Gambling on K-12 funding

“Sin taxes” an unsteady revenue source for education

Revenue from marijuana taxes earmarked for Colorado school construction looks like it may be just a quarter of the amount projected this year — and that’s just the most recent example of education’s disappointing experience with taxes on things like gambling and drugs to help fund schools.

Education interest groups and policymakers generally haven’t pushed for such taxes and are skeptical of the reliability of those revenues. But gambling interests repeatedly have tried to attract votes by promising that education would get a slice of various schemes to expand gaming. Yet another such measure is expected be on this November’s ballot.

Why do non-education interests like to tie schools to ballot measures?

“If education is polling well, they figure out a way to tie education to it,” said Tracie Rainey, executive director of the Colorado School Finance Project, a research organization.

Jane Urschel, deputy executive director of the Colorado Association of School Boards, agreed that tying such tax proposals to education is a useful marketing tool. “They know that will help sell their measure,” she said. “People like sin taxes because they don’t themselves as being taxed. They think it’s fine for other people to be taxed.”

The problem for education leaders is that such targeted taxes don’t pay the bills.

“There aren’t enough sins in the state to fully fund the K-12 system,” said Sen. Mike Johnston, D-Denver.

Taxes on marijuana were initially projected to bring in $40 million a year, but the real figure may be closer to $10 million in the current budget year.

While marijuana tax revenues are expected to grow over time, the slow start is reminiscent of a 2008 constitutional change that was predicted to provide more than $50 million a year for community colleges from gaming taxes. The actual revenues are projected to be just $6.7 million in 2014-15.

“There aren’t enough sins in the state to fully fund the K-12 system.”
– Sen. Mike Johnston

“Dollars from sin taxes are so fragmented. … It’s always such a piddling amount,” Urschel said. “It’s never a solution to the funding of K-12.”

But others think education has little choice but to rely on such revenues. The Taxpayer’s Bill of Rights requires public approval of all tax increases, and proposals to raise taxes for education historically have fared poorly at the ballot box.

“The legislature in Colorado cannot have a real and open debate on school finance and then fund it,” said former Sen. Bob Hagedorn, an Aurora Democrat who is a backer of this year’s casino initiative. “We’ve had to get creative in ways to find additional revenue.”

Marijuana revenues not living up to hopes

Amendment 64, the 2012 constitutional change that legalized adult recreational use, requires that the first $40 million in excise tax revenues go to the Building Excellent Schools Today construction program. In 2013 voters approved Proposition AA, a companion ballot measure that authorized the 15 percent excise tax rate on transfers of marijuana from greenhouses to retail stores, plus a 10 percent tax on retail sales.

Hopes & RealitiesMarijuana/Construction

  • $40M projected
  • $10M actual

Gaming/Comm. Colleges

  • $50M+ projected
  • $6.7M

Gaming/K-12

  • $100M projected
  • ??? actual

But BEST is projected to receive only about $10 million in the current budget year.

Tax revenues – and hence money for BEST – have been lower than projected for a variety of reasons. For starters, revenue projections for a business that didn’t exist legally were very difficult to make.

Experts and observers cite factors such as many users continuing to buy medical marijuana, which is taxed significantly less that recreational marijuana, and the fact that many local governments haven’t permitted sales of the drug as reasons that revenues haven’t lived up to expectations.

Another factor may that the excise tax hasn’t been collected on some transfers of marijuana inventories to recreational stores.

A complex marijuana tax law passed in 2013 established the tax on marijuana grown for retail sale, but it did not create a tax on medical marijuana. But only stocks of medical marijuana existed before recreation sales became legal last Jan. 1. So, following the law, the Department of Revenue allowed businesses to make tax-free, one-time transfers of medical marijuana inventory to retail operations. That had the side effect of reducing projected revenues to the BEST program by an undetermined amount.

“That is one factor why the excise taxes were lower,” said Larson Silbaugh, an economist with the Legislature Council, the General Assembly’s staff research arm.

The Department of Revenue wasn’t able to provide a number for the amount of tax-free transfers. But Matt Samuelson, a Donnell-Kay Foundation staff member who follows the BEST program, predicted that “it’s going to be a significant number, a seven-figure number.”

While there were no guarantees, that $40 million figure was widely assumed to be what BEST would receive.

“Everyone had been straight up assuming there would be $40 million,” said Mary Wickersham, former chair of the state Capital Construction Assistance Board and now director of the Center for Education Policy Analysis at the University of Colorado Denver.

That number certainly was tossed around a lot last spring as the 2014 legislature debated overall school funding. Lawmakers sometimes correctly hedged the amount as “up to $40 million,” but that qualification often got lost in the debate.

