MINUTES OF THE JOINT SUBCOMMITTEE MEETING OF SENATE COMMITTEE ON FINANCE AND ASSEMBLY COMMITTEE ON WAYS AND MEANS Sixty-eighth Session March 22, 1995 The joint subcommittee meeting on Human Resources/K-12 of the Senate Committee on Finance and the Assembly Committee on Ways and Means was called to order by Chairman Raymond D. Rawson at 8:10 a.m. on Wednesday, March 22, 1995, in Room 352 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. SENATE COMMITTEE MEMBERS PRESENT: Senator Raymond D. Rawson, Chairman Senator William J. Raggio Senator Bob Coffin Senator Dean A. Rhoads ASSEMBLY COMMITTEE MEMBERS PRESENT: Mr. Lynn Hettrick, Co-Chairman Mrs. Vonne Chowning Mr. Joseph E. Dini, Jr. Mr. Dennis L. Allard Ms. Sandra Tiffany Mrs. Jan Evans STAFF MEMBERS PRESENT: Dan Miles, Fiscal Analyst Jeanne L. Botts, Program Analyst Sue Parkhurst, Committee Secretary OTHERS PRESENT: Don Hataway, Chief Assistant Budget Administrator, Budget Division, Department of Administration Brian Cram, Superintendent, Clark County School District Mike Alastuey, Assistant Superintendent of Business, Clark County School District Douglas C. Thunder, Director, Fiscal Services, State Department of Education Mary Nebgen, Superintendent, Washoe County School District Doug Sever, Business and Financial Services Administrator, Washoe County School District Richard Kester, Director of Business Services, Douglas County School District Nat Lommori, Superintendent, Lyon County School District Wade Johnson, Comptroller, Lyon County School District Mary L. Peterson, Superintendent of Public Instruction, State Department of Education Distributive School Account - Page 171 Don Hataway, Chief Assistant Budget Administrator, Budget Division, Department of Administration, prefaced his presentation of the Governor's recommendations for this budget with the statement he would attempt to place in perspective information the subcommittee has been receiving from various sources on the critical distributive school fund issue. He drew attention to page 172 of the Executive Budget, which he said is probably one of the most important pages the Legislature must consider for the distributive school fund. It represents the transition between the total distributive school budget used by the Budget Division to determine the basic support, and the Executive Budget itself. Mr. Hataway itemized and explained the line items on page 172. Regarding Weighted Enrollment, he said while it is well and good to consider enhancements for any budget, including the distributive school fund, the present enrollment levels require the use of available funds simply to maintain a continuation of the basic level of expenditures. Mr. Hataway said an additional 31,847 students are projected to enroll in Nevada's K-12 schools for the next biennium, and this must be addressed in the distributive school fund. By comparison, he stated, in the 10 years prior to this period, through 1995, the actual weighted enrollment increased by 86,722 students. As a result, the state is having to budget for an increase in growth of approximately 40 percent over the last 10 years. Mr. Hataway stated, "That is a staggering figure. If you just take the basic support figure that we are currently working with and multiply it by 31,847, you come up with a fairly staggering amount of money." With respect to Basic Support, Mr. Hataway said the Governor is recommending a 4.2 percent increase from the legislatively approved amount of $3,323 to $3,460 per pupil for Fiscal Year (FY) 1996 and another 3.7 percent increase to $3,582 for FY 1997. Mr. Hataway pointed out the percentage figures he would be reciting during this presentation must be kept in perspective in that, for example, 4.2 percent of $1 billion is a much larger amount than 10 percent of $1 million. He said this particular budget compares favorably with other parts of the Executive Budget. The Special Education line item represents the amount of non-distributive school fund support provided by the state, Mr. Hataway stated, and provides a special support for funds already in the Distributive School Account. The figures in this line item represent a 2 percent roll-up and a roll-up for the growth occurring in the school district. This also applies to the Adult Diploma category, in which roll-up and growth costs have been included. Continuing his review of the line items on page 172, Mr. Hataway said the Transportation item refers to the cost of transportation by the Lyon County School District (LCSD) of students from Schurz and Wadsworth, which cost is borne by the state. Lyon County is the only county involved in such transportation at this time. Mr. Hataway said the amounts budgeted will probably need to be increased somewhat because the $14,698 represents Lyon County's cost for transporting the children from Schurz, but since the Executive Budget was prepared the county has begun transporting children from Wadsworth to Fernley. He said even doubling the budgeted amounts would not materially impact the state budget. The most important line item on page 172 is the Total Support line, Mr. Hataway stated. The Total Support is the amount of funding the state guarantees. He emphasized the funding is guaranteed regardless of what transpires with respect to all other revenue sources or to enrollment. He noted there is an increase of $325,450,000 in Total Support guaranteed to the local school districts for the 1996 and 1997 Fiscal Years. By way of comparison, Mr. Hataway said when he assumed responsibility for the Distributive School Account budgeting he began tracking costs beginning with the year 1990, and that year the actual cost of Total Support was $560,340,000. The amount recommended by the Governor is over $1 billion for FY 1997, which represents an 85.5 percent increase over the same amount for 1990. The weighted enrollment in 1990 was $176,000; the projected amount for FY 1997, by contrast, is $272,916, a 54 percent increase over the amount for 1990. Mr. Hataway said the adjustments in the Consumer Price Index (CPI) since 1990 must be taken into account in comparing the dollar amounts. The CPI has increased nearly 26 percent since 1990, and when it is applied to enrollment the effect is "basically a wash," Mr. Hataway said; the costs have been increasing with enrollment, as adjusted by the CPI. To place the Total Support increase of $325 million in perspective and to provide a comparison of the DSA budget with those of other state agencies, Mr. Hataway noted the total budget for the Department of Prisons as recommended by the Governor (subject to modification that is currently underway) for the biennium is $260 million. While it might be desirable to provide more funding for both schools and prisons, Mr. Hataway stated, the total budget for the prisons department is small in comparison to the $1 billion budget for K-12 education. Another budget cited for purposes of comparison was the budget for the Welfare Division. While acknowledging the welfare budget involves federal mandates, Mr. Hataway said the largest budget for welfare, the Medicaid budget, would increase by $271 million over the next biennium, if the Governor's recommendation is approved. Mr. Hataway further stated the $325 million does not completely address the total expenditure increases being recommended in this budget. Mr. Hataway said the key line on page 172 is the General Fund line item. The amount provided by the General Fund will increase by nearly $77 million, he stated. He emphasized the $77 million increase is guaranteeing a $325 million increase in total support to the school districts. If the enrollment increases beyond what has been estimated or if the Local School Support Tax (LSST) from the Economic Forum's projections do not materialize as anticipated, the General Fund line guarantees the $325 million funding level. Mr. Hataway stressed the importance of this fact. He said the 25 percent Property Tax line item is the only stable revenue source in this budget, and the other revenue sources are highly volatile. He reminded the committee members that 2 years ago it was necessary for the state to provide additional funding support of $34 million to the school districts because the LSST revenues decreased significantly. A copy of a spreadsheet composed of two Budget Division DSA work sheets (Exhibit C) was distributed at this time. A handout (Exhibit D) that details the components of the recommended budget was also distributed. Mr. Hataway pointed out the total support for the DSA is much larger than what is shown in the Executive Budget. He said it is necessary to "think globally on this issue to fully appreciate and understand the magnitude of what is in [the DSA budget]." He synopsized the contents of the spreadsheet, by column and then by line. With regard to column A, which contains the expenditure and revenue elements of the DSA, Mr. Hataway explained there are revenues both inside and outside the DSA that help fund the total expenditures of the local school districts. Column B is the "actual" and is the basis on which the adjusted base budget is constructed. Regarding columns M and N, Mr. Hataway said the cost of living allowance (COLA) was purposely isolated to determine what the costs are for this item versus any other adjustments to salaries that were made beyond the base and the growth amount. Line 15 represents the total recommended funding for salaries and fringe benefits, Mr. Hataway continued. He noted 85.2 percent of all expenditures in FY 1996 and 85.7 percent in FY 1997 is for salaries and fringe benefits. For the first time, salaries and benefits alone will exceed $1 billion for all local school districts in the state, Mr. Hataway observed. Lines 50 and 54 contains the ending fund balance and the opening balance, respectively. Mr. Hataway noted there has been much discussion regarding the manner in which the two line items are addressed. He said the Budget Division decided that whatever the ending balance was in FY 1994, that amount would become the opening and ending balance throughout the budget to in effect neutralize this item. He stated he has run a spreadsheet with no ending or opening balance and has determined it has not affected the basic support in the budget proposal. Mr. Hataway cautioned committee members, however, that in the past the basic support per student for the second year of the biennium has often been somewhat lower than for the first year, and the ending and opening balances have been used as an adjustment tool to balance the basic support between both years of the budget. If this flexibility in budget preparation is removed from either the executive or legislative branch, the school districts "have only themselves to blame for that particular problem," Mr. Hataway stated. Senator Raggio said this seems to be a departure from the way this component of the distributive school fund budget has been treated in the past. Mr. Hataway said the Budget Division chose to neutralize the ending and opening balances in the proposed budget. In