Tuesday, May 11, 2010

Budget Deficits and Educational Reform

In February of 2010 the Governor of Minnesota, Tim Pawlenty, submitted a supplementary budget proposal to the state legislature that, amongst other things, cut higher education spending by $47 million dollars. Faced with a $994 million budget deficitfor the current budget biennium , and massive $5.8 billion dollar projected deficit for the 2012-13 biennium, the Governor used his budgetary authority to take steps to solve the budget crisis. These budget cuts will result in tuition increases, layoffs of college and university employees, and even the discontinuation of some programs by a few institutions across the state. Cuts to higher education can be considered short-sighted when considering the already rising cost of tuition, which puts at risk both the competitiveness of Minnesota’s workforce in the coming years, as well as the state’s reputation as a leader in education.

Standing by his pledge to not raise taxes Pawlenty instead made cuts to higher education which were was shared between the University of Minnesota system that incurred a $36 million dollar cut, and the Minnesota State Colleges and Universities system (MnSCU) which had $10.5 million slashed from the budget. A year earlier Pawlenty cut $63 million dollars for higher ed., and also used the now unconstitutional power of unallotment to cut it further. Just a month after Pawlenty’s announcement, Minnesota State Mankato announced that 28 programs and 13 percent of the full-time faculty would be cut. St. Cloud State University also reacted by cutting 23 programs because “the state has limited the school's ability to raise tuition while at the same time cut money for higher education.” The University of Minnesota has been forced to respond with yet another tuition increase. These funding cuts and tuition increases come at a time that has already seen a historic rise in the cost of college tuition. The increase in tuition costs rose by 439 percent from 1982 to 2007 for a four year public institution. Meanwhile, state grants are close to running dry and unless more money is found “students who received an average of $1,700 last year will see a roughly $300 cut when they return to class this fall”.

All of these factors converge toward an uncomfortable, but seemingly unavoidable reality – college is becoming too expensive for everyone to have the opportunity to go. This hurts Minnesota both from an equity standpoint and also has long-term economic consequences as well. Minnesota has always valued educational opportunity for everyone that wants to go, and this has pushed Minnesota to become of the most economically developed states in the country. In a global economy, the demand for highly skilled, highly educated workers is higher than ever. Competing in the global market place requires a skill set for workers that is attractive for investment, and also one that increases the entrepreneurial capacity of the populace.

One possible solution would be to introduce a flexible tuition system, which alters tuition cost depending on the field of study. The proposed reform would seek to expand enrollment in programs – like math, engineering, finance and the sciences - that produced higher economic outputs by reducing tuition costs for these programs. The effects would be two-fold; first it would make college affordable for groups of socioeconomic classes have been increasingly excluded, and would also provide a pathway to success in a high demand field. Second, reform would expand future economic opportunity by training a new generation of highly skilled workers. Investing in human capital with a higher potential for long-term economic payout would improve MN budget outlook and increase entrepreneurial activity in the state.

Saturday, May 8, 2010

As the recruitment of new businesses, and therefore jobs and tax base becomes more and more competitive, states are searching for ways to stand out. One of the ways they can do this is through the creation of “shovel ready” sites. Oregon was one of the first states to implement a program in 2003. The idea behind “shovel ready” sites is to identify sites that have potential as industrial sites and prepare the infrastructure, permitting, environmental research and other things that need to be done before construction can begin.

Inevitably these do come with a cost. The personnel hours that go into permitting and research and the construction costs of infrastructure like water and electricity can be very high. These are sometimes recouped at the point of sale to the new company through impact fees, but there is still the issue of funding them beforehand. This is where grants come in. Oregon currently does not have a dedicated fund for these projects and so a lot of the money winds up coming in the form of grants. Getting money from grants allows the Oregon Business Development Department (Sometimes known as the Oregon Economic and Community Development Department) to be creative about where they get funding. If they are remediating brownfields there are grants for that. If they are ensuring wetlands are protected as a part of the site, there are grants for that. These are on top of the typical economic and community development grants that are routinely used by the OBDD in creating shovel ready sites.

