The fourth meeting of the interim School Finance Study Committee was called to order by Representative Orville Smidt, Chair, at 9:40 a.m. on Wednesday, September 25, 2002, in the Gymnasium of the Estelline High School in Estelline, 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 Estelline and thanked them for agreeing to host the meeting. He commented on how he grew up in the area and "feels right at home." He proceeded with his opening remarks, explaining 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 with the intention of gaining as much information as possible on the topic of school finance in South Dakota, and the committee had selected Estelline to represent SDHSAA "B" schools. There will be one more meeting during the interim in Pierre on October 7.

Before proceeding further, Chair Smidt called for a moment of silence in honor of Senator Richard Hagen, who he and the committee were saddened to learn had passed away just a few days ago.

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, so it had strong, bipartisan support. He introduced Ms. Melody Schopp, who explained to the committee certain aspects of NCLB.

Secretary Christensen mentioned that DECA is holding a series of meetings around the state to explain NCLB to the public and to clear up misconceptions. He mentioned that it is strongly linked to Title I funding, and that if a state wishes to receive or continue to receive Title I it must meet requirements of NCLB. South Dakota receives several million dollars from Title I and wishes to continue.

Secretary Christensen explained that the key components of NCLB are accountability, quality staff in local school districts, data gathering based on "good science," and assessment.

Ms. Schopp explained accountability methods and distributed a handout (Document #1). She said there are points of South Dakota?s effort that will require legislative approval at the upcoming session, and that DECA has hired a national consulting firm, the National Center on Accountability and Achievement, to advise the department.

Senator Dennert asked if there is new money associated with NCLB, and Secretary Christensen responded in the affirmative that there is some $16 million at stake. He said there is other money that could be lost as well if South Dakota does not comply.

Representative Bradford asked if there is transitional money for states, and Secretary Christensen replied that it has not yet been determined.

Representative Broderick asked if special education is underfunded by the federal government and if so, how much. Secretary Christensen responded that Congress initially promised they would pay for 40 percent of special education but that they are only at about 10 to 12 percent now. He said about $3 to $4 million of the $16 million in new money will go toward special education.

Representative Heineman asked how DECA is and will be getting the word out to parents about NCLB. Secretary Christensen responded that they are conducting the information sessions this month and have done several press releases and the Web site.

Chair Smidt asked if Lemmon?s quality staff model can be applied across the state. Ms. Schopp responded that Lemmon does indeed have a good model and that aspects of it can be applied to other districts.

Chair Smidt asked if the federal money going toward special education will cost local school districts, and Secretary Christensen responded in the negative.

Chair Smidt asked if the department will have its legislation ready for this committee?s October 7 meeting, and Secretary Christensen responded they will not because their task force has not yet met. He hopes they will be able to have legislation by early in session when other agency legislation is introduced.

Representative Bradford asked if, with regard to accountability, it is the department?s plan to have all schools in the same or similar curriculum series. Ms. Schopp responded that content standards are being aligned statewide across grade levels, and that the locals have to align to those content standards, so it?s going to happen.

Chair Smidt if there are difficulties in assessing by K-8 or 9-12. Secretary Christensen responded that all schools in South Dakota are now K-5, 6-8, or 9-12.

Representative Heineman asked about alignment of standards to content areas. Secretary Christensen responded that there has been a narrowing of content standards and the state Board of Education has adopted standards for the core reading curriculum.

Mr. Stacy Krusemark, Department of Education and Cultural Affairs, discussed school funding issues and provided a list of Definitions of Funds (Document #2). Senator Dennert asked if any school?s bond redemption fund has come close to the maximum 10 percent of assessed value limitation. Mr. Krusemark, Secretary Christensen, and Senator Olson all responded "No."

Chair Smidt referred to the handout from early in the interim that showed Carthage, Agar, and Conde as examples of high expenditures per ADM. Mr. Krusemark commented that those schools have exceptionally small numbers of ADM. Secretary Christensen further commented that the Agar anomaly will go away because Agar has consolidated with Sully County.