the past, the attempt was made to project the balances based upon economic forecasts; for the new DSA budget, however, these line items were simply ignored. Mr. Hataway voiced the opinion good management and accounting practices require that opening and ending balances be taken into consideration, and its removal from an income and disbursements sheet and a balance sheet does not make sense. However, it is a decision that he said must ultimately be made by the Legislature. The Budget Division has basically followed the legislative interim study committee's recommendation not to consider the ending and opening balances, and this is reflected in the proposed budget. Mr. Hataway repeated his earlier statement the absence of the balances in the budget has not altered the basic support. Jeanne L. Botts, Program Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, addressed the issue. She said in the last 2 biennia the Budget Division was criticized by representatives of K-12 education for considering a portion of the ending fund balance as revenue outside the Nevada Plan. The previous budget administrator "spent down" approximately $10 million of the projected ending fund balance over the 1991- 1993 biennium; that amount for the current biennium, 1993-1995, is only about $4 million, Ms. Botts stated. She noted there have been complaints the ending fund balance should not be considered as available revenue. Ms. Botts drew attention to a graph depicting information presented by the fiscal analysis staff to the subcommittee regarding the budgeted versus actual ending fund balances in the General Fund budgets for the school districts. She pointed out the substantial difference between the budgeted and actual amounts of the ending fund balances. In the prior two sessions, Ms. Botts continued, the Budget Division recognized as additional revenue the difference between budgeted figures and the ending fund balances that were likely to occur. This session the Budget Division, being sensitive to criticism of this practice, chose not to consider that the ending fund balances might prove to be larger than the amounts budgeted by school districts and, therefore, left the amounts requested by the school district. Senator Rawson asked what level of ending fund balance is considered prudent. Noting the range for state agencies is between 5 and 10 percent, Senator Rawson inquired if this would be reasonable for school districts, as well, in view of the fact the education budgets are the largest in the state General Fund. Mr. Hataway replied the state statutes stipulate the school districts should have ending fund balances of between 4 and 8 percent, although they have not reached even the 4 percent level for some time. He suggested the Legislature might consider requiring that a certain percentage, perhaps 2 percent, be reserved for such things as emergency situations and accumulating funds for opening schools, to exempt the funds from collective bargaining demands. There is at present no specific rule for this, Mr. Hataway said. Senator Raggio requested further clarification on the ending fund balance issue. He asked the actual amount of the ending fund balance for FY 1993-1994. Mr. Hataway replied it was $21 million. He said in constructing the DSA budget for the 1995-1997 biennium the Budget Division made the decision to use the actual ending fund balance for 1993-1994 as the opening and ending balance. Continuing his explanation of the line items, Mr. Hataway said line 52 is the Total Expenditures line and presents a composite picture of all general funds of the local school districts. It does not include class-size reduction (CSR) or other special funds such as those received from the federal government, but reflects strictly the total expenditures in the distributive school fund. Mr. Hataway pointed out the total increase recommended for the FY 1995-1997 biennium is $426,132,353. Responding to questioning from Senator Raggio, Mr. Hataway reiterated the Total Expenditures line does not include expenditures for the CSR or for kindergartners at- risk, counselors in the School Improvement budget, special accounts for nutrition and special education, or federal funding, but consists strictly of General Fund budget expenditures of the local districts. It also does not include the number of teachers hired as a result of the CSR. This expenditure is contained in a different budget account, Mr. Hataway stated. He said approximately 85 percent of the $426 million will be allocated to salaries and fringe benefits. Stating there is a proposal to roll existing class size reduction into the DSA, Senator Rawson inquired as to the administration's position on this issue. Mr. Hataway said the State Department of Education is recommending this action. While the Department of Administration recognizes the validity of some of the points made on this issue, he said, the CSR has always been regarded as the flagship of educational reform, and the Governor would propose that it be kept separate. This also keeps the CSR off the bargaining table, Mr. Hataway noted. He said the Legislature must consider the relative advantages and disadvantages of the proposal, but the administration's preference is that the CSR program should be kept at this time as a special, identified cost. He said the amount of increases beginning in FY 1990, which he referred to earlier (first paragraph, page 3 of these minutes) does not include the nearly $150 million of additional funds put into the CSR program. Referencing page A1 of the Executive Budget, which contains the Economic Forum's forecast of revenues for the biennium, Mr. Hataway said the total DSA General Fund budgeted expenditures for the FY 1995-1997 biennium ($1,183,778,543, FY 1996 and $1,289,458,704, FY 1997) for the first time will exceed the total General Fund revenue increases that have been projected by the Economic Forum for the biennium. The General Fund revenue forecasts are $1,216,858,490 for FY 1996 and $1,277,590,314 for FY 1997. Mr. Hataway said this is an indication of the high rate of growth of the K-12 education system. Acknowledging the difficulties local school boards and administrators have in attempting to balance the funding priorities and mandates under which they must operate, he said the fact is that before enhancements can be considered, the basic student growth in the K-12 programs must be budgeted and addressed. Mr. Hataway said lines 54 through 59 and lines 82 through 94 reflect the revenues for both inside and outside the DSA. He drew attention to lines 57 and 83 (Exhibit C), which in his opinion represent the only two stable tax revenue sources in this budget. Line 57 is the 50-cent ad valorem tax "inside the DSA" and line 83 is the 25-cent ad valorem tax "outside the DSA." Returning to page 172 of the Executive Budget, Mr. Hataway reminded the committee the General Fund line is the one that guarantees the entire process. Regarding the Basic Support Per Pupil, line 71, Mr. Hataway said the manner in which this budget item was constructed this time produced several interesting individual cost issues for each of the decision units in the DSA budget. The Basic Support, as shown on line 71 under columns E and F (Adjusted Base Budget),would be $2,938 for FY 1996 and $2,820 for FY 1997 (if no further adjustments are made). He said this item illustrates the opening and ending fund balance issue previously discussed. If no additional adjustments were to be made and the actual ending balance in FY 1994 were to be used, the Basic Support Per Pupil would actually decrease in the second year of the biennium. However, the adjustments in columns G through R affect the total basic support per pupil, which is recommended in the Executive Budget at $3,460 for FY 1996 and $3,582 in FY 1997. Mr. Hataway said this is one line the Budget Division "has never looked at before as the incremental cost increases or decreases, as the case may be, of each of these decision units. So from that perspective, the budgeting methods that we use today have some clear advantages." Mr. Hataway said he wished to emphasize line 98, the last line on the spreadsheet (Exhibit C), which is the balancing line for General Fund expenditures. It was felt by the Budget Division that growth in revenues should correlate with the growth in expenditures, and consequently the only two places in this budget that display revenues outside the General Fund are the Adjusted Base Budget and M-200 (growth) decision unit, Mr. Hataway stated. All other decision units are driven by and balanced with General Fund appropriation. Remarking on the increase in per-pupil support, Senator Rawson observed the sources of the funds and the spending restrictions affect the options available to the school districts. Using special education as an example, he stated, "You can make these figures appear to change, but you can add options or take options away depending on how we fund it." Mr. Hataway affirmed the senator's observation. He said his recommendation would be to return the special education funding to the DSA budget, increase the class sizes and inform the local school districts there are laws pertaining to this issue with which they must comply. He said the decision to bifurcate this process has led to confusion. He said the expenses for special education, a population he said is growing much more rapidly than the general population, are displayed on lines 1 through 52 (Exhibit C). He added, "We have just chosen to pull that out as a special funding source, and you can adjust it upward or downward; you can roll it all back into the DSA and drive the basic support up; you can pull it all out and drive the basic support down. There are options that you have to consider." Senator Rawson commented one alternative would be to fully fund special education, but that would lower the rest of the support. Mr. Hataway contended special education is fully funded, but "they have to, unfortunately, compete and make some tough decisions at the local level as to then what do they give up if their [special education] population is growing faster." He pointed out the school districts are bound by certain laws, and this would be one of the elements involved. Assemblyman Joseph E. Dini, Jr., countered that special education is actually not fully funded. He requested figures showing what is actually spent on this program, noting General Fund monies are being used to make up the difference. Mr. Hataway said the school districts have provided the information regarding what they have actually spent on special education, and the amount is over twice what is provided in the special funding. However, he contended the total expenses are in the General Fund cost in the budget, and a portion of the special education cost is merely being extracted to fund as a special element. He repeated the budgeted amount does not include federal funds received for special education, only those funds provided by the state through the General Fund. Returning to line 89, the General