Lakeland Currents, your public affairs program for North Central Minnesota.

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Welcome to Lakeland Currents.

I'm your host Todd Haugen.

I have as guests on this edition of Lakeland Currents two school superintendents.

One of them from Grand Rapids, his name is Matt Gross.

He's the superintendent of Grand Rapids Schools and also Jeremy Olson who is the superintendent of schools here in Bemidji.

Gentlemen welcome to Lakeland Currents.

Good morning.

Thank you.

Nice to have you both here.

We, there are a lot of things and for sake of full disclosure I'll just start by saying that I'm a member of the Bemidji school board, so I want to be clear about that.

There are a lot of things to talk about about our public schools but what we're going to focus on in this edition of Lakeland Currents is public school budgets and how they work and how schools are funded.

Matt let's start with you.

In Grand Rapids what is the size of your school district?

Sure, we have about 3,900 students in K through 12.

We have nine educational sites and we're really, really large geographically.

We're the third largest district in the state about 2,000 square miles.

Wow!

So, we're about the size of Delaware and that comes with a lot of complications.

We run a number of schools in Grand Rapids itself and Cohasset but then we also have a K-12 building in Big Fork which is 40 miles north of town.

Gee, I've already learned something.

I didn't know your district was that big.

It's very large.

Jeremy District 31 is large as well right?

It is yes, we have about 4,600 students.

We have, we're actually slightly small.

This is the first time I've really talked about being slightly smaller than another school district.

We also have a very large and diverse district with Bemidji, you know, we serve it our service area when you look at our district is about 40,000 people that live within the Bemidji area schools and so when you look at the size of Bemidji compared to what we're looking at we are very spread out right?

So, we like our space here in Bemidji which is great.

It's not so great for transportation efficiency right?

So, we have a fairly large cross subsidy on busing because of that large geographical area and so we're, I'm very proud to be from Bemidji.

Transportation must be an even bigger challenge in Grand Rapids because 318 is even bigger.

It's, we run about 50 routes and as Jeremy probably would say, you know, there's a dynamic that school districts like ours have to figure out and that's balancing cost with ride times for kids.

We don't want kids on the bus early, early, early, but at the same time when you start adding routes that's really the only way to do that to shorten those ride times it increased costs and so districts like ours are at a disadvantage when we're having to transport kids from all corners of very, very large districts especially when you compare it to the metro where they might have the same number of students in a district that's a fraction of the size of ours.

And we don't want to get too far into transportation but we bring up transportation and size of districts because those have a lot to do with school district funding.

Does District 318 Matt run a deficit in transportation?

We will be this year.

We run our own transportation system and in Minnesota districts handle that in a number of different ways.

Some districts contract out, some districts run their own, some districts actually do both.

We run our own system, that helps.

Contracting out is generally a little bit more expensive and so we've made a lot of reductions over the last year in a few years there too cutting routes and we also pushed off some some bus purchases which anybody that knows about a transportation system you can't maintain that type of approach forever either.

Eventually, you'll have high maintenance costs or you'll have buses that won't pass inspection.

So, we pushed off some of those.

We did buy some this year but all those things add up and make it difficult to operate a large system like Jeremy and I both have in our districts.

And transportation is a difficult issue in Bemidji right Jeremy?

Absolutely, we've been talking about this quite at length at the legislative levels.

We run about a million dollar deficit.

We have 62 bus routes which again we are doing the same thing, we're trying to reduce bus routes and trying to eliminate that cross subsidy there because obviously that comes out of K-12 education funds and so that's been a real challenge as we have balanced the same thing as how far, how long is acceptable to be on a bus?

What does that look like because you can cut additional routes but that means that your kids are on the bus for longer and so trying to find that right spot between length of ridership but also economic efficiency.

A million dollar deficit?

So, you know like almost half of the current budget deficit in Bemidji.

How, why does that happen?

Do our drivers go too fast or something?