Samuelson, who said he always felt the estimate was too high, said, “I’ve always had concerns about the $40 million number as a talking point.”

Beyond talking points, there even was some vigorous fighting over how to use the money. BEST supporters wanted all of it go to the state’s school construction fund. But there also were bids to use the money for construction of kindergarten classrooms or for charter school facilities. In the end, BEST got most of the money, and charters got a small slice.

Sen. Pat Steadman, D-Denver, tried to remove the earmarks from the marijuana excise revenues. “I told them the number would be smaller” than forecast. But I didn’t win that one,” said Steadman, vice-chair of the Joint Budget Committee.

Instead of the $40 million, legislative economists last month issued these estimates for excise tax collections:

  • $3.6 million for the second half of the 2013-14 budget year
  • $10.1 million for the current 2014-15 budget year
  • $10.6 million in 2015-16
Kathleen Gebhardt / File photo
PHOTO: Scott Elliott
Kathleen Gebhardt / File photo

“It’s going to be a long time before we see $40 million,” said Kathleen Gebhardt, a current member of the BEST board.

Despite the squishiness of the $40 million figure, Johnston said, “I think it was very worth having the debate” ahead of time over how to use the money. “This was the legislature’s correct place to step in, so I think it was very worthwhile.”

Officials who track marijuana revenues agree that the revenue picture may improve, but that’s difficult to predict as well.

In their June revenue forecast, legislative economists wrote, “The marijuana revenue forecast is based on only four months of data. … There will likely be changes in the price and consumption of marijuana as the adult-use market matures.”

Natalie Mullis, the legislature’s chief economist, said, “We are a lot more confident in our forecasts than we were a year ago” but that it may take as long as a decade for marijuana revenue forecasts to be as reliable as those for other taxes.

Any excise taxes above $40 million plus retail marijuana taxes go into a special fund that’s used for enforcement, health education, research and other programs related to marijuana. Retail tax revenues also are lower than projected.

A small slice of that money, $2.5 million, is supposed to go to the Department of Education for grants to schools districts to help train school nurses in recognizing signs of student marijuana use and in counseling.

Jeff Blanford, CDE chief financial officer, said, “Currently, we expect to receive the full $2.5 million, but we are also aware that may change.”

Why BEST supporters worry about the shortfall

The BEST program, created in 2008, combines revenues it receives from leases and royalties on state-owned lands with local district matching funds to pay back lease-purchase agreements that are used to build new schools and do major renovations, mostly in rural and smaller districts. The program also makes direct cash grants for smaller renovation projects.

But state law caps annual debt payments to $40 million a year. The program basically has reached that limit, meaning no big projects will be funded in the foreseeable future. BEST has recommended $67.9 million for 2014-15, significantly less than the $105 million in projects for 2013-14 and the $273 million in projects for 2012-13.

Urschel said it’s “frustrating that some of our capital construction is dependent on a growing and unpredictable industry.”

Johnston said he’s “hoping” it might be possible to find more BEST funding during the 2015 legislative session. “We’re in the midst of an all-of-the-above discussion.”

Gaming expansion no boon for community colleges

Amendment 50, a constitutional change passed in 2008 with nearly 59 percent of the vote, is a top example of a sin tax that hasn’t lived up to its promises of helping education.

Front Range Community College in Westminster
Front Range Community College in Westminster

The measure increased betting limits and allowed longer opening hours at casinos in the historic mining towns of Black Hawk, Central City and Cripple Creek, the only places in the state where casinos currently are permitted by the constitution. (There also are two Native American casinos in southwestern Colorado that aren’t subject to state jurisdiction.)

To sell the plan to voters, drafters of the amendment dedicated a slice of the expected additional gambling tax revenues to the state’s community colleges. The group behind the amendment even named itself Coloradans for Community Colleges.

Nancy McCallin, president of the community college system, recalled, “The gaming industry came to us after they decided to include us.”

She said community colleges endorsed the amendment because, “At the time is was important for us to have an alternative revenue stream. Yes, we got onboard because it was extra money.”

The state voter guide issued before the November 2008 election estimated the plan would raise $29 million for community colleges in the first year, rising to $63 million in the fifth year.

But the taxes raised only $6.5 million for community colleges in 2012-13, according to the Office of State Planning and Budgeting. Revenue is expected to be $7 million when the books are closed on the 2013-14 fiscal year, $6.7 million in 2014-15 and $8.8 in 2015-16. Estimates by legislative staff economists are slightly lower.

McCallin said she always felt the estimates were too high, noting, “It’s very difficult to project revenues” from a new tax.