By identifying and preparing sites, economic development departments have another tool for recruiting new companies. If they can offer a site that will be ready to break ground and requires significantly less research and time, they are offering a valuable incentive. This has become a part of the incentive packages that Oregon has been using to lure companies to the state.

One of the biggest successes was the Lowe’s Distribution Center that serves the Western United States and brings about 500 jobs to Lebanon, Oregon. Lowe’s appreciated the work the OECDD had put in and it showed in their choice of sites. As the Lowe’s Real Estate Manager said,

You cannot put a dollar value on having that work done in advance. Don’t let anyone ever tell you that it was not money well spent … the work you provided gave our engineers a big head start on evaluating the site and really helped move this site forward in our process.

Now that you are reaching the end of this reading, you are probably going to Facebook so I will include the link for that here brought to you by another shovel ready site.

Friday, May 7, 2010

Public School (K-12) Financing in California


Since 1970, a combination of landmark judicial decision and votes of the ballot has dramatically transformed the public school (K-12) financing mechanism in California. This has resulted in shifting of responsibility of funding the public schools from the shoulders of the local government to the state government. This yielded to a very complex and murky financial system for public school.

In 2008-09, K-12 schools in California had 6.42 million pupils (highest in the nation) enrolled in 1043 school districts and 746 public charter schools. But the state’s funding has not been adequately matching to the public schools. As compared to the national average of expenditure on per pupil of K-12 schools, expenditure in California has been less. In the past 15 years, the states’ ranking in the country has been hovering between 27 and 42. In 2005-06, the average expenditure per K-12 pupil in California was $8,486, which was $614 less than the national average of $9,100.


Until the late 1970s, local property tax revenues comprised the major share of school funding. But in 1978, with the voter approval of Proposition 13, the state’s finance system began to shift from local to state control. Proposition 13 was a complying response to the California Supreme Court decision in Serrano v. Priest (1976), which required the state to remove the discrepancies among K-12 school funding for general-purpose revenue which cannot be based on local property wealth. Proposition 13 (1978) effectively removed school districts’ ability to exert substantial control over their revenues. In 1988, the voters passed Proposition 98 binding the state to guarantee Alsominimum funding-level for schools so that any economic downturn may not affect that. The minimum funding level for schools could be exceeded but not reduced.

Funds to the School Districts:

The basic criteria of funding are meeting the constitutional minimum-funding of Proposition 13. About two-thirds of total funding is for general purposes, with the other third for special purposes/programs of students. Also, the average daily attendances (ADA) of students define funds provision.

a) General Purpose (Revenue Limit): Each year, the state legislature determines the amount of general-purpose, or revenue-limit. This income is a combination of local property taxes and state aid. As neither the school board nor local voters can increase the revenue limit, for most school districts, state aid is reduced if property taxes increase.

b) Categorical Aid (Special Support): This funding is for categorical programs that differ across the school districts depending on the types and numbers of programs the district is offering and also the volume of students enrolled in those programs. It is also based on categories of children, such as students with disabilities; characteristics of the district, such as low-income families; or programs, such as class size reduction (CSR).

Among the school districts the funds are proportioned based on the number of students enrolled in them. In the table below it can be observed that the number of students enrolled in the unified schools is the highest (4,347,073), hence this type received lion’s share of the funds (71%). Next is elementary schools which had a total enrollment of more than 1.2 million of pupils and it was given 18% of the funds.

Types of School Districts in California

District Type

No. of Districts





High School






County Office









Source: Department of Education, California.

