The official FY2019-20 school budget season began today with the January Consensus Revenue Estimating Conference (CREC).

The Bottom Line

The final January 2019 revenue estimate made slight adjustments to the May 2018 CREC totals. Estimates were lowered for School Aid Fund (SAF) revenue by $23.9 million for 2018-19, but increased by $25.9 million for 2019-20. The 2020-21 estimate was shown for the first time and grew $337.7 million over the prior year’s revenue estimate! All-in-all, good news!

It’s important to understand that there is continued revenue growth expected in the SAF for the forecast period. We have posted documents on our webpage dedicated to the CREC. The full implications of the FY2019-20 School Aid Budget won’t be known for some time for many reasons including a new Administration and Legislature. A priority list of funding objectives won’t be known until the new Governor delivers her first State of the State address and presents her first budget, which is expected sometime before mid-March. That leaves a lot of time to determine priorities and how today’s revenue forecast can help support the areas she is most interested in funding.

In the final CREC agreement for January 2019, the GF/GP estimate from May 2018 was increased $288.6 million for FY2018-19 and was increased by $199.1 million for FY2019-20. Revenue for the FY2020-21 was unveiled showing 1.3 percent growth or $134.8 million above the estimated FY2019-20 level.

The SAF estimate for FY2018-19 was decreased by $23.9 million from the May 2018 estimate, totaling a $210.6 million increase over prior year revenues. FY2019-20 estimate was increased $25.9 million, totaling $376.2 million over FY2018-19, and FY2020-21 is slated to increase $337.7 million above the FY2019-20 level! This represents overall growth year after year at 1.6%, 2.8% and 2.4% for the three fiscal years, respectively.

The reasons for the growth in both funds relate to elevated income tax revenue, which could be a risk in the future years due to higher than usual 2018 revenue. The refunds for 2018 will be better known in May as a result, revenues could be adjusted then. On the plus side, the SAF will benefit from online sales tax revenues that are now being collected, as well as sales tax on recreational marijuana. The pressure on the GF/GP expenditure side could be an issue with roads expenditures and other tax reductions kicking in over the next few years. Although the SAF seems to have more funding, the pressure to push more expenditures through SAF is always a concern. The interaction between the GF/GP and the SAF is something we watch closely as the transfer of revenue from the GF/GP to the SAF has been a significant source of ongoing support for SAF programming.

Balance Sheet

The HFA estimated balance sheet shows the impact of the revenue agreement on the funds available for school aid. Some key areas to note include:

• The GF/GP transfer to school aid is reduced for FY2019-20 by $42.9 million, leaving a transfer in of $45 million. This is an estimate based on the prior Administration, so this is something that could change with the new Governor. The HFA balance sheet includes no revenue from the MPSERS retirement obligation reform reserve fund, which was $31.9 million in the prior year.
• The ongoing baseline expenditures include all categorical payments and foundation allowances as we know them today. The forecast includes moving forward current law with adjustments for student projections, the effect of lowered assumptions in the MPSERS system for both payroll and investment return, and the impact of implementing the dedicated gains policy to lower the unfunded liability. Total expenditures are expected to increase $20.9 million for FY2019-20.
• FY2017-18 final figures leave $362.5 million in the coffers to carryover to FY2018-19. Although positive, there is still a current year structural deficit of $174.9 million.
• The estimate for FY2019-20 shows a structural surplus of $75.6 million, leaving a final ending balance of $263.2 million at the end of FY2019-20.

The balance sheet represents the best high-level estimate of revenues and ending balances based on the consensus agreement. Depending on policy decisions, it appears that there are funds available to increase foundation allowances or possibly increase other categorical funding in FY2019-20. Caution is needed because spending more than $75.6 million of the $263.2 million projected ending balance will create a structural problem for FY2020-21.

The figures represented in the estimated SAF balance sheet incorporate all of the changes that occurred in the “lame duck” session. This includes changes in the income tax split, the sales tax revenues for online sales, and revenues from the legalization of recreational marijuana. We also heard that the GF/GP estimates include roads funding and the impact of the tax changes, and like the SAF, have an ending surplus. The big unknown is what are the priorities of the new Administration and Legislature and how that will impact the “bottom-line.” As we say, stay tuned!
    
Pupil Estimates

Overall, the pupil estimates continue to decline annually.

FY2018-19

• Local district pupils were adjusted to 1,323,700 which is a 7,800 decrease from May estimates
• PSA pupils were adjusted to 146,700 which is an 1,800 student decrease from the May estimates
• Compared to FY2017-18, local districts are down 13,200 students and Public School Academy (PSA) students are up 100
• Grand total for all pupils is estimated to be 1,470,400 for FY2018-19

Several factors attributed to forecast decline in students. There was a reduction in final audited student numbers of 1,500 for 2018, which was not anticipated and therefore will be included in the forecast coming forward. The cohort of students entering kindergarten was down 3,000 from the graduating grade12 cohort. There is a flat forecast for the number of non-public school students taking classes in public schools and enrollment in PSA’s is down even with nine new PSA schools last year, although eight others closed. The overall trend that declining birth rates are anticipated also accounted for a reduction in the overall student forecast. After a few years of only slight overall declines, this estimate shows a somewhat significant reduction of students in the near future.

FY2019-20

• Local district pupils were adjusted to 1,314,200 which is a 11,800 decrease from May estimates
• PSA pupils were adjusted to 146,600 which is a 4,000 student decrease from the May estimates
• Compared to FY2018-19, local districts are down 9,500 students and PSA students are down 700
• Grand total for all pupils is 1,460,200 for FY2019-20

FY2020-21

• Local district pupils are estimated to total 1,306,000
• PSA pupils are estimated to total 146,000
• Compared to FY2019-20, local districts are down 8,200 students and PSA students are unchanged
• Grand total for all pupils is 1,452,000 for FY2020-21

First Step in the Budget Process

We can’t stress enough that the January CREC is the first step in the budget process. The fact that revenues are being revised makes everyone feel a little uneasy, but the real story will be told when the Administration weighs in with their funding priority list. Of course, the House and Senate will both have their chance to propose changes to the budget.

Don’t forget, there is the second CREC scheduled in May. It should include the full estimated impact of roads funding, tax reform, tax refunds, and other items that may influence both GF/GP and SAF available revenues.

We’ll have a detailed discussion about these revenue estimates and the impact on the SAF next week at the MSBO Financial Strategies Conference. There is still time to reserve your seat through our online registration process until midday Monday or as a walk-in when you arrive to the conference on Tuesday, and get the best information at the right time to start your district budget process.

Stay Tuned!

David and Bob