Update: On May, 4, 2016, the Arizona Legislature approved a budget that provides funding to prevent cuts to districts that lose funding under the implementation of current-year funding in Fiscal 2017.
Arizona school district officials say a new funding law due to take effect next school year will add uncertainty to their budgeting processes and in doing so could harm their ability to hire and retain teachers, an issue with which many public schools already are struggling.
For this and other concerns about the impact on an already complex system, getting the new model repealed is top on the list of many education advocates this legislative session.
Beginning next school year, school districts will receive their per-pupil funding from the state based on real-time enrollment, rather than enrollment from the previous school year as state funding for district schools has been determined for more than three decades.
Prior year funding gives districts time “to make budgetary adjustments and potentially mitigate financial hardship to school districts and their employees,” said Mike Barragan, assistant superintendent for financial and auxiliary services for Glendale Elementary School District.
“Prior year funding provides a level of certainty for the various stakeholders that current year funding does not,” Barragan said. “Current year funding promotes unpredictability and is counter-productive to employee morale.”
Infographic by Lisa Irish/AZEdNews
Click here for a larger JPEG of this infographic
What makes current year funding problematic when it comes to teachers, according to school officials, is that their budgets for the year ahead must be set in June and teachers, whose salaries make up the largest portion of most district budgets, are offered their annual contracts for the coming school year in the spring.
Barragan noted that “during a time with a teacher and a leader shortage in the state, we must promote financial stability as best as we can to hire and retain quality employees.”
The change could make district tax rates for local property owners unpredictable as well.
In addition to those ongoing challenges, an analysis from the Arizona Department of Education shows that 149 school districts, or 64 percent of Arizona districts, will see a decline in revenue for next school year as a result of the change, a cumulative decrease to schools of $40 million. In contrast, 83 school districts will see a slight increase, a combined total of $7.2 million.
Even districts who will see a slight increase will experience consequences from the change.
“I understand that some people have said that charters live by current year funding and so should districts,” said Ken Hicks, chief financial officer for Peoria Unified School District. “There are many differences between charters and districts and if some of those crucial differences are not addressed then this intended alignment is misaligned and creates competitive disadvantages.”
Teacher contracts and compensation
Committing revenues before funding is known is not only a budgeting concern when it comes to personnel, but an issue of morale as well.
School districts must honor teacher contracts once they’re signed whether or not the projected number of students enroll.
“Districts will be forced to add contractual language that makes teachers more like ‘at-will’ employees, which will adversely impact teacher morale and worsen the growing teacher recruitment and retention problem in Arizona,” said Dr. Paul Tighe, superintendent of Mingus Union High School District in Cottonwood in Yavapai County.
Districts might consider understaffing to avoid exceeding their budgets, said Barbara Hickman, superintendent of Flagstaff Unified School District.
That would mean many districts would try to hire teachers after the school year starts when enrollment is better known, Tighe said.
“At this time of year, the candidate pool is shallow,” Tighe said. “Finding highly qualified and appropriately certified teachers will be quite challenging.”
“If the state is concerned about teacher recruitment and retention, which they should be – (Arizona Superintendent of Public Instruction) Diane Douglas said there are 1,700 vacancies – then we better be offering at least year-long contracts to teachers coming in,” Hickman said.
Hicks said “In a time when we should be working to improve the teaching profession, the State has increased the instability of funding. Also, I believe that as a State, even if we are making changes to try to improve and simplify our funding structure, we should be taking the stance that we will not decrease funding.”
Other sources of funding districts put toward teacher salaries such as the Classroom Site Fund and Instruction Improvement fund would be paid out in a similar manner, according to the ADE analysis.
“I believe that the final budget for Classroom Site Fund will not be known until after the year is completed. So, there would be a ‘Month 13’ that would be considered a reconciliation period that would take budget and money from some charters and districts and give some to others” Hicks said. “This creates complexity in that we try to issue contracts to teachers before the year begins and this would once again require districts to create a contingency to be able to adjust for the potential changes.”
Instructional Improvement Fund is a cash fund that is only paid a couple times a year, and this may cause a delay in that last payment to ensure that ADE doesn’t overpay, Hicks said.
“Districts will need to maintain higher budget carry-forward to be able to absorb salaries in the event of lower than estimated enrollment,” Tighe said.
Hickman said her biggest concern with current year funding is its impact on the relationship the school district has with the community.
The school district is the fifth largest employer in Flagstaff, so “it is important that we have a stable economic impact on the community,” Hickman said.
“Anything that impacts our ability to predict accurately our hiring and budget is going to affect the town,” Hickman said. “It’s very easy to directly see our significant impact on the fiscal stability of the community and the vitality of the town.”