What's the problem?

Well and we've taken a slightly different approach.

We have also a couple years ago we were putting off buying buses but I also talked about that that's not a long-term solution right?

And we're really interested in balancing the budget long term and just we could take a short-term approach and not buy buses for several years and it would certainly help us with the cross subsidy but that doesn't actually get us to the point of being thriving and we don't want to just survive.

We want to thrive and so we've been trying to take an approach of trying to balance the budget with the transportation, you know, putting dollars in transportation replacement and so forth just so we can be sustainable in the long term.

So, what is the size of the budgets in each of these districts and how are they funded?

I know that that just answering that part of the question might take more than the rest of our show but how big are your budgets?

I'm about $80 million in Bemidji.

$60-$62 million in Grand Rapids.

Wow!

This is essentially, you know, the size of a budget for a sizable corporation really and where does that money come from?

Well, I think it's one of the things that communities sometimes don't realize that the majority of the funding for schools comes from the state and so in our school district that number looks like about 73 to 75% depending on the year comes from the state.

The portion of funding that comes from the federal government has changed a lot over the last few years as we've received COVID funds and now that those have waned but that's generally in my district about 8%.

Our local funding is around 12% when you look at property taxes and fees and things like that.

So, local direct payment or taxes to schools actually makes up a small percentage of our overall general fund.

Bemidji is very similar.

73% of our dollars come from state sources.

About 12% from local and then the rest coming from federal.

That does vary from time to time.

The numbers I shared with you are when we had COVID dollars and that was the last audit that we had.

That proration is going to shift a little bit as we move in as COVID dollars are no longer available for 2025.

So, sometimes we hear following a legislative session, legislators will say we increased funding for public education and so, you know, they're in a much better position now yet some of our districts operate with budget deficits.

So, if state funding is increasing then why are there budget deficits?

I think the question is how much is it increasing right?

So, I mean that's, we have inflationary factors and historically state aid has not kept up with inflation.

So, it is true that state aid has increased in most years right?

There is a slight increase but it's increasing at a rate lower than inflation which is obviously affecting most districts in Minnesota.

I'd add too that one of the, I have three new board members this year and one of the things that's been the most surprising to them is the degree to which our funding is specified or designated.

So, we may get large increases in a particular area but that area doesn't necessarily help us hire teachers or keep class sizes down or invest in transportation.

We saw that coming out of the 2023 legislative session a great deal where funding may have been increased in an area but we had to use it in an area that maybe wasn't where we really needed the money.

I remember from an early, early a long time ago now, in my when I was in my school finance class the longtime superintendent at the time saying something to the effect that schools would probably have enough money to operate if they could use all the money they get how they need to use it.

So, districts many times as an example will carry a fund balance in food service, a large fund balance in some cases and they can't use that, it can only be used there.

We can't use the money anywhere we want.

So, I think that's a really important dynamic too that we deal with.

It's so different than the private sector.

Doesn't the State sometimes, I mean when they say they've increased public school funding don't they oftentimes attach to that new mandates that are going to cost even more than the increase?

Yes, that does happen quite a bit.

So, unfunded mandates are kind of, they're actually unfortunately par for the course.

We've seen that a lot in legislation.

I think about several mandates right off the top, you know, there's summertime unemployment, that is something that it had one-time funding put aside for it by the legislature but by law when that one-time funding is gone that is going to revert back to the school district.

So, it's a mandate that was put in place by the legislature that schools are being asked to pay for and that is challenging.

Now the legislature, right now is trying to figure out a fix for that long term to make that sustainable.

I certainly hope that they do find that fix but the current law is written so that it once the onetime funding runs out it is going to be borne by the districts, the school districts.

So, what are the options then for the district?

Right now there really isn't a whole lot of options.

So, with unemployment in the other nine months that is something that we can levy for.

In this law that was passed we're unable to levy for it and so therefore really the only fixed absents state aid dollars that would come attached to that if the State was to come up with some type of funding mechanism to carry it forward.