Fund totals, Mr. Hataway stated much has been said about the funding support that local school districts receive versus the funding for other state entities, "and there have been some crocodile tears spilled on this particular matter." Addressing this issue, he listed the K-12 share of the state budget, by percentage, for each of several past bienniums as follows: FY 1987-1989, 38.1 percent; FY 1989-1991, 38.2 percent; FY1991-1993, 34.3 percent; FY 1993-1995, 36.2 percent; and the amount recommended for FY 1996-1997 is 34.8 percent. Explaining the meaning of the above figures, Mr. Hataway said the sizable decline from 38.2 percent to 34.3 percent was the result of the substantial reduction during the 1991 legislative session of the General Fund appropriation and added a three-quarter cent increase to the LSST. Nothing magical happened, he continued, with reference to the 38.2 percent versus 34.3 percent in terms of the share of the state budget received by the local school districts. He described the perceived change in the funding situation as an illusion, "smoke and mirrors." He said the Budget Division and the school district authorities had been overly optimistic as to the revenues that would be produced by the LSST. Mr. Hataway commented the LSST, for reasons unknown to him, is legally interpreted as a local tax but it is actually a state-collected, locally shared tax. With regard to what caused the change in the 36.2 percent K-12 share for FY 1993- 1995 to 34.8 percent recommended for the next biennium, Mr. Hataway said the Economic Forum has projected the non-state General Fund portion of the DSA revenues supplied by the LSST, the slot tax and other sources is growing much more quickly than the General Fund revenues, and therefore the school districts' share of the General Fund naturally decreases. He reminded the subcommittee the guaranteed support from the General Fund for K-12 is increasing by $325 million, and the total expenditures will increase by $426 million. He maintained the school districts do have funds to spend, even though difficult spending decisions may be involved. He claimed there is no basis in fact for the complaint regarding the change in the K-12 share of the General Fund from 38 percent to 34 percent, when the cause of the changes in percentage is taken into account. Mr. Hataway directed attention to the spreadsheet identified as DSABASE in Exhibit D. (The spreadsheet referenced is attached to these minutes as Exhibit D-1.) Mr. Hataway said the base budget spreadsheet is the one that represents the roll-up in the adjusted base budget for salary and fringe benefits. He reminded the subcommittee the instructions followed by the Budget Division in constructing the budget provide that the adjusted base budget is composed of the identical expenditures of 1994 actuals adjusted for merit, with respect to salaries. The budget office has always used a 2 percent roll-up in the DSA budget and a 3 percent roll-up in the CSR budget. As reported by the school districts through the State Department of Education and as shown on the base budget spreadsheet (column B, line 11), the average 1994 salary was $36,300 for licensed instructional personnel. Senator Raggio inquired if the average salary figures include the paid retirement. Mr. Hataway replied no; the salary figures represent only the salary portion of the compensation. The fringe benefit rate, shown on page 74 of the spreadsheet, would be applied to the salary to arrive at the combination salary/fringe benefits figure. Continuing, Mr. Hataway said the average 1994 salary of $36,300 was "rolled up" 2 percent to FY 1995, to $37,026. That figure was then multiplied by the number of licensed instructional personnel reported by the school districts (11,827.8), for an FY 1995 cost of $438 million (rounded off). He stated, "That was driven then by 2 percent into FY 1996 for $447 million... and driven again into FY 1997 another 2 percent for $455.6 million." Line 60, Exhibit D-1 contains the Total Salaries costs of $700 million for FY 1996 and $714 million for FY 1997. Mr. Hataway said the fringe benefit rates as actually reported in FY 1994 were applied to the salary costs. Line 72 contains the Total Positions/Salaries and Fringe Benefits costs. The amount for FY 1996 is $885 million; for FY 1997 the cost is $901 million. Senator Rhoads inquired as to the amount of fringe benefits per teacher. Mr. Hataway said the average cost for medical insurance for FY 1994 was $2,589.96; the average retirement cost was 16.69 percent of salary. (The fringe benefits are itemized on lines 62 through 68 and totaled on line 69.) Referencing columns E and F on the combined spreadsheet (Exhibit C), Mr. Hataway explained the manner in which the adjusted base budget was finally constructed. He said the major change with regard to the salaries expense is the 2 percent roll-up. The operating expenses (lines 20 through 36) are identical to the actual FY 1994. Equipment (lines 39 through 41) was removed per the budget instructions, and Mr. Hataway said this is the primary reason the basic support in the base year is considerably lower than the current rate. All other costs in the adjusted base budget are identical to the 1994 actual with one exception, Mr. Hataway stated. Toward the end of the budget construction process, the Budget Division was requested by the education department to change the 50-cent ad valorem and the 25-cent ad valorem in the 1994 actual to figures the department regarded as more accurate, and Mr. Hataway was unable to change the figures elsewhere in the budget due to time constraints. Consequently, the totals in columns E and F are somewhat different than the 1994 actual. Senator Coffin asked Mr. Hataway to explain the reason for removing the Equipment line item from the budget and putting it into a one-shot appropriation request. Mr. Hataway said the instructions for construction of the adjusted base budget states that all items for funding as one-shot appropriations (for example, computer equipment, other kinds of equipment and onetime expenditures) should be removed from the adjusted base budget. The equipment request has been addressed in another decision unit. Mr. Hataway observed the rules have changed with regard to state budget construction. In further discussion on this item, Mr. Hataway said a $29 million one-shot appropriation for equipment, to be used at the discretion of the local school districts, has been recommended. This can encompass a wide range of uses, Mr. Hataway said, because it is the Governor's wish to provide as much discretion as possible to allow catch-up of deferred maintenance, computer labs, roof replacements, or other uses of the funds. Mr. Hataway said a large part of the $29 million one-shot request would probably be spent on equipment and associated costs. The normal, ongoing equipment expenditures for transportation and instructional costs are still incorporated within the budget, he continued, but are not included in the base. Senator Coffin questioned Mr. Hataway regarding the removal of the equipment replacement category item from the base budget. He said he is concerned about this situation because in many budgets equipment replacement is considered an enhancement, yet there is normal wear and tear on equipment that involves maintenance costs. He pointed out the state might not have the spendable reserves in future years (with which to fund the enhancement requests) that it currently has. Mr. Hataway concurred with Senator Coffin's point and said there had been considerable debate on this subject, centered on the question of what constitutes new equipment versus replacement equipment. The decision was made, for better or for worse, to identify for the Legislature the total cost of the equipment being requested in the budget. Replacement equipment was assigned to decision unit 710 and new equipment is in decision unit 720. Mr. Hataway said he would propose "rolling those two together because it is really confusing." The equipment needs are addressed in the maintenance budget, decision unit M-200 for growth as well as for meeting equipment replacement needs, or upgrading equipment, related to ongoing operations. Mr. Hataway said two distinct issues are involved. Senator Coffin commented the new method regarding equipment replacement may work for the 1995-1997 biennium, but might not work for the biennium that follows. Mr. Hataway replied it has been a concern of state agencies that during times of tight budget constraints the enhancement items would be the first to be cut from the budget. He acknowledged this is always a problem with including equipment in the enhancement component of the budget, but he remarked agencies can survive without the enhancement although they may be hard-pressed to meet certain needs. It is necessary to budget a certain ongoing level of expenditures, Mr. Hataway stated, and the K-12 budgets are being treated in the same manner as other executive branch agencies in this regard. Senator Rawson inquired whether the one-shot appropriation includes funds for ongoing programs, or if it is truly intended only for onetime expenditures. Mr. Hataway said he will continue to interpret the instructions regarding the one-shot appropriations as being that they are to be used for onetime expenses, until such time as the Budget Division receives instructions otherwise. Senator Rawson asked if it would be appropriate to begin reserving some accounts for the replacement of equipment. Mr. Hataway replied that good management practices in the private sector include setting aside depreciation funds for replacement of equipment, and as long as there is adequate cash flow this is probably a viable practice in the government sector as well. Senator Rawson said this issue would be explored further. Continuing his explanation of DSA budget construction, Mr. Hataway pointed out the adjusted base totals for columns E and F reflect a credit to the General Fund because of the growth in the other, non-General Fund revenues that are driving the adjusted base. The credit to the General Fund applies to two decision units, the adjusted base and the growth section, again due to the enormous increases the Economic Forum is predicting, particularly in the LSST and the increases in assessed valuation projected by the Department of Taxation. Mr. Hataway noted there are also 2 percent roll-ups in the Special Education and Adult Diploma costs, which is the reason the amounts differ from the 1994 actual. Mr. Hataway said as a result of the revenue flowing over from the 1994 actual expenditures into the adjusted base budget accounts, "the General Fund actually receives a credit for balancing that particular decision unit." Mr. Hataway next referenced the work sheet from Exhibit D labeled DSAM100 (decision unit M-100 in the maintenance budget) and attached to these minutes as Exhibit D-2. Directing the committee's attention to the second page of the work sheet, Mr. Hataway remarked that while the school officials can