the meeting, and then proceeded with his opening remarks. He reiterated his intention from the first meeting that the study adhere to the scope assigned by the Executive Board:

He further explained that the committee is meeting at a number of school locations to gain as much information as possible on the topic of school finance in South Dakota, with Brandon Valley being the school selected to represent AA schools.

There will be three more meetings over the course of the interim. The Class A school is Custer, and the Class B school is Estelline. The final meeting will be in Pierre.

Each meeting will also feature a discussion of funding for secondary career and technical education, which prior to 1995 was categorically funded in the State Aid to Education program.

Chair Smidt explained that his rationale for visiting the different size schools is because the State Aid to Education formula treats schools differently so it is important to hear from them and out in the field so that more local educators may participate as well. He then recognized Mark Zickrick who introduced Steven Smith of the National Conference of State Legislatures (NCSL).

Mr. Steven Smith, NCSL, presented information to the committee on methods employed in other states for calculating the foundation levels of their state aid to education formulae. He distributed a handout to accompany his remarks (Document #1).

Mr. Smith stated that states provide about 48 percent of the funding for their local schools. State funding, usually from states? general funds, most often comes from state sales or income taxes. It often comprises up to 40 percent of a state?s budget and is usually the single, largest item of expenditure. Other sources of state funding for education are lotteries and education trusts. Experts question the dependability of lotteries for stable funding, but education trusts, such as those funded with tobacco settlement monies, are growing in popularity.

All states fund education through finance formulae and/or categorical funding programs. All states except North Carolina and Hawaii require local support of education in order for the districts to receive state funding. Hawaii, which is one statewide school system, is controlled from the state level. North Carolina allows local school districts to supplement their state aid payments, but it is not mandated.

Local funding is approximately 45 percent of school funding, and the largest source of local revenue is property taxes. However, there are also local sales taxes used for education and local income taxes and fees. Nationwide for several years there has been growing interest in reducing the dependence on local property taxes.

States that require local effort to fund education usually use a statutory foundation program to "equalize" state aid among districts based upon the districts? ability to pay or raise local support. Foundation programs vary from state to state.

Federal funding comprises about seven percent of funding for schools, with most of that coming from the federal Title I (for educationally disadvantaged) and federal special funding.

Mr. Smith described education funding practices in Michigan and Minnesota, in particular. Michigan over recent years has shifted from and reduced property taxes and increased rates of and dependence on business taxes and sales tax. The result of litigation in that state was to stress the importance of diversification of revenue. In 1993 the Legislature eliminated local property taxes for support of schools and offered the electorate a choice for alternative revenue sources. The voters chose to raise their state sales tax from 4 percent to 6 percent.

Minnesota used large budget surpluses to increase their foundation amounts and lowered the limits by which local districts could exceed property tax levels.

Representative Bill Peterson asked what happened to local control of education in Minnesota and Michigan. Mr. Smith replied that the local school districts have ceded considerable control over to the state education agencies because of the shift of funding.

Senator Ed Olson asked how many states are in litigation. Mr. Smith replied that about 22 states are in or nearing litigation, and that the shift in litigation emphasis is from equity to adequacy. States are starting to seriously look at their dependence on local property taxes for support of education. Recent decisions are saying that if a state is going to set standards for local schools, they have to provide the districts with the tools or means by which to reach those standards. Michigan enacted a state property tax.

Representative Napoli asked a further question on diminishment of local control as funding emphasis switches to state funding. Mr. Smith said this is a real phenomenon, but that if it?s important to the states to set standards or demand improvement from schools, they have to "let the locals reach them."

Mr. Smith resumed his presentation with a description of Minnesota?s changes in education funding. There the state repealed mandates that the local districts meet specific millage rates in order to get state funding and the state would fund the difference between local effort and the foundation level. Local districts could levy above the foundation and the state would provide further support up to a certain level. Their new system provides full foundation funding from the state. Locals can still levy additional amounts up to a maximum, but there is no more match from the state.

On mandated property tax levels, Mr. Smith commented that if a state is going to mandate minimum mill levies, there has to be uniformity across the state of appraisals. In 1999 and 2000 New Hampshire moved from 85 percent local funding to 60 percent state funding with implementation of a statewide property tax. This was challenged and found unconstitutional there, however, because of swings in appraisals.

Mr. Smith explained that there are many variations in foundation programs among the states. Many require minimum percentages of local support, but some set maximums. Some states even recapture local funding if the local required effort is greater than the foundation level. Some states? formulae use weighting factors for At-Risk-Youth or sparsity.

Some states handle transportation categorically, but Mr. Smith said it is good, in his opinion, when it?s part of the foundation formula because this encourages efficiency. Some states use differential cost index factors for relieving some of their districts of abnormally high costs, especially for things or circumstances beyond their control.

Senator Olson asked Mr. Smith for his opinion of South Dakota?s formula, as he understands it and in comparison to other states? formulae. Mr. Smith replied that "overall [South Dakota?s formula is] pretty good." He said an important strength is the importance it places on local effort. He said some states give poor districts "too big a break," but that, "rich or poor, [every district] has to ante up some amount" in South Dakota?s formula. He observed that South Dakota?s formula contains no At-Risk-Youth factor or weight, and that he thinks it probably should have one as it would improve the performance of the formula vis-à-vis how it treats some of the rural districts or those with larger minority populations.

Representative Napoli questioned whether Mr. Smith was saying that property taxes should be uniform across the state and that in his understanding of the formula they are not. Senator Olson commented that while tax rates may be the same, some districts are subsidized more than others. Mr. Smith commented that when tax rates trigger litigation, if the states being sued can show upfront how they reach their foundation levels, plaintiffs might be more hesitant to sue. Rational methodology is very important.

Representative Bill Peterson asked if any state has found "the magic formula." Mr. Smith said Maryland?s formula is about as close as he?s seen. Representative Peterson asked if any states? courts have mandated tax increases. Mr. Smith replied that while no state has been told to enact or raise a tax, the court in one state ruled that bonds were not allowable for operating expenses.

Representative Teupel asked how sparsity could be addressed. Mr. Smith replied that a district cost differential factor could be utilized. Representative Teupel asked if it makes sense to separate costs by K-6 and 7-12. Mr. Smith replied that Florida is an example of a state that tracks expenditures by elementary, middle, and high school, and assigns weights in their formula. The goal there, though, is to reduce elementary class size.

Representative Bradford asked if any other states are suffering declining enrollment and how they manage it. Mr. Smith replied that West Virginia and some others are also suffering declining enrollments and that a Hold Harmless factor can be implemented.

Representative Heineman asked how other states handle revenues that come to school districts outside of their formulae. Mr. Smith replied that "a lot of states" run categorical funding programs, but there are dangers that A) there can be too many categories (e.g. Connecticut has 52), or B) that the categories will never end.

Representative Bill Peterson asked if any states mandate teacher salaries. Mr. Smith replied that Southern Regional Education Board states do, and he said that it?s important for legislatures to allow districts the capacity and freedom to reach the standards.

Representative Bradford asked if it is true that in Arizona there is or is going to be an At-Risk study with a focus on Native Americans. Mr. Smith replied affirmatively, noting that the study was also going to consider other factors.

Mr. David Shreve, NCSL-Washington, D.C., addressed the committee on the No Child Left Behind (NCLB) Act (Document #2). He portrayed it as very powerful legislation that is going to have a significant effect on the way schools do business.

In reading from an NCSL document, he commented that one of the first, most noticeable effects will be the stringent standards on school districts to hire highly qualified teachers and teachers? aides. They have to meet these requirements after September of this year.

Mr. Shreve said it is important to look at NCLB in light of school finance because the law is so comprehensive there are many areas in which states have to comply if they are going to continue to receive funding, especially through Title I.

Representative Bradford asked if parochial schools are allowed as parents? choices when their local public schools are deemed failing or put on improvement plans. Mr. Shreve answered they are not.

Representative Bradford asked who would provides tutoring services, and Mr. Shreve answered that the local districts must set up lists of approved providers of tutoring.

Representative Teupel asked in regard to testing if there is a provision or mechanism to compare public schools to private or home schools. Mr. Shreve replied there is not.

Representative Jim Peterson asked if there are any estimates of costs for implementing NCLB. Mr. Shreve replied that it will be very expensive to states to create and implement testing programs, gather and analyze data, and hire better educated and more "highly qualified" teachers and aides, but that there are so many variables no one has yet been able to calculate all the costs. So far there has been little cost, relatively, but once the chief state school officers begin to implement the law they will begin to compile cost figures. In Mr. Shreve?s opinion, data handling will be the first and a very significant cost of NCLB. It will be a "huge expense," and only six states are ready now to handle the new federal standards established in NCLB.

Chair Smidt stated he would ask the Department of Education and Cultural Affairs to follow up at the next meeting on South Dakota?s readiness for data collection.

Mr. Wade Pogany, Department of Education and Cultural Affairs (DECA), updated the committee on testing and NCLB implementation in South Dakota (Document #3). He said that the state?s Dakota Assessment of Content Standards (DACS) is currently under the review process for NCLB. He said there are a number of challenges the state faces in becoming NCLB compliant, and he discussed statewide testing. Currently there is a test of writing skills in the fall, the SAT-10 will be given in March, and DACS in April. NCLB requires more grade levels to be tested each year to amass more data. DECA is going to request legislation allowing them to combine the SAT-10 and DACS and to deliver them to students on-line.

Mr. Pogany said another challenge facing the state is complying with aspects of NCLB that require schools to make more information on students available to parents. DECA is setting up a system whereby all schools in the state will be able to report to parents via the Internet.

Another challenge will be hiring and keeping highly qualified teachers and aides. DECA is working with the colleges of education on this.

Representative Heineman asked if DACS info will show growth in student performance, and if the new test will be as focused. Mr. Pogany replied in the affirmative.

Representative Teupel asked about the ramifications of school choice. Mr. Pogany said there is already choice through open enrollment. However, it will become a bigger issue when parents with children attending schools that are failing or just in need of improvement want to send them elsewhere.

Chair Smidt distributed a copy of a letter to the editor (Document #4) and recognized Neal and Linda McIntyre of Winfred, South Dakota. The McIntyres approached the committee and read from a written statement (Document #5).

Ms. Stacey Bauers, Sioux Falls, addressed the committee on the value of Career and Technical Education (CTE).

The committee recessed for lunch at 12:02 p.m.

The committee reconvened in the Brandon Valley High School Center for Performing Arts at 1:00 p.m.

Mr. Al Kosters, Sioux Falls, addressed the committee and distributed a information on CTE (Document #6). He said that the key to turnaround in CTE stats is the decline in supplemental funding from school districts since the repeal of categorical aid.

Mr. John Emmett, Aberdeen, addressed the committee and distributed a copy of a resolution (Document #7) adopted by the South Dakota Association for Career and Technical Education stressing the importance of maintaining quality secondary vocational-technical education programs.

Representative Mike Jaspers addressed the committee on the value of CTE and the need to increase support funding.

Chair Smidt asked about the $3,000,000 amount requested for CTE funding in the resolution distributed by Mr. Emmett. Mr. Emmett replied that when CTE was last funded as a category in State Aid to Education it was funded at $3,000,000.

Representative Teupel asked about the decline in the number of business and marketing students. Mr. Emmett responded that the industry has changed so dramatically that students are going in other directions.