The only other option would be for districts to pay for it out of their K-12 general education dollars.

And you know some of the mandates I think have good intent, you know, I think people could have a long discussion about school term employees and them earning unemployment.

There could be good intent there but when there's either no funding attached to that or one-time funding attached to that eventually either that catches up to the state or that catches up to school districts and so that will be part of the budget deficits that we're dealing with.

In our school district we planned as we went through the spring and went through our budget planning for fiscal year 26 next year that we would make a reduction in the amount necessary to cover the gap in unemployment costs that we would have because of that mandate.

I think the READ Act was another one that came out and and I'm a huge fan of evidence-based literacy and I think there was a need for a change.

So, I'm proud of that.

I think again when the state looks at large changes like that, those things have to be funded in whole otherwise the cost of those end up being borne by school districts and when most of our budget 83% in our district's case is spent on people when it comes time to make budget reductions it's difficult to do that.

You can't turn the lights off in the middle of the day and you have to keep the heat on and you can only adjust that 17% or squeeze that 17% so much.

Eventually, it comes down to having fewer people, teachers, paras, principals administrators, school support.

It's just really tough.

Matt do you currently have a budget deficit in Grand Rapids?

We've been making budget reductions.

This is our sixth straight spring of doing that.

We've cut almost $10 million and and over 80 jobs because of budget deficit and that's the situation that I walked into and we've balanced our budget the last two years.

We've been really careful about how we've used COVID funding and making sure we're really judicious about that.

So, we've been able to balance our budget but it's been after making hard hard cuts.

What about in Bemidji Jeremy?

There's currently a budget deficit right?

There is currently a budget deficit.

We've been in a budget deficit since 2019.

As Matt talked about, you know, we had COVID funds that we could use to supplement that budget deficit and we talk a lot, you know, when I came in as a superintendent, I talked a lot about structural deficit because we, that term is basically our dollars minus COVID dollars because those are those are onetime dollars or not sustainable dollars and so we've had a deficit a structural deficit since 2019 and we've been working very diligently to try to reduce it.

We are not to a balance point yet.

We are actually in the process right now of the board has set a budget target or budget reduction target to try to take a further step to balance that budget.

So, school district budgets are public information, they're public school districts and people can look at that and when they do they may see well wait hold it here's a fund balance of some number of millions of dollars.

Well gee that they have money.

Why don't they spend that money?

What's a fund balance for?

So, in our case, you know, as we talk about our path towards a balanced budget we're using it as a runway to, you know, basically a runway to take off, so runway to balance that budget.

So, what we're using those dollars for is in the in between time between now and when we balance our budget to basically as we have to spend using that fund balance drawing that down so we don't have to make really, really large drastic cuts.

If we did not have a fund balance, right now we should be making the board budget reduction target was $1.5 million.

We should probably be making double that but we didn't want to make that drastic of a step right now because we do have the fund balance that was really artificially inflated by COVID dollars and so we're going to use that and be very judicious in how we approach this because we want to make sure that we keep as many of the reductions outside of the classroom as possible and we want to do as good of a job as possible, being very diligent about not just making a giant step but making some very concerted steps towards balancing the budget so that we don't, you know, wreck our programs, destroy our system because we have a very strong system here in Bemidji and we want to keep that intact as much as possible.

Plus the State of Minnesota is projecting some budget deficits into some future bienniums.

So, in those cases they're known to do what they call shifting and what's shifting in terms of public school budgets Matt?

We've experienced this in the if you've been doing this work long enough you've been through this before.

Currently, the State gives school districts 90% of the aid that they generate in a particular year and they give 10% sort of as a settle up payment during the next fiscal year and when the State has run into its own budget problems in the past, they've shifted the payments so that a district might receive back then 60% of the revenue it should be allocated in a particular fiscal year and 40% as that settle up payment the next fiscal year and what that enables the State to do is to show a balanced budget in a year just because they've pushed some of their expense into their own next fiscal year.