make a good case for the inflation that is impacting their budgets, the instructions governing the budget office allowed adjustments in only four expenditure categories: heat, electricity, property insurance and postage. The amounts budgeted for heating represent a 4 percent increase from the 1994 actual, for FY 1996 and FY 1997. The amount of increase for electricity is 3 percent for each year of the biennium; property insurance, 10 percent in FY 1996 and zero percent in FY 1997; postage, 10 percent in 1996 and zero percent in FY 1997. The total adjustments for inflation in the DSA budget are $1,155,067 for FY 1996 (line 50, column I) and $1,847,551 for FY 1997 (line 50, column L). The total amount is balanced with General Fund dollars, Mr. Hataway stated. This translates into a cost for inflationary adjustment of $5 per student in the first year of the biennium and $7 per student in the second year. Mr. Hataway said the next decision unit, M-200, presents "a wealth of information in terms of what the school districts have been doing in these particular areas." Turning to the work sheet labeled DSAM200 (Exhibit D-3), Mr. Hataway said this is a critical decision unit in the sense that it addresses the growth, the 31,000 additional students for which funding must be provided for the upcoming biennium. He stated his intention to use one component of the work sheet, the licensed instructional personnel, to illustrate the methodology employed in constructing the DSA budget. He drew attention to column B of the work sheet. Noting he has been tracking the student-employee ratios since 1988, Mr. Hataway said the main driving force in the determination of how many additional employees should be funded in each of the personnel categories is the ratio of employees to students for the "actual" year, in this case FY 1994. He pointed out the ratio in the licensed instructional personnel category is 19.22, which is slightly higher than the ratio for the previous year. The number of additional licensed teachers budgeted for FY 1996 was determined by dividing the projected weighted enrollment of 256,585 for FY 1996 by the student ratio of 19.22, generating a need for 13,352 licensed teachers less the current number of teachers in FY 1994 for a total of 1,524 new teachers to be added to the DSA for FY 1996. Mr. Hataway acknowledged some of the 1,524 new teachers are actually new teachers in FY 1995 but said the budgets are driven according to the FY 1994 actual expenditures. The same process applies to each of the personnel categories for each of the fiscal years of the biennium, Mr. Hataway continued. For FY 1996 the total number of employees in the M-200 decision unit of the DSA budget is 22,998, compared to 20,372 in FY 1994 actual. The new budget therefore provides for 2,624 additional personnel in FY 1996 and a cumulative total through FY 1997 of 4,089 new employees. Mr. Hataway commented, "This is a real growth industry, and it is a high quality growth industry with the salaries that are paid." Senator Raggio said he has always questioned the area of administrative support personnel. He requested an explanation of the logic involved adding such personnel as more teachers are hired. Mr. Hataway deferred to the local school officials to respond in greater detail, but he pointed out the state is growing. Senator Raggio again challenged the logic employed in this area and asked why the determination as to the number of administrative personnel to be added is not based more on such factors as the projected number of new schools than on the number of new teachers. Mr. Hataway replied the factors all "tie together." Senator Raggio stated the reason he raised the issue is that the legislators receive more complaints about the amount of funds allocated to administrative support expense than any other area with respect to education costs. He voiced the opinion the methodology should be reviewed. Mr. Hataway agreed such review may be desirable, but to achieve consistency the Budget Division employed the method of constructing this budget that has been in use. Senator Rawson inquired as to the history of changes in the formulas and ratios with regard to administrative support personnel. Mr. Hataway stated, "Unfortunately, we split those out from instructional support, so my actual comparisons start in [FY 1989] actual." He listed the ratios of licensed administrative support personnel for each of the fiscal years from FY 1989, as follows: FY 1989, 135.57; FY 1990, 134.41; FY 1991, 219.22; FY 1992, 222.2; FY 1993, 238.55; FY 1994 actual, 239.98. Mr. Hataway commented that, if anything, [the school districts are] losing ground in this area. However, there have also been changes in ratios in the other personnel categories. For example, in the instructional staff category the FY 1993 ratio was 18.87, compared to the 19.22 ratio used to construct the proposed budget. Mr. Hataway suggested the student ratio (class size) is one area that was probably affected by the wage increases received by local school districts from funds that were not provided in the Executive Budget; that is, the class sizes increased to fund the wage increases. Senator Rhoads asked how the ratio of 332.65 in the administrative support personnel category compares to other western states. Mr. Hataway stated he does not know. Mr. Hataway called attention to page 2 of Exhibit D-3 to illustrate "how we get from the adjusted base into the cost." He pointed out there is a direct comparison between the salaries and fringe benefits in the adjusted base, and the cost required to fund the adjusted base and the new growth. The amount for additional salaries and fringe benefits for FY 1996 is $76,466,109; for FY 1997 the amount is $120,504,287. (These totals are displayed on line 15, columns I and J of Exhibit C.) Continuing his review of the spreadsheets in Exhibit D, Mr. Hataway commented on the work sheet labeled DSAM201 (Exhibit D-4). He said the work sheet is the subset for columns I and J, which pertain to operating expenses. Mr. Hataway stated there are three major areas that drive operating expenses at the local level: the building square footage that drives the costs of such items as heat, electricity, water and garbage and property insurance; the weighted enrollments that drive such items as pupil transportation, textbooks and library supplies; and staff-driven costs that drive other operating costs as indicated in the operating expense category. Senator Rawson indicated the time available for detailed discussion of the DSA budget was limited. Mr. Hataway said he would review highlights from the remaining portions of the spreadsheet. Mr. Hataway called attention to line 13, column G (Exhibit D-4) and said the cost for heat in FY 1994 was $3,765,474, which is 15 cents per square foot for the building component of the operating costs. The school districts have provided the Budget Division with the total current square footage of building space, the projected square footage for FY 1996 and the projected square footage for FY 1997. The 15 cents per square foot was multiplied by the 26,655,137 total square footage projected for FY 1996 (line 9, column K) to produce an additional $235,310 (line 13, column I) in expenditure authorization for the school districts in the building-driven cost area. Senator Rawson commented the methodology appears sound. Mr. Hataway said he wished to ensure understanding as to how the figures for operating expenses relate to the base budget. He pointed out the additional $10,377,580 on line 72, column D, page 2 (Exhibit D-4) for operating expenses in FY 1996 and an additional $16,544,768 for FY 1997. These totals are displayed on line 37 in columns I and J of Exhibit C. With reference to the spreadsheet identified as DSAM202 (Exhibit D-5), Mr. Hataway said the calculations on this spreadsheet relate to the equipment component of the DSA budget. As displayed on line 42 in columns I and J of Exhibit C, the Executive Budget calls for the expenditure of $2.5 million in FY 1996 and $3.9 million in FY 1997 for additional equipment, over and above the equipment expenditures incurred in FY 1994. Mr. Hataway emphasized the operating costs "go up and down" in the various fiscal years. He expressed interest in further examining the property insurance costs, for example, noting the cost for this item was .067 cents per square foot in FY 1992, .047 cents per square foot in FY 1993 and .035 cents in FY 1994. He stated, "They must be getting some good insurance deals throughout the state to drive those per square foot costs down." Senator Rawson suggested the low costs might indicate a lack of insurance, which he said is something that should be examined. Mr. Hataway agreed. He remarked it would be interesting to analyze many of these figures in depth. He stated the figures and the methodology are sound with respect to providing the school districts with incremental additional costs for both the operating and equipment categories. Mr. Hataway said he would forgo a detailed explanation of the calculations pertaining to the growth of revenues. He said the important factor is that the LSST, the out-of- state sales LSST and the slot tax are all driven by Economic Forum predictions, and if the forum chooses to adjust its estimates there will be an impact in the DSA budget. He maintained the expenditure recommendations for this budget are sound. Continuing his explanation of the data displayed in Exhibit C, Mr. Hataway referred to columns K and L and the subset of those columns (DSAM300, Exhibit D-6). He noted considerable consternation had been raised with regard to how the budget office would address or not address the FY 1995 salary adjustments made by some of the school districts, either as a routine matter or otherwise. He said the Governor decided to compromise on this issue. As background information, Mr. Hataway said each October the State Department of Education conducts a survey on the contractual obligations of the school districts with regard to the teachers in the district for purposes of comparison with the preceding year. Referring to the Salaries line item (line 5, columns K and L) indicating $2.5 million for FY 1996 and $5.5 million for FY 1997, Mr. Hataway explained the decisions made by the Budget Division regarding these recommendations. He said the budget office determined the average percentage increase in the school districts' contractual obligations from October 1, 1993 to October 1, 1994, which was 2.59 percent. Two percent had already been built into the budget, and the salary adjustment recommendations of $2.5 million in the first year and $5.5 in the second year reflect the .59 percent increase that could definitely be documented. Mr. Hataway contended the Governor's recommendation represents an adequate compromise and provides some funds to address the situation. Senator Rawson inquired as to how much money is in question. Mr. Hataway replied he does not know the quantifiable amount. He cited as an example, however, that Clark