Representative Teupel asked if there would be advantages to school districts to consolidate grad levels or attendance sizes, such as neighboring districts cooperating for a middle school or a high school. Secretary Christensen responded that there could be definite advantages to that because small towns could maintain a school identity and it would give a number of communities an easier or more acceptable way to consolidate. On the other hand, he said it could be a bit of a backslide because all communities would want to keep their K-6 or K-8 so there could end up being more of those. He said "some good, hard discussions need to be had" between and within some districts.

Representative Jim Peterson stated his opinion that the main goal of this committee is to study the overall financing of the majority of schools, and that the redistribution of money from the small, anomaly schools will do very little to improve the quality of education in South Dakota.

Chair Smidt asked what percentage of all education funding is covered by opt-outs. Mr. Krusemark said he does not know, but that he will get an estimate of that total to staff. Senator Olson commented that 60 schools of the state?s 176 have opted out.

Representative Bill Peterson asked if such a high number of opt-outs means the formula has failed. Secretary Christensen responded that, in his opinion, it has not. He said that some school districts have been pressed to maintain their level of programs so they have had to opt-out. He stated his opinion that declining enrollments are the number one problem facing school districts.

Representative Bill Peterson asked if the state is violating NCLB by allowing differing standards of education by school size. Secretary Christensen responded that NCLB is not violated if quality is maintained.

Representative Heineman asked if NCLB accountability will finally lead to some funding answers. Secretary Christensen responded that the focus on reading and math will benefit all students, and that art education needs to be continued or strengthened rather than diminished or cut.

Representative Jim Peterson asked if it would have meant a significant difference if "Declining Enrollment Dollars" had been put back into the formula and redistributed to the schools, rather than used for other purposes as the Governor directed. Secretary Christensen responded affirmatively, but reminded the committee that the Governor directed that those "Declining Enrollment Dollars" go toward technology.

Representative Teupel asked if there are recognized economies of scale or certain ADM levels beneath which schools cannot deliver a quality education. Secretary Christensen responded that problems with small size do not appear in elementary schools. At the high school level, however, for "every student . . . to have an equal shot," a high school must have at least 30 students, even with offering some classes on Dakota Digital Network (DDN). He said an elementary school can operate with 25 to 30 students and the students will not suffer a poorer education.

Senator Olson commented that focusing too much attention on spreadsheets poses problems in itself because there are too many disparities between districts and that?s a natural occurrence. He would rather that the committee look ahead. He suggested that the Legislature may do well to consider bringing a national consulting firm such as Augenblick and Myer to South Dakota to research the anomalies and disparities in South Dakota?s range of school district funding and expenditures.

He said that it is crucial that the Legislature recognize or get to what is an adequate education and how much it costs, but that attention has to be paid to aspects of NCLB. He said school districts need to be left alone for the main part for day-to-day operations to take care of themselves. There is just no way to get all school districts to look alike, either in reality or on paper. He said that while the current formula may work for Brandon, "whose planets are aligned," it does not work for Aberdeen or the scores of other schools that have had to opt out.

Chair Smidt asked if it is fair to a district?s neighbors when that district opts out of the formula. Senator Olson replied that any district can opt out if it feels the need.

Representative Bradford commented it is unproductive to pay too much attention to those "big chunks of money" that "are there for a special purpose," such as federal funding for Fetal Alcohol Syndrome or Impact Aid.

Auditor General Martin Guindon, along with Mr. Deene Dayton, Legislative Audit, presented to the committee their report on head-to-head comparisons they made between school districts of similar sizes (Document #3). Mr. Guindon explained the statutory requirements for school districts to be audited by someone, and how Legislative Audit conducts audits of nine schools per year. The audits are for financial compliance with federal and state laws concerning management of school district funds. There are no performance audits of schools in South Dakota.

