The third meeting of the interim School Finance Study Committee was called to order by Representative Orville Smidt, Chair, at 9:40 a.m. on Wednesday, August 28, 2002, in the Meeting Room at the Forest Supervisor?s Office in Custer, 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 John Teupel.

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

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

Chair Smidt welcomed the committee and audience to Custer and thanked Custer in advance for agreeing to host the meeting and the Forest Service for the facility. He then proceeded with his opening remarks. He explained the rationale behind holding meetings around the state, and reiterated his intention from the first meeting that the study adhere to the scope assigned by the Executive Board:

Chair Smidt stressed 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, and the committee had selected Custer to represent "A" schools. There will be two more meetings over the course of the Interim. The next meeting will be at Estelline, which the committee selected to represent ?B? schools. The final meeting will be in Pierre.

Chair Smidt mentioned the committee may want to address the statutory definition of a school district, and distributed the current law (Document #1). He said that North Dakota will be considering at its upcoming legislative session a bill to drastically reduce the number of school districts. He asked staff to get a copy of that legislation for the next meeting and distributed a copy of this committee?s Scope of Study (Document #2).

He explained that because the State Aid to Education formula treats schools of different sizes differently it is important to hear from them out in the field so more local educators may participate. He then recognized Mark Zickrick, Legislative Research Council, who gave some very brief remarks on the No Child Left Behind (NCLB) Act. Mr. Zickrick distributed a copy of an article from the most recent STATE LEGISLATURES magazine on school funding (Document #3) and mentioned that it was co-written by Steve Smith, one of the presenters at the Brandon meeting. He also distributed data on school districts? Other Revenues (Document #4) and commented that it was based upon Department of Education and Cultural Affairs data, just re-sorted by several criteria. Finally, he presented a list of the 13 schools identified by the federal Department of Education for "school improvement" under the No Child Left Behind Act (NCLB) (Document #5).

Mr. Ray Christensen, Secretary, Department of Education and Cultural Affairs (DECA), addressed the committee and gave an update on NCLB and its implementation. He said the Act passed Congress with 90 percent of members voting for it. He distributed a handout (Document #6) and said the major focus of the legislation is to "Provide all children with a fair, equal, and significant opportunity to obtain a high-quality education." He listed the four pillars upon which it is built: Accountability for results; Flexibility; Research-based education; and Parent options. He explained the key definitions and characteristics of the Act.

Secretary Christensen mentioned there is a crucial requirement that a copious amount of data be collected and that it be disaggregated to four subgroups, and that standardized testing and improvement of teacher quality are vital parts of the Act. He said South Dakota?s on-line test, the Dakota Assessment of Content Standards, will probably not meet federal approval because it is computer-adapted to the individual student taking the test. He said the federal department wants strict, standardized tests administered. South Dakota will switch to the SAT-10, augmented to check state standards, but that it will be given to grades 3 through 8 and 1 high school grade. This will require adoption of legislation and the department will be requesting such this coming Session.

He discussed teacher quality and whether there is a shortage of qualified teachers. He mentioned the department had over 1,000 new applicants for teacher certification and they issued 500 certificates to first-time teachers within the past year. He said he believes, but does not have data to substantiate, that South Dakota is a "net importer" of teachers. He acknowledged that NCLB requirements of highly qualified teachers and aides will affect local districts? hiring and retention practices.

He said, however, that South Dakota and its districts have done a "good job" of staff development through teacher in-services and the technology academy for teachers, but that the necessary continuation of these practices will require more money in upcoming fiscal years.

NCLB requires a substantial amount of reporting on school performance for parents and the public, and that the information be easily available. DECA is trying to get the information available on-line for interested parties. In particular, local districts have to make Adequate Yearly Progress (AYP) for their schools not to be identified as in need of improvement. AYP must occur over 12 years with 2002/03 as the base for the four categories of student performance advanced, proficient, basic, and below basic. After 11 years all students will have to have progressed beyond basic. DECA is developing an accountability system and will bring legislation for its adoption.

