School financial problems important issue for state lawmakers this session


By Michael Hicks

Leaders of Indiana’s legislature have signaled they will take a look at school funding issues this year.

Among their concerns are 1) the use of an early warning signal of financial distress, 2) the creation of technical assistance teams for school districts and 3) a tiered approach to a state takeover of distressed systems.

Sadly, among voters and even among elected officials, there remains an astonishing level of misunderstanding about school funding in Indiana, and what has caused some recent problems for many school districts. A little explanation is in order.

In 2008, Indiana changed the funding approach for schools to a process that phased in over three years. Under the new formula, the state took over 100 percent of operational funding. Local property taxes could only be used for transportation and school construction. Under the formula, schools were paid a base amount for each child they enrolled, and an extra stipend for the number of poor children enrolled in the district.

This was done to insure school children in poor areas received more funding than students in rich areas. This bears repeating.

The state pays all the operating expenses — teacher salaries, technology, health care and the like. Poor places get much more funding than richer places and federal grants and aid tip the scale even further towards poor schools. As a result, schools with the highest share of poor students have about 40 percent more money per student than do schools with the lowest share of poor students.

This is not a mistake; it was the intent of the funding formula to give more funds to poorer places.

One consequence of this is that the two school districts the state has taken over, Gary and Muncie, are actually awash in annual revenues when compared to other districts in Indiana. For example, Muncie Community Schools receives almost $25,000 more from the state for a class of 25 students than any school district in Delaware County. And, last year, the affluent Carmel Clay Schools received $5,744 per student, while Gary received $8,030.

These funding differences do not imply that the funding formula is ideal. Perhaps the funding differences between schools is too large, maybe it is too small. Perhaps Indiana needs to spend another $500 million on K-12 education.

These are worthy questions requiring lengthy study and work in a budget session of the General Assembly. However, these funding data do make it clear that financial problems at Gary and Muncie have absolutely nothing to do with revenues. It is all about the spending, or rather misspending. So, when someone claims that a school district is in financial trouble because the community is poor, it is clear they simply have no idea what they are talking about.

With the state takeover of Gary and Muncie schools, one key lesson became apparent. The financial distress for both resulted from decades of poor management by both school boards. The underlying problems in both places were well reported by local media and successive superintendents.

The financial warning signs were apparent well more than a decade before either school was taken over by the state.

Thus, over the past few months, the Legislative Services Agency has created a financial condition indicator dashboard. This would alert the legislature and the public to school districts that are headed down the road to financial distress.

Using this tool, proposed legislation (Senate Bill 368) seeks to create technical assistance teams that would help schools before they become truly distressed.

Michael Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].

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