County School District granted a 3 percent increase effective March 1 (1995), and the district has said it can afford 1 percent of the increase. He stated, "They are asking you to bail them out for the additional 2 percent in this biennium." Mr. Hataway reiterated he does not know the total effect of the salary increases awarded by the school districts, but he said the Legislature needs to address the manner in which salaries are handled in future years to eliminate the kinds of problems now being experienced in this area, particularly with regard to the Clark County School District. Regarding columns M and N, Exhibit C, Mr. Hataway said the figures in these columns reflect the 4 percent and 3 percent cost of living increases. He noted the total state obligation is $36 million for FY 1996 and $67.9 million in FY 1997. Senator Raggio asked how much a 1 percent cost of living allowance (COLA) costs over the biennium in the DSA budget. Mr. Hataway said the cost for FY 1996 would be $9 million (obtained by dividing the $36 million by 4 percent) for both salaries and fringe benefits. Noting the attempt has always been made to treat university and K-12 employees the same, Mr. Hataway said the overall costs for this item in the education budgets is $14 million for FY 1996. Addressing columns O and P, Exhibit C, Mr. Hataway said these columns reflect the costs associated with the opening of the Lovelock Correctional Center. Returning to the matter of COLA costs, Senator Raggio inquired as to the CPI (Consumer Price Index) for FY 1994. Mr. Hataway replied it was less than 3 percent. He said the CPI has been at slightly less than 3 percent in the years since the Legislature last provided funds for cost of living increases. Senator Raggio asked what the justification is for the 4 percent COLA in FY 1996 and the 3 percent increase in FY 1997. Mr. Hataway said when the Budget Division constructed the DSA budget, the projected CPI was at approximately 3 percent. He said the additional 1 percent was recognized as a "catch-up," although it would not enable state and university employees to totally regain what they have "lost" since the last time they received a COLA. He reiterated the rationale was the projection of a 3 percent per year CPI and the 1 percent "catch-up" for what has not been received in the intervening years. Mr. Hataway again referred to columns O and P. He said initially the education department provided the Budget Division with a cost estimate for providing educational services to Phase I of the Lovelock prison expansion. After the figures were submitted by the department it was learned there was a move to open Phase II within the same time frame. Mr. Hataway said he merely divided the FY 1997 projections by two and added it to what had been provided by the education department. He noted the final decision has not been made as to when the Lovelock prison will open, and if it opens earlier than had been anticipated when the budget was constructed, adjustments will need to be made. He said in that event the Budget Division will work with the Legislature's fiscal analysis staff to revise the figures. Senator Rawson suggested the Budget Division begin preparing the revised figures because an earlier opening of the Lovelock Correctional Center is being considered. He inquired if education is included in this category or in a separate category. Mr. Hataway replied it is handled within the adult education section; however, there is no fiscal impact on the cost per pupil in that the cost is "backed out" and funded separately from the distributive school fund. For this reason there is no per pupil cost on line 71. Senator Rawson said there is concern no allowance for growth has been made in this area. Mr. Hataway responded the proposed budget includes a 2 percent roll-up and "an increase of the average growth that we are predicting [of] 6.1 percent and 6.3 percent." He said it does not include any cost of living increases because it is felt these are already incorporated in the total budget. Senator Rawson inquired as to the impact of the prison population growth on this budget item. Mr. Hataway said he is not very familiar with the population projections for the prison. He explained the Budget Division's adoption of the education department's projections for this category is based on the costs encountered by the three districts currently serving the prison populations within their systems. Mr. Hataway next explained columns Q and R, which pertain to equipment. He said these columns merely reincorporate the actual expenditures that the districts had for equipment in FY 1994. Senator Rawson noted an inflationary factor has been included in this category in the past, but it appears that has not been done in this budget. Mr. Hataway agreed there is no inflation allowance in the proposed budget. He said growth has been built in on a per-pupil basis, as reflected in columns I and J; the actual expenditures were then reincorporated. Assemblyman Joseph E. Dini asked if the Transportation line item includes the cost of new buses and if it is mandatory the buses be purchased the year in which the funds are allocated. Mr. Hataway replied the larger districts normally buy more than one bus at a time, consequently a uniform standard does not exist as to when the buses need to be replaced. Mr. Dini said a local school district official informed him the district is required to purchase the buses during the year in which the funds are allocated. Mr. Hataway responded the school districts essentially have no control over the revenues they receive, "and so consequently when they approve one budget they are looking ahead to ascertain their total needs over both years of the biennium, probably longer than that." Assemblyman Dini requested staff to work with the Budget Division to obtain the answer regarding when the buses must be purchased. Ms. Botts pointed out that while the school districts have no control over the revenues, they do have complete control over the expenditures. She said there is no state requirement the buses must be purchased within the year funding is allocated or even that the funds must be used for purchasing buses. The budgeting is based on past expenditures, Ms. Botts stated. Mr. Hataway noted only 15 percent of the budget allows any flexibility since 85 percent of the budget is comprised of salaries and fringe benefits. Explaining columns S and U (Exhibit C), Mr. Hataway said these contain the totals of all of the decision units, from the base budget through the equipment adjustments category. He emphasized the fact 85 percent of the budget is for salaries and fringe benefits. For the first time, he continued, "those salaries and fringe benefits will increase [to] over $1 billion per year for the entire state." The total expenditures for the distributive school fund are projected to increase $426 million for the biennium, and for the first time the total expenditures in the DSA budget will be more than the state General Fund revenues available for funding all state agency budgets, Mr. Hataway stated. The basic support per student is recommended at $3,460 for FY 1996, a 4.16 percent increase, and $3,587 in FY 1997. The total General Fund support, as recommended, will increase by $77 million for the biennium. Mr. Hataway concluded his presentation on the distributive school fund budget with the statement he has pointed out to the Legislature's fiscal analysis staff several modifications that need to be made in the DSA budget. He said the Budget Division stands ready to work with the fiscal analysis staff on any modifications deemed necessary by the committee, in order to close the budget expeditiously and in a "legitimate" manner. Senator Rawson announced comments would be taken from school district officials at this time, prior to beginning discussion of the class size reduction (CSR) budget. Brian Cram, Superintendent, Clark County School District (CCSD), introduced himself and his associate, Mike Alastuey, Assistant Superintendent of Business, CCSD. Referencing the document entitled "Distributive School Account Issues" (Exhibit E), Mr. Cram stated his intention to provide a factual overview from the students' perspective on the DSA financing. Regarding the statistics on page 1 of Exhibit E, Mr. Cram pointed out Nevada ranked 35th in the nation in per-pupil expenditure in 1993-1994, with $4,606 spent per pupil compared to the national average of $5,301. He said this is especially significant in view of the fact the students served in Nevada tend to be very at-risk when compared on a national basis. The percentage of students who experience either social or physical problems is very high, he stated, and serving these students tends to be more expensive for school districts. Senator Rawson inquired if the per-pupil costs indicated in the above document represent the entire expenditure per student. Mr. Alastuey explained the statistics were obtained from the 1994 Ranking of the States, a document produced by the National Education Association (NEA). He said table H of the document is intended to represent general and special revenue funds, including federal funds, and the funds also include provision for food service. Mr. Alastuey said the statistics represent efforts by the school district to present, in the best manner possible and based on information from the NEA and the State Department of Education, "figures on a comparable basis for a comparable time frame." Mr. Cram added the attempt was made to ensure an "apples to apples" comparison. Mr. Cram said the second set of statistics on page 1 of Exhibit E represents the school district's perception, from the student level, that annual per-pupil funding has actually declined from 1991-1992 ($4,182) to 1994-95 ($4,066), when general and special education funds are considered. He invited correction of these figures if appropriate. Pages 2 through 4 of Exhibit E display elements of the Executive Budget relative to the DSA budget. Mr. Cram said the first table (1994-95 School Revenue Loss) indicates a loss to schools from the LSST revenues of $86 million because only $45 million of the amount to be collected from this source, projected at $131 million, is reappropriated to K-12 education. Senator Raggio requested clarification of Mr. Cram's statement. Mr. Alastuey responded the information depicts the comparison between the reversion from the distributive school fund to the General Fund that is scheduled in the Executive Budget, as compared to the recommended onetime appropriations. Senator Raggio said in a good year the state must compensate for lean years. Mr. Alastuey concurred, but remarked the guarantee mechanism has failed on "some memorable occasions." The senator countered he has no recollection of the state ever having failed to honor the guarantee and characterized the supposed loss as "illusory." He said the school districts lose nothing from the LSST revenues, and he questioned the validity of the school district's argument on this matter. To