Supplemental state aid (SSA) is the percentage by which the state cost per pupil increases annually. For the past decade plus, the state cost per pupil has only grown by about 2%. By law, the growth rate is supposed to be set by the legislature within 30 days of the governor releasing budget targets. Those benchmarks are announced as part of the Condition of the State address. While that 30 day deadline was met this week, most of the time it comes and goes without the rate being set. This can be problematic because it is difficult to budget when we don't know the state cost per pupil. Why? Well, the SSA is directly related to the property tax rate of the school district. Since we are currently in budget season with an April 15th certification deadline, not knowing the state per pupil cost is kind of a big deal. This means school districts have to guess what the SSA rate is, usually somewhere between what the governor proposes and where they think the legislature will ultimately land.
Further, the historical trendline of legislative per pupil growth over the last decade [plus] has not even kept up with the statutory increase by which school districts must budget expenditures. In 2017 when the collective bargaining reform bill was enacted, the floor by which salaries could grow was 3% or CPI (consumer price index) during the month of the contract settlement, whichever was lower. Remember, more than 80% of a school budget is made up of salaries and benefits. Thus operating a school is a very labor intensive enterprise. From a practical standpoint, the resources 'coming in' are less than those 'going out'. For a school district with static enrollment, this will cause a steady erosion of the financial stability of the school district resulting in teacher layoffs and larger class sizes. In a school district with declining enrollment (of which there are many), the deterioration of financial viability is much more pronounced and dramatic.
Luckily we are one of the few districts in Iowa that is actually experiencing enrollment growth. Time will certainly tell how much that momentum is blunted with the passage of the recently enacted voucher program. Indeed it has already had an impact, and the rules are not even written yet. Even so, as mentioned a few weeks ago I have modeled out a forecast that shows the SSA rate growing at 2.5% over the next five years with an increase in expenditures of 5%. In that scenario, you may recall I explained that our reserve fund balance would decrease by just more than $3M in 5 years. While this certainly isn't something to celebrate, by most measures we are in better shape than districts with flat or decreasing enrollment.
The good news is that we met the statutory deadline this year. The governor proposed a rate of 2.5% and the Senate proposed a 2% rate. The House, on the other hand proposed a 3% increase and from what I am seeing, everyone seems to be getting on board with the House proposal. If passed, it will be the highest rate increase since 2015. Now, many would argue the rate still isn't high enough considering the consumer price index for the month of February is running at 8.1%, but the 3% is certainly better than the 2% or 2.5% that was originally proposed.
So the question now becomes, how does 3% impact the forecast model? Well by changing the variable from 2.5% to 3% per annum, over the next 5 years we will still see a loss in the reserve fund of just under $2.5M. An overall difference I calculate to $640,920 when compared to the other model. This proves the point that, yes 3% is much better than 2.5% and slows down the 'bleed off' of reserves. Yet it will take a greater investment of SSA in the long run to stabilize the system statewide.
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