So, it's an accounting game they play but school districts end up paying the price for that because and it reiterates the point of having a fund balance.

Our in school funding we see peaks and valleys over time and what a fund balance enables districts to do is to sort of shave those peaks off and shave those valleys off so that we can ride through some of that uncertainty.

Jeremy's example is really, really good because Bemidji had a healthy fund balance the board and administration could make decisions about how to adjust budget reduction amounts because they could accommodate some of that with the fund balance.

Had there been no fund balance those would have been real cuts to real people to the budget and so fund balance are really, really important.

Sometimes I think they're looked at as a savings account and that's not really what they are.

They're a way for an organization, any business to have a reserve that enables them to ride out those tough times, build that during those good times so that overall a district can have health and stability for people and you know when a district has health and stability it's better for their employees, better for kids, better for families.

So, it's reasonable to expect with these coming budget deficits from the State of Minnesota that the more dramatic shifting will once again take place and if districts don't have a healthy fund balance it could get really, really tight.

It's a strategy they've used in the past and certainly is a strategy that I think districts would be wise to prepare for and the way to prepare for that is to have a fund balance so that we don't have to borrow.

I was in a previous school district in a place where we had to borrow money because, you know, the bills come at 100% and if you don't have 100% of your funding, you have to come up with a way to pay those bills and so many districts during that time especially when it was as dramatic as 60/40 many districts had to do cash flow borrowing and borrowing money you pay interest everybody knows that.

So that cost districts more.

And when we went through this last time the cost of borrowing was very, very low.

So, when we had the 60/40 several years ago the cost of borrowing was very, very low to districts.

It was to a point where it was an additional cost.

It wasn't pleasant, wasn't fun but to do borrowing now would be much more costly to school districts just based on where the interest rates are in the market and so forth.

So, we certainly, I've talked even internally that that's something we have to be somewhat prepared for and I think we would be very unwise not to to look down the road and say that that might be coming.

In addition to that the state aid formula, one of the big factors for why districts in Minnesota are struggling is state aid has not kept up with inflation right?

So, historically we have just not kept up with inflation.

This last biennium we were able to get inflationary factor built in which is effective for next fiscal year and that's going to I believe to be important for districts to use and stabilize long term because that inflationary factor is going to help us adjust as inflation increases.

Now there is a certainly a cap floor of 2% ceiling of 3% but that will help us manage our budgets a little bit better than in the past.

It'll give us a little bit of certainty as we move forward and as we work on our own budgets but one of the concerns I have is that that is a very important piece to maintain because long-term health really is dependent on that being maintained for school districts.

So, I'd be much more inclined to look at shifting as opposed to, you know, seeing any changes to that inflationary factor that was just put in.

Just if I can just put a, you know, we talk about that from a context, a numerical perspective.

When that formula was disconnected from inflation 20 plus years ago, if we compare that to where we're sitting right now it's about $1,300 less in buying power that school districts have.

You think about a district of $4,600 that would be a change in revenue of I don't know $6.5 million.

Well, if Bemidji had an additional $6.5 million dollars right now in revenue that would just be the same buying power as they had then, These conversations are very different.

Bemidji's ability to do what it wants to do is different.

For Grand Rapids it's $5 million in additional revenue we'd had if they had left that formula alone.

So, I agree with Jeremy that keeping that inflation factor is really, really important.

The State bases a large portion of its funding to public school districts on the size of enrollment for each district.

You have fewer kids you don't, shouldn't cost as much to operate your district.

You have more it should cost more.

So, when district's enrollments change especially if they go down that affects the funding to a great extent for public school districts.

Now we just went through the COVID pandemic.

It seems like it just happened but I guess it's been a few years now, that had a dramatic effect on school districts across the state probably across the country, but what happened in Bemidji Jeremy as a with enrollment as a result of the pandemic?

