School districts could face spending crisis

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PHOENIX — Arizona schools are facing the prospect of not being able to legally spend some of the money they are receiving.

And without legislative action they will have to reduce their spending this school year by a cumulative total of more than $1.2 billion. That translates out to more than $1,300 per student than what they've already budgeted — a 17% drop.

Put another way, they will be able to collect the state and local taxes as planned. They just won’t be able to spend it all.

And that has implications for districts who may find themselves unable to pay for the teachers they hired and the contracts they've already signed.

The only thing that could avert this fiscal train wreck would be action by the legislature which could approve an exemption from the voter-approved aggregate expenditure limit which currently stands at about $6.6 billion.

But that would take a two-thirds vote. And that vote would have to happen soon after lawmakers reconvene in January to help schools avoid having to make up that 17% loss in spending authority with last-minute cuts.

“Cutting that amount out of our budget would be absolutely devastating,” said Darcy Mentone, spokeswoman for the Vail Unified School District.

She pointed out that 88% of the district's operating budget is staff, with the balance for everything from utilities to pencils.

“If you cut 17% out of our budget this year we would have to look at layoffs,” Mentone said — and right at the end of the school year.

Others have similar assessments.

“It's catastrophic and it would be devastating to our budget, especially since we've already committed contracts for the year,” said Chris Hermann, chief financial officer for the Kyrene Elementary School District. And he said if the district has to start altering spending plans in the spring “it doesn't give you hardly any time to make adjustments.”

Pima County School Superintendent Dustin Williams said he and his staff have looked for a way around the expenditure limit short of legislative intervention.

But they haven't found one. And absent action at the Capitol, he said there will be a “devastating impact” on education.

“Schools have the money currently in their bank account,” Williams said. “But they wouldn't be able to spend it, which is ironic because that's what we're all trying to do right now ...  make sure that the kids and the schools are all safe and then, also, really start to tackle the learning loss.”

That, he said, leaves it up to lawmakers to come up with a plan.

“And, hopefully, the governor can come through and help us all as well,” Williams said.

But gubernatorial press aide C.J. Karamargin would not commit to Ducey supporting an exemption.

“The governor is not going to comment on pending future legislation, if it is pending at all,” he said.

Instead, Karamargin listed things he said his boss has done to improve overall education funding. For example, he said, Ducey signed a budget which funds the construction of seven new schools this fiscal year.

Only thing is, those are dollars that can be spent only for school construction and cannot be used for basic operations.

More to the point, no matter how much more cash the governor says is given to schools, the expenditure limit means they cannot spend it absent an exemption from the limit.

Karamargin also noted that schools got more than $4 billion in COVID relief dollars. While those dollars are not subject to the expenditure limit, they also are one-time monies.

State schools chief Kathy Hoffman wants legislative action.

“Needless cuts will severely hamper school districts' ability to serve students and help them recover from the effects of the pandemic,” said press aide Morgan Dick. “We need serious leadership and meaningful action from lawmakers so our schools can get on to their critical work of providing safe in-person learning for students in their community.”

Senate President Karen Fann, R-Prescott, said she is personally interested in helping schools avoid a crisis.

“The intention is never to do these kind of draconian cuts,'' she said. "As we know right now, many of the schools are struggling already with the COVID issues. We don't need to pile more on to them right now.”

House Majority Leader Ben Toma, R-Peoria, agreed for the need to act.

“We expect to address the matter in the upcoming session,” he said. And Toma said part of the reason an exemption is needed is “because Republicans have funded K-12 education at record levels.”

But the current problem is more complex than that.

It goes back to the aggregate expenditure limit that voters approved in 1980 for all K-12 spending statewide. Based on figures at that time, it is adjusted annually for inflation and student growth.

What’s happening this year is largely the convergence of two unusual factors.

First, the limit is always based on last year's student numbers. Chuck Essigs, lobbyist for the Arizona Association of School Business Officials, estimates that the drop in students in public K-12 education last year, much of that due to COVID, will reduce the spending limit by about $300 million.

But the bigger problem is one that the legislature created in seeking to provide financial help.

In 2000 voters approved Proposition 301 to levy a 0.6-cent sales tax to fund education, including teacher salaries, for 20 years. And voters made those revenues exempt from the aggregate expenditure limit.

With that tax expiring this year, lawmakers in 2018 agreed to a new, identical levy to pick up in July and run until 2041 to keep the money flowing without interruption.

Only thing is, they never exempted what the new levy will raise from the expenditure limit. And that alone accounts for more than $632 million of money now coming in to schools — money they formerly got to spend but, legally speaking, cannot spend this year absent a legislatively approved exemption.

If lawmakers do not act, that starts the process of determining how much each district will lose in spending authority.

Essigs said the way the law is written, anything over the expenditure limit is divided up among all schools, with each forced to reduce spending by the percentage set regardless of how much they were spending.

“If you're a high-spending district, you have to reduce your budget by 17%,” he said. And that same figure also applies to those with lower spending.

“If you're a district that has a lot of special ed kids, obviously you can spend more because the formula allows you to spend more,” Essigs explained. That's because state law provides a higher level of aid for youngsters with special needs.

But that 17% hit, he said, would come to the total spending authority, “even the part of it that includes special ed students.”

There's something else complicating the problem.

To balance the budget in the last decade, lawmakers cut dollars from the “district additional assistance” fund, money earmarked for schools to pay for items like books, computers and buses. In fact, that account was zeroed out by Ducey during his first year in office.

That account is now fully funded. But those additional dollars that were restored to schools also helped to push total statewide expenditures above the constitutional limit.

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