clarify the school district's position, Mr. Alastuey said it is the district's contention that once the Executive Budget is set, including all of the revenue assumptions and all of the expenditure assumptions, if the only variable that takes place during the 2 years of the fiscal biennium is a sales tax-based shortfall, that shortfall is evident in a shortfall to the school districts. By definition, using this illustration, he continued, that same shortfall will be evident in the state General Fund, and the General Fund will fall short of making up the guarantee "without other cuts." Therefore, the heavy sales tax dependency, in the school district's estimation (and borne out in fact in FY 1993 and in FY 1983, immediately following the increase in the sales tax for schools, Mr. Alastuey said), results in the support guarantee being "very fragile." Mr. Alastuey reiterated the contention the guarantee has failed on two occasions. Regarding the second table on page 2, "Operating Budget Increases," Mr. Cram said exclusive of salary increases (for which, he interjected, the school district is very appreciative), the increases are only .4 percent from FY 1993-1994 to FY 1994-1995 and .06 percent from FY 1995-1996 to FY 1996-1997. This constitutes very modest funding, Mr. Cram asserted. Mr. Cram said page 3, Exhibit E, indicates the Executive Budget is based on FY 1993- 1994, rather than FY 1994-1995, budget commitments. He stated, "What that does is short, basically, things that happened in [FY 1994-1995]." (He said the CCSD is a victim of this, to some extent, in terms of a salary increase that was not rolled up.) The result is that an additional burden is placed on the school districts, Mr. Cram said. Traditionally, salaries have been rolled up; off-year increases are not something unusual and have occurred periodically throughout the history of Nevada, he continued. He said the CCSD received a copy of a graph indicating the district is near the lower end of the scale, possibly the second lowest, in terms of salary increases beyond the appropriations made by the Legislature. Mr. Cram further stated the school district initiated this increase with the expectation the salaries would be rolled up, having seen nothing to indicate such would not occur, "and now it appears retroactively." He said it was learned after having taken the action to increase salaries that the salaries are not being rolled up, and this represents a significant problem for the CCSD. The district's assumption was the matter would be treated as it has been in the past. Senator Rawson said that while committee members recognize there is an actual loss to the school districts, they also recognize the need to handle the situation correctly and to avoid a situation in which all of the school districts begin adjusting their raises just before the year ends. Assemblyman Dennis L. Allard requested the school district officials to provide a table depicting the costs per pupil in Nevada in relation to the costs in other states, to indicate whether the state's per-pupil expenditures are more cost effective than those in other states or vice versa. For example, he remarked, the school districts in Nevada may be obtaining certain items at a lower or higher cost than districts in other states. He said the figures can fluctuate drastically, in terms of real dollars. Mr. Cram replied such a comparison might be meaningful. He said there are two or three different aspects, including the fact the Nevada students are "more expensive" on a per pupil basis due to higher percentage of social and physical problems than in other states. With respect to purchasing, Mr. Cram said while it might be possible that Nevada school districts can purchase some items at a lower cost than some districts in other states, in most school districts from 85 percent to 89 percent of the costs are related to personnel. He agreed to provide the information requested by Mr. Allard. Drawing attention to the table on page 3 identified as "K-12 Percentage Decrease 1993-97," Mr. Cram said the table indicates a decrease of $34 million occurs. He said comparisons are believed by the school district to be valid, allowing for slight variations in the figures for both the state appropriations and the K-12 education component of the comparison. It is the school district's contention the $34 million "lost" to the school districts is being directed to other state entities, and the district is requesting equal consideration. Mr. Cram referenced page 4, Exhibit E, and said the data is derived from the school district's comparison of the percentage increases of funding for the public schools (state and local funds combined) from the FY 1993-1995 biennium to the FY 1995- 1997 biennium, with the General Fund increases for prisons and Medicaid. He pointed out the data indicates the increases are greater in other areas than in K-12 education. While acknowledging costs are increasing for all state entities, Mr. Cram said the K-12 costs are increasing, as well, and the school districts are therefore requesting equal representation. He remarked the school districts are not as effective at lobbying as are the other groups and can only present the statistical information upon which the Legislature will base its decisions. Senator Rawson said he has seen, during his tenure with the Legislature, the budget for education increase from essentially half a billion dollars to over $1 billion per year, while the budget for welfare has increased from $50 million to $380 million. Noting the much larger increase in welfare spending compared to the funding increase for education, he remarked it appears some of the education budgets are "slipping." Assemblyman Allard requested, in the interest of accuracy, that data be presented which indicates per-unit costs (cost per student, per prisoner and per Medicaid participant). Mr. Cram noted the increases are shown as percentages rather than as total dollar amounts. Mr. Allard inquired if the percentages are known. Mr. Alastuey addressed the question, stating the tables labeled C-1 and C-2 (in Exhibit E) point out the differences in allocations of dollars from the state General Fund for K-12 education, for higher education, for Medicaid and for prisons. In an attempt to make the comparisons more valid, the salary increases have been extracted, Mr. Alastuey said. He said C-2 (Exhibit E) indicates K-12 education fares the worst among the four population-driven entities. Assemblyman Allard reiterated his request for per-person costs within the different populations. Acknowledging the budgets for the Department of Prisons are being revised, Mr. Cram said the information currently available indicates the cost per prisoner is approximately four times the cost per student. Mr. Allard said he is interested in data that indicates percentage of change. Mr. Alastuey said the information shown in C-1 (Exhibit E) will be provided in graph form. Mr. Allard repeated his desire to know the amount of increase. Mr. Cram stated for the record the school district is not opposed to inmates. Senator Rawson requested the school district officials work with the fiscal analysis staff to compile the information requested by Assemblyman Allard. Senator Raggio said he spoke with John P. (Perry) Comeaux, Director, Department of Administration, the previous day and asked him about the forthcoming changes to the prison budget. Directing his remarks to Mr. Hataway, the senator said Mr. Comeaux told him he did not have specific information at this time but it would be provided by Friday. He offered an estimate instead. Less than an hour later, Senator Raggio continued, he received a press release in which the Governor indicated that as a result of the inaccurate estimation of the projected inmate population, the budget would be revised upward to accommodate the additional 400 inmates now being projected. He noted parenthetically the Executive Budget, with the new estimates for prison department costs and related capital improvement project (CIP) expenditures, will compound what is already a deficit situation in the budget. The budget for FY 1997 contains $53 million more in expenditures than in revenues, Senator Raggio said. Senator Raggio inquired as to the source of the extra funds the Legislature is being asked to provide in the Executive Budget. He said the administration has raised the issue of whether education or prisons has greater priority with respect to the allocation of state funds. Acknowledging his chagrin at "having to get a press release on this issue, having asked the direct question only an hour before," Senator Raggio said it is not his intention as one member of the Legislature to remain silent while being accused of having to take the money from children to provide for the increase that someone failed to project in the Governor's budget. He requested a response from Mr. Hataway. Mr. Hataway replied he is responsible for all education budgets, environmental protection budgets and elected official budgets. He said the question asked by Senator Raggio pertains to policy and is not a question he feels qualified to address. He stated, "You obviously will have to make some tough decisions in terms of balancing the budget..." Senator Raggio interjected, "Who will have to make the decision?" He noted the Governor is required to present a balanced budget, and the proposed Executive Budget is currently out of balance for the second year of the biennium. He said he is concerned because if the additional costs projected in the revised prison budgets are included, the Governor's budget becomes even more out of balance. Mr. Hataway indicated he is not the appropriate person to respond to the senator's question. He said the Budget Division and the Governor's Office are willing to assist the Legislature in "trying to make those tough decisions, and they are tough decisions, Senator Raggio." Senator Raggio responded, "I'm serving notice that we expect...the Governor to make that recommendation. ...I'm chagrined at not getting that information. This Legislature didn't get it, we got a press release. I don't want to do business by press release." Mr. Hataway responded the budgets are based upon the best available information at the time the budgets are constructed, just as the Legislature's decisions at the time the budgets are closed are based on the best available information. He said the changes in the prison population estimates require the Budget Division to provide the Legislature with the revised estimates, and it then behooves the budget office and the legislators to work together to balance the budget. While voicing appreciation and understanding for the concerns expressed by Senator Raggio, he stated he could not provide a definitive answer to the senator's questions at this point. Senator Rawson said the point is the legislative session is half over and the Legislature has not yet been presented with a balanced budget. He said the revised budget that was presented to the Legislature initially