So, as a result of the pandemic there was certainly a large enrollment loss.

I know right before I came here as superintendent there was a really large loss.

We've been trying to recoup ever since.

We've been trying to manage our enrollment.

We're still in a declining enrollment phase unfortunately.

It's much less drastic than it was during COVID but there was certainly a drop in students during COVID.

How about in Grand Rapids Matt?

Similar story.

We had a dramatic drop during COVID, after COVID I think two years past COVID we were back to where we were preandemic levels but the State of Minnesota, rural Minnesota are all seeing declining enrollment and we're certainly in that camp too.

Now in Bemidji we haven't seen that many kids come back.

I mean some came back but a lot did not.

That is correct.

So, what we did we were not able to recover, you know, what we try to do is we're trying to stabilize what we, what we do have, the enrollment we do have.

So, that's a little different story I guess between the two districts but that is true.

So, is it a safe generalization to say that I mean you hate to think of kids in terms of dollars and cents and we wouldn't be in doing what we're doing if we, you know, thought of kids that way but again in public school funding it kind of comes down to dollars and cents to a certain extent and the each kid I mean the state compensates the district to the tune of about $10,000 bucks per kid.

Is that about right?

It's a, I think that's an easy math number to use, a safe number to use.

By the time you add on a variety of categorical fundings and this is where it gets really complicated when we talk about school funding but you know one of the challenges with declining enrollment especially when you look at districts our size.

If our enrollment drops by a hundred across the system that's over a million dollars in revenue loss but if you look at a hundred students across 13 grades K through 12 there's not a corresponding reduction that you can really make because there's only just a handful of kids in each in each section right?

You can't eliminate an entire sections worth of students.

So, that's where declining enrollment gets really, really complicated.

You lose this enrollment revenue but you're not able to make a corresponding reduction in expense.

And so if you run into budget troubles then there are options where you can ask local voters to are they willing to pitch in a little more?

The so-called operating levy referendums.

Is that an option that seems like a good idea?

Well I think we need to also recognize the issues that we're dealing with right now are not issues from one or two years.

It's historically as we were talking about, it's 20 years of underfunding in public education when we look at not keeping up with inflation right?

We're subject to the same inflationary factors as any other business.

We're in some cases some of the things that like buses.

The inflationary factor doesn't keep up with the price of busing or of school buses and so forth.

That's just one factor but for 20 years now we have basically not been keeping up with inflation.

So, the issues we're dealing with right now are not issues from one, two, three years ago.

They're issues that are really compounded over 20 years and as Matt pointed out had we been keeping up with inflation, had we had that inflationary factor in place, we would be looking at a much much different situation across the state from a school budget standpoint.

Is there an operating levy in place in Grand Rapids?

There isn't.

We're one of the, I think it's probably say fair to say few districts in the State of Minnesota that do not.

I think the number is over 70% of school districts have made up for this gap that Jeremy's talking about by going to voters and increasing that number from 12% to some other number where the community is contributing.

We did run an operating referendum in 2023 in the fall and it was defeated soundly and so we're trying to regroup and restrategize there but that gap has to be filled somehow in the gap between revenues and expenditures and if it's not going to be filled by local contributions, it has to kind of be worked on from the expense side and that's where budget reductions end up coming in.

But there's a bill that's getting some attention now around seasonal recreational property and I know for Bemidji and Grand Rapids area schools we both have a significant amount of seasonal recreation, cabin type property and again looking back a long time ago 20 years ago, a change was made in where tax money went and tax money from those properties went away from local schools to the State general fund and this bill would bring those those funds back, would be an increase for those property tax owners or those property owners but it would bring that money back to school districts that had a referendum in place.

Well, let's hope that sees the light of day.

Gentlemen we've run out of time for our Lakeland Currents show.

Thank you for being our guest today.

You're welcome.

That's Lakeland Currents, thanks for watching.