Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts January 2008 Office of Strategic Planning, Research, and Evaluation Office of School Finance Massachusetts Board of Education Members January 2008 Mr. Paul Reville, Chairman, Worcester Ms. Ann Reale, Vice-Chair and Commissioner, Department of Early Education and Care, Boston Mr. Christopher Anderson, Westford Ms. Harneen Chernow, Jamaica Plain Dr. Thomas Fortmann, Lexington Ms. Ruth Kaplan, Brookline Dr. Patricia Plummer, Chancellor, Board of Higher Education, Boston Dr. Sandra Stotsky, Brookline Mr. Zachary Tsetsos, Student Advisory Council, Oxford Mr. Jeffrey Nellhaus, Acting Commissioner and Secretary to the Board The Massachusetts Department of Education, an affirmative action employer, is committed to ensuring that all of its programs and facilities are accessible to all members of the public. We do not discriminate on the basis of age, color, disability, national origin, race, religion, sex or sexual orientation. Inquiries regarding the Department’s compliance with Title IX and other civil rights laws may be directed to: Human Resources Director, Department of Education, 350 Main Street, Malden, MA 02148, phone: 781-338-6105. Copyright © 2008 Massachusetts Department of Education Permission is hereby granted to copy any or all parts of this document for non-commercial educational purposes. Please credit the Massachusetts Department of Education. This document is printed on recycled paper. Massachusetts Board of Education – Massachusetts Department of Education 350 Main Street, Malden, MA 02148 Telephone: 781-388-3000 Fax: 781-338-3392 Website: http://www.doe.mass.edu/ Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts Massachusetts Department of Education Office of Strategic Planning, Research, and Evaluation Office of School Finance January 2008 Summary and key findings Over the past decade and a half, the Commonwealth has moved steadily to increase expectations on school districts, schools, teachers, and students to meet the demands of a global economy. It has also added fiscal resources to support reaching these expectations, increasing state aid for education by almost 11 percent per year throughout the 1990s. Recent fiscal challenges at the state level, however, coupled by rising fixed costs and shifting enrollment patterns for districts, have combined to create substantial challenges for districts in sustaining the momentum of education reform. This initial investigation found that: • Academic expectations and challenges have risen, but spending on instructional services has not kept pace. From fiscal years 2002 to 2007, total spending by districts and spending per pupil have remained flat relative to inflation. At the same time, the academic expectations for districts, schools, educators, and students have appropriately increased, and the demographic characteristics of the state’s students have changed. Spending on instructional services is being crowded out by increases in other budget areas such as health insurance and out-of-district student placements. As a result, instructional services are declining as a share of total spending. • On average, districts spend 18 percent more than their foundation budget, and nearly every district in the state is spending over foundation. This suggests that the current foundation budget formula may not reflect the cost of providing an adequate education to all students. Health insurance, payments to other districts, and teacher salaries were areas of particular concern; actual expenditures in these areas substantially outpaced the assumptions behind the foundation budget. • Chapter 70 aid increases did not keep up with inflation between 2003 and 2006. From fiscal year 2003 to fiscal year 2006, most districts saw little or no increase in their aid, and many districts experienced cuts in fiscal year 2004. With the adoption of changes to the Chapter 70 formula in fiscal year 2007, aid has increased by more than 6 percent in each of the last two years. But after adjusting for inflation, state aid has only recovered to fiscal year 1999 levels, well below the high-water mark of fiscal year 2002. • Despite the Chapter 70 aid cutbacks, many districts were able to maintain their overall spending levels, but only by increasing local funding, and, to a much lesser degree, imposing user fees for transportation and extracurricular activities. Although Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts i these actions helped protect school budgets, they created added pressure on municipal budgets and on parents and community members. • A number of districts have experienced enrollment declines, which can have both a positive and negative fiscal impact. Declining enrollment should make it easier to maintain services when budgets are tight, but in extreme cases it may also require school consolidations and teacher layoffs. Declines have been especially common in districts that serve large percentages of low-income students. • Districts have employed a variety of strategies to maintain services for students despite constraints in their instructional budgets. In some cases, staff reductions have compensated for higher-than-average salary increases. In other cases, lower-than-average salary increases have helped maintain staffing levels but leave the district at risk of not being able to attract qualified new teachers. Statewide, average salaries have grown more slowly than inflation but more quickly than assumed by the foundation budget, and student-teacher ratios have edged up slightly during the period. In summary, at a time when districts need to be moving forward quickly to address their students’ growing educational needs, they are hard-pressed to maintain their expenditure levels, let alone increase them to meet higher expectations. And unlike the situation in the late 1980s, when school budget cuts were disproportionately affecting the poorer urban districts, today’s fiscal pressures appear to affecting a much broader range of districts, including many middle- class communities that have traditionally taken great pride in the quality of their school systems. The current statewide foundation budget is $8.4 billion. Some short-run increase in this funding level is likely necessary to address the rising cost of education in the Commonwealth. Beyond that, the Board of Education may wish to recommend a detailed study to update the foundation budget formula to ensure that it provides an adequate level of fiscal resources for both current and future needs. While the state continues to work toward a sustainable long-range funding