ANALYSIS OF S1701 & THE BUDGET

OVERVIEW OF KEY COMPONENTS

• S1701 (the substitute for A99) greatly expands the power of the county superintendent to reject budgets and uses undefined and ambiguous terms, such as “administrative inefficiencies,” “per pupil administrative costs,” and “inefficient and ineffective programs and services” to control budgets and restrict line item transfers.

• S1701 reduces the size of districts’ spending growth limitations (the cap on the entire operating budget) to the greater of 2.5% or the Consumer Price Index (CPI).

• The law creates new governance requirements, such as a voting (2/3 of the board) requirement for transfers of certain monetary line items.

• The law requires significant reductions in cap banking and surpluses.

• The law imposes unnecessary administrative spending limits.

2005-2006 School Year

·        Advertised per pupil administrative costs for the 2005-2006 school year budget cannot exceed the lower of either (1) the advertised per pupil costs for the 2004-2005 school year inflated by the CPI or 2.5 percent, whichever is greater, or (2) the per pupil administrative cost limits for the district’s region as determined by the commissioner based on audited expenditures for the 2003-2004 school year. The definition of what is included in the “per pupil administrative cost” is not in the bill

• The county superintendent may reject 2005-2006 budget. The county superintendent may reject the proposed 2005-2006 budget if he determines that the district has not implemented all potential efficiencies in the administrative operations of the district. The county superintendent appears to have full discretion, as there is no appeals process or any criteria for making this decision to reject the budget. The bill’s only requirement is that the county superintendent shall work with each school district in 2004-2005 to identify the “administrative inefficiencies” that might cause the county superintendent to reject the budget.

• Any reductions to programs and services required to keep the budget within the spending growth limits can only be targeted to “excessive administration or programs and services that are inefficient or ineffective.”  This terminology is ambiguous and raises concern over how these terms are defined and what happens when all the excesses and inefficiencies are addressed.

2006-2007 School Year and Beyond

• Administrative Costs Become Effectively Frozen. The bill requires that the advertised per pupil administrative costs in the budget for the 2006-2007 school year and every year thereafter must not exceed the lower of either (1) the district’s prior year per pupil administrative costs (with certain Commissioner-approved exceptions), or (2) the prior year per pupil administrative cost limits for the district’s region inflated by the CPI or 2.5 percent, whichever is greater. The Commissioner-approved exceptions are supposed to be introduced via the regulatory process.

• Although the provision where the Commissioner could withhold state aid was removed in the final amended version of S1701, it was included in the FY 2005 Appropriations Act for the 2004-2005 budget.

SPENDING GROWTH LIMITATION ADJUSTMENT (SGLA)

• Although it was prohibited in an earlier version of the bill, the final version permits continuation of the budget cap adjustment for new school start-up costs.

• The SGLA for courtesy busing services is limited to the increase in the cost of the service indexed to the CPI or 2.5 percent, whichever is greater.

• The SGLAs for early childhood program aid and demonstrably effective program aid are eliminated.

• Voter proposals to exceed the cap may not contain any programs or services that were included in the prior year budget unless approved by the commissioner with “sufficient reason for an exemption.”  Proposals may not contain any new programs or services necessary to achieve core curriculum content standards. The county superintendent now has authority to reject proposals for reasons such as not implementing administrative efficiencies.

MONEY / SURPLUS TRANSFERS

• In 2003-2004, a school district was able to, without restriction, increase its budget based upon increases in current year miscellaneous revenue or other unbudgeted revenues. Under the bill, this provision is eliminated for all subsequent years.

• For the 2004-2005 school budget year, except for county vocational school districts, any undesignated general fund balance in excess of 3% or $100,000, whichever is greater, must be appropriated for tax relief.

• Any appropriation of surplus made following the April 2004 school budget election to a district’s capital reserve account or maintenance reserve account or to increase spending for the 2003-2004 school year will be null and void unless the district can demonstrate to the commissioner the need to have done so and state it was done to meet core curriculum content standards.

• Starting in 2005-2006 and thereafter, except for county vocational school districts, any undesignated general fund balance in excess of 2% or $100,000, whichever is greater, must be appropriated for tax relief.

• County vocational schools have different guidelines for surplus. If the amount of the budgeted general fund for the prebudget year is $100 million or less, the county vocational school district must appropriate for tax relief any undesignated general fund balance in excess of 6% or $100,000, whichever is greater. Vocational districts with a budgeted general fund for the prebudget fund in excess of $100 million have an additional guideline.

• Previously, school districts could transfer amounts among line items and program categories by a simple majority resolution. Now, the bill mandates a new set of conditions for transfers to take place.

• Under the bill, the general rule is that any transfer of amounts among line items and program categories requires a two-thirds affirmative vote by the board. While this is the general rule, certain transfers are targeted for severe scrutiny.

• One such area targeted for scrutiny is the transfer of surplus amounts or any other unbudgeted or underbudgeted revenue to line items and program categories for items and program categories necessary to achieve the thoroughness standards. These transfers can only occur between April 1 and June 30 and require Commissioner approval. There is a narrow exception for an “emergent circumstance” to transfer surplus amounts or other unbudgeted or underbudgeted revenue before April 1. Under this exception, a board must obtain a two-thirds majority vote to petition the Commissioner and the Commissioner can only approve it if the Commissioner determines it is necessary to meet the emergency.

• Another area targeted for additional scrutiny is the transfer of any general fund appropriation, on a cumulative basis, that exceeds 10% of the amount of the account included in the school district’s budget as certified for taxes. These transfers require the approval of the Commissioner.

DECREASED “CAP” BANKING

• Previously, the law permitted a carryover (or “banking”) of any unused budget cap, which is the difference between the school district’s actual net budget and the permitted net budget. However, under the new bill, this amount that a school district can bank is cut in half (50%) and is subject to additional county superintendent review. Now, the county superintendent can reject a budget if the superintendent determines that not all “administrative efficiencies” have been implemented that would eliminate the need for use of the banked cap.

OTHER BUDGET CONCERNS

·        S1701 uses a new language not seen before in determining its effective date. The bill links to A100 / S1678 (The Millionaires’ Tax), A98 / S1702 (The Municipal Spending Caps), and A97 / S1787 (Commission to study the Constitutional Convention). S1701 does not take effect until all the bills are enacted.

·        Administrative penalties were written into the FY05 state budget as follows:

Notwithstanding any other law to the contrary, the Commissioner of Education may reduce State aid to a school district in which the “2004-05 Proposed Budget” per pupil “Total Administrative Costs” as shown in the “Advertised Per Pupil Cost Calculations” report of the district’s budget for the 2004-2005 school year exceeds the 2002-03 actual average per pupil administrative expenditures plus one standard deviation inflated by 6.09 percent for districts in its region. The State aid reduction shall not exceed the amount of the excess or the amount of State aid awarded to the district for fiscal 2005. The administrative expenses of non-operating districts and county vocational districts shall not be used in the calculation to determine the average education expenditures and such districts shall not be subject to a reduction of State aid. The commissioner may, upon receipt of a revised district budget or Comprehensive Annual Financial Report, recalculate a district’s 2004-2005 per pupil “Total Administrative Costs” and assess the district with an additional reduction or relieve the district of a previously imposed administrative spending State aid reduction.

• There is no definition of “Total Administrative Costs.”  As such, it is difficult to determine specifically what items are included in this calculation.

BILL IS SUBJECT TO REGULATORY INTERPRETATION

• The bill expressly allows the Commissioner to immediately implement regulations without going through the usual administrative code process. These regulations can be effective for up to twelve months.

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