Back to the Future: Declining School Aid in Minnesota

Despite increases in recent years, real per pupil state operating aid to Minnesota school districts has declined overall since fiscal year (FY) 2003. This decline in state aid translated into significant property tax hikes and—in many instances—reduced funding for public education. To compound matters, projections based on current state law indicate a significant decline in real per pupil school aid in FY 2020 and 2021.

These trends are explored in a new North Star report entitled Minnesota Backslide: School Aid Cuts on the Horizon. The report tracks change in real per pupil state operating aid, levy, and revenues since FY 2003 statewide and for each of the 330 Minnesota school districts. Information in the report is based on Minnesota Department of Education data.

FY 2003 was a milestone year for education finances in Minnesota. In that year, school district operating levies fell by 87% relative to the prior year. A large infusion of new state aid made up for the loss of property tax dollars.

However, with looming state budget deficits, state operating aid to school districts not only failed to keep pace with inflation, but actually declined in nominal dollars (i.e., dollars unadjusted for inflation) from FY 2003 to 2004.* With one exception—in FY 2008—real per pupil school district operating aid declined in each of the subsequent eight years. (In FY 2008, real per pupil operating aid increased by a scant 0.04% relative to FY 2007.) In constant 2019 dollars, per pupil state operating aid to school districts fell by $2,063 from FY 2003 to 2012.


School districts dealt with this cut through nearly equal portions of levy increases and budget reductions. From FY 2003 to 2012, real per pupil levies increased by about $1,000, while real per pupil operating revenue declined by $1,000. For property taxpayers, it was literally a case of tax more, get less—all thanks to massive real state aid reductions.

By FY 2016, about half of the real per pupil state operating aid reduction from FY 2003 to 2012 had been restored. The largest increases occurred in FY 2015 and 2016 and were paid for with a portion of state tax increases enacted in 2013—the largest of which was an income tax increase targeted toward the wealthiest two percent of Minnesota households.

The report makes no attempt to identify all of the various factors that contribute to changes in state aid over time. However, one overarching trend is worth noting: while state policymakers often provided a nominal increase in state assistance to school districts, in most years since FY 2003 these increases have not been sufficient to keep pace with inflation in the cost of the goods and services that school districts must purchase. The result has been a decline in the real purchasing power of the dollars that school districts received from the state. This in turn has led to a combination reductions in the inflation-adjusted revenue of school districts and increases in school property taxes. This condition exists because state funding for Minnesota school districts is not routinely adjusted for inflation.

Because school operating aid is not explicitly adjusted for inflation, the real per pupil purchasing power of these dollars is expected to decline again in FY 2020 and 2021 under current law. FY 2021 per pupil aid is expected to be $481 or 4.7% less than it was in FY 2019. Meanwhile, per pupil levies are expected to increase by $137 or 6.2% and per pupil operating revenue is projected to decline by $344 or 2.8%.


Of course, the legislature and governor can act during the 2019 session to prevent a further decline in real per pupil state aid—and possibly restore a portion of the cuts that have occurred since FY 2003. To keep pace with inflation, nominal per pupil state aid to public schools will need to increase by approximately three percent from FY 2019 to 2020 and again from FY 2020 to 2021, based on current inflation projections. In the absence of this, Minnesota school districts and property taxpayers can expect a return to the era of tax more, get less.

 

For the full report and appendices, click here.

 

*Inflation adjustments in this article and in the report are based on the Implicit Price Deflator for State & Local Government Purchases, which is the appropriate index to use when adjusting state and local government revenues and expenditures for erosion in the purchasing power of the dollar due to inflation, as explained in a 2016 North Star article. Unless otherwise noted, per pupil amounts in this article and in the report are expressed in constant FY 2019 dollars.