plan, it will need to continue other initiatives to ensure that it is making the best use of its existing resources. Examples include: • Creating incentives for local participation in the state health insurance and pension fund programs, to help bring the cost of these programs under control. • Expanding the use of educational collaboratives and other regional entities to more efficiently provide services such as special education transportation, professional development, and specialized education programs. • Helping districts to identify and adopt instructional practices and models that have been proven effective at improving student outcomes at a reasonable cost. • Addressing the inefficiencies and lack of capacity created by the large number of small school districts in the state. Currently, 284 of the state’s 328 operating districts serve fewer than 5,000 students. Bringing all these resources to bear will allow districts to provide an adequate education to every child and allow the state to reach the vision and promise of education reform. Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts ii Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts Massachusetts Department of Education Office of Strategic Planning, Research, and Evaluation Office of School Finance January 2008 Introduction During the past several months, the Board of Education has begun a discussion on the fiscal conditions facing Massachusetts public school districts. The Board has heard considerable anecdotal evidence that a number of districts are facing financial difficulties that may be compromising their ability to provide quality educational services. At the Board’s direction, the Department has conducted an initial investigation into district fiscal conditions in order to further this discussion and identify areas for possible Board action. Increasing expectations, increasing challenges Massachusetts was one of the first states to establish the concept of a foundation budget: the minimum amount of funding needed by each local district to provide an adequate education. The foundation budget formula was first enacted in the Education Reform Act of 1993, and since then it has been used annually to calculate state aid allotments and minimum local funding levels. Other than some minor enhancements, as well as annual adjustments for inflation and enrollment changes, the foundation budget formula has essentially remained unchanged since its enactment. Over the past decade and a half, the Commonwealth has moved steadily to increase expectations for school districts, schools, teachers, and students to meet the demands of a global economy. In 1993, the state had not yet articulated the standards it expected students to attain, nor had it developed the assessments the state would use to determine whether students had met those standards or the programs and supports that would help all students to achieve those standards. Today, the Commonwealth has a fully articulated set of standards for all core subjects, including English language arts, mathematics, science and technology/engineering, history and social science, foreign languages, health, and the arts. Since the graduating class of 2003, students have been required to pass the grade 10 mathematics and English language arts MCAS tests in order to graduate from high school, with requirements for passing high school science and social science assessments soon to follow. In addition, students in the classes of 2010 and beyond who achieve only a Needs Improvement level on the grade 10 MCAS English language arts and mathematics tests will be required to complete an Educational Proficiency Plan in order to meet the state’s high school graduation standard. Report on Current Fiscal Conditions in Massachusetts School Districts 1 The state provides significant financial and programmatic support to help students attain these standards, and the state’s students perform relatively well by many measures. Yet while 87 percent of the state’s tenth graders passed both sections of the grade 10 MCAS test on the first try in spring 2007, only about 70 percent score Proficient or higher on either assessment—and proficiency on these grade 10 tests is increasingly viewed as an indicator that students are on a path to be college- and career-ready by the time they graduate. Moreover, more than one-third of the state’s public high school graduates who enroll in public higher education in Massachusetts must take at least one remedial course in college, indicating that they are not yet ready for college-credit-bearing coursework despite having completed all the state and local requirements for high school graduation Local educators are working hard to bring all their students to proficiency and beyond, but this is essentially a new job, and one that is proving to be tremendously challenging. Teachers today are educating a different set of students with different and greater needs than they were a decade ago. Total enrollment has declined slightly since its peak in 2003, but the number of students who require increased educational services (such as English language learners, those eligible for free or reduced-price lunch, and special education students) has risen dramatically relative to the total. Teachers must use a broader set of educational tools to reach these students and bring them all to proficiency—tools which they may not be trained or prepared to use. At the same time, state support for the professional development that would help teachers make this transition has stagnated, and the requirement that districts spend at least $150 per pupil on professional development each year was eliminated as a result of the most recent budget crisis. Schools and districts, too, are finding it difficult to reach the state’s ambitious goals for education. Every year more schools and districts are identified as “in status”—that is, as not making sufficient progress in improving the performance of their students, either as a whole or for certain student subgroups. Statewide, 38 percent of the state’s schools and 20 percent of its districts are in status for at least one subgroup, and the number will continue to increase as the federally required target of “all students proficient by 2014” looms ever closer. Impact on districts For the first nine years of education reform, large increases in Chapter 70 aid, averaging almost 11 percent per year, allowed most districts to maintain and increase their educational services. Cities and towns also committed more resources to schools in order to meet the state’s school spending requirements for