Senator Olson asked if it was true, as one lobbyist has stated, that at some point every school in South Dakota will be identified at least once as needing improvement on some criterion. Secretary Christensen replied affirmatively, but said these are not "failing" schools.

Representative Monroe asked if it will be a problem for the public schools to maintain accelerated progress year after year. Secretary Christensen responded that it will definitely be a challenge, and that even high-performing schools will have to work hard to maintain their levels of performance. Funding through Title I will help, however.

Representative Teupel asked why only grades 3 through 8 and grade 11 are being tested. Secretary Christensen responded that the Advisory Panel is convinced that there is no reliable testing of students younger than third grade, and that particularly in math there are too many variables in the level of math education 9^th and 10^th graders have had, so testing 11^th graders captures more levels. He also said that there is a problem with students in the upper grades showing some testing disincentives.

Senator Dennert asked if South Dakota?s alternative routes to teacher certification will meet federal requirements for highly qualified teachers. Secretary Christensen responded affirmatively.

Representative Rhoden asked if there is or will be too much emphasis on the bottom of the education spectrum, and not enough on gifted education. Secretary Christensen responded that there will be curriculum alignment and qualified teachers to improve education for gifted students, too.

Representative Jim Peterson asked if NCLB addresses home schooled students. Secretary Christensen responded that it does somewhat, though home school is exempt from requirements for standardized testing. He mentioned that under NCLB poor performing schools will have to pay transportation costs to send their students to higher performing schools.

Dr. Tim Creal, Custer Schools Superintendent, commented on the federal requirements that list education in arts as part of the core education requirements. He said that a lot of schools are having to cut programs in the arts first. Secretary Christensen responded that there is a problem there for schools, but that Dr. Creal?s reading of the law as to the requirement for arts education as part of the core curriculum is correct.

Representative Monroe asked about the other methods of delivering education and whether they?re acceptable under NCLB. Secretary Christensen responded that students are taking distance learning courses through such education tools as the V-Tel system, as well through on-line courses, but there is some concern among regulators about quality of the courses.

Secretary Christensen commented that prior to 1995, State Aid funding was not on a per-student basis but was analogous to distribution of "pots of money" for categories. In 1995 there was a philosophical change that resulted in doing away with this categorical approach toward funding education. He said that now there is an anomaly in other funds in that some school districts have a lot more money available to them in these other funds than do other districts. He said that there will have to be some discussion and decisions made to correct some of the inequities. For example, why should one school district benefit from the fines collected by a weigh station and not the neighboring or other districts? Why shouldn?t bank franchise tax revenue be distributed statewide to schools?

Senator Olson asked why a school district would show $0 for bank franchise tax income. Ms. Susan Woodmansey, DECA, said this information comes from the finance reports submitted to the department by the school districts, and that some schools must count their bank franchise tax income with Miscellaneous.

Representative Bradford asked if this had to do with the location of the bank or its branch. Ms. Woodmansey said she did not know. Representative Broderick explained that the distribution of bank franchise tax income has to do with whether a bank has a branch in the county and what percentage of the bank?s overall deposits are in that county and the counties then reallocate the money to the schools.

Senator Olson asked about the total amount of bank franchise tax and what happens to the rest of the revenue. Staff responded that there is probably a different distribution prescribed for the tax on credit card operations.

The Chair asked staff to report at the next meeting on how bank franchise tax is distributed.

Ms. Woodmansey stated that opt-out revenues and mobile home taxes do not show or get counted as other income to the schools. She said that one of the several previous education funding studies considered what revenues should be rolled into the formula. They considered the gross receipts tax on utilities (which is approximately $10 million of the Miscellaneous local revenue), county revenue (fines), the bank franchise tax, and state apportionment from School and Public Lands income. That committee either did not reach a decision or the one they reached was not successful in its legislation.

Representative Rhoden asked whether rolling the revenues from these other sources into the formula would just exacerbate the problem of unfairness, especially since some schools have a relative windfall with federal revenues. Chair Smidt agreed in light of how some districts can opt-out and get their own windfalls.

