Despite a snow storm that led to canceling after school programs and adult basic education, the Finance Committee of the Minneapolis Public Schools Board of Education held its monthly meeting in person at the Davis Center Tuesday evening.

Audience attendance was sparse, but all committee members were present, along with board members elect Sonya Emerick, Lori Norvell and Colin Beachy.

This was the first public presentation on the district’s financial outlook for the next five years, which is explained in detail in the 36- page long pro forma financial projection. While the majority of the meeting time was focused on the pro forma, the committee also covered the timeline for preparing the 2023-24 school year budget, voted to send another amendment to the 2022-23 budget to the full board, and shared farewells to departing committee members. A summary of those agenda items is here.

Minneapolis Public Schools Senior Financial Officer Ibrahima Diop warns of “an imminent financial crisis related to declining enrollment and a failure to align increasing expenditures with anticipated declining revenue.”

The projected gap between revenue and expenses next year is forecasted to be $85 million, which the district will close with COVID relief funds.

The district’s general fund balance, currently $131.9 million, is expected to be just $8.5 million by the end of the 2024-25 school year, putting the district into statutory operating debt, because the balance will dip below 2.5% of general fund revenue.  When this happens, a district is required to submit a plan to the state legislature showing how it will get out of statutory operating debt. If the Education Commissioner does not approve the plan, the state will withhold state aid from the school district.

Even while projecting historically large increases in state education aid, the district expects it will enter statutory operating debt in 2025 if it continues to maintain its existing structure.

The financial projections in the pro forma assume that the state legislature, where both the House and Senate are now controlled by the Democratic party, will pass historically large funding increases for schools. The district is anticipating a 3% increase in its general education funding from the State in 2025. Director Jenny Arneson, who is leaving the board after three terms, said “it would be a historical increase from [the State].”

“They really only ever raise it [general education formula] 1.5 or 2 percent,” Budget Director Thom Roethke added.

The pro forma assumes that future collective bargaining agreements will include a 2.5% annual increase in compensation, meaning salary plus benefits, starting in fiscal year 2024. In the current fiscal year, compensation for teachers increased 3.5%, 6.1% for education support professionals, and 5.4% for principals. These larger-than-typical increases were a result of collective bargaining agreements.

The expiration of COVID funds and ongoing enrollment declines will adversely impact the district’s finances.

The district will have used nearly all of its one-time COVID relief funds to maintain its current structure and pay bonuses to teachers and ESPs when those funds end on September 30, 2025.

The district has been utilizing approximately $60 million per year in COVID relief funds for what it calls “continuity of services” to temporarily address its structural budget deficit. These funds have allowed the district to avoid changes to its operations.

By using the funds to maintain operations, the district has not been able to utilize those COVID funds for additional services to address the impact of the pandemic on its students. Federal COVID relief funds will be exhausted in the next fiscal year (July 1, 2023- June 30, 2024), after which point the district would have to pull from its general fund balance in order to continue to pay for its operational footprint.

District revenue is tied to enrollment, which has declined 17% in the past five years, while the costs of operating the district have increased. Going forward, the district projects that its annual costs will grow by 1%, even assuming it reduces staffing in response to declining enrollment. Annual revenue is forecast to decline by 3.7% per year, with 1.8% due to ongoing enrollment decline. This gap between expenditures and the decline in revenue will create a growing structural budget deficit for the district.

In fiscal year 2025, when COVID relief funds have been exhausted, the district will have a gap between its revenue and expenses of $105,181,000, or 20% of its total general fund revenue. The budget deficit will increase over time, reaching $173 million, or 34% of general fund revenue, in fiscal year 2028.

MPS schools operate with fewer students per staff member compared to other large districts in Minnesota, including St. Paul Public Schools.

