Comprehensive Review of Proposed School Funding: Memphis and Shelby County Schools.

Introduction

The continuing pressure to construct new schools within the Shelby County School System (SSCC) and to relocate, renovate, and/or reconstruct aging schools and build new schools within the Memphis City School System (MCSS) is burdening Shelby County with capital debt and growing the capital improvement component of the Shelby County property tax. Implicit with the growth and need for new schools is the increased need for operations and maintenance funding for both school systems. Regardless of which system a school is located in, each new school creates between $2.5 million and $4.0 million in new operations and maintenance needs. There is additional pressure for operations and maintenance due to Basic Education Program (BEP) requirements and the accountability demands of the state of Tennessee.

Within this environment, Shelby County government (Mayor and Commission), City of Memphis government (Mayor and Council), the Memphis City School System (Superintendent and Board), the Shelby County School System (Superintendent and Board), the suburban mayors, the Memphis Area Chamber of Commerce, the NAACP, and other interested parties have been conducting an "Ad Hoc" study of the issue of education funding for both public school systems within Shelby County. "Ad Hoc" committee discussions have focused on the following: a centralized single source of operations funding for MCSS and SCSS; the effects of ADA on capital funding and the creation of capital improvement districts; issues of governance; alternative revenue sources for funding, primarily in relation to capital funding; and accountability. This report investigates each of these points as discussed in the "Ad Hoc" committee process for the purpose of advancing a possible solution to the funding dilemma.

Memphis and Shelby County Must Invest in a 21st Century School System

Controversy surrounding the need for additional financial support for public education is not a new issue for most Tennessee residents. Adequately funding public education has always been a problem in Tennessee. What is new is the magnitude of the impact that under-investing in education and training is having on the state's economy.

It seems clear that the problem of the long-term under-investment in education and training in Tennessee has come home to roost. Our failure in the past to address the educational shortcomings of the citizens of Tennessee now works against us. Labor shortages constrain our growth and limit our ability to take advantage of the new job opportunities that will be created in the future. [1]

In spite of a decade of nearly unprecedented economic growth in the nation, the Tennessee economy and, consequently, state tax revenues have simply not grown fast enough to keep pace with the rising cost of providing public services. As a result, the responsibility for paying for public services, including public education, is being shifted to units of local government.

Unfortunately, local tax revenues (much like state tax revenues) are not growing fast enough to pay for the increase in tax liabilities. The burden of funding the increasing operations and maintenance costs and the capital costs for Memphis and Shelby County schools falls squarely on local taxpayers. More than ever before, the rising cost of Memphis and Shelby County schools is driving up property taxes for both City and County residents.

Increasing City and County property taxes has a negative impact on residential, commercial, and industrial development. In addition, educating the labor force of the future with obsolete, dilapidated, and over-crowded facilities negatively impacts economic development. In a 1999 survey of Memphis Area Chamber of Commerce member businesses, employers clearly stated that the lack of skills, a poor work ethic, and poor work attitudes were the most severe weaknesses in the Memphis labor pool. [2] Employers said the following things about the pool of job applicants:

* A very large percentage of the potential and actual applicant pool is ill-prepared for the world of work; there are shortfalls in terms of language skills (oral and written), quantitative ability, problem-solving, interpersonal skills, work orientation--the basics.

* We hire only one in 10-15 applicants after agency screening.

* Communication skills and appearance are so poor that 90 percent aren't even considered. [3]

The Issue--Better Schools Cost More Money and More Money Means Higher Taxes

The rapid expansion in both operating and capital expenditures since 1994 has been an important step toward improving both school systems. Even so, the continuing demand for tax revenues has created a funding crisis for public education (Figure 1). From 1994 until 2000, the combined spending for both school systems increased $555.5 million. During this six-year period, the combined annual general fund expenditures increased $398 million, and the combined annual capital expenditures increased $157.5 million. MCSS' general fund expenditures increased 75 percent, growing from $410 million in 1994 to $719 million in 2000; and its annual capital expenditures increased 244 percent, growing from $46 million to $160 million. The SCSS' general fund expenditures increased 61 percent, growing from $145 million in 1994 to $234 million in 2000; and its annual capital expenditures increased 668 percent, growing from $6.5 million in 1994 to $50 million in 2000.

Annual comparisons can exaggerate year-to-year fluctuations in spending, but, regardless, large spending increases are evident for both school systems. These annual increases in general fund and capital expenditures have accelerated in recent years (Figure 2). The increases in capital funding requirements are driven by a rapid population expansion in suburban areas and an increasing need to modernize numerous existing schools within the MCSS. The city's recent annexations have shifted some of the suburban population and school-aged children to the city. The average daily membership and average daily attendance figures for 1999 - 2000 reflect this recent expansion of the city's boundaries (Figure 3).

Financial pressures continue to build on both school systems in spite of spending increases. For example, the demand for capital improvements in both systems is escalating in spite of major expenditures over the last few years (Figure 4). In fact, the $655 million in capital improvements funded by Shelby County and planned for both systems through 2006 now may be inadequate to meet the needs of Shelby County schools. Part of the reason for this is that by law, $458 million--70 percent of the $655 million in funding-must be allocated for MCSS. This leaves only 30 percent--$197 million--to support school expansion needs in other areas of Shelby County (Figure 5).

Recently revised capital expenditure estimates for Shelby County already exceed the current plan of $197 million. Based upon SCSS' estimates, before 2007, the system will need an additional $146 million to accommodate the anticipated growth in student enrollment of more than 1,200 per year. Based upon current state-mandated ADA disbursement guidelines, an additional $533 million in school funding must be generated in order to fund this additional $146 million needed by the SCSS. The remaining $387 million would be allocated to the MCSS. If financed by debt, the annual cost will exceed $88 million for the $1.2 billion in new capital construction needed during this seven-year period for both school systems. MCSS' Comprehensive Capital Plan would then exceed $845 million through 2006.

It is easy to see the dilemma created by the legal requirements to allocate school funding according to average daily attendance or even average daily membership figures. For example, currently, in order to construct a high school worth $30 million in Shelby County, approximately $79.5 million would have to be generated to provide funds for MCSS. Consequently, a $30 million high school costs Shelby County taxpayers approximately $109.5 million in total taxes (Figure 6). A less dramatic but similar example is demonstrated if Memphis needs to build a $30 million school (Figure 7). If $30 million is needed for the school, then $41.3 million must be generated to give a share of the money ($11.3 million) to SCSS.

In both of the examples shown, the need for schools in one area costs taxpayers far more than the cost of the school simply because of the funding allocations required by law. This is the issue at hand: if the need exists for new schools, then they should be funded without the need to provide unnecessary resources to the other school system. Shelby County taxpayers should be aware that the allocation system is a problem and that it must be revised. In order to provide adequate funding for public schools, taxpayers should not be penalized by an outdated and extravagant allocation system.

The Options--Local Government Support for Public Schools Comes Primarily From Property and Sales Taxes, So One Or Both Must Increase to Meet the Needs of Public Schools