Funds to the Charter School:

California’s public charter-school finance system is much simpler and more straight-forward than the school-district finance system. Like the school districts the public-charter schools receive general-purpose which is relatively similar, but the funding mechanism has some differentiating characteristics:

a) General-purpose grant revenue is adjusted according to grade-level, i.e., more weightage is given to pupil in higher grades. Thus per pupil expenditure in upper grades is higher than that for lower grades.

b) Most charter schools do not receive the special purpose or categorical aid, rather they use part of their general-fund for any special program, and

c) Declining Funding in K-12 Education:

Over the past three decades, state funding to the K-12 education in California has been below the national average. Looking at the ranking of California in per pupil expenditure for the years 1998-2006, it makes the decline in expenditure quite obvious.

Table 2 Expenditures per K–12 Pupil in Fall Enrollment for California (1998-2006)



U.S Average











































Data: National Education Association (NEA) Rankings and Estimates.

According to an analysis by Education Week, California's K-12 schools face one of the largest funding cliffs, which the analysis placed at $5.15 billion. This figure represents the gap between how much the state gave to schools in the 2007-08 fiscal year and how much it is contributing now. California’s fiscal 2010 K-12 state spending is $32.9 billion or 14 percent less than it was two years ago. The actual gap yawned as wide as $5.7 billions, which was somewhat plugged with federal stimulus funds of $3 billion.


It can be recommended that the state:

a) Relax the restriction of not utilizing the special-purpose earmark categorical funding structure for general-purpose funding structure and give discretionary right to the school districts over their budgets.

b) Must not reduce its share for a school district, when the district receives surplus funds from the
local governments under the property-tax. The state’s share must remain the same, and not conditioned to the property tax fund component.

Containing Medicaid's Long-Term Care Cost for the Elderly

The Explosive Growth in Medicaid Expenditures

As a joint federal-state program, the growth of Medicaid expenditures has become a major budget issue for federal and state lawmakers alike. Between 1990 and 2003, federal Medicaid expenditures grew at an average annual rate of 19.7 percent. In Minnesota, Medicaid is known as Medical Assistance. In 2007, Medical Assistance expenditures equaled about 17 percent of state spending, ranking 24th among states. The federal government and State of Minnesota share costs for Medical Assistance equally, at the federal minimum of 50 percent. Minnesota’s current budget crisis has exacerbated concerns about the rising cost of Medical Assistance.

Although disabled individuals and the elderly only make up roughly 25 percent of Medicaid recipients, these two groups account for more than 72 percent of Medicaid expenditures nationally for direct medical care in 2004. For example, the average annual cost per Medicaid enrollee (in 1998) was $1,225 per child, $1,892 per adult (age 21-64), $9,558 per disable individual, and $11,235 per elderly adult.

Demographic Trends Affecting Minnesota

While the number of disabled Minnesotans is not expected to change significantly, 1.4 million Baby Boomers will retire over the next 25 years. As Minnesota’s Baby Boom generation ages over the next twenty years, demand for long-term care services funded by Medical Assistance (MA) will increase dramatically. In 2000, there were roughly 600,000 Minnesotans 65 years of age or older. By 2020, this number will climb to nearly one million; by 2030, it will reach over 1.3 million.

A number of factors will mitigate the impact of this wave of retirement on MA expenditures in Minnesota. First, Minnesota has the third lowest poverty rate (approximately 8 percent) of any state in the U.S. Second and closely related, Minnesota has one of the highest per capita incomes in the U.S. Since eligibility for MA is means-tested, these two factors will limit the MA eligibility pool. However, due to the high cost of nursing home care, more than 60 percent of current residents of nursing facilities are MA recipients – even though half of these individuals entered the nursing home as private payers. Third, Minnesota has a relatively high rate of individuals with long-term care insurance at fourteen percent, compared to the national average of less than two percent. Nonetheless, one in four individuals 85 and older will require nursing facility care, and this population is projected to grow by 118,800 over the next 25 years.

Long-Term Care Options and Costs

This demand will put unprecedented strain on the long-term care system in the state, as well as on Minnesota’s state budget. Three long-term care options are offered by MA: Nursing facility care, Elderly Waivers, and Personal Care Assistance services. Of these three, nursing facility care is the most expensive long-term care option. In 2008, nursing facility care cost an average of $4,888 per recipient. (Care was provided for an average of 19,488 recipients at a total cost of $813 million.)