localities. The current period of fiscal distress began in fiscal year 2003, when the economic recession of the early 2000s resulted in significant stresses on state and district fiscal conditions. Over the past six years, district fiscal conditions have worsened. Our initial investigation has found that: • Academic expectations and challenges have risen, but spending on instructional services has not kept pace. From fiscal years 2002 to 2007, total spending by districts and spending per pupil have remained flat relative to inflation. At the same time, academic expectations for districts, schools, educators, and students have appropriately increased, and the demographic characteristics of the state’s students have changed. Further, spending on instructional services—those services most directly related to Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts 2 educating students—has increased at only half the rate of inflation, and even more slowly in districts that serve large shares of low-income students. Spending on instructional services is being crowded out by substantial increases in other budget areas such as health insurance and out-of-district student placements. As a result, spending on instructional services is declining as a share of total spending. • On average, districts spend 18 percent more than their foundation budget, and nearly every district in the state is spending over foundation. This suggests that the current foundation budget formula may not reflect the cost of providing an adequate education to all students. Three areas were particularly concerning: o Health insurance expenditures have far outpaced the foundation budget assumptions. On average health insurance spending grew by 74 percent between 2002 and 2007; 84 districts saw their costs more than double. This increase reflects national trends in health care costs. o Payments to other districts have also increased substantially. A primary reason is rapid growth in special education costs, particularly for out-of-district students. o The teacher salary assumptions in the foundation budget have historically underestimated actual statewide average salaries. This gap has grown in recent years, even though teacher average salaries are actually increasing more slowly than inflation. • Chapter 70 aid increases did not keep up with inflation between 2003 and 2006. From fiscal year 2003 to fiscal year 2006, most districts saw little or no increase in their aid, and many districts experienced cuts in fiscal year 2004. With the adoption of changes to the Chapter 70 formula in fiscal year 2007, aid has increased by more than 6 percent in each of the last two years. But after adjusting for inflation, state aid has still only recovered to fiscal year 1999 levels, well below the high-water mark of fiscal year 2002. • Despite the Chapter 70 aid cutbacks, many districts were able to maintain their overall spending levels, but only by increasing local funding, and, to a much lesser degree, imposing user fees for transportation and extracurricular activities. Although these actions helped protect school budgets, they created added pressure on municipal budgets and on parents and community members. • A number of districts have experienced enrollment declines, which can have both a positive and negative fiscal impact. Declining enrollment should make it easier to maintain services when budgets are tight, but in extreme cases it may also require school consolidations and teacher layoffs. Declines have been especially common in districts that serve large shares of low-income students. • Districts have employed a variety of strategies to maintain services for students despite constraints in their instructional budgets. In some cases, staff reductions have compensated for higher-than-average salary increases. In other cases, lower-than-average salary increases have helped maintain staffing levels but leave the district at risk of not being able to attract qualified new teachers. Statewide, average salaries have grown more Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts 3 slowly than inflation but more quickly than assumed by the foundation budget, and student-teacher ratios have edged up slightly during the period. In summary, it is clear that many districts have lost ground with respect to instructional spending over the past six years, while others have struggled to maintain their existing levels of services. And few districts have had the resources to expand their instructional offerings to keep pace with the rising demands of education reform. Unlike the situation in the late 1980s, when school budget cuts were disproportionately affecting the poorer urban districts, today’s fiscal pressures appear to affecting a much broader range of districts, including many middle-class communities that have traditionally taken great pride in the quality of their school systems. Recommendations The current statewide foundation budget is $8.40 billion. Some short-run increase in this funding level is likely necessary to address the rising cost of education in the Commonwealth. Beyond that, the Board of Education may wish to recommend a detailed study to update the foundation budget formula to ensure that it provides an adequate level of fiscal resources for both current and future needs. As noted earlier, no such review has occurred since the foundation budget was first established in 1993. This study, in turn, will help inform the Board’s future budget requests for Chapter 70 state aid and other district funding programs. While the state continues to work toward a sustainable long-range funding plan, it will need to continue other initiatives to ensure that it is making the best use of its existing resources. Examples include: • Creating incentives for local participation in the state health insurance and pension fund programs, to help bring the cost of these programs under control. • Expanding the use of educational collaboratives and other regional entities to more efficiently provide services such as special education transportation, professional development, and specialized education programs. • Helping districts to identify and adopt instructional practices and models that have been proven effective at improving student outcomes at a reasonable cost. • Addressing the inefficiencies and lack of capacity created by the large number of small school districts in the state. Currently, 284 of the state’s 328 operating districts1 serve fewer than 5,000 students. The remainder of this report analyzes district financial conditions in more detail, identifying which factors are likely to have contributed most substantially to the fiscal conditions faced by many districts today. It provides supporting detail on school district spending and other fiscal trends during this period of time based on the end-of-year pupil and financial data submitted by each district to the Department. In addition to the summary tables included in this report, more detailed data used in this analysis is available on the Department’s website at 1 An operating district is a municipal or regional school district or vocational or agricultural school. Charter schools are not included. Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts 4 http://www.doe.mass.edu/research/reports/research.html. These data will help inform the Board’s continuing discussions on whether districts have adequate fiscal resources to meet their current and future needs. A comparison to the early 1990s Today’s fiscal situation for districts is best understood in relation to the last major fiscal crisis for school districts, in the early 1990s. At that time, the problems facing Massachusetts school districts were clearer. The state had not defined what constituted an adequate education, and state and local officials were not required to ensure that districts met annual spending goals. As a result, wealthier school districts were spending substantially more on their students than the districts that served our most disadvantaged students. Further compounding this situation was the economic recession that the Commonwealth experienced in the early 1990s, which severely limited the amount of aid available from the state to supplement local resources. The Board and Department of Education played important roles in documenting these conditions in two influential reports that were published in the fall of 1991 entitled “Report on the Condition of the Public Schools in Holyoke, Lawrence, Brockton, and Chelsea” and “A Policy Position on Distressed School Systems and School Reform.” This situation led the Supreme Judicial Court to rule in the McDuffy case that the Commonwealth was not meeting its constitutional obligation to provide an adequate level of education to its students. The Education Reform Act of 1993, which included substantial changes to how the Commonwealth funds public education, was signed into law a few days after the McDuffy decision. The Act required the legislature to define a foundation budget for each district: the amount of money necessary to provide an adequate education to all students in that district, based on district enrollment patterns and other factors. Forty percent of school districts were already spending at or above the foundation budget level, but many urban and rural districts were spending at levels far below it. The act also established annual spending requirements for cities and towns to make on behalf of their schools. For districts spending below foundation, the state committed to increasing state aid to make up the difference between required local spending and the foundation budget amount. Districts that were already spending at or above their foundation budgets were guaranteed minimum aid increases each year. Today all districts are spending at or above foundation and the correlation between property wealth and per-pupil spending is far weaker. Since the implementation of the Education Reform Act, overall spending has increased and it has increased the fastest in districts that serve the highest numbers of low-income students, as Table 1 demonstrates.2 2 Districts in the lowest quartile have low-income populations between 0 and 6.1 percent; second quartile, between 6.2 and 12.7 percent; third quartile, between 12.8 and 24.7 percent; highest quartile, 24.8 percent or greater. The state average is 28.9 percent. These data are calculated from the 2006–2007 school year special populations report published by the Department of Education. Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts 5 Table 1: Actual net school spending per pupil by enrollment of low-income students (quartiles), 1993 and 2007 Percent Actual Net School Spending Per Pupil FY93 FY07 Change Lowest quartile (smallest share of low- income students) $5,640 $9,622 70.6% Second quartile $5,257 $9,402 78.9% Third quartile $5,234 $10,003 91.1% Highest quartile (largest share of low- income students) $5,250 $10,388 97.9% FY07 includes data on 293 of 328 operating districts. In a recent test of the progress that the Commonwealth has made since McDuffy, the Supreme Judicial Court ruled in the Hancock case that the Commonwealth was meeting its constitutional obligations relative to public education. Citing the billions of dollars invested and the establishment of curriculum and accountability standards since McDuffy, the court denied further relief and terminated ongoing oversight. Yet there have been only minor adjustments to the assumptions that underlie the foundation budget since they were established in the mid 1990s. Fifteen years later, how closely do they track actual spending? The foundation budget is not keeping pace with actual spending in some key expenditure categories The foundation budget is derived from a series of assumptions about the school staffing, salaries, and non-instructional costs necessary to provide an adequate education to students. These assumptions are reflected in a set of per-pupil rates, adjusted for inflation each year. Higher rates are assigned to students whose resource needs are assumed to be greater, such as vocational students, English language learners, and low-income students. District foundation budgets are calculated by applying these rates to the student demographic profile of the district. Since fiscal year 2000, all districts have been funded at least at foundation budget levels through a combination of local contributions and Chapter 70 aid. The metric that the Department has traditionally used to track district expenditures against the foundation budget is net school spending (NSS) as a percent of the foundation budget. Using available data, by this measure the average district in the Commonwealth spent 18 percent more than foundation in fiscal year 2007, suggesting that the foundation budget assumptions may not be keeping pace with actual spending. So far, 117 districts spent 25 percent or more above foundation, and 64 districts spent 40 percent or more above foundation. Breaking the foundation budget out by spending categories reveals the areas where the assumptions are most out of alignment with actual spending. Recent changes in the spending Preliminary Report on Current Fiscal Conditions in Massachusetts School Districts 6