Shift Happens: State Accounting Shifts & Their Impact on Minnesota School Districts & Charter Schools

Given the lively class conversation about charter school financing that we had recently, I am excited to share some information from my expenditure paper, which examines two state accounting shifts - the education aid appropriation shift and the property tax shift - and explores their impact on Minnesota’s school districts and charter schools.  In this entry, I will explain the education aid appropriation shift and demonstrate why it is generally tougher on charter schools than school districts.

In Minnesota, independent school districts receive funding mostly from two sources (Source #1): 

1.  State Education Aid Appropriation (75.7%)
   This funding source includes both General Education Aid, which provides the basic fundamental support of education, as well as Categorical Aid designated for programs that vary between districts such as special education and adult basic education.
2. Local Property Tax Levies (22.8%)
   This funding source includes local property tax levies usually approved directly by voters that provide money for operating and debt service expenses.

In normal circumstances, the State of Minnesota pays 90% of a school district’s “Education Aid Appropriation” (category 1 from above) for a specific fiscal year, which is July 1 – June 30 for school districts and the state, by the end of that fiscal year.  However, the state “holds back” or “shifts” the remaining 10% until October of the following fiscal year.  The purpose of this shift in normal years is to verify final enrollment numbers and ensure compliance with other state requirements before making a final payment (Source #2).

From 2009 - 2012, however, the state “hold back” or “shift” has increased significantly from 10% to 40% of the total aid entitlement.  This means that districts are only receiving 60% of their education aid appropriation funds during that fiscal year.  The state has done this to help balance the official budget during a challenging economic recession (Source #2).  As of January 2012, the state has delayed nearly $2.8 billion of payments to schools, according to Tom Melcher of the Minnesota Department of Education (Source #4).

In response to these increasing shifts, school districts have generally employed two strategies.  First, districts have taken advantage of their accumulated cash reserves or cut budgets to cover their cash flow needs internally.  Second, school districts borrow money from external sources.  One tool they can use is an Aid Anticipated Certificate, which helps publicly funded agencies secure cash flow in advance of state payments.  These certificates allow districts to borrow money at very low interest rates (less than 1%) through organizations like MNTAAB.  Because of these two strategies, districts are able to manage through these shifts relatively well. (Source #3).

Charter schools, on the other hand, usually do not have the same options for dealing with the shifts at their disposal.  Given that most charter schools in Minnesota are under ten years old, many have not had the opportunity to build reserves large enough to meet their temporary cash flow needs.  Additionally, since charter schools do not have the taxing authority or the state guarantees that districts enjoy, they are ineligible for Aid Anticipated Certificates and the low interest rates that accompany them.  (Source #3).

In the conventional banking market, charter schools are also at a disadvantage.  Even if districts were unable to get Aid Anticipated Certificates, they would likely be able to qualify for a cheaper line of credit from commercial lending sources because in addition to their taxing authority, they have other capital which can be used as collateral.  Meanwhile, charter schools cannot own real estate and have fewer assets that can be used as collateral for a loan.  As a result, charter schools pay much higher interest rates for conventional loans and lines of credit (Source #3).

In response to these challenges, charter schools and social finance organizations like Nonprofits Assistance Fund have advocated for change at the legislature.  In 2011, helpful adjustments were made to the aid payment schedule for charter schools, even though the overall shift percentages will stay the same moving forward.  These adjustments have helped charter schools better manage their cash flow to some degree, but major challenges still remain.

Source #1:  "Financing Education in Minnesota 2011-12."  Minnesota House of Representatives Fiscal Analysis Department.  September 2011.  

Source #2:  "Minnesota School Finance:  A Guide for Legislators."  Minnesota House of Representatives Research Department.  November 2011.

Source #3:  "State Education Funding Shift Has Disparate Impact on Minnesota Charter Schools."  Nonprofits Assistance Fund, Minnesota Association of Charter Schools, & Charter School Partners.  March 2011.

Source #4:  Melcher, Tom.  “E-12 Education Funding Update.” Minnesota Association of School Business Officials Legislative Conference.  July 27, 2011.  Conference Presentation.