The fifth and final meeting of the interim School Finance Study Committee was called to order by Representative Orville Smidt, Chair, at 9:30 a.m. on Monday, October 7, 2002, in Legislative Conference Rooms 1 & 2 of the State Capitol Building in Pierre, 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 members present were Mark Zickrick, Principal Fiscal Analyst, and Rhonda Purkapile, Senior Legislative Secretary.

(All documents presented are on file with the master minutes. For the purpose of continuity, these minutes are not necessarily in chronological order.)

Chair Smidt commented that a correction should be made to the minutes on Page 4, paragraph 7, delete "Canistota" and insert "Conde". The committee agreed.

Chair Smidt thanked the superintendents from the schools the committee had visited throughout the summer, stating that the visits and tours had been very informative and would help the committee with its deliberations.

Chair Smidt referenced the data comparison sheet from a previous meeting (Document #1), which pointed out the differences in school district costs per Average Daily Membership (ADM) and suggested that this might be a good thesis topic.

Finally, Chair Smidt called the committee?s attention to proposed legislation in North Dakota which changes the way they define their school districts in an attempt to deal with declining enrollments. Though none of these bills progressed out of committee, North Dakota is undergoing a similar study of its funding for education.

Mr. Ray Christensen, Secretary, Department of Education and Cultural Affairs (DECA), testified that is important to have a funding formula for education that treats all students equally. He stated his belief that South Dakota has an essentially fair funding formula which could use a little tweaking in the area of equalizing other funds. Secretary Christensen noted that declining student enrollment has been a huge challenge for most school districts across the state because there is a great reluctance to cut programs and staff. The issue of declining enrollments has been the number one crisis in fiscal impact on the schools.

Secretary Christensen noted that the ratio of students to staff has steadily been improving over the years; however, this is very expensive for the schools. He stated that schools have been spending their reserves, and many of their expenditures have been outpacing their revenues. This will become a major issue in the future because schools cannot continue to outspend their revenues.

Mr. Stacy Krusemark, DECA, presented the committee with a computer printout of General State Aid for 2001-2002 including Bank Franchise, State Apportionment, and Gross Receipt Taxes (Document #2) and with a computer printout of General State Aid for 2001-2002 including Bank Franchise, State Apportionment, Gross Receipt Taxes, and an additional $7.4 million from interest earned on the Education Enhancement Trust Fund (Document #3). Mr. Krusemark noted that the additional funding included in Document #2 would increase the per-ADM allocation from $3,802 to $4,008. The additional funding included in Document #3 would increase the per ADM allocation from $3,802 to $4,064. Mr. Krusemark clarified that this additional funding would be included in the state aid to education formula and would be equally distributed to all school districts on a per ADM basis.

In response to committee questions, Mr. Krusemark indicated that county apportionment was not included in this example. The additional funds that were included in Documents #2 and #3 were easily deposited into the general fund. If county apportionment were included, it would total an additional $10 million to be redistributed, and would result in an extra $77 per ADM.

In response to committee questions, Ms. Susan Woodmansey, DECA, stated that the calculations in Documents #2 and #3 were based on last year?s ADM calculation of $3,802 because all of the data has not yet been collected for this year.

Representative Jim Peterson requested another computer printout that would also include county apportionment.

Representative Bill Peterson asked if this additional money in the formula would be subject to the small school factor. Secretary Christensen responded affirmatively, noting that a larger portion of this funding would go to the smaller schools because of the small school factor.

Representative Napoli expressed his concern with this additional money being included in the formula because it would affect the Cutler/Gabriel amendment and the small school factor.

Representative Jim Peterson stated that what the school districts want to do with regard to their local effort is a local control issue. The Legislature should be concerned with equalizing the funding for students as far as the public funds are concerned. He did not feel the committee should spend time trying to place caps on what local school districts can spend.

Chair Smidt stated that the question should be how much is enough to educate a student in South Dakota.

Representative Napoli asked if mobile home taxes are included in this additional funding. Mr. Krusemark replied that this tax is outside the formula and has not been included in any of the printouts presented. Representative Napoli felt that county apportionment as well as mobile home taxes should also be included in these funds.

Representative Jim Peterson commented that the committee has not addressed the issue of increases in state aid being given based on ADM and not total expenditures. With declining enrollments, schools are not really receiving the full effect of a cost-of-living increase in the formula.

Senator Dennert commented that the committee should be looking at more than redistribution of current revenue. He noted that more than 43 schools have opted out for an average of $700 per ADM across the state. This tells him that more money is needed in the formula.

Senator Olson commented that the committee was really getting in over its head with all this tax information. He suggested that the committee recommend a study to be conducted by consultants Augenblick and Myers with regard to the current formula and the amount of dollars funding the formula. He stated his belief that the formula is underfunded. He noted that when enrollments decline, there is not necessarily a corresponding decline in expenses.

