Education & Workforce Development and Government

Special Report: Flawed funding: Years of guaranteed increases set stage for school crisis

April 18, 2005

Indiana's decades-long effort to protect shrinking school corporations from drastic cutbacks may well backfire on the very districts that most depend on it-including Indianapolis Public Schools.

Critics say the promise of more money regardless of enrollment has allowed some school systems to bloat their budgets, and now state legislators are poised to let the air out.

School funding already represents more than one-third of Indiana's $24 billion, twoyear budget, and lawmakers want to rein in expenses and eliminate a projected deficit.

So new formulas proposed by both the House and Senate eschew the so-called minimum guarantee, eliminating what has been a growing disconnect between funding and the number of students served.

The changes could mean as much as $20 million less for IPS over the next two years-quite a shock for a district that has seen state support grow 64 percent in the past 15 years, even as enrollment dropped 20 percent.

"That's a lot of money," said IPS Superintendent Pat Pritchett, who has vowed to make necessary cuts to the district's $340 million general fund budget before he retires this summer. "It's probably going to come down to staff reductions." Indeed, more than 200 of IPS' 2,800 teaching positions are in jeopardy, the district says. No decisions have been made, Pritchett admitted, but the writing is on the wall. "We have very few choices," he said. Others aren't convinced. "IPS is still running out of the same building it was when it served 105,000 kids," said former state legislator Morris Mills, who chaired the Senate's budget subcommittee throughout the 1980s and '90s. "... Nonteaching costs are rising faster than teaching costs. They have assistant superintendents, curriculum specialists-they're just handing out money."

All school corporations file financial reports with the state Department of Education each year, but no one analyzes how the money is spent.

"We serve as consultants to them," said department spokeswoman Mary Tiede Wilhelmus. "If they need our help, we do everything we can to advise them. But they are all professionals."

IPS Business Manager Rod Black is paid $110,000 a year, in fact, to oversee finances in the 38,500-student district. Despite his apparent expertise, Black refused IBJ's request to discuss the district's 57-page financial report or to provide any insight into its spending priorities.

But an analysis of other data submitted to the Department of Education suggests not all of IPS' extra money has gone into the classroom:

The number of teaching positions in the district declined 9 percent from 1990 to 2004; the ranks of other professionals increased 17 percent.

"I think there are efficiencies to be found," said David Holt, vice president of work-force development for the Indiana Chamber of Commerce. "But lots of times districts are reluctant to make those kinds of decisions."

Pritchett defended IPS' 69-to-1 ratio of students to administrators and other certified professionals-despite a 105-to-1 statewide figure-because of the urban district's increasingly needy population.

Less than half of the district's 589 nonteaching professionals are true administrators, he said. The rest are counselors, social workers, psychologists and the like.

All told, IPS employs nearly 6,000 people; 49 percent of them are teachers.

That's one reason not everyone agrees teaching positions should be the first jobs cut-especially as school districts' budgets keep growing.

"School corporations have not had to make difficult decisions in allocating resources," said Patrick Kiely, former chairman of the House Ways and Means Committee and current member of the Education Roundtable, a state-appointed advisory group focused on improving education in Indiana. "They've never been driven to that point before."

The obvious option isn't necessarily the best one, said Sajan George, a New Yorkbased management consultant who spent a year as St. Louis Public Schools' chief financial officer.

"The simplest way [to deal with school funding cuts] is to decrease the number of teachers and increase class sizes," said George, managing director at corporate turnaround firm Alvarez & Marsal. "The problem is, that jeopardizes your very mission-helping children learn and achieve."

Preserving that mission was the goal of the minimum guarantee when state legislators made it part of the school funding program in 1976.

A few districts, like IPS, were losing students, but not enough at one time or in one place to merit closing schools or eliminating teachers. With relatively fixed overhead, they couldn't afford harsh funding cuts without compromising the education of the children who remained.

The concept was simple-rather than allow districts to lose money under an enrollment-based formula, the state promised them a specific increase from the previous year's funding.

"The guarantee was initially a short-term thing to help with a unique situation," recalled longtime observer Dennis Costerison, executive director of the Indiana Association of School Business Officers. "Then, more and more districts got guarantees."

In Indiana, most state appropriations for schools come in the form of tuition support, which goes into districts' general fund and is used for day-to-day operations. The districts raise additional money through local property taxes.

The General Assembly funds its share of education spending as part of the state's biennial budget, and school finance experts determine specific allocations by running each district's data through three formulas, then using whichever calculation generates the most money.

The minimum guarantee is the simplest to figure, since it's essentially a flat percentage increase over the previous year's funding. The other mechanisms are more complicated, adding enrollment changes and various socioeconomic factors into the equation.

When state coffers were full, guarantees amounted to 3 percent to 5 percent a year, but most districts got even more through the traditional formula. That changed as money got tight.