Elderly Waiver (EW) services provide home and community based services to MA enrollees who are at risk of nursing facility placement. EW offers a wide-range of services for individuals who require the level of care provided in a nursing home but choose to reside in the community. EW care is significantly less expensive than nursing facility care, with an average cost per recipient of $2,669 per month in 2009. Enrollment in EW has grown dramatically over the past 15 years, at a rate of nearly 40 percent annually, and is partly responsible for a drop in the number of MA-funded nursing facility residents.

The Personal Care Assistance (PCA) program provides services to people, such as the elderly and disabled, who need help with day-to-day activities to allow them to be more independent in their own home. The PCA program offers assistance with activities of daily living (such as eating, toileting, grooming, dressing, and bathing,) health-related functions, and redirection and intervention for behavioral issues. The PCA program primarily serves individuals with physical disabilities, chronic diseases, and mental illness – but also serves some elderly as well. PCA care is also much more affordable than nursing facility, with a cost per recipient of just over $3,000 per month. (Total expenditures for PCA program services in 2008 exceeded just over $400 million, providing services to approximately 11,000 recipients.)

Impact of Federal Health Care Reform on Medical Assistance Expenditures

Indirect Effects

The federal health reform bill expands eligibility for Medicaid coverage to low-income adults, ages 21 to 64, who have no dependent children and who did not previously qualify for Medicaid coverage with incomes up to 133 percent of the Federal Poverty Guideline (FPG). For states like Minnesota that already cover a large portion of this population under the General Assistance Medical Care (GAMC) and MinnesotaCare programs, the federal government will begin sharing 50 percent of the cost of these programs almost immediately, totaling about $330 million for the current state budget. This level of federal support will continue for three years until 2014, when the federal match will increase gradually from 75 percent in 2014 to 90 percent by 2019. At current costs and enrollment for GAMC and MinnesotaCare, federal matching support would therefore rise to $495 million in 2014 and $594 million by 2019

Direct Effects
The federal health reform creates a new national long-term care insurance program to help seniors pay for home-based care rather than institutionalized care in nursing or assisted living facilities. This long-term care insurance (known as CLASS, from the name of the provision that creates it, the Community Living Assistance Services and Supports Act) will be financed by voluntary payroll deductions. Enrollment in CLASS will be available to full and part-time working adults. CLASS insurance will offer a cash benefit ranging from $50 to $75 per day (the actual cash benefit will depend on the person’s level of impairment) to pay for home-based long-term care services. (CLASS insurance can also be used to help pay for assisted-living or nursing facilities.) Policy makers expect CLASS insurance will help defray the cost of long-term care to Medicaid, but since CLASS insurance will be voluntary, it is difficult to estimate the impact it will have.

Four provisions in the health reform bill attempt to encourage more affordable home-based care. First, the Community First Choice program will offer an additional six percent federal match to the state for individuals with disabilities who receive home-based care covered under Minnesota’s PCA program. Second, the bill removes barriers to providing Medicaid funded home-based care through PCAs for the disabled and senior, including increasing income eligibility and expanding the scope of services covered. Third, the bill creates temporary incentives for states that undertake structural reforms and increase the percentage of individuals receiving home-based care instead on institutional care, with incentives ranging from increased federal matching of 2 to 5 percent. Finally, the bill applies the same protections against impoverishment that are currently provided to spouses of nursing home residents covered under Medicaid to spouses of individuals receiving Medicaid home-based services, such as Elderly Waivers or PCA care in Minnesota