Mr. Guindon explained that the Legislative Audit document has two parts. The first shows statistical data and "analysis on selected factors which affect the variability of school district expenditures per ADM." The second part of the report does the head-to-head comparisons. Mr. Dayton explained how they selected two schools in each of small, medium, and large size categories, and picked schools as close in size as possible.

Senator Olson asked how the data used was generated. Mr. Dayton responded that very little of it was gathered through interview; they used data gathered and published by DECA.

Mr. Guindon summarized the factors they considered that affect variability among school districts? expenditures per ADM. First of all, certain other revenues "are not evenly distributed resulting in varying amounts of resources available to districts." They looked at the Gross Receipts Tax, County Apportionment, Bank Franchise Tax, and Mobile Home tax. They found that 95 percent of school districts, or 167 of 176, are with in a range of $126 to $644 per ADM for a total of these four revenues, which account for more than $31 million of school funding.

Next, they found that "transportation expenditures are for the most part unavoidable and vary more with the geography of a district than its number of students." They found that general fund transportation expenditures for 163 of 172 districts, or 95 percent, "fell within a range of $45 to $680 per ADM."

Thirdly, their analysis showed that average teacher salaries ranged from $19,994 to $35,751 in FY2001, which accounts for significant differences in expenditures per ADM.

Finally, some schools have the means to shift pension expense out of their general fund to a pension fund levy, likewise for capital assets. These wealth differences mean some schools are able to free up general fund revenues for education purposes by shifting the burden to pension or capital asset levies that are not equalized.

In the head-to-head comparisons, Mr. Dayton explained the comparisons of Bison to Summit, Sioux Valley to Miller, and Huron to Brandon Valley. In the small schools category, Bison had general fund expenditures of $2,649 per ADM more than Summit. However, Bison is geographically eight times larger than Summit, has 5 bus routes compared to 3 for Summit, and Summit charged some of its transportation costs to capital outlay. Bison has a more experienced teaching staff and thus a higher average salary. Bison operates a rural attendance center 32 miles outside of town for 4 students with the associated costs for a teacher and operating the center. Bison has 2 more instructional staff; Bison has a full-time librarian and Summit does not.

In the medium size schools, Miller has general fund expenditures of $1,292 per ADM more than Sioux Valley. However, Miller?s school district is geographically five times larger than Sioux Valley, with nine bus routes compared to six. Miller contracts for its busing so does not transfer any of that cost from its general fund to capital outlay like Sioux Valley does. Miller has separate facilities for elementary, high school and 2 rural centers, but Sioux Valley is all under one roof, so Miller has greater physical plant as well as staffing costs. Finally, Sioux Valley did "comparatively less teacher training resulting in $62 less expenditures per ADM."

As for "large" schools, Huron was compared with Brandon Valley, with Huron?s expenditures per ADM being just $474 more than Brandon Valley?s. Huron operates 5 elementary sites and 2 colony sites. Brandon has just 2 elementary sites. Huron received and spent $135 per pupil in federal grants resources, probably owing to unemployment factors. On the other hand, Brandon Valley does not use a pension fund levy and Huron does. Brandon Valley has higher busing costs because their bus routes are more populated than Huron?s.

Representative Jim Peterson asked if any major differences are because of an accumulation of local decisions. Mr. Guindon and Mr. Dayton both responded affirmatively, with Senator Olson reinforcing the answer. Representative Jim Peterson said it is very important then that the committee keep its focus, that being on the overall financing of the majority of schools, not necessarily the gross differences between the average and a few anomalies.

Representative Teupel asked how the small school factor?s inability to correct for transportation differentials and numbers of rural attendance centers could be fixed. Mr. Guindon responded that they would have to study the issue more.

The committee recessed for lunch at 12:40 p.m.

The committee reconvened at 1:25 p.m.

