Real Per Pupil State Aid Has Declined Since FY 2003

The conservative Minnesota Business Partnership recently challenged our contention that real (i.e., inflation-adjusted) per pupil state aid has declined since fiscal year (FY) 2003. North Star’s assertion in regard to declining state aid is completely accurate—if you use an inflation index appropriate to measuring the impact of inflation on school district finances. Only by using an index not designed to measure inflationary pressures on school districts is it possible to conceal the real per pupil decline in state operating aid.

The Partnership’s claim that real per pupil state aid has increased since FY 2003 relies on use of the Consumer Price Index (CPI) to adjust for the effects of inflation.* The CPI is calculated by the U.S. Bureau of Labor Statistics to measure “changes in the prices paid by urban consumers for a representative basket of goods and services.” The problem with applying the CPI to school district revenue is that school districts do not purchase the same “basket of goods and services” as the ordinary consumer. While the typical consumer is spending money on food, clothing, housing, transportation, entertainment, and so forth, the purchases of school districts and other state and local governments more heavily weigh toward the wages, salaries, and benefits of employees.

In recent decades, the overall growth in the cost of items purchased by school districts and other forms of government has been generally (though not always) greater than overall growth in the cost of goods and services purchased by consumers. One of the primary reasons for this has been growth in health care costs. Insofar as health care costs—in the form of employee benefits—comprise a larger share of government purchases than of consumer purchases, the rapid growth in these costs has a heavier impact on government budgets.

An alternative index—the Implicit Price Deflator for State & Local Government Purchases (or S&L IPD)—was created to measure the unique inflationary pressures on state and local governments. In recognition of the inadequacies of the CPI as a measure of the impact of inflation on school purchases, in 2011 the Minnesota Department of Education (MDE) began to use the S&L IPD in addition to the CPI to assess changes in real per pupil school operating revenue over time.

The chart below shows the actual and projected rate of inflation as measured by the CPI and the S&L IPD since FY 2003, based on index values reported by MDE.

During the entire period from FY 2003 through projected FY 2019, the rate of inflation as measured by the CPI is nearly one-third less than inflation based on the S&L IPD. Using the CPI to adjust state aid to school districts understates the impact of inflation on school purchases and creates the illusion of an increase in the per pupil purchasing power of these state aid dollars, when in fact the purchasing power has declined.

Some conservative groups have criticized the use of the S&L IPD, claiming that it is influenced by the discretionary actions of state and local governments to increase benefits, especially pension and other post-employment benefits, thereby driving increases in the S&L IPD. In reality, however, this critique does not hold up. A 2016 North Star article demonstrated that overall growth in state and local government employment costs—including benefits—is only slightly greater than that of the private sector and nowhere near sufficient to explain the large gap between the CPI and the S&L IPD.

Furthermore, inflation as measured by the S&L IPD continues to be higher than CPI inflation even during periods when growth in state and local government compensation costs is less than that of the private sector. Thus, allegedly generous compensation packages offered by school districts and other governments cannot be a primary explanation for the large gap between these two inflation indexes. Other forces must be at work. As noted above, one such force is rapidly escalating health care costs; the gap between the S&L IPD and the CPI is highly correlated with the annual rate of inflation in the cost of medical care.

In fact, a case can be made that the S&L IPD understates the impact of inflation on school district purchases. The S&L IPD is a composite measure of the impact of inflation on all levels of state and local governments, not just school districts. Insofar as employee wage and benefit costs comprise a larger share of school budgets than of county, city, township, and state government budgets,† inflationary pressures on school districts arising from escalating health care costs could be greater than those of the other forms of government—and thus school districts could be subject to inflationary pressures in excess of those measured by the S&L IPD.

Regardless of the merits of the S&L IPD, one fact is clear: the basket of goods and services purchased by school districts is distinctly different from that purchased by the ordinary consumer. Thus, the consumer-based CPI does not adequately measure the impact of inflation on school districts and should not be used as a basis for claims regarding growth or decline in state aid or other school revenues over time.

Using the best measure of the impact of inflation on school purchases, the real purchasing power of state operating aid to Minnesota school districts today is nearly nine percent (or $1,000 per pupil in constant FY 2018 dollars) less today than it was in FY 2003. While changes in aid levels vary across the state, approximately ninety percent of school districts are receiving less state support today than they did fifteen years ago. The decline in state aid has not only contributed to school property tax increases, but has also diminished the ability of school districts to achieve in all of the areas that the Partnership and others contend need improvement.

 

*The Partnership’s claim appears in a letter published in the Pioneer Press. This article is an exposition of North Star’s reply to this claim, which was also published by the Pioneer Press.

In aggregate, compensation expenses comprise approximately sixty percent of state and local budgets. If we focus on school districts alone, however, compensation costs comprise over three-quarters of general fund spending, based on MDE data.