Containing the Growth of Long-Term Care Costs for Minnesota’s Elderly

With 1.4 million Baby Boomers set to reach retirement age in Minnesota over the next 25 years, MA expenditures for long-term elderly care could easily double to $2 billion without concerted efforts by state and federal policy makers to contain these costs. The following policy options could help contain these costs:
  • Recommendation 1: Experiment with a state tax credit for the purchase of long-term care insurance. For example, a $600 maximum annual tax credit with a total lifetime maximum of $12,000 would subsidize 20 to 25 percent of the monthly premium for a 45 year old individual. Since the average length of stay in a nursing facility is 2.4 years, one in four seniors over 85 will require nursing home care, and fifty percent of seniors over 65 will need some other form of long-term care, the state would save approximately $27,000 for each resident induced to purchase private long-term care insurance. (The Money Alert, 2010) A matching federal tax credit would double the cost savings from $15,000 to $30,000. The actual amount of any tax credit could be determined by a more detail statistical analysis to maximize savings to the Medicaid program while still inducing the purchase of private long-term care insurance.
  • Recommendation 2: Continue to move elderly in need of long-term care to lower cost home-based care via the Elderly Waiver or Personal Care Assistance programs (whenever possible). The Minnesota Department of Human Services determines eligibility for long-term care through county social services offices, called a Long-Term Care Consultation, conducted in tandem with a public health nurse. County social service workers should educate and encourage clients in need of long-term care to consider home-based care options, while also considering the elderly person's preferences, wishes and informal supports when making any recommendations.

Community Development Block Grants (CDBG)

The Community Development Block Grant (CDBG) is an adaptive program administered by the U.S. Department of Housing and Urban Development. The program began in 1974 as resource assistance for a variety of community development needs. The Federal program provides annual grants on a formula basis to 1209 general units of local government and States. The program provides for a variety of program areas including Entitlement Communities, State Administered “Small Cities” CDBG, Section 108 Loan Guarantee Program, Neighborhood Stabilization, CDBG Insular Communities, Disaster Recovery Assistance, Non-entitlement CBDGs in Hawaii, and Colonias. Each of the programs addresses an issue in the mission to support families to find affordable house, jobs, and meet community needs.

The previous approach prior to 1974 of “top down” community development from the Federal level did not achieve the results The CDBG grant allows a more bottom up approach for the community to decided what types of support they need at a current time. These communities that have a strong network of bottom up approach will also attract a certain type of developer based on public support.
Block grants provide the opportunity for political organization of local development projects because of the support of Federal funding awards. The differences in the CDBG are due to the need to support the diverse needs of structurally and geographically different communities.

The differentiation between the types of programs depends on the size of the municipality or jurisdiction that is delivering the resources. Entitlement Communities are for larger cities and addresses the housing, built environment, and jobs for low and m
oderate income residents.

According to HUD, eligible entitlement grantees have the following characteristics:

  • Principal cities of Metropolitan Statistical Areas (MSAs)
  • Other metropolitan cities with populations of at least 50,000
  • Qualified urban counties with populations of at least 200,000 (excluding the population of entitled cities) are entitled to receive annual grants.

Smaller cities, counties, and other local forms of government can apply for CDBG funding from the State administration of non-entitlement areas or areas with populations less than 50,000 and counties with popula
tions less than 200,000. Another source of funding are Section 108 loans which are long-term, fixed-rate financing tools to finance economic development, housing rehab, public facilities rehab in order to also benefit low to moderate income residents. Insular Areas such as eligible Territories are also included and funded for similar purposes.

CDBG funds may be used for activities, which include, but ar
e not limited to:
  • Acquisition of real property
  • Relocation and demolition
  • Rehabilitation of residential and non-residential structures
  • Construction of public facilities and improvements, such as water and sewer facilities, streets, neighborhood centers, and the conversion of school buildings for eligible purposes
  • Public services, within certain limits
  • Activities relating to energy conservation and renewable energy resources
  • Provision of assistance to profit-motivated businesses to carry out economic development and job creation/retention activities

A special purpose CDBG is the Colonias set-aside program for
communities on the U.S.-Mexico border. These are 10% of State allocated funds set aside for the pupose of funding water and sanitation projects specifically. These services are designed to meet the basic needs of public service


As a part of the Federal Recovery Act of 2009, the CDB
G included grants known as CDBG-R for recovery. The Recovery Act included $1 billion appropriation or CBDG. The requirements for the CDBG-R according to the grant applications include providing the activity name, narrative, jobs created, organizations responsible. Under the Recovery Act, recipients shall give priority to projects that can award contracts based on bids within 120 days of the grant agreements.