The pro forma also lays out  the cost structure of MPS as more costly than other large districts in Minnesota. The district is the state’s largest employer of licensed teachers, but is only the third largest in terms of student enrollment. Statewide, districts employ, on average, one teacher for 12.3 students. Within MPS, there are 9.6 students per licensed staff member.

Minneapolis Public Schools operations are more expensive than other districts because it operates smaller schools with more teachers per student. The district’s students are also more likely to qualify for free and reduced price meals and English learner services, relative to the state average.

Nearly 54% of MPS students qualify for free and reduced price meals, compared to 32% statewide. Additionally, 17% of MPS students are categorized as “limited English proficiency” compared to 8.5% statewide. It is widely believed that students who qualify for these services require additional funding in order to meet their educational needs.

The pro forma shows in Table 5 that while the other fourteen largest districts in the state have a staff to students ratio of 12.5, these districts have just 27.3% of students qualifying for free and reduced price meals, and only 8.9% of students with limited English proficiency. However, in Appendix 5, the data shows that St. Paul Public Schools, where 65.5% of students qualify for free and reduced price meals and 28.3% of students are considered limited English proficiency, their staffing ratio is closer to the state average, at 11.28 students per licensed professional. Thus, even in a large, urban district with a larger proportion of students expected to have higher educational needs than MPS, SPPS’s operational model utilizes 15% less staff than MPS.

During Tuesday evening's meeting, in an exchange with Senior Finance Officer Ibrahima Diop, Director Arneson said that the upcoming budget discussions at the state legislature will have to focus on “where Minneapolis might be unique as well. We pointed out where we spend more money but we also have, I would argue, a unique set of students that perhaps … some of the other 15 largest school districts might not share. And to help us fine tune our advocacy efforts at the state capitol.”

MPS operates smaller schools, across all grade levels, than other large districts in Minnesota, including St. Paul Public Schools.

In addition to employing more teachers per student than the state average, the district also operates significantly smaller schools than other large districts. Elementary schools in Anoka-Hennepin and Rosemount-Apple Valley, for example, average 602 and 656 students, respectively. This is about twice as large as the average MPS K-5 elementary school, 317.

In addition, their 6-12 middle and high schools are also nearly twice as large, 1,973 and 1,478 respectively, compared to 867 in MPS secondary schools.

St. Paul Public Schools, which has student demographics more comparable to MPS, operates larger schools, on average than MPS. Its K-5 elementary schools average 357 students and its secondary schools average 1,088. (Note: This is based on data from 2021, and does not reflect that SPPS closed 6 schools this school year. Holding enrollment constant, that would have increased the average size of SPPS elementary schools to 416 students.)

The district budget is stretched thin by operating many small school buildings instead of fewer, larger ones. In the pro forma, the district asserts  that larger school buildings are more economically efficient. For example, additional administrators, office staff, specialists and custodial staff are needed to service more, but smaller, buildings.

More numerous, smaller buildings also impact the ability of schools to offer specialists. MPS funds schools based on the expected number of classrooms in each building. At the elementary level, each classroom is funded for 1.2 teachers. The extra 0.2 is funding to cover the classroom teacher’s prep period.

In order to have three full-time specialists, an elementary building needs to have at least 15 classrooms, which in a K-5 elementary school would be 2.5 classes per grade level. In order to fund additional full-time specialists, like a media center specialist, additional arts programming like dance, theater or instrumental music, or a STEM specialist, schools would need additional classrooms.

The pro forma projection does not assume MPS increases expenditures to meet the goals of its strategic plan.

Although the board passed a new strategic plan earlier this year, and Interim Superintendent Cox has started implementation of that plan, the pro forma notes that it does not assume that the district incurs the expected expenses of implementing that plan. Throughout Appendix 4, the pro forma details the potential increased costs of the strategic plan. For example, it estimates it would cost the district millions of dollars to regularly invest in the evaluation, selection and implementation of new curriculum, one of the conditions the district says is necessary to achieve its goals for student academic achievement.