Mr. George Gulson, Superintendent, and Mr. Paul Lundberg, Business Manager, addressed the committee. Mr. Gulson gave a brief history of Brandon Valley Schools and explained it as the product of a school district consolidation and reorganization in 1962. Where there were once 12 districts there is now one. The school district consists of 128 square miles and has 23 bus routes. He said their enrollment is growing about 40 to 50 students per year. Because of the heat, Mr. Gulson gave a photo tour of the facilities rather than a physical tour. He said they are building a new elementary school and library.

Mr. Gulson distributed an information packet that describes Brandon Valley Schools (Document #8). This packet contained information on Brandon Valley High School, Brandon Valley Middle School, Brandon Elementary School, and Valley Springs Elementary School. The following is Enrollment and Faculty Information for 2002-03:

Mr. Lundberg gave budget and finance information for Brandon Valley Schools (Document #9). He reported a General Fund Budget for 2002/03 of $11,528,200 and listed budget highlights such as: a 4.73 percent salary increase for all staff; provision of a new bus facility from Capital Outlay Surplus; and a Pension Fund Levy of $.20. He reported a General Fund Cost Per Student for 2002/03 of $4,447, which is 4.1 percent over the $4,272 for 2001/02. The State Aid To Education Allocation Per Student is $3,889 and Other Income is $622 for a Total Income of $4,511 per student. (Other income and opt-out revenue are not part of the State Aid formula allocation.)

Mr. Lundberg provided comparison data for Brandon Valley and the other schools that compose the ESD Plus 5, as well as for the state average, for 2000/01. Brandon Valley?s General Fund Per Pupil Cost was $4,137. The ESD Plus 5 average was $4,529, and the state average was $5,095. Brandon Valley was the lowest of the ESD Plus 5, and Spearfish was the highest at $4,959 General Fund Per Pupil Cost.

For 2002/03 Brandon Valley has projected General Fund Revenue of $11,676,000. This is comprised of $5,491,000 Local Taxes (47 percent), $323,000 Local Sources (3 percent), $165,000 County (1 percent), $5,449,000 State Aid (47 percent), and $248,000 Federal (2 percent).

Brandon Valley?s Special Education Budget for 2002/03 of $1,514,000, which is 11.0 percent over that for 2001/02, calculates to $477 per pupil. The ESD Plus 5 average is $592, and the state average is $610. Only Madison, at $432, is lower than Brandon Valley. Rapid City is the highest of the ESD Plus 5 at $672.

Finally, Mr. Lundberg?s information showed 2002/03 Property Valuations for Brandon Valley of $677,851,000, an 8.1 percent increase over 2001/02. The 2002/03 Total breaks down to 10 percent Ag Land, 2 percent Non-Ag Z, 64 percent Owner-Occupied, 15 percent Commercial, and 9 percent Utilities.

Senator Olson asked if growth handles the special education needs of the district and if growth in ADM handles the general fund needs. Mr. Lundberg replied in the affirmative.

Representative Teupel asked Mr. Gulson to what they would attribute the success of the ?62 reorganization and consolidation and what the state could do to foster that elsewhere. Mr. Gulson responded that Brandon Valley is efficient and compact in size and their growth in property value and ADM are both beneficial and manageable. He did not have a suggestion for how the Brandon Valley success could be translated to other districts in the state.

Senator Dennert asked how many of the 12 districts that consolidated were K through 12. Mr. Gulson replied it was just 2.

Senator Dennert asked what the starting salary is for a teacher in Brandon Valley. Mr. Lundberg replied it is $25,990.

Representative Heineman asked how Brandon Valley achieves with such a low per pupil expenditure. Mr. Lundberg reiterated it is because of compactness of the district and the accommodating growth in enrollment. Mr. Gulson commented that Brandon Valley does not have the diversity needs of Sioux Falls schools.

Representative Bill Peterson asked: A) if the State Aid formula is fair; B) if it is underfunded; and, C) if there is a target amount by which funding should be increased. Mr. Lundberg replied the formula is fair but that it is underfunded because there is so much more Brandon Valley could do with increased funding. However, he did not have an amount of funding as a target.