According to the Community development block grant CDBG critics believe that the programs do allow for a certain level of flexibility but argue that the ambiguous goals and lack of accountability lead to inefficiencies in the funding. The discrepancies of the targeted beneficiaries of the grant funding can be disproportional. Communities with low need for Federal support can receive higher levels per capita of support. The flexibility in the system to support entitled larger jurisdictions and the discretion of the state to select any community projects that would fit the flexible goals has lead to some inefficiency in the system. These are just specific example, however, overall the system does support the those with the highest need receiving the most benefit. The general trend of the needs index is that communities with the most need receive the most benefit from the CBDG.

Public Education Finance in New York State

New York State, which has the highest per pupil total current spending of public elementary-secondary school system and the second highest per pupil total expenditure has a headache for its increasing disparity of state aid and educational quality among different jurisdictions. As a matter of fact, in New York State the proportion of formula assistance, designed to decrease the gap between the needs and revenue raised by local jurisdictions, is almost the 10th lowest in all of the 50 states.

State aid formula reform in New York State in 2007-2008

Pre reform

The 2007-2008 reform was not the first try to solve the “equity” problem. As early as 1993, litigation CFE v. State was initiated by the Campaign for Fiscal Equity and New York City parents in response to the long-term underfunding of New York City schools.

However, Governor's and the Legislature's failed to comply with the July 30, 2004 deadline in the state Court of Appeals' landmark June 2003 Campaign for Fiscal Equity (CFE) decision, which was providing its schoolchildren with the opportunity for a "sound, basic education,". Again, in the 2005-06 Executive Budget, the Governor failed to meaningfully respond to the decision or to reform the irrational and unfair state school aid system. The Governor failed to propose a reform of the state school aid formula based on student needs.

Reform in 2007-2008

In addition to providing the largest one-year increase in school aid, the 2007-08 state budget also provides every school district with predictable state aid increases for each of the next three years.

Also, the Foundation Aid formula has been changed. The new Foundation Aid formula combined nearly 30 separate aid formulas into a single aid formula. Also, Foundation Aid is calculated based on the actual costs associated with providing an adequate education and is adjusted for:

o Disadvantaged students and special needs students;

o Regional cost;

o Local contribution based on the wealth of a district.

The results of the reform


· Except the large cities, the 2007-2008 reform in aid formula have moved state aid amounts closer to those provided by a need-based foundation formula.


· For the large cities, the new Foundation Aid formula made the situation even worse. Recent aid changes still leave large cities in the state with a much smaller relative aid amount than they would receive with a straightforward need-based formula.

· The state aid formula still favors downstate districts at the expense of upstate districts.

Except the above comparisons between need and actual foundation aid of different areas, a research from Statewide School Finance Consortium shows the distribution of foundation aid in jurisdictions with different wealth and tax effort levels:

· The CWR and FRPL measures of poverty graph (graph 2) clearly illustrates that significant amounts of funding flows to wealthy districts with some combination of low FRPL percents and/or a relatively high CWR.

· The CWR and Local Tax Effort graph (graph 3) demonstrates that those school districts with the highest CWR and lowest Tax Effort (tax rate on true per $1000/full value) received significant aid. The law of opportunity costs again is a factor as aid was denied to lower wealth/higher tax rate school districts by the current distribution to wealthier districts with lower tax rates.

Therefore, although to some extent the new foundation aid formula has eliminated the inequity among all the jurisdictions in New York State, more improvements need to be made to achieve need-based foundation aid.

Information is also available at: