Against Revenue Limits

It was a tough budget year for Madison’s schools. We delayed our technology plan, put a hold on expansion of our successful AVID college-preparation program, and reluctantly adopted more than $9 million in additional cuts. But as Wisconsin school districts operating under revenue limits go, we were lucky.

Revenue limits have forced the Pardeeville Area School District to absorb unusually deep cuts. Since last spring, the district has cut spending for teaching positions, field trips, textbooks, staff development opportunities, summer school, and athletic equipment and eliminated the cheer and dance team. (In a rousing example of bake-sale financing, the team was reinstated last month after team members raised $4,000 to keep going.)

The School District of Rhinelander is making plans to go to referendum next February for authority to spend more than revenue limits allow. Without revenue limit relief, the district will be facing more than $7 million in budget cuts. The jaw-dropping list of projected cuts include closing the district’s two charter schools, increasing class sizes, axing high school AP and foreign language classes, and eliminating all extracurricular activities.

The Solon Springs school district is planning to go to referendum in April to exceed revenue limits. The stakes are particularly high. Without spending relief through a successful referendum, the district will operate at a deficit that puts it on a path toward mandated dissolution within five years.

School advocates have been complaining about revenue limits for more than two decades. Those concerns have taken on an added urgency over the last few years. Revenue limits force schools to spend less today than they did five years ago, and the biennial budget adopted in July allows for zero increases for the 2015-16 and 2016-17 school years. Cash-strapped school districts have increasingly been turning to referenda for voter approval to spend more than the limits allow, but legislative proposals would make such referenda less frequent and more risky.

The problem revenue limits were adopted to address has evaporated even as the restraints they impose on all the state’s school districts have become more binding. The legislature has not let the obsolescence of revenue limits’ original purpose dampen their enthusiasm for the policy. Instead, waving the banner of lower property taxes, Governor Walker and his legislative allies have doubled down on denying schools the resources their locally-elected school boards know they need to provide the quality of education their communities expect and are willing to pay for. 

1. Where Revenue Limits Came From and How They Became Unnecessary

Following the searing Hortonville teacher strike of 1974, Wisconsin adopted a mediation-arbitration law to resolve collective bargaining impasses between teachers unions and school districts. The unions generally made out fairly well under the new system. Local taxpayers, not so much. The school portion of local property tax levies increased an average of 7.6% per year between 1985 and 1993.

In 1993, Governor Tommy Thompson and the legislature adopted a strategy to address the surge in school property tax levies. Their approach side-stepped the mediation-arbitration law that had functioned as a ratchet to push up school district spending across the state.

Instead, they established the qualified economic offer, or QEO, enabling school districts to avoid arbitration if they offered their teachers a 3.8% increase in salary and benefits. To provide an incentive to school districts to rely on the QEO rather than offer more expensive raises, the legislature imposed revenue limits that set caps on annual increases in school district expenditures. To make the whole package more palatable, the state also agreed to pick up two-thirds of the cost of school funding. The changes became known as the three-legged stool of school finance.

The first leg of the stool gave way in 2003, when the legislature abandoned the two-thirds funding pledge. The second collapsed in 2009, when the QEO was repealed. The last leg of the stool – revenue limits – remains with us today.

Act 10 can be seen as a different strategy for addressing perceived flaws in the mediation-arbitration law. Rather than adjust the statutory standards as a way of modifying arbitration outcomes following a collective bargaining impasse, Governor Walker chose to blow the whole thing up instead. Collective bargaining was eliminated for anything other than base wages, and, short of a referendum, increases in base wages cannot exceed inflation.

The upshot is that revenue limits no longer serve their original purpose. They were established as part of a strategy to prevent school districts and local taxpayers from getting hammered by adverse arbitration rulings arising from collective bargaining. That is no longer possible. Save for the restrictions revenue limits impose, school boards are now the masters of their own fate in setting their budgets and compensating their teachers and staff.

2. Governor Walker Tightens the Revenue Limit Vise

Revenue limits need not be an acute problem for school districts if they include reasonable annual increases. But that’s not been the case under Governor Walker.

From the start of revenue limits in 1993 through the end of the Doyle administration, revenue limits increased every year by a per-pupil amount between $190 and $275. Roughly speaking, this translated into annual spending limit increases between 2% and 3%.

Governor Walker has taken a different approach. His first biennial budget called for a decrease of more than $500 per student for the first year, and a small $50 increase the second year. School districts were supposed to manage the cut in their spending authority by taking advantage of the Act 10 “tools,” which primarily meant taking the cuts out of the take-home pay of teachers and staff by requiring employee contributions to retirement accounts and increased sharing of health insurance costs.

In Governor Walker’s second budget, school district spending authority went up $75 the first year and an additional $75 the second year. This represented annual increases of less than one percent. In the most recent biennial budget, covering the 2015-16 and 2016-17 fiscal years, revenue limits are held constant – no increase at all.

Here’s how the annual changes in revenue limits have looked over the 24 years the limits have been in place:

When revenue limits were imposed in 1993, school districts started with a base of their then-current per-pupil spending. Over the years, annual changes in revenue limits have had a cumulative impact as they have (mostly) nudged up the amount of allowable spending each year. The following chart shows on a year-by-year basis how much more school districts could spend per-pupil than their 1993 base amount.  

As the chart makes clear, after 18 years of steady growth in revenue limits Governor Walker reversed course. Those limits are less today than they were in 2009 and 2010.

The negative impact of the very tight limits of the last few years has been offset to some extent by increased categorical aid payments to school districts outside of revenue limits. These payments started out at $75 per pupil in 2013-14, increased by $75 to $150 per pupil in 2014-15, remain the same in 2015-16, and go up $100, to $250 per student in 2016-17.

Even considering the special categorical aid payments, school district spending cannot increase at all during 2015-16 and can go up only $100 per student in 2016-17, which hovers slightly below the one percent level for most districts.

3. Revenue Limits Are an Unnecessary Affront to Local Control of Schools

With more than 400 school districts, Wisconsin has structured K-12 education to empower local control. Local control of schools is embraced as a bedrock principle by Republican politicians. Back when he was running for president, Scott Walker’s spokesperson told Breitbart news, “Governor Walker’s budget calls for local control over education, freeing up local school boards to decide how best to educate their children. This is consistent with the view he holds in his book … where he said any decisions that can be made at the local level should. . . .”

The governor doesn’t always put that belief into practice. The stingy revenue limits Governor Walker has set trample on local control by barring school boards from authorizing expenditures that their schools need. Revenue limits effectively override the best judgment of locally-elected school boards as to how the schools-taxpayers balance should be struck for their communities.

The top-down imposition of revenue limits is not necessary to impose spending discipline on school boards. If the limits disappeared tomorrow, school boards would not go crazy jacking up property tax levies. School board members are accountable to the voters in their districts and are very well aware of the pain increased property tax bills cause, particularly to the elderly and others on fixed incomes.

The state has other methods of discouraging increased spending. In Madison, for example, our relatively high property value makes us a “negative tertiary aid” district under the state’s complex equalization aid formula. Consequently, our state aid decreases by about 50 cents for each additional dollar we spend. In Madison we know that if we spend an additional dollar on our schools, we’ll have to raise the local tax levy by $1.50. That is a powerful disincentive to new spending on innovative programs or anything else.

And, of course, revenue limits or no, with Act 10 school districts cannot increase base wages for teachers more than the increase in the consumer price index without winning voter approval through an April referendum called for that purpose.

4. Schools Are Not Immune to Increased Costs

School districts have been slashing their budgets in response to revenue limits for more than 20 years. Districts will be forced to cut even more deeply than usual this year and next if they are to accommodate the rising costs all school districts face without increasing their overall spending.

Schools are a labor-intensive operation.  The costs of salaries and benefits make up anywhere from 70 to 80 percent of a school district budget.  Like other workers, teachers reasonably expect that they’ll see some bump in their pay over time if they continue to meet the expectations of the job.   The cost of benefits like health insurance increase over time no matter what kind of a job teachers are doing.

Teachers are like all other workers in this regard.  According to the Bureau of Labor Statistics, compensation costs for all U.S. workers, both public and private, increased by 2.0 percent during the 12-month period ending in September 2015, and by 2.2 percent during the preceding year.

If the compensation costs for a school district mirrored the national growth trend and increased 4.2 percent over the two years of the biennial budget, that would translate to at least a three percent increase in total costs for the district. That district would have to slash its spending by at least two percent to stay within the revenue limits, even holding all other expenditures constant and even taking into account the small boost in categorical aid payments in the second year of the budget.

Few employers budget for no increase in compensation costs for their employees. An example from the do-what-we-say-not-what-we-do department can be found in the biennial budget treatment of the office of Governor Walker.  The budget for the governor’s office is tabbed to go up 5% over the biennium, in order to account for “full funding of continuing position salaries and fringe benefits.”

There is an unfortunate cumulative effect here as well. Given the pinch of revenue limits, there is never a year when school districts can afford to give their teachers and staff a genuine raise. For those making career choices, this is a disincentive to enter the teaching field. For those determined to teach, it is a disincentive to come to, or stay in Wisconsin. The flurry of articles earlier this school year about emerging teacher shortages throughout the state were both troubling and completely predictable.

Cost increases are not limited to salaries and benefits.  Utility expenses rise each year, as do other costs of operation.  In Madison, we received a surprise this year when our property insurance costs soared from $212,000 to $449,500 as a direct result of a biennial budget provision that ordered the shutdown of the Local Government Property Insurance Fund.

While costs inevitably increase for a school district simply trying to maintain the status quo, budgets get even more challenging for districts that take seriously their obligation to attack achievement gaps and otherwise improve the quality of education they offer their students.  Not all improvement strategies cost money, but most do.

In Madison, we adopted plans in the last few years to dramatically upgrade the technology available to students and in classrooms and to address the services we provide to advanced learners and our growing number of English language learners.  We will soon take up a review of our services to students with disabilities.