Representative Peterson commented on his frustrations as a legislator constantly hearing from the education community that the Legislature is not doing enough or spending enough for education, but the education community never has a number as their request for increased funding.

Representative Jim Peterson asked if the ESD Plus 6 schools would "stand up and tell us what is wrong" or what kind of changes could be made in the State Aid to Education formula. Mr. Gulson turned the floor over to Ms. Dianna Miller, Sioux Falls.

Ms. Dianna Miller, Sioux Falls, testified on behalf of ESD Plus 6 Schools. She prefaced her remarks with a comment that while she and her organization have suggestions and alternatives to offer for consideration, the current formula is essentially sound. She said that it was a good decision to go to a per-pupil formula, but in their opinion the formula is underfunded by $10 to $12 million. The increases over the last three years of 1.7 percent and 1.8 percent in the per-ADM levels have only exacerbated problems with funding in districts because of larger than normal increases for utilities and health insurance, plus the mandated increase in the retirement match.

Ms. Miller acknowledged that the reserve balances in some schools were "ridiculous," and said that her organization agrees with the 20 percent cap. She said the prohibition on transfers between funds was probably a good idea at the time, but it may hamper some districts unnecessarily. She said working toward efficiency and adequacy is not good enough--South Dakota needs quality.

Ms. Miller listed a number of issues that have made it difficult for school districts to operate:

• The Legislature sets maximum mill levies and state aid increases, but also caps assessment growth;
• The Legislature raised the retirement match to 6 percent;
• The Legislature made the opt-out process more difficult; and
• The Legislature made joint use projects more difficult by increasing the bond election requirements to 60 percent.

She said that while the schools appreciate the wiring efforts of recent years, technology and wiring are not the answer to the problems schools are facing. She also commented that merit pay programs will not work unless base teacher pay is sufficient; the Legislature has been told this repeatedly, by at least four consultants since 1972. She commented that the Legislature has talked a lot about the issues but never seriously addressed them.

Ms. Miller said "it?s time to roll up our sleeves" and made the following suggestions for improvement of state aid to education: 1) the per-ADM amount needs to be raised at least $150, perhaps over three years, in addition to the statutory inflation rate; and 2) the Legislature needs to seriously reevaluate the 20 percent small school bonus factor. She said they have not yet committed these ideas to actual drafts, but she reviewed for the committee legislative proposals made by ESD Plus 6 in the past year that were defeated and said they have brought ideas to the Legislature but they have been rejected.

Her members are finding it very hard to continually strive for efficiency while losing funding because of ADM declines. She closed her presentation with the comment that solutions can be found, and that "Throwing up our hands and saying ?We can?t do this because we?re in a budget shortfall? is not an answer."

Mr. Joe Graves, Mitchell, offered a proposal to address assessments for new construction (Document #10).

Mr. Brad Meeks, Aberdeen, testified on how Aberdeen has had to struggle with loss of funding because of declining ADM and offered ideas for legislative consideration (Document #11):

• Leave "Declining Enrollment Money" in the formula;
• Increase the base per ADM amount;
• Maintain general fund levies at current levels;
• Increase local control with a new construction levy and a pension levy;
• Stop unfunded mandates; and
• Review the 20 percent small school factor and consider instead a sparsity factor.

Representative Bill Peterson asked if the Legislature?s repeal of hundreds of mandates has saved the school districts any money. Mr. Meeks responded that he has not seen any savings. Ms. Miller responded that there is no data to show that the schools have saved any money because of the elimination of mandates. Representative Peterson further asked if the ESD Plus 6 would support minimum teacher salaries set by the Legislature. Ms. Miller responded they would not if this was just a mandate without accompanying funding.

Representative Jim Peterson asked how the $150 per ADM increase over three years would be structured. Ms. Miller reiterated that neither she nor her organization has settled on an actual draft plan yet so she had no answer.

There being no further business, Chair Smidt adjourned the meeting at 3:52 p.m.