Senator Dennert asked if it was accurate that the sum of the above-discussed other fund sources is about $40 million. Ms. Woodmansey responded affirmatively. Senator Dennert then asked why opt-out revenue should be considered part of the formula. Chair Smidt responded that this gets to the basis of the difficulties in accounting for what districts are actually spending for education and from where they?re getting it. He cited as an example the differing ways in which the districts report or classify their revenue.

Senator Olson commented that it is fair to discuss getting a better, more accurate picture of all revenues and costs, but that it is definitely not fair to consider opt-out revenue in the formula. "These discussions are 15 years old," he said.

Representative Teupel asked if the state apportionment of School and Public Lands income is by statute, if it goes to the students? home districts, and if it stays there rather than following them if they go somewhere else via open enrollment. Ms. Woodmansey responded affirmatively.

Representative Bill Peterson asked Secretary Christensen: Is the current formula fair? Is it underfunded? If it is underfunded, by how much? Secretary Christensen responded that in his opinion the formula is basically fair, but that the wide discrepancy in per-ADM amounts diminish that fairness. He said it is difficult to assess the amount by which it is underfunded, if it is, so he would not suggest an amount by which it is underfunded.

Representative Heineman asked how Title I revenue is allocated by the department. Ms. Woodmansey responded that it is by census. Mr. James Heinert, Meade Schools, said it is by percentages of free and reduced lunches.

Representative Jim Peterson asked if all school districts have to be K-12. Ms. Woodmansey responded affirmatively, but said that those districts that were in contracting agreements at the time of the consolidations were grandfathered.

Representative Napoli asked if any increase in per-ADM funding would be wiped out by declining enrollments. He cited an example wherein a district could receive more money through a $150 increase per-ADM, but within 3 years if its enrollment is declining by 50 a year, that increase would be gone. Secretary Christensen responded affirmatively.

Representative Jim Lintz commented that districts growing in assessment value or new construction are losing to the rest of the state because the "Cutler-Gabriel Amendment" does not level out that growth in local income well enough to be fair to the financially growing districts.

Senator Olson commented that there will never be agreement on an amount and "we?ll never find that magic bullet that will make every district look like every other district."

Mr. Stacy Krusemark, DECA, distributed information on declining enrollment dollars in the State Aid formula and how those dollars have been used to fund technology (Document #7).

The committee recessed for lunch at 12:10 p.m.

The committee reconvened at 1:30 p.m.

Dr. Tim Creal, Superintendent, Custer Schools, presented information to the committee on the budget for Custer Schools (Documents #8 and #9). For 2002/3, Custer Schools has a General Fund budget of $5.5 million, a Capital Outlay budget of $969,000, a Special Education budget of $977,000, a Food Service budget of $172,000 and Pension budget of $93,000.

Senator Olson asked what the levies are for Custer. Dr. Creal responded they levy at the maximum allowed by statute for pension, capital outlay, and special education. He said their revenue is 53.4 percent local effort. For 2001/2, Custer Schools? expenditures were $5,362,973, of which $3,357,108 was educational expenses, or 62.6 percent, including special education. Custer Schools? ADM for 2001/2 was 985.764, a decrease from the 995.623 in 2000/1. Their FTEs to ADM ratio in 2001/2 was 12.7.

Dr. Creal said Custer has a starting salary of $21,785 and an average salary of $34,682. The district?s average years of experience for teachers is 15.75 and 24.4 percent have advanced degrees. He said a popular aspect of Custer Schools is the four-day week. He said it?s popular with teachers, students, parents, and the public.

Representative Bill Peterson asked Dr. Creal: Is the current formula fair? Is it underfunded? If it is underfunded, by how much? Dr. Creal responded that it is basically fair and that tinkering with it, even if to roll other revenues into the formula, would not benefit Custer Schools. He said it?s underfunded, however, and that in his opinion it is underfunded by $400 to $500 per ADM.

Representative Teupel commented that would mean an increase of approximately $60 million for the state?s approximately 120,000 students.