Other examples of the costs associated with the strategic plan include paying educators for their time doing  professional development, and hiring additional drug and alcohol counselors, and other mental health supports for students.

While the pro forma is not intended to prescribe solutions for the board, it notes that simply increasing enrollment will not be enough to prevent statutory operating debt.

The district is currently structured to serve around 40,000 students, according to the analysis in the pro forma. If enrollment were to reach this level, the district would be able to remain in compliance with the board’s fund balance policy. Last fiscal year, enrollment in MPS was around 29,000 students, or about 60% of the school-age students living in Minneapolis.  The remainder of 21,000 students living in Minneapolis attend public charter schools, open enroll into public school districts outside of Minneapolis or attend private schools. Over the past four years, the district has lost 5,993 students.

U.S. Census data also shows a decline in children living in Minneapolis. American Community Survey data estimates a decline of 3,000 children ages 6-15 living in Minneapolis, and a decline of 4,600 children under the age of 6 living in Minneapolis.

The decline of children living in Minneapolis, particularly children under the age of six, leads to the conclusion that MPS enrollment will continue to decline over the next five years. By the 2027-2028 school year, the district expects enrollment to be just 23,072, a decline of 4,720 students, or a further 16% decline in enrollment.

Inflation-adjustment alone is unlikely to eliminate MPS’s long-term financial challenges because of its significant special education and English learner cross-subsidies.

One item on the district’s legislative agenda is advocating for the state to tie the general fund formula to inflation. Currently, districts cannot expect any automatic increase in funding from the state because the basic education formula is not indexed to inflation. Tying the formula to inflation would change that. Had the formula been tied to inflation in 2001, then the district would currently be receiving an additional $26.8 million per year in state aid.

The district has long-term financial challenges because of its special education and English learner programming that are not fully funded by the State.

MPS is spending nearly $69 million on special education and English learner services beyond what is covered by State aid. MPS is spending about $2169 per student on these underfunded, mandated services that the State does not fully fund.

Last year, MPS was required to pay for $53 million of special education services using its general fund revenue because the State of Minnesota does not pay the full cost of special education services for all students. MPS has the largest special education cross subsidy in the state. A cross subsidy is the difference between what the State pays school districts for required services, and the actual cost to school districts of providing the required services.

The State also does not pay for the full cost of services for students who qualify for English learner services. MPS spends an additional $16 million of its general fund revenue to cover the cost of these State-mandated but underfunded services for its students. Its English learner cross subsidy is the second highest in the state of Minnesota.

Districts that have a smaller percentage of students receiving special education and English learner services have significantly smaller cross subsidies. For example, in Minnetonka, the English learner cross subsidy and special education cross subsidies were just $656 per pupil last year- less than one third of MPS. Around 3% of Minnetonka students qualify for free and reduced price lunch, while around 1.5% qualify for English learner services.

The fiscal year 2024 budget process will begin in January 2023 when five new members join the school board.

At the December 13, 2022 board meeting, the full board will hear a presentation on the pro forma. At the same meeting, the board will hear a presentation on the 2022 financial audit, and take votes to adopt the proposed levy, the proposed legislative agenda, and another proposed amendment to the current year’s budget. This will be the final board meeting for Directors Arneson, Siad Ali, Nelson Inz, Kimberly Caprini and Cynthia Booker.

On January 3, 2023 the board will meet again, and newly elected board members Sonya Emerick, Lori Norvell, Collin Beachy, Fathia Feerayarre and Abdul Abdi will take the oath of office and join the board. Along with returning board members Kim Ellison, Sharon El-Amin, Adriana Cerrillo and Ira Jourdain, the board will confront an expectedly dismal financial future. Although there are likely enough COVID relief funds to keep the district budget balanced for another year, this board will eventually have to confront the district’s large structural deficit. It remains uncertain whether the state will increase aid to MPS enough to prevent statutory operating debt without a significant restructuring of district operations.