The Likely Impact of the IMA Charter School Proposal on MMSD Equalization Aid

On January 30, the Madison School Board will consider a proposal from Isthmus Montessori Academy (IMA) to establish a new charter school within the Madison school district. As the name suggests, the school would offer a Montessori curriculum.

A key question is what would be the financial impact of the new charter on the school district. For several reasons, this is very hard to project.

The financial analysis that the MMSD administration prepared for the School Board’s benefit looks at whether the addition of the school would generate sufficient new revenue authority to cover its net costs to the school district. In other words, would we be able to raise property taxes enough to cover the cost? The answer: not for the first couple of years. This is because revenue limits are based on the number of students in a school district, and new students are phased in over three years for revenue limit purposes.

While this analysis is helpful, I think it may be more useful to look at the likely impact of a new charter school on the equalization aid we receive from the state. Will the additional costs of the new school be offset at all by an increase in equalization aid? If so, by how much?

It is hard to make projections of future equalization aid. The equalization aid formula is based on six variables. Three are calculated by the Department of Public Instruction (DPI) on the basis of statewide factors as well as on the total amount available in equalization aid in a given year. The other three factors are specific to the school district: the total number of students (calculated per DPI rules), the total amount of property value in the school district, and the total amount of school district expenditures (again calculated per DPI rules). (I wrote an explanation of the equalization aid formula a few years ago that you can find here.)

With the help of a friend (thanks, John Voorhees!), I have developed an Excel spreadsheet that calculates equalization aid based on these six variables. The spreadsheet is helpful for showing how our equalization aid would change if we added (or lost) students.

I have taken the same assumptions used in our administration analysis of ISA to calculate how the addition of the school is likely to affect our equalization aid. I have used the statewide variables that DPI calculated for the 2016-17 school year. This is an approximation. The variables will be different next year and in future years, but they tend not to change significantly from year to year.

The administration analysis looks at the first three years of the school. For year one, it assumes a net enrollment of 174 students, half of whom are new to the school district and half of whom were previously in a different MMSD school. It also assumes that the school would have net expenditures of $1,074,450.

These assumptions change two of the variables used in the equalization formula: the total number of students in the school district and the school district’s total expenditures.   For 2016-17, changing these variables in the formula would have boosted MMSD’s equalization aid from $54,817,110 to $55,587,590, an increase of $770,480.

This suggests that, in its first year, about three-quarters of IMA’s cost to the school district would be offset by increased state aid. The net cost to the school district would be about $300,000.

I have run the same analysis of equalization aid impact for years two and three of the school. In year two, with a net enrollment of 220 students, again half of whom are assumed to be new to the school district, the net cost to the school district would be about $200,000. In year three, with a projected 228 students, the net cost would go up to about $315,000.

These are just approximations. As I noted, the three statewide variables in the equalization aid formula will be different in future years. Also, the analysis is critically dependent on the assumptions made about the number of students enrolled in IMA that would be new to the school district. This analysis assumes that half would be new. If the actual percentage is more, equalization aid would go up and the net cost to the school district would be less. If the percentage is lower, the net cost to the school district would be higher.

This illustrates one of tensions of the IMA proposal. From the school district’s perspective, the value of the school inheres primarily in the extent to which it can provide a better school environment for some of our students whose learning styles are not a good match for our neighborhood schools. But from a financial perspective, the school district is better off if the school attracts families who would otherwise be paying the tuition to send their kids to private Montessori schools.

If we are able to attract a 50/50 split of such students, as my analysis assumes, then the school seems like a pretty good deal. In year two, for example, if the projections hold, we’d be providing a more productive learning environment for 110 students who would otherwise be in our other schools, and we’d be providing basically free Montessori to another 110 students whose Madison families would otherwise be paying private school tuition. All of this at a net cost to the school district of about $200,000, or about $1,000 per student served.

Whatever one’s views of the IMA proposal, the cost of the new charter to the school district certainly does not seem like it should be a deal-breaker.