Representative Teupel commented that this other revenue should have been included in the formula when it was first adopted in 1995. He suggested that if the committee chooses to include this other revenue in the formula for equal distribution to all schools, perhaps additional funding could be placed into the formula to hold schools harmless.

Representative Monroe commented that the opt out should not be seen as an evil thing--it is a local decision being made at the local level with regard to spending in any particular school district.

Representative Bill Peterson commented that property taxes are a big issue because historically, South Dakotans want low taxes. He did not feel opt outs are a bad thing--this is something that local taxpayers need to decide. However, he expressed concern about the cumulative effects of the opt outs because the 20 percent of property tax relief that was found has been eaten up by the opt outs. Representative Peterson commented that he sees three major issues with regard to education: 1) the quality of education; 2) the funding of education; and 3) declining enrollments. He stated that he has become convinced that the formula is under funded, but nobody knows for sure by how much. He did not feel the opt outs would be occurring if there were enough funding in the formula. He suggested that perhaps the committee try to increase state aid by $150 per ADM and that the committee try to equalize other revenue throughout the system. He suggested that the committee look at the way school districts are defined as a possible solution to declining enrollments?with one possibility being the communities keeping their grade schools but combining their middle schools and high schools where feasible.

Representative Teupel suggested that perhaps local property tax money should follow the open enrolled student.

Mr. Gene Enck, Associated School Boards of South Dakota (ASBSD), presented the committee with a graph of 2000/2001 revenue/ADM compared to expenditure/ADM (Document #4) by school district. He testified that the school districts are at a critical point because they are spending their reserves and, in fact, many are having to borrow money to meet expenditures. More money needs to be found for public education. He recommended that the committee contract with the consultants of Augenblick and Myers to determine an appropriate funding level for the formula.

Mr. Zickrick, LRC, presented the committee with the proposal from Augenblick & Myers, Inc., to study school finance adequacy in South Dakota (Document #5). Senator Olson commented that this study could probably give the Legislature an unbiased opinion of the funding formula.

Chair Smidt recessed the committee at 11:55 a.m. for lunch and reconvened the committee at 1:15 p.m.

Mr. Zickrick presented the committee with copies of the draft legislation (Document #6).

At the committee?s request, Mr. Dale Bertsch, LRC, presented a revenue update to the committee (Document #7). Mr. Bertsch indicated that sales tax is growing but not as much as was projected during the 2002 Legislative Session. He noted that the contractor?s excise tax collections are also encouraging. In broad terms, Mr. Bertsch indicated that revenues are just about on target or slightly ahead of projections. However, he cautioned that these numbers are subject to change. He noted that these numbers are based on only the first three months of the current fiscal year. As the months go by, the picture will become clearer.

Representative Monroe asked how much revenue the state has lost due to internet sales not being subject to sales tax. Mr. Bertsch responded that there is really no way to determine the amount of lost revenue.

Representative Bill Peterson commented that he did not feel there is state-wide support of a sales tax increase at this time. He noted that anybody that supports a sales tax increase has the ability to take the proper steps to get the issue put on the ballot.

Senator Dennert commented that he had requested drafts 2, 4 and 7 which would provide an additional $7.4 million in funding. Draft 2 would place an additional $3 million into the funding formula, Draft 4 would place $3 million into career and technical education (CTE), and Draft 7 would allocate $1.4 million for teacher merit pay.

Senator Olson commented that the Teacher Enhancement Review Committee dealt with a performance pay plan rather than merit pay. He noted that the plan adopted by that committee would need a minimum of $2.1 million to make it feasible. He felt it would be better for this committee to work on placing additional funding into the basic formula. He stated his opinion that CTE was outside the scope of study of this interim committee.

Representative Teupel commented that he did not believe additional monies should be added to the funding formula before the inequities in other revenue are addressed. If additional funding is placed into the formula, he stated that it should be used to help diminish the effect of equalizing the other revenue. He also questioned the additional money going to small schools due to the small school factor included in the formula. These schools should really be considering consolidation.

Representative Heineman commented that by placing all the additional funding into the formula, it would basically take the Legislature out of the discussion of additional money for other categories such as career and technical education (CTE) as proposed in Draft #4.

Chair Smidt commented that he did not want the committee to get sidetracked with the amount of funding in the bill because the committee does not know at this time how much money will be available.

Representative Napoli commented that this proposal would eliminate the additional funding for CTE. He stated that these programs are very important to maintain in high schools because not every student goes on to college. He noted that many CTE programs are being cut because the schools do not have the money to support them.

In response to committee questions, Mr. Zickrick indicated that the bank franchise tax deposits can be changed by statute; the other revenue the committee is discussing would require a constitutional change.