These plans are all part of our goal to be a model of a successful urban school district that prepares all students to graduate ready for college, career and community.   We keep a close eye on proposals for new spending to advance our improvement efforts, but the necessary level of new expenditures is always going to be greater than zero.

Under these circumstances, the imposition of revenue limits that allow for virtually no increase in school district expenditures over the two years of the biennium simply makes no sense from an educational perspective.  I do not believe that our legislators actually want to undermine the education our public schools provide.  But if they did decide to go that route, they would not have to change their approach to revenue limits one bit.

5. The Imperfect Solution of Referendum Relief

The law provides a relief valve for school districts pinched by revenue limits. The districts can go to referendum to ask their voters to authorize the district to exceed their limits. There are three types of referenda. The first seeks approval to issue bonds or other forms of debt in order to undertake a large capital expenditure, typically to build a new school. The second asks for an exemption from revenue limits to spend more for one year, with no effect on the limits in subsequent years. The third asks for recurring authority to exceed the limits by a specified amount such that the limits are permanently bumped up by the referendum amount.

As cost pressures have increased on school districts under Governor Walker, so have the frequency of referenda. The number of referenda has jumped significantly during the last two years, as the following chart shows:

Is it misguided, inefficient and wasteful to compel school districts to resort to referenda for authority to meet the rising costs of school operations? Not everyone thinks so. For example, Republican Jeremy Thiesfeldt, chair of the Assembly Committee on Education, does not see a problem with government by referendum. “A school district, if they decide that they need additional money to provide a quality education, what is wrong with them having to sell this to the providers of the tax dollars, the voters?” Thiesfeldt says.

We shouldn’t require our school boards to win voter approval for their annual budgets any more than we should hold a statewide referendum every other year so voters can weigh in on the biennial budget. Representative Thiesfeldt voted in favor of requiring a civics test for high school graduation so he should know that our government does not operate by plebiscite. We have a representative democracy and elect office holders to make decisions so that the voters don’t have to.

Voters become understandably irritated if they are called to the polls every year for a referendum on school district spending. There are dedicated volunteers in every school district, but other community members have other priorities and would not welcome the obligation to educate themselves every year on school district finances in order to cast an informed vote on a referendum. That’s the kind of thing they elect school board members to take care of.

Also, there is likely to be a presumption of reasonableness around revenue limits. Those not steeped in school policy issues might naturally though erroneously assume that revenue limits are set at a generally reasonable level and that school districts that continually seek to exceed them must be addicted to profligate spending.

It takes work to correct such misunderstandings. Referenda to exceed revenue limits are significant undertakings that require considerable time and attention from school district administrators, school board members, and school volunteers. They also take money to mount effective information campaigns. The time and resources siphoned off toward efforts to pass referenda could otherwise be devoted to improving academic outcomes for the district’s students.

Budgeting by referenda also engenders uncertainty, complicates planning, and can be disastrous in those districts where referenda fail. Unavoidable reliance on referenda for adequate funding erects a wholly unnecessary and burdensome hurdle for school districts that already confront quite enough challenges in finding the resources to provide a top-notch education for their students.

6. Referenda in the Cross-Hairs

The response of our Republican legislators to school districts’ increasing reliance on referenda is to attack not the revenue limit problem but the referendum solution, imperfect as it is.

Senator Stroebel and Representative Schraa recently introduced legislation –Senate Bill 355 and Assembly Bill 481 – that would make two changes to referendum procedures. It would limit the scheduling of school district referenda to only three days every two years – either the April spring election, which occurs every year, or the November general election, which only occurs in even-numbered years. It would also extract a price for failure. The bills provide that if a school district referendum does not pass, that district would be barred from scheduling any other referenda for two years, no matter how draconian the budget cuts that revenue limits compel.

As I have written, the proposed legislation poses a danger to every school district, not just those where referenda fail. The proposal would mean that a school district would have only one chance to go to referendum to exceed the revenue caps established in a biennial budget. That one chance would only affect the second year. There would be no opportunity to respond by referendum to the revenue limits set for the first year of a biennial budget.

7. What’s a School Board to Do? 

As restrictive and unnecessary as they are, revenue limits are not going to be repealed by the legislature anytime soon. The only realistic solution over the next few years will be a grassroots and patchwork one. So long as the legislature does not erect more referendum roadblocks, we can expect to see more and more school districts go to referendum year after year in order to win authority to spend the funds necessary to carry out their educational mission.

A more audacious strategy is available to school boards that are confident of the support of their communities. They could schedule a referendum to effectively eliminate revenue limits. This could be accomplished by winning voter approval for recurring authority to exceed revenue limits by some extremely large amount – say $100 million, $200 million, or more.

Passage of such a huge referendum would not obligate the school board to spend an additional dime. Since school districts can carry over unused spending authority from year to year, it would enable the board to cease worrying about revenue limits to be set in future budgets.

With passage of a jumbo referendum, a community could reassert local control over its schools by liberating its school board to set budgets at levels that suit the community, free of the misguided restrictions that subordinate our schools and our students to a property-tax talking point for short-sighted politicians.