Representative Bradford asked if they see a real financial advantage to the four-day week, and if so how much. Dr. Creal responded that they probably save $50,000 to $75,000 per year, and that savings come from transportation. He said there are other advantages to the four-day week, however, and schools should not consider switching just to save money. For example, he said that they have gone to scheduling traveling sports and other events on Thursday, Friday, and Saturday nights only, and thus do not have students sitting and sleeping through school the day after an out-of-town game. Students get their homework done on Fridays and still have a two-day weekend. Teachers can correct papers on Fridays and still have a two-day weekend. He said an indirect result of the four-day week is that some 86 percent of students are involved in at least one extra-curricular activity, versus the national average of 35 percent. A direct result is that since students do not have to miss a day of school to travel to an event, there is actually more contact time than there would be otherwise. He said the four-day week is very popular in Custer.

Representative Bill Peterson asked if they are considering or if they have had to cut any activities to meet funding shortfalls from declining enrollments. Dr. Creal responded they have not yet, but that in his estimation school districts are "cutting their own throats" when they cut activities. He cited an example of cutting varsity basketball to save $20,000. In Custer Schools that could mean a loss of six to eight students if they opted to go to another school to play basketball. That drop in enrollment would mean a loss of $24,000 to $32,000 in funding to the district so they would be worse off than before the cut.

Dr. Creal commented that the percentage of students eligible for free/reduced lunches is not reflective of the local economy because there are so few lunches eaten in high school.

Representative Teupel asked if all of Custer County is one school district. Dr. Creal responded affirmatively. Representative Teupel asked if they get any money from the Small School Factor, and Dr. Creal responded in the negative. Representative Teupel commented on how sparse Custer County is and that how so much of the Small School Factor money goes to just seven districts that do not compose as much area geographically as Custer Schools.

Ms. Shawn Oligmueller, Miller, testified that Miller Schools are very similar to Custer Schools and that they are trying for their third time to opt-out to raise $600,000 over three years (Document #10). Representative Bill Peterson asked Ms. Oligmueller: Is the current formula fair? Is it underfunded? If it is underfunded, by how much? She responded that it is basically fair, but that it needs "some work." She said it is underfunded and agreed with the $400 to $500 estimate. Representative Peterson asked what should schools do to handle declining enrollments. Ms. Oligmueller responded that good school districts will make the necessary cuts to handle declining enrollments, but they can only cut to a point.

Dr. Creal commented that technology in the schools is not necessarily the savior some have portrayed it to be. He said that along with wiring and new computers, even if they are free initially, there are associated costs down the road and that much of those costs would not have been foreseen or planned by a district prior to the technology windfall. Wiring requires maintenance, computers require training for staff and students, as well as replacement, for example.

Representative Rhoden commented that eventually all school districts with declining enrollments have to address their needs in light of those declines. He suggested that carrying "phantom ADM" for a time can help, but that it may not be the answer in the long term.

Chair Smidt commented that Brandon Valley is the epitome of a growing enrollment and that perhaps the state needs to structure its school districts such that they are all growing, even if that growth needs to be geographical to attain ADM growth.

Custer?s data compares to Aberdeen Catholic Schools? and Brandon Valley?s (all figures for 2001/02 School Year) as follows:

NOTE: Above expenditure figures do not represent revenues raised outside the State Aid Formula.

Mr. Richard Deaver, Sturgis, addressed the committee on how the demise of categorical funding for Career and Technical Education (CTE) meant a decline in funding.

Ms. Colleen Keffeler, Sturgis, addressed how CTE can help schools meet NCLB requirements (Document #11) and gave a number of examples of students who gained in life knowledge or made good career decisions due to their internships.

Ms. Nancy Worth, Sturgis, commented on how CTE students make a very big difference to the businesses that have them.

Mr. Larry Nelson, Pierre, distributed information (Document #12) on how other states fund CTE.

Ms. Christie Johnson, School Administrators of South Dakota, Pierre, testified that the Legislature is probably "getting the cart before the horse" in trying to determine how much or if the formula funding should be increased before there has been a careful study or determination of what constitutes a quality education. Chair Smidt commented that he thinks Ms. Johnson?s organization needs to address the discrepancies among school districts in expenditures per ADM.

There being no further business, Chair Smidt adjourned the meeting at 3:35 p.m. Dr. Creal invited committee members to tour Custer Schools.