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F I S C A L I M P A C T R E P O R T

SPONSOR HECS

DATE TYPED 03/10/05 HB 1091/HECS

SHORT TITLE Change School Calculation of MEM

SB

ANALYST Chabot

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$20.0 Non-Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to HB 854, HB 1083, SB 125, SB 274 and SB 1056

Relates to Appropriation in the General Appropriation Act

SOURCES OF INFORMATION

LFC Files

Response Received From

Public Education Department (PED) in responses to original HB 1083 and HB 1091

Public School Facilities Authority (PSFA)

SUMMARY

Synopsis of Bill

House Bill 1091 amends Section 22-8-25 NMSA 1978 (State Equalization Guarantee Distribu-

tion—Definitions—Determination of Amount) to delete the requirement that a portion of local

and federal revenue be used for capital outlay and have PED calculate program units for charter

schools or school districts implementing formula-based programs for the first time based upon

current 40

th

day memberships. In addition, it changes the calculation of MEM for school dis-

tricts on the average of the prior year 80

th

and 120

th

day attendance. For school districts with 200

or less it is the average of the prior year 80

th

day and 120

th

day attendance or the 40

th

day of the

current year whichever is greater. The committee substitute combines features from HB 1083

and HB 1091.

Significant Issues

The statutory requirement for public school districts to designate an amount of state aid equal to

20 percent of local and federal revenue for capital outlay purposes is to assist the state in efforts

to ensure all schools meet the minimum levels of adequacy.

House Bill 1091/HECS -- Page 2

From discussion with the department, but not included in its analysis, New Mexico is certified as

an equalized state under Section 8009 of Title VIII—Public Law 103-381. This means the per

pupil expenditure at the 95

th

percentile compared to the 5

th

percentile does not vary by more than

25 percent. This allows New Mexico to deduct from state aid to the school district an amount

based upon the impact aid receipts. New Mexico currently uses approximately $58 million as a

credit from federal sources in determining the unit value under the State Equalization Guarantee

(SEG).

PFSA is concerned that removing the requirement to use 20 percent for capital outlay will cause

capital improvements needs of schools to compete against other operational needs of the district.

This may affect districts’ ability to meet match requirements for the Public School Capital Out-

lay Council (PSCOC) funded projects and limit a major funding source for completing projects

beyond the Statewide Adequacy Standards. However, there is nothing in the bill that would pre-

clude a public school district from using the 20 percent for capital outlay needs.

PED assesses not using the 40

th

day information except for growth calculations and new for-

mula-based programs will encourage school districts to retain student membership beyond the

40

th

day reporting program. This is a Governor’s initiative to kept students in school.

PERFORMANCE IMPLICATIONS

This bill could indirectly be related to performance measures on student proficiency which may

improve because students stay in school.

PSFA will begin performance-based budgeting in FY06 and has a measure tied to the statewide

public school facility condition index. If public school districts are unable to meet match re-

quirements and make needed repairs, it will impact PSFA ability to meet performance goals re-

lating to improving the condition of school facilities.

FISCAL IMPLICATIONS

PED indicates that over the past four years, approximately $14.7 million has been budgeted for

public school capital outlay from the following sources: $2 million has been budgeted for capital

outlay from the .5 mill levy, $12.7 million from impact aid funds, and $119 thousand from the

forest reserves. While these funds may still be available, the statutory requirement to use them

for capital outlay purposes will be removed.

PFSA states there may be a negative impact to the Public School Capital Outlay Fund if the local

match requirements are reduced or waived. Increasing capital expenditures from funds gener-

ated for maintenance may affect districts’ ability to adequately maintain facilities. Federally im-

pacted lands typically have low assessed valuations which limit bonding capacity.

Changes to the public school funding formula modify the distribution of SEG to school districts

and charter schools. PED assesses some charters and school districts would potentially lose

some funding if membership continues to drop after the 40

th

day reporting period.

PED would have to reprogram the Accountability Data System to perform the required calcula-

tions and estimates the cost at $20 thousand.

House Bill 1091/HECS -- Page 3

OTHER SUBSTANTIVE ISSUES

The Executive, LESC and LFC have recommended a public school funding formula study in

FY2006; HB 2 as amended has a $200 thousand appropriation to the Legislative Council Service

to study the formula. If possible, changes to the funding formula should wait until the study is

complete and changes proposed to the Legislature during the 2006 session.

PFSA adds the following issues:

The most updated assessment of New Mexico school facilities performed by 3D International

shows a total estimated current cost for the life cycle building renewal and repair needs of $2.28

billion. The funding model to address this serious backlog of capital needs is predicated on an

average 50 percent local matching share to bring all public school facilities throughout the State

up to adequacy.

The Public School Capital Outlay Task Force was created in part in response to the Zuni lawsuit,

filed in January 1998, which challenged the constitutionality of the state's process for funding

public school capital outlay in the state that was in effect at the time. In 1999, the judge of the

eleventh judicial district court found that the state was in violation of the uniformity clause of the

New Mexico constitution (Article XII, Section 1) in the manner in which it funded capital outlay

for schools. The state was given until July 28, 2000 to correct past inequities and to establish

and implement a uniform system of funding for future capital improvements. The court ex-

tended the time frame to await the work of the 2000 task force after its creation.

Laws of 2001, Chapter 338 enacted various recommendations of the Public School Capital Out-

lay Task Force. The legislation established a framework for public school capital outlay and

provided one hundred percent state funding for correcting health and safety deficiencies at all

public schools in New Mexico, continued funding of the backlog of critical capital outlay needs

of school districts that had capped their own resources for public school capital improvements;

and implemented a long-term public school capital improvement process beginning September 1,

2003 that guarantees all school districts an adequate physical space, adequate educational suit-

ability and adequate technological infrastructure. The legislation also increased the funding for

maintenance and repair of schools so that the state investment in school facilities is safeguarded.

Finally, it established a permanent revenue source for public school capital outlay using supple-

mental severance tax bonds.

As of September, 2004, Laws of 2004, Chapter 125, required PSCOC to make public school

construction grant awards compliant with the new standards-based process adopted by PSCOC in

September 2003. PSCOC awarded $198.5 million for statewide public school construction in

FY2004-05. Of the $198.5 million, $124.7 million was awarded for 39 projects in the top of 100

ranked for schools of greatest need as listed in the New Mexico Condition Index (NMCI) rank-

ings. Of the total awarded, $73.8 million was allocated to complete projects partially funded in

the prior award cycle. Although no longer required by law, the awards provided $109.4 million

to Impact Aid districts, including Albuquerque.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

The calculation of units under the funding formula will not change and the provisions for using a

portion of impact aid and property tax levy for capital outlay will continue.

House Bill 1091/HECS -- Page 4

POSSIBLE QUESTIONS

1.

What will be the impact on capital outlay matching funds available to a public school dis-

trict.

2.

What has been the historic average of per student funding calculations under the federal

equalization determination.

3.

Can this change to the funding formula be held in abeyance until a formula study is com-

pleted and recommendations made to the 2006 Legislature.

GAC/yr:lg