was balanced, based upon the information available to the Budget Division at the time. He again stated the willingness of the budget office to work with the Legislature to make the necessary adjustments. Senator Rawson remarked the issue of the balanced budget diverts the committee's attention from the matters at hand. Mr. Cram concluded his overview with the statement it was not the school district's intention to appear before the committee to complain and whine, but to convey the overall view that educational funding is slipping and has been very flat "for a couple of years"; additionally, inflation has had a significant impact on the education budgets. The school districts are anticipating 2 more years of similar constraints at a time when it appears the state has surplus revenues available, Mr. Cram said. He stated the school district's desire to offer some alternatives for the committee's consideration and to work cooperatively for the benefit of all parties. Mr. Alastuey presented the alternatives proposed by the school district beginning on page 5 of Exhibit E. He highlighted and commented on the major points of the recommended alternatives, which are as follows: (1) Direct any additional school property taxes and school sales taxes to increase state support per student. (2) Return to K-12 education that share of state dollars lost to prisons and other state operations. (3) Recalculate school funding with current 1994-1995 financial information, not prior year data. (4) Provide for a fiscally responsible school funding system by: -- Assuring that Distributive School Account balances are directed exclusively to K-12 schools and not diverted to other purposes. -- Restoring the state's priority for education in the share of state appropriations directed for K-12. -- Strengthening the state guarantee mechanism which has been weakened by sales tax dependence. Provide for alternative reserves to meet the guarantee in years of revenue shortfall. -- Refining and streamlining accountability statutes to enhance the flow of information to citizens and taxpayers. -- Clarifying the state-school district funding partnership in all areas, including the area of collective bargaining. Regarding the recommendation to strengthen the state guarantee mechanism, under Item 4, Mr. Alastuey said in answer to Senator Raggio's earlier question, if all other estimates of revenues and expenditures are realized and if there is a dramatic shortfall in sales tax revenues it will not be possible to make up the shortfall. He further voiced the district's view the only other major tax source available to make up the supplemental funds would be the gaming tax, which itself is subject to worldwide market conditions and pressures. It is therefore the school district's opinion the Legislature should consider setting aside sales taxes and DSA revenues in good years to meet the state guarantee in years of downturn. Alternatively, the Legislature could establish, on a tax other than a sales tax base, a floating or contingent rate that would only be activated in the event of a sales tax shortfall. Mr. Alastuey said the mechanics exist and the fiscal analysis staff is available to consider such an option. Explaining the recommendation to clarify the state-school district funding partnership in the areas of special education, language-different students and at-risk students (under item 4), Mr. Alastuey emphasized the need for serious consideration of these special populations in terms of policy. Finally, Mr. Alastuey stated, the school district would like to have the collective bargaining component of the state-school district funding partnership clarified. Currently, he noted, state law mandates collective bargaining in school districts. State law also provides and mandates the state shall dictate all of the operating tax rates. The Legislature holds all of the purse strings, Mr. Alastuey stressed. Further, he said, the Legislature has also dictated a certain relationship between employees and school districts. It is time, in the view of the school districts, to bring these two factors together and to administer the partnership in a way that is expected and that is clearly understood. Concluding his remarks on the DSA budget, Mr. Cram stated it is the school district's desire to make clear it does not question the intent of either the executive branch or the Legislature with respect to providing for the education of the children. However, the districts would like the Legislature to reexamine, in terms of weighing the manner in which the available funds are distributed, the K-12 students' portion of the funds. The issue is regarded as one of perspective rather than philosophy, Mr. Cram continued. He stated the opinion education is the only solution to many of the problems that are making heavy demands on the state budget. It is only education that can solve the prison problem, the violence problem and the welfare problem, he contended. Mr. Cram encouraged the committee members to consider preventative maintenance, which he maintained is a function of education. Senator Rawson stated the subcommittee on K-12 education must work through this issue with the school district officials and the Budget Division in the months ahead. He said a date would be scheduled for such a meeting, and he expressed the desire to hold additional work sessions to facilitate expeditious processing of the education budgets. Douglas C. Thunder, Director, Fiscal Services, State Department of Education, came forward to testify on the DSA budget. He highlighted the main points of the testimony provided in prepared text (Exhibit F). The first issue mentioned by Mr. Thunder was the provision in the Executive Budget to start a Adult High School Diploma Program at the new prison in Lovelock. If the prison opens earlier than originally anticipated, the education department believes changes in the DSA budget may be appropriate with respect to the diploma program. Additionally, the 4 percent and 3 percent salary increase amounts have not been applied to the program. The department has calculated the costs of the salary increases at $288,724 for FY 1996 and $533,538 for FY 1997. Commenting on special education funding, Mr. Thunder noted the proposed budget increases the number of special education units at the same rate as enrollment growth increases, while the amount per unit has been allowed to increase by 2 percent in each year of the biennium. Mr. Thunder drew attention to a handout containing graphs and a table of backup information used to produce the graphs (Exhibit G). He said the first graph depicts the percentage of state appropriations allocated to K-12 education, and the second graph shows the history of the basic support per student (appropriations per student). Regarding the table, Mr. Thunder called attention to the last two percentage figures in column K (4.33 percent for FY 1996 and 4.23 percent for FY 1997) and commented on their significance. He voiced the opinion the percentages of increase in state appropriations appear somewhat deficient, in view of the 4 percent and 3 percent salary increases to be funded in the proposed budget in addition to other increases that "go through" the Department of Education. Mr. Thunder mentioned two other problems presented in his written testimony (Exhibit F). The first pertains to the new positions being added to the budget for the first year of the biennium, FY 1996, when in actuality some of the positions are for FY 1995. He stated the fiscal impact could be as much as $17 million in FY 1996. He explained this is because the positions are all considered new in FY 1996, and the salaries were therefore calculated much lower than the average salary. Mr. Thunder said more detail on this issue will be provided later. The second problem addressed by Mr. Thunder concerns the manner in which average continuing employees' salaries are computed in the base year of the budget. Mr. Thunder said that if new employees are to be estimated at a salary level lower than the average across-the-board salary for the employee group, then the average continuing salary in the base year should be adjusted to reflect the removal of the new positions in the base year. By doing so in the case of teachers, the average salary for the continuing teachers would be increased by $450. Mr. Thunder said the issue would be addressed in subsequent discussions with the fiscal analysis staff and the budget office. Senator Rawson noted the issues have been presented to the subcommittee by the fiscal analysis staff. Concluding his presentation, Mr. Thunder called attention to a report subsequently distributed to committee members entitled "Special Education Funding in Nevada" (Exhibit H). Mary Nebgen, Superintendent, Washoe County School District (WCSD), introduced herself and her associate, Doug Sever, Business and Financial Services Administrator, WCSD. She prefaced her testimony with an anecdote concerning a test she was given recently. In the test, questions were presented as to the value society places on education relative to other activities. An essay question asked, "Do you believe there is an educational problem in our society, and if so, why?" Stating there is indeed an educational problem in our society and in Nevada, Ms. Nebgen said the dropout rate is too high, the number of students going on to postsecondary education is too low, the number of violent acts on school campuses is increasing, and too many children are entering kindergarten "unready to learn." She said it is clear that "you can't do better with less." She asserted the Governor's recommended DSA budget in its present form is inadequate for the needs of the WCSD. With the funding as projected and assuming a 1.5 percent salary increase for the current year, a 4 percent increase for FY 1996 and a 3 percent increase for FY 1997, the school district anticipates a deficit of $4 million in 1995-1996 and $2.7 million in 1996-1997. In 1992-1993, Ms. Nebgen stated, the WCSD reduced its budgeted expenditures by $2.5 million at the Governor's request. She said the district accomplished its goal of minimizing the effects of the budget cuts on the classroom by reducing custodial services, administrative support services, supplies and materials, and staff development. Continuing, Ms. Nebgen said most of the funding reduced through budget cuts has never been restored, and the WCSD has been unable to expand programs for at-risk children. She further stated the principals and teachers in the WCSD continue to work as hard as ever with fewer resources and greater problems. In conclusion, Ms. Nebgen said the final question on the above-mentioned test was: "Which costs more? (a) quality education for all children, or (b) failure to educate." Stating her opinion the answer is obvious, Ms. Nebgen said the WCSD is asking the Legislature to consider the educators' dilemma when making its decisions about the DSA budget. Mr. Sever testified next, drawing from written testimony (Exhibit I). He stated his