By 2000-when annual increases were only 1 percent to 2 percent through the traditional formula-nearly a third of Indiana's 292 school corporations were covered under the minimum guarantee, according to a recent report from Indiana University's Center for Evaluation & Education Policy. In 2004, that grew to 81 percent.

It was a vicious cycle. As more money went into the guarantee, less was available for the enrollment-based formula. And if districts didn't get enough there, they qualified for the guarantee.

"There just wasn't enough money in the formula itself," Costerison said. "The guarantee is not a good thing. It basically says the formula is not working."

The long-term impact of the short-term fix is that it severs the connection between enrollment and funding, raising questions of fairness, observers say.

"It protects declining districts, but at the same time hurts the ability of the state to fund growing districts," said IU researcher Robert Toutkoushian.

Take burgeoning Hamilton Southeastern Schools, for example: It's set to receive $32 million in tuition support this year, or $2,450 for each of its 13,000 students. IPS is slated to get $217 million, or $5,620 per pupil.

"[Guaranteed increases] introduce fundamental inequities into the system," said Eric Hanushek, an education policy expert who works from the Hoover Institution at Stanford University. "Some districts are getting a lot more for what they're doing than others."

Pritchett and others argue that it costs more to educate some children. More than three-quarters of IPS students are eligible for free lunch. Nearly as many come from single-parent homes. And almost 3,000 children don't speak English.

Indiana's formula factors in such variables, using a multiplier-called the "complexity index"-designed to give more money to districts with more challenging students. It's just not enough, the IPS superintendent said.

"The problem we're looking at is one of adequacy, not equity," he said. "Indianapolis has unique challenges that very few other corporations deal with in the state of Indiana."

IPS board President Kelly Bentley supplied specific examples: The district pays an average of $125 per student for its school police department, $80 for the English-as-a-second-language program, and $36 for textbooks.

In theory, the multiplier used in the traditional formula would generate enough funding to cover such expenses. In reality, the minimum guarantee produces more revenue for most districts, including IPS.

"Certain kids require different resources. That was the genesis of the complexity index," said Kiely, the former legislator who now is president of the Indiana Manufacturers Association. "But it won't work if there's not enough money to go around."

"The minimum guarantee is really a secondary stop-gap strategy," echoed Dan Clark, deputy director of the Indiana State Teachers Association. "The only reason we have it is because the state hasn't been able to adequately fund the complexity index."

Clark said education activists are in the early stages of considering whether problems with Indiana's funding system are serious enough to justify an adequacy lawsuit. About 35 such cases are pending in other states, Kiely said.

The discussion is being spurred here and elsewhere by state and federal mandates intended to improve the quality of public education. Educators say they can only do so much without additional funding.

"There are things we cannot control," explained Eugene White, superintendent of the Metropolitan School District of Washington Township, also in Indianapolis. Legislators "think they can reduce our revenue and we're going to make that work, but we still have to pay for all these special mandates. People don't seem to get that point."

Doing away with the guarantee while trying to improve achievement doesn't make sense, said Chuck Little, executive director of the Indiana Urban Schools Association.

"If there's not enough money to properly fund the formula, going to a system where the dollar follows the child could be destructive to making additional progress in our schools," he said. "This is not the way to go."

But questioning whether schools get enough money raises other issues-like whether they're making the most of the funding they get.

Overall spending on education increased 69 percent from 1993 to 2003, according to a study conducted last year by a Government Efficiency Commission subcommittee, but instruction spending rose only 47 percent.

"If that analysis is correct, it's not a good trend," ISTA's Clark said. "... You can't make a case for adequacy until you make a case for efficiency."

Critics say that's where the minimum guarantee may have hurt longtime recipients by protecting them from making tough decisions.

"If you continue to lose kids, overhead's got to be cut," said Mills, the former Senate budget chairman. "You have to make those adjustments. [But] if you've always got the money, that's not going to happen."

IPS has cut back anyway, Pritchett and Bentley said. The district closed a dozen schools in the past decade-two reopened in 2000-and reduced staff whenever it couldn't be avoided.

"Can we cut costs [again]?" Pritchett said. "Yes. Will we survive this [funding] loss if we have to? Absolutely. Are there great efficiencies out there to be had? No."

Hanushek, the education policy expert, isn't familiar with the specific situation at IPS, but he has heard that argument before. He doesn't buy it.

"I don't think there's much of a case, other than they've built it in, for declining districts needing to spend more money than some little district that's been growing," he said. "Frankly, the rhetoric doesn't add up."

The Indiana Government Efficiency Commission's subcommittee on K-12 education reached a similar conclusion-albeit a more general one-last year.