Dr. Dennis Rieckman, CEO, and Ms. Nancy Meyer, Business Manager, presented expenditure information on Estelline Schools (Document #4). They reported that the Estelline School District is 171 square miles and reaches into three counties. Estelline was one of the first schools to opt out of the current State Aid to Education Formula, but they have also made budget cuts to accommodate declining revenue. For example, they eliminated their superintendent position and replaced it with a chief executive officer who is also a principal.

Dr. Rieckman commented on the reserve fund balances issue involving school districts, and stated that it is completely a matter of local control and decision-making whether schools maintain reserve balances to handle contingencies as they see fit.

Representative Broderick asked about the $207,000 Estelline has spent from reserves and what justified the expenditures. Dr. Rieckman responded that they have increased teachers? salaries but have also seen State Aid revenue decline. He reiterated, however, that they are serious about "watching out for the taxpayer" in Estelline.

Representative Monroe asked how this philosophy was attained in Estelline. Dr. Rieckman responded that their Board of Education is very active in financial decisions and that their enrollment is rather stable, or at least not declining too rapidly.

Representative Bill Peterson asked Dr. Rieckman: Is the current formula fair, is it underfunded, and if it is underfunded, by how much. Dr. Rieckman responded that it is basically fair but that it is underfunded. He estimated they would do well with as little an increase as $176 per ADM.

Representative Napoli asked about the use or intention of the reserve balance. Dr. Rieckman responded that it is used to meet emergencies. For example, there was recently a fire in Estelline?s school that required contingency funding.

Representative Rhoden asked if use of reserve funds to plug their budget deficit is a problem, and Dr. Rieckman replied it is not?yet. Representative Rhoden asked if it is fair to give State Aid payments to school districts with large reserve balances; Dr. Rieckman responded that there are 176 school districts with that many different philosophies so it should be up to local decision.

Chair Smidt asked about Estelline?s revenues that exist outside the State Aid formula. Ms. Meyer clarified that their expenditures/ADM figure is just General Fund.

Representative Bill Peterson asked why Estelline raised its teachers? salaries some $3,000 in light of declining revenue and having to dip into their reserve. Dr. Rieckman responded that they raised teacher salaries to remain competitive in recruiting and retaining teachers. Representative Peterson asked if they have trouble recruiting, and Dr. Rieckman replied that they do because Minnesota and even Brookings are so close.

Senator Olson commented on the local decision to use reserve dollars to balance their budget and commended them on raising teachers? salaries. Dr. Rieckman added that they also received some insurance to compensate in part for the fire, but they have also made cuts. Senator Olson commented that he appreciated their candor.

Representative Jim Peterson asked if they had accumulated their reserve balance during the former cost-driven State Aid formula. Dr. Rieckman responded they did not.

Representative Napoli commented that this is his fifth year of studies on school finance and asked if it is correct that the current formula seems to "work for Estelline." Dr. Rieckman responded that it does. Ms. Meyer reiterated that their reserve grew largely because of the insurance settlement but also because of the early opt-out.

Estelline?s data compares to some of the committee?s data gathered from the previous schools? presentations (all figures for 2001/02 School Year) as follows:

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

Mr. Larry Nelson, Pierre, commented on how important Career and Technical Education (CTE) is to NCLB, and distributed information (Documents #5, # 6, and #7).

Mr. Roger Fritz, Superintendent of Colman-Egan Schools, commented that CTE will decline even more if categorical or otherwise increased funding is not restored.

Chair Smidt asked how much is needed per student. Mr. Fritz replied that he does not know.

Dr. Lee Poppen, Willow Lake, testified that his district is having to deficit spend heavily just to maintain programs and they are still going to have to opt out.

Representative Rhoden asked why their expenditures have grown nearly 50 percent over the last five years. Dr. Poppen replied they have had increases in health insurance and have also raised teachers? salaries $2,000.

Representative Bill Peterson asked Dr. Poppen: Is the current formula fair, is it underfunded, and if it is underfunded, by how much. Dr. Poppen responded that it is basically fair but that it is underfunded. He estimated it is underfunded between $300 and $500 per ADM. He said the small school factor needs to be continued.

