WORTHINGTON — Public school funding in Minnesota is extremely complex. For example, the Minnesota Department of Education’s booklet explaining school funding is over 80 pages long. Trying to understand it can make your eyes glaze over and your mind go numb. Public school funding comes from several sources and comes mainly from federal, state and local taxes, grants, and other means such as fees and donations. Most sources specify how the money can be spent and require separate accounting for those funds. Of major interest to local taxpayers is how school property taxes are arrived at, including how they are determined and what the expenses the funds are used on.
For all taxing entities including schools, counties, cities, townships and special taxing districts like watershed boards, the county assessor places an estimated market value on all property in the district. The taxable market value of the property is then computed by subtracting the homestead market value exclusion. The homestead market exclusion, established by the Minnesota Legislature, excludes a portion of the estimated market value from the market value. The maximum exclusion is $30,400 for homesteads valued below $76,000 and is gradually reduced and is fully phased-out for homesteads valued above $413,800. The exclusion amount can be found on the proposed property tax notices sent out by the county.
The assessor then applies the appropriate class rate, established by the state legislature (residential, commercial, homestead, etc.) to the taxable market value of each parcel of property. The resulting value is called tax capacity, or net tax capacity. This is the value of the property that the property taxes will be levied against for all school funding formulas, except for the levy share of operating referendum, local optional revenue, equity revenue and transition revenue (which are levied against the referendum market value of the school district). The referendum market value excludes seasonal recreational and agricultural lands. Complex to be sure.
Each year, the local school board approves a budget for the coming year. It starts by approving budget assumptions for district administration to use including the estimated number of pupils, an inflationary or deflationary figure for general costs, estimated wage and salary costs, and other costs based on both known and unknown factors. The board then sets the dollar amount for the final budget. The state sets a maximum dollar amount the district can levy. Most districts levy the maximum amount, but in the last 10 years Worthington has under-levied by 2.7 million dollars.
When all these district calculations are complete, the county auditor figures the dollar amounts to come from local taxes for the coming fiscal school year. The total amount will come from several other computations. These computations include taxpayer-approved levies and board-approved levies.
For ISD 518, the taxpayer-approved levies include the principal and interest for the bonds used to build Prairie Elementary. The principal and interest for the bonds for the new intermediate school approved by voters in November of 2019 as well as the principal and interest for bonds to refinance lease levies used to build the Learning Center and the high school addition, also approved by voters in November of 2019. Finally, this area also includes the $1,000 (now $300 — see below) per-pupil operating levy approved by voters in 2013 that will expire in 2023.
Board-approved levies are allowed by the state legislature and may come with partial aid from the state. For ISD 518, board approved levies include a board approved referendum for $300 per pupil and was done by reducing the $1,000 referendum levy to $500. The state pays 38% of this levy. Also included are the Local Option Revenue of $424 per pupil (43.6% paid by the state) and long-term facility maintenance revenue of $380 per pupil (39.7 % paid by the state). There are also several smaller amounts from other categories.
The total dollar amount all the local property tax generates is then allocated to the various taxable properties based on the property’s classification and market value. The increase or decrease in the taxes for a specific property from year to year will depend on three factors, the total market value of all property in the school district, the market value of the individual property and whether it has increased or decreased relative to other property, and the total amount of all levies for the school district relative to the previous year.
There are seven funds that the school district is required by law to maintain and keep income sources and expenditures separate. These six funds are divided into Operating Funds and Non-Operating Funds categories.
The Operating Funds category holds three funds. The first is the general fund, which covers the general operations of the school district including salaries and benefits, instructional materials, supplies and custodial operations, transportation, ongoing capital expenditures and equipment. For 2019-2020, the funds in the general fund come from the following sources: state aid at 86.6% of the fund, local levy at 8.2%, federal aid at 2.3% and other at 3.0%.
The food service fund, also an operating fund, services the school lunch and breakfast programs. For 2019-2020, the funds come from the following sources: state aid at 5.3% of the fund, federal aid at 75.4% and other (includes payments for meals by students and staff) at 19.3%.
The final fund in the operating fund category is the community service fund. This fund is for community service, early childhood family education, adult programs and recreation programs. For 2019-2020, the funds come from the following sources: state aid at 70.3% of the fund, local levy at 10.0% federal aid at 2.2% and other (includes fees for classes and activities) at 17.5%.
Non-operating Funds include the building construction fund, containing bond proceeds used to pay for constructions. Also in the non-operating funds category is the Debt Service Fund, which is used to pay principal and interest on bonds. For 2019-2020, the funds come from the following sources: local levy at 65.6% of the fund, state aid (mainly from Ag2School, Disparity and Ag Homestead credits) at 33.0% and other at 1.4%. The last non-operating fund is the Trust Fund, containing donations made to the district.
The funds from nearly all sources are restricted in what they can be used for and must be accounted for separately. For example, if there is a surplus in the food service fund, it cannot be used to pay salaries for teachers.
If actual revenues exceed expenditures, the surplus is also restricted in what it can be used for. A surplus in the transportation fund cannot be used to pay down an existing bond. State law does not allow for prepayment of bonds at the discretion of the board. Bonds can be refunded only if they meet requirements set by the state as to frequency and how far from the original date the refunding will occur. ISD 518 has refunded several bonds; that has saved taxpayers nearly $4.25 million since 2005.
The board also has a policy to have several months of budget expenses in reserve to use for unanticipated needs. A few years ago, the budget reserve was used when the state had a budget shortfall and deferred school payments for several months. Many districts were forced to borrow money to cover the shortfall but because their lack of reserves. ISD 518 was not. The district also has funds to cover possible post-employment benefits as required by law as well as funds designated for future use.
There are 17 funds that are restricted by state or federal laws. At the end of the last fiscal year on June 30, 2019, ISD 518 had $8,873,296 in restricted funds. In addition, the board had dedicated $15,000,000 for future capital projects and $150,000 for possible separation of employment costs. General fund revenues for ISD 518 totaled $52,378,000. Local property taxes contributed 6%, state sources 87%, federal sources 3% and other sources 4% of the total.
Minnesota public school financing is complex. The school board, administration and staff work diligently to ensure that applicable laws and accounting requirements are followed, all possible sources of funds are explored, savings opportunities utilized, and funds are spent wisely and within board guidelines. The clean audit reports given by the district auditor supports that the district is doing an excellent job of fiscal management.
Linden Olson is a member and treasurer of the District 518 Board of Education.