"Our schools exist to use taxpayer resources efficiently [and] to drive achievement for the vast majority of students," subcommittee Chairman David Shane said at the time. "The current system frustrates both these goals."

Shane, now one of Gov. Mitch Daniels' senior advisers, declined to be interviewed for this story, citing political considerations.

But the subcommittee report, which he helped write, recommended changes to the financial reporting process, in hopes analysis would help districts make better spending decisions.

Little, the urban schools representative, doubts there's much fat to trim.

"That's a misconception that grew out of the efficiency report," he said. "The shelves have been cleared. Everything's running pretty tight right now."

The report has its detractors, but its authors hope it sparks discussion about improving schools-and schools finance-in Indiana.

"There isn't one silver bullet, one answer," said subcommittee member Gretchen Gutman, an attorney and former Senate fiscal analyst. "It's going to take a series of things."

And sometimes, an outside opinion can make all the difference.

St. Louis school board members hired corporate turnaround firm Alvarez & Marsal in 2003 to restructure operations at the district, which was facing a multimillion-dollar deficit.

Sajan George was CFO; colleague William Roberti was interim superintendent. In one year, the team cut $80 million from a $400 million budget-without laying off a single teacher, George said.

"The premise of any turnaround is to figure out what the core competency is and invest all the resources in that," he explained. "In St. Louis, that was teaching and learning."

The team started with a blank piece of paper, figuring out what resources the district needed to educate its 37,000 students. The district closed schools, sold unused facilities and outsourced non-instructional jobs.

"Most [educators] look for ways to cut 5 percent here and 2 percent there," George said. "We started from the bottom up."

The process was anything but easy-especially in a setting where 80 percent of the overhead is personnel.

"We were not popular," George said. "There's always a huge amount of attention and unrest anytime a restructuring involves jobs. [But] we're an independent, outside firm, and we've done it before. If I lived in St. Louis, I don't think I could have done that work."

Danny Tanoos knows how gut-wrenching the experience can be. The former high school principal was new to the superintendent's job at Vigo County School Corp. when the Terre Haute district faced a $2 million deficit in 1997.

He vividly remembers a school auditorium packed to capacity with upset parents and teachers, calling for an end to the layoffs and cutbacks that never seemed to be enough. The superintendent and his team responded.

"We put everything under the microscope, examined every aspect of the school corporation," said Tanoos, now a member of both the state Board of Education and Education Roundtable. "We did not want to go through that ever again."

The resulting cost-containment plan ran the gamut, from closing underused schools to turning off computers on weekends.

"We have a saying: 'Don't step over the pennies to get to the dollars,'" Tanoos said. "The little things add up."

By the end of the first year, the changes-big and little-had generated a small cash surplus. Now the district holds about $17 million, or 17 percent of its budget, in reserve.

"Cutting spending wasn't the hard part," said CFO Thomas Thornton. "The hard part is keeping it down."

Communication is key, Tanoos said.

From the start, district leaders formed committees-made up of administrators, teachers and staff alike-to focus on the financial situation. A cash balance forecast group meets monthly, for example, to go over expenses line by line.

"The depth of knowledge, the understanding that we're in this together, makes the difference," Thornton said.

The fact that teachers weren't the first target of cuts likely didn't hurt, either.

"I think you have to look at the administration first," Tanoos said. "Classroom teachers are on the front lines."

Vigo realigned some administrative duties to cut overhead in the 16,000-student district: The director of secondary education also coordinates music and athletic programs. The elementary education director oversees art. The language arts coordinator fields all travel requests.

"People just had to double up. We're bare bones," Tanoos said. "We would rather not be. ... But you have to look at what you have dollars-and-cents-wise and figure out what's most important.

"Without question, the classroom has to be the last place touched."

White said he has taken a similar tack in 10,000-student Washington Township.

"Our people are working their butts off," he said, ticking off an array of jobs one employee handles. "I don't think many districts could pull off what we do. ... People are not falling down to get these jobs."

Some schools may be able to find additional efficiencies, White admitted, but that isn't the only answer.

"Every time you squeeze a dollar, you're going to hurt kids," he said. "There's only so much you can do before you've got to put more money in the budget."

Since that's unlikely to happen in the short term, Bentley and the rest of the IPS board are bracing themselves for some difficult discussions.

"We're going to have to defend our expenditures-and I think we can defend quite a bit because of our special circumstances," she said. "But if we can't, we're going to have to make cuts. I'm not saying we shouldn't have to ... I'm just concerned because we're going to be taking this hit really quickly."

Some observers say schools need to start adjusting to changing economic realities.

"Everyone in the world is doing more with less," said John Myrland, president of the Indianapolis Chamber of Commerce and a member of the Education Roundtable. "We can't afford to pay for the kind of government we have now. That's not an indictment of IPS, but we can't keep doing things the same way."
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