intention to briefly discuss the impact of the Governor's recommendations on the school district with respect to the DSA budget. He reiterated Ms. Nebgen's statement regarding the district's anticipated shortfall of $6.7 million over the 2 years of the upcoming biennium, an increase from the $5.8 million amount initially presented in a joint meeting of the Senate Committee on Finance and the Assembly Committee on Ways and Means earlier in this legislative session. Senator Raggio inquired as to the amount of the per pupil expenditure in Washoe County, based on using the same manner of compiling per pupil expenditures used by the Clark County School District. Mr. Sever replied he would need to provide the information after obtaining the appropriate data. Senator Raggio questioned the district's projection of a $6.7 million deficit. Mr. Sever said the deficit assumption is based on comparing the Nevada Plan guarantee as it "flows down" through the education department (based on the Governor's recommendation) with the school district's carryover of increase in 1994-1995, and then applying the 4 percent and 3 percent increases for the respective years of the biennium. Continuing, Mr. Sever said the WCSD is simply attempting to describe an impact of the Governor's DSA budget recommendations over the course of the biennium, given the situation known to exist at present. He said it is essential to address the question of "what happens in 1994-1995?" with respect to the current collective bargaining negotiations in process. The district must plan a certain amount for this budget item and carry it through the ensuing years in the biennium to determine its impact on the school district's funds. Mr. Sever said the school district is apprehensive about the recommendations in the Executive Budget. He said the WCSD must attempt to accommodate the desires of the collective bargaining units within the constraints of the 4 percent and 3 percent salary increases recommended for the DSA budget. Mr. Sever expressed appreciation for the establishment of a subcommittee to review the impact of the 13th month of LSST on the school districts, and he discussed subsequent developments as outlined in his written testimony (Exhibit I). He stated for the record the school district's support of a suggestion by the State Department of Education that calls for deducting only half of the estimated amount (of the 13th month of the LSST) in the fourth quarter, with the other half to be deducted from the final adjustment in August. Senator Rawson questioned Mr. Hataway about the Governor's intentions with respect to the possible impact on the WCSD's funding of the collective bargaining negotiations currently in process. Noting the Legislature has not provided cost of living increases in the budget since FY 1991, Mr. Hataway said the record is clear the local school districts have negotiated routine cost of living increases during that time which the districts have funded by either spending reserve funds, deferring maintenance, increasing class size or doing whatever else is necessary. He pointed out the school districts must balance their budgets, just as the state must, and they will continue to take the actions necessary to accomplish this if circumstances so dictate. Richard Kester, Director of Business Services, Douglas County School District (DCSD), came forward to testify. He said the impact of the Governor's recommendation for the DSA budget on the district's budget would be a deficit of $496,000. This figure was obtained by applying the district's share of the distributive school funds to the district budget. The revenues in the calculations include the distributive school funds and local revenues, including revenues from a 9 percent increase in property taxes, while the expenditures consist only of the following: movement of existing employees on salary schedules, a 4 percent increase, inflationary adjustments only in utility accounts, and staffing strictly to meet growth. The projected $496,000 deficit equates to approximately $70 per student, Mr. Kester noted. He said this means the district could not give the 4 percent salary increase as recommended in the Governor's budget, because to do so would require a 20 percent reduction in the remaining non- salaried accounts. Mr. Kester stated the school district is not complaining and believes the Governor's budget provides "many good things"; however, the current recommendation for the level of funding received by the district to fund its budget will result in a shortfall. Another concern of the DCSD, he continued, is that the district is currently subsidizing class size reduction out of its general fund, at a cost of approximately $100,000 to fund the salaries and benefits of the 25.5 CSR teachers. This is coupled with the rapidly increasing special education costs, Mr. Kester continued. The position of the Douglas County School District, Mr. Kester stated, is that the district would prefer to see adequate funding provided for CSR and the DSA (in terms of funding for the recommended salary increases) before any new programs, expansions of existing programs or new projects are funded by the state. Senator Rawson inquired regarding funding problems related to the CSR program. Mr. Kester said the problem in Douglas County is the roll-up assumptions used with CSR. Previously, only 2 percent was allowed for roll-up, while the roll-up cost for DCSD has approximated 7 percent because only one of the 25.5 CSR teachers has "turned over," and turnover is a big factor in having the general roll-up assumption at the level of 2 percent. Senator Rawson asked if the deficiency is compensated for in the roll-up of the district's other teachers. Mr. Kester replied no. He said the district is actually making a transfer to the CSR fund of $100,000 in hard dollars. Nat Lommori, Superintendent, Lyon County School District (LCSD), introduced himself and Wade Johnson, Comptroller, LCSD. He said the district would reiterate much of the testimony presented by other school district officials. Mr. Lommori said the Lyon County School District has tried many things in an attempt to maintain a balanced budget. A tax neutral bond issue supported by the school district recently passed, for example; however, the district has had to expend most of the available funds on facilities, which it then cannot adequately furnish. He said the district's general fund will not support the increases recommended in the Executive Budget. Mr. Lommori said Lyon County's communities are growing rapidly. Mr. Johnson also provided testimony on behalf of the LCSD. He referenced a graph (Exhibit J) illustrating the increases in enrollment compared to General Fund revenue increases from 1990 through 1994, as well as estimated revenues for 1995 and projected revenues for 1996. Regarding the problem of insufficient revenues to cover inflation and federal mandates, Mr. Johnson said the problem is expected to continue throughout the next biennium based on the proposed DSA budget. He reiterated the LCSD has been experiencing significant growth. The bonding did not provide enough funds to adequately furnish and equip the buildings that have been built, he said, and the only revenue source available to support the needs in this area is the district's general fund. As an example of inadequate funding to cover inflation, Mr. Johnson said the related services in special education (occupational and physical therapy) have increased from $30,000 2 years ago to $60,000 last year, and it is projected to exceed $90,000 this year. This is definitely inflationary, he stated. He said it is hoped by the LCSD that some inflationary costs for other line items will be provided for in the proposed budget, if funding permits. Mr. Lommori stated the LCSD, like the DCSD, is supporting the CSR program from the district's general fund in the amount of $45,000 for the current year and an estimated $60,000 next year. This equates to two teaching positions, he noted. Class Size Reduction - Page 177 Senator Rawson invited Mary Peterson, Superintendent of Public Instruction, to present a review of the CSR evaluation report ("The Nevada Class Size Reduction Evaluation Study 1995," Exhibit K). Acknowledging the limited time available for Ms. Peterson's testimony, Senator Rawson said additional time would be accorded at a subsequent hearing. Ms. Peterson read from prepared text (Exhibit M) in presenting testimony on the CSR evaluation report. She reminded committee members the CSR program was implemented in Nevada in the fall of 1990 in response to legislation passed during the 1989 legislative session. The program provides funding for salaries and benefits to reduce the student-teacher ratio to 16:1 in all Nevada first and second grades as well as in designated at-risk kindergartens. Referencing the first page of the Executive Summary (Exhibit K-1) in the CSR evaluation report, Ms. Peterson noted the primary purpose for reducing the student- teacher ratios in the early grades is to ensure student success in later years. As indicated on page 1 of the study, students who attended Nevada schools during second grade had significantly higher third grade reading and math scores than did students who did not attend second grade with reduced class sizes in Nevada or for whom second grade attendance could not be determined. Ms. Peterson further noted that students who attended Nevada schools during first grade had significantly higher second grade math scores than did students who did not attend first grade with reduced class sizes in Nevada. In other words, she stated, if class size reduction is intended to improve performance in later years, it is apparent this has occurred with respect to third graders and second graders who have participated in the CSR program. Ms. Peterson highlighted the other major components in the Executive Summary (pages 2 through 3), including class size, classroom configuration, student characteristics, and gains in reading and mathematics performance. She then commented on the findings of a report prepared by the testing and evaluation department of the Clark County School District (Exhibit L) as summarized on page 13 (Exhibit L-1) of the report. She noted the responses from principals, teachers and parents have all been very positive. Assemblywoman Jan Evans asked Ms. Peterson if her use of the word "significant" in reference to the findings in the report means "statistically significant." Ms. Peterson replied yes. She offered to arrange contact with the researchers who conducted the study if desired. Senator Rawson repeated his earlier statement the CSR issue would be addressed at a later date. The meeting was adjourned at 10:55 a.m. RESPECTFULLY SUBMITTED: Sue Parkhurst, Committee Secretary APPROVED BY: Senator Raymond D. Rawson, Chairman DATE: Assemblyman Lynn Hettrick, Co-Chairman DATE: Assemblywoman Jan Evans, Co-Chairman DATE: Senate Committee on Finance Assembly Committee on Ways and Means Joint Subcommittee on Human Resources/K-12 March 22, 1995