Chair Smidt asked about the approximately $10,000 per ADM general fund expenditure amount published by DECA. Dr. Poppen replied that the figure is not correct.

Representative Teupel asked where Willow Lake is located, and if consolidation has been considered. Dr. Poppen responded that they are 22 miles west of Estelline and that they already are cooperating with other districts for sports and they are using DDN for courses.

Mr. Des Miller, Hurley, addressed the committee on the negative worth of allowing school districts the opportunity to opt out of the State Aid Formula (Document #9). He commented on how his local district wanted to opt out, but then found revenue. He expressed his belief that districts need to cut "garbage" from their budgets and mentioned sports.

Representative Bill Peterson asked Mr. Miller if he considers music, art, debate, and other extracurricular activities as "garbage." Mr. Miller responded he does not consider music "garbage."

Representative Rhoden commented that he shares some of the same feelings as Mr. Miller concerning non-academic offerings, but he definitely disagrees about deletion of sports from school programs.

Senator Olson commented to remind Mr. Miller that, by law, schools must provide a "comprehensive education," and sports is part of that.

Representative Bradford commented that local schools may already forego sports offerings if they choose.

Mr. Larry Johnke, Superintendent of Irene and Wakonda schools, explained how his district will be having to opt out of the formula to maintain programs. He offered that $600 per ADM should be added to the formula, and that the Legislature could easily accomplish that with a sales tax increase of one cent.

Representative Napoli asked if the declining balances of ADM would nullify within a few years the $600 increase per ADM for schools such as Irene and Wakonda. Mr. Johnke responded that ADM averaging would alleviate that problem, at least for a couple of years.

Representative Heineman asked what would change with increased funding. Mr. Johnke responded they would be able to strengthen education programs, better retain teachers, and improve schools as necessary for NCLB compliance.

Representative Bill Peterson asked if Mr. Johnke would consider initiating a ballot measure to accomplish the increase in sales tax. Mr. Johnke responded he would if they could get support for petitions. Representative Peterson continued saying voters may at any time initiate a measure but that he does not sense public support for a tax increase.

Representative Teupel asked whether it was true that South Dakota, while ranking 50^th in tax burden also ranks 50^th in per capita income. Mr. Johnke responded that he did not know. Senator Olson responded that South Dakota ranks 37^th in per capita income.

Representative Teupel asked if allowing consolidation of levels of education or attendance centers would help, and Mr. Johnke responded affirmatively.

Representative Jim Holbeck, Clark, testified that the current State Aid to Education formula is a "one size fits all" attempt at a formula, and that no two schools? needs are the same and consequently all spend varying amounts of money to provide an education for their students. Local decisions are cumulative and even neighboring districts can decide issues and matters of funding and expenditure entirely differently. He said that everybody knows tax increases are not popular, but neither is losing graduates. He stated that those graduates are going to places, when they leave South Dakota, where they pay even higher taxes, so just keeping taxes low forever should not be an end in itself, nor will it accomplish what some might want.

Chair Smidt closed the public testimony section of the meeting.

Chair Smidt commented that the agenda for the next meeting will be a continuation of this meeting with regard to discussion of legislation.

Senator Olson commented that, with all due respect to the people who have testified on behalf of CTE, he does not believe discussion of restoration of the categorical funding for CTE is within the committee?s scope of study.

He further commented that making changes to how fines and School and Public Lands apportioned revenues reach schools will require a constitutional change, and that is a two-year process.

Representative Bill Peterson asked if there could be a revenue briefing at the next meeting and for projections of the effect on State Aid to schools of running the revenues discussed through the formula.

Senator Dennert wondered what has happened with regard to the agricultural land study.

Representative Heineman asked if anything has been learned about identifying Best Practices or explaining why certain schools spend less per ADM than others.

There being no further business, Chair Smidt adjourned the meeting at 4:00 p.m.