Creating a budget
With prior year funding, schools “have a good idea of their budget before the school year began,” said Jeremy I. Calles, chief financial officer of Kyrene Elementary School District.
With current year funding, districts will be required to commit to expenditures before their state funding is calculated.
“One of the main drivers of your budget, which is your student count, will no longer be known before you have to propose a budget in June, adopt it in July and the kids aren’t going to show up until school starts in August,” Calles said.
“Prior year funding, helps to create stability in the district because we know that our funding limits have a baseline,” Hicks said. “That creates predictability in operations.”
Budgeting will become more complex, as schools revise budgets throughout the year, without an actual number of students, special education students and English Language Learners until after fiscal year’s end, according to the Arizona Department of Education analysis.
“My biggest concern is that this creates a more unstable system to identify a district’s budget limits,” Hicks said. “The more a district’s enrollment fluctuates the more contingency funds need to be available to adjust to the changes. In a time in our State when we need to support the teaching profession, we are limiting funding and stability.”
Districts will need to estimate their budgets eight months before they know their actual final student count and five months before local variables are set, increasing the risk of overstaffing if enrollment declines after teacher contracts are issued in April, Tighe said.
For example, Prescott Unified lost over 300 students in fiscal 2015 when a charter school opened over the summer.
“They had no way to know in advance how many students they would lose – or even if the charter would actually open – when they planned their budget and issued teacher contracts in Spring 2014,” Tighe said.
“Prior-year enrollment funding helps all districts plan better, because we would know for sure what our revenue would be to plan for expenditures for the upcoming year,” said Aron Rausch, director of business services for Maricopa Unified School District.
Under prior year funding, school districts allocations were determined in the first few months of school, but under current year funding allocations will change every month, as student enrollments and withdrawals are submitted to the new AzEDS system, according to the analysis.
Anticipating how this uncertainty could affect its own budget, the state created a cushion to enable them to make those allocations two or three times during the school year through a $930 million reduction district’s first state aid payment, and withheld amounts would be paid to districts in early July after the fiscal year ends, according to the analysis.
A similar process would happen with a $381 million reduction in district additional assistance, except districts won’t receive their final allocation until the statewide recalculation is done in August, also after the end of the fiscal year.
Setting a tax rate
Property tax rate certification requires the county school superintendent to provide approval to the Property Tax Oversight Commission by July 25, well before the first day of school and 13 months before the student count those amounts are based on will be known.
This can increase fluctuations in tax rates, which can cause confusion for property tax payers, Hicks said.
“School districts are criticized for the instability of tax rates,” Tighe said. “With current year funding, tax rates will be increasingly volatile due to over- and under-estimations without known student counts to determine budgets which are then used to set tax rates.”
This could result in cash deficits if the tax rate is set too low or significant positive cash balances if it’s set too high, impacting budget capacity for maintenance and operation and/or capital overrides, Barragan said.
Transition to AzEDS new system
After experiencing some difficulty with the Arizona Department of Education’s previous system, some districts are concerned the new AzEDS system, which is in a pilot study this year, may have similar issues and might not be able to handle the volume of financial data from districts’ multiple budget revisions when it goes statewide next year.
“I do not believe that ADE has demonstrated the ability to accurately pay school districts based on current year funding,” Hicks said.
Some districts have met with the Department of Education to share their concerns and learn how things should be handled, said Jill Barragan, executive director of business services for Avondale Elementary School District and a board member of Laveen Elementary School District.
Sharing concerns with legislators
Education advocates are talking with legislators about the possibility of repealing current year funding, and, if that’s not possible, then delaying current year funding until there’s more confidence in the reliability of the AzEDS system to handle the increased financial reporting it will generate.
“We have met a number of times with Representative Thorpe and Senator Allen,” Hickman said. “We have also discussed this with a variety of other groups.”
School leaders have told board members of their concerns, they’ve spoken to legislators, and urged other declining enrollment districts to talk with legislators and spread the work through the Education Finance Reform Group, said Jill Barragan.
Tighe discussed his concerns with legislators and provided the school board and his community with an informational presentation on the model and its budgetary implications.
“Staff has met with the executive branch, the department of education, and more recently met with the chairman of the House education committee to raise the concerns,” Mike Barragan said. “In addition, staff has written an article in The Edge, which is a publication of the Arizona Association of School Business Officials, in hopes of bringing awareness to this very issue.”
Hicks said he has discussed issues with current year funding with ADE , participated in panel discussions with legislators and has brought up issues with current year funding with the Governor’s Classroom First Initiative Council, of which he is a member.
District operations will change with current year funding, but legislative changes could mitigate financial hardships for districts and employees, and protect the solvency of Arizona school districts through greater financial flexibility, he said.