Ms. Dianna Miller, ESD Plus Six, testified in opposition to redistribution of other revenue. She did not feel redistribution was appropriate until the need for additional funding in the formula is addressed. She specifically objected to changing the way Bank Franchise Tax revenue is handled because that is already distributed to the schools. She also expressed opposition to categorical aid being added to education funding, advocating that the committee focus its efforts on adequately funding the formula.

Ms. Penelope Douglas, S.D. Coalition of Small Schools, also testified in opposition to redistribution of other revenue. She felt that additional funding of the formula is what is necessary to address the needs of the school districts.

Ms. Christie Johnson, School Administrators of South Dakota (SASD), testified that other revenues seem to be an issue with the Legislature every year, but it is not an issue among the school administrators. A redistribution of these funds would merely involve a different set of winners and losers. She did not feel it is a good situation when school districts are having to opt out of the tax freeze simply to remain status quo. The opt out was put into place to make improvements. With so many school districts opting out, it appears that the formula is not funding education at the appropriate levels. She also encouraged the committee to consider contracting with the consultants to really examine the formula and its funding level.

Ms. Lona Lewis, South Dakota Education Association (SDEA), testified in favor of hiring the consultants to examine the formula. She suggested that the Legislature put in some seed money for the study and ask interested parties to also contribute to the cost of the study. She felt that this would ensure more objectivity and possibly better reception of the results by all parties involved. Ms. Lewis testified that SDEA has a long-standing resolution against the redistribution of other revenues, and if legislation like this were to pass, they would want a guarantee that these monies would indeed go back into funding education. She also testified in opposition to the merit pay proposal, noting that the performance pay plan adopted by the interim Teacher Enhancement Review Committee was much more palatable.

Representative Teupel commented that if the different education entities want the Legislature to fix the funding problem in education, then there should be some cooperation among the different parties involved. He stated that he would not be opposed to placing more money in the formula; however, he felt that the issue of other revenues should also be addressed.

Representative Bill Peterson stated that this is really an issue of equity. These are other sources of revenue outside the formula that have been left untouched. There is great disparity among the school districts on the amount of other revenues collected. He felt these funds should be equally distributed among the school districts throughout the state.

Representative Broderick commented that he would be in favor of increasing the funding for the state aid formula but felt that the increase should be phased in over three years. He also expressed support of equally distributing other revenues among the school districts.

Representative Rhoden asked why the committee is trying to fix a "problem" that is not perceived as a "problem" by others. He felt the committee was focusing on issues that are not its concern. He stated that he did not feel it necessary to spend $150,000 to hire a consultant to tell the Legislature that the formula is under funded.

Mr. Larry Nelson, DECA, testified that the career and technical education program trains young people for jobs directly out of high school and is directly linked to the vocational technical institutes. He noted that funding for CTE is supposed to come from the money received by the schools from state aid funding; however, in reality, CTE is one of the first programs cut because it is an expensive program. Mr. Nelson stated that the dollars proposed for CTE in Draft #4 could be used to begin new programs.

Mr. Garry Heck, Isabel, a director of an educational cooperative which represents eight schools, testified in favor of Draft #4. He stated that letting the school boards make the decisions with regard to funding CTE at the local levels sounds good, but this is not what happens in actuality. Every parents? dream is to see their child go to college, but college is not for every child. Some children have different talents and learn in different ways. Putting in new CTE programs is an expensive process because these are not the typical "shop" programs that many committee members may remember from the past. He advocated that the committee place additional money into education specifically for CTE, truly ensuring that no child is left behind.

Representative Bill Peterson commented that appropriating this money when the committee does not know if the money will be available sends the wrong message. He felt the proper way to address both the issue of additional funding in the formula and funding CTE is to properly fund the state aid formula.

Senator Olson asked about the fiscal impact of this legislation, and Mr. Zickrick responded that a fiscal note on the proposed legislation was not prepared but that the impact would be substantial.

In response to committee questions, Mr. Marty Guindon, Auditor General, Department of Legislative Audit, stated that best practices reviews is probably a good idea; however, he felt the legislation was a bit vague and stated that he would have no idea how many staff he would have to devote to this process.

Mr. Curt Johnson, Commissioner, School and Public Lands, testified that the interest earned on the trust fund has been declining, noting that normally, when stock earnings are down, bond earnings are up, but this has not been happening. He cautioned the committee on placing a lot of hope on big interest earnings from the various trust funds in these economic times. He also cautioned the committee that if these revenues are included in the general state aid formula, they become hidden.

Representative Heineman commented that since the Department of Education and Cultural Affairs now has the ability to do monthly ADM calculations, state aid to education should be figured on a monthly ADM count rather than being figured on the total ADM from the previous year, which would pay the schools for the students they are currently teaching.

There being no further business, Chair Smidt adjourned the meeting at 4:55 p.m.