After the new gaming rules went into effect, two unforeseen factors combined to reduce revenues, McCallin added. Those were the recession and a smoking ban that affected casino patronage.

Education a favorite cause for gambling promoters

Even before Amendment 50, promoters of various plans to expand gambling tried to attract voters by earmarking future revenues for education.

Ballot measures in 1984, 1992 and 1996 proposed allowing casinos in Pueblo, various eastern plains towns, Parachute and Trinidad, and all promised some revenue for schools. None of them passed, showing that voters don’t always go for sin taxes.

What’s currently labeled Initiative 135, which would allow creation of casino-style gaming at the Arapahoe Park racetrack in the metro area and in the future in Pueblo and Mesa counties.

The campaign committee behind the plan calls itself Coloradans for Better Schools, and it’s supported by Mile High USA Inc., the company that owns the Arapahoe Park racetrack and a subsidiary of Rhode Island-based Twin River Casino.

The group’s website promises the initiative “will provide more than $100 million in new funds every year to enhance K-12 education in our state – without costing taxpayers a dime.” The money would go into a K-12 Education Fund, which would be distributed directly to districts on a per-pupil basis, bypassing the state’s weighted school finance formula. The campaign says would be used for such things as reducing class sizes, buying new technology, enhancing school safety and improving facilities.

 Former Sen. Bob Hagedorn, D-Aurora /File photo
Former Sen. Bob Hagedorn, D-Aurora /File photo

The plan’s public proponents are Hagedorn and former GOP Rep. Vickie Armstrong, along with former Republican House Majority Leader Chris Paulson.

Paulson said, “We’re pretty confident we’re being conservative” about the $100 million estimate. Hagedorn called it “no small amount of money” even in the context of basic state and local K-12 funding of more than $5.9 billion a year.

Josh Abram, a legislative staff analyst who is helping prepare the 2014 voters’ guide to ballot measures, said his office estimates the plan would bring $80 million to schools during a partial year of implementation in 2015-16, including a one-time $25 million upfront payment by Arapahoe Park. Revenue could be $114 million in the first full year, 2016-17. (The ballot measure doesn’t include a dollar amount but says schools would receive 34 percent of adjusted gross casino proceeds – the money left over after winners are paid.)

The preliminary staff analysis assumes growth in gaming, based on the fact that Arapahoe Park is near population centers, but it also assumes existing casinos will lose business.

“About half of the money that the new casino is going to obtain from gamblers is a dollar not spent in the other towns. … There will be cannibalization,” said Abram.

The proposal already has sparked fierce opposition from mountain casino interests, whose spending helped defeat a similar measure in 2003. (That proposal wouldn’t have benefited education.)

“We really don’t understand how they got to their number,” said Michele Ames of the opposition committee Don’t Turn Racetracks Into Casinos. “We’re just not clear on where the $100 million number comes from.”

She added, “It implies a rather large growth of gamblers in the state of Colorado that doesn’t seem realistic. … Their proposition is that they won’t affect the mountain casinos. That implies we’re going to double or triple the amount of gamblers.”

The Department of State is reviewing the 136,342 petition signatures submitted by the Better Schools group to determine if there are the 86,105 valid signatures needed to put the measure on the ballot.

Read the final text of proposed amendment here.

Education funding wasn’t really part of the discussion when the state’s two major gambling enterprises, the Colorado Lottery and the mountain-town casinos, were created. Voters approved the lottery in 1983, and a subsequent 1992 amendment restricted most of the revenue to open space and outdoor recreation projects. Casino gambling was approved in 1991, and a substantial portion of the revenue goes to historic preservation and the mountain communities.

money matters

Why Gov. Hickenlooper wants to give some Colorado charter schools $5.5 million

Students at The New America School in Thornton during an English class. (Photo by Nic Garcia)

If Mike Epke, principal of the New America School in Thornton, had a larger budget, he would like to spend it on technical training and intervention programs for his students.

He would buy more grade-level and age appropriate books for the empty shelves in his school’s library, and provide his teachers with a modest raise. If he could really make the dollars stretch, he’d hire additional teacher aides to help students learning with disabilities.

“These are students who have not had all the opportunities other students have had,” the charter school principal said, describing his 400 high school students who are mostly Hispanic and come from low-income homes.

A $5.5 million budget request from Gov. John Hickenlooper, a Democrat, could help Epke make some of those dreams a reality.

The seven-figure ask is part of Hickenlooper’s proposed budget that he sent to lawmakers earlier this month. The money would go to state-approved charter schools in an effort to close a funding gap lawmakers tried to eliminate in a landmark funding bill passed in the waning days of the 2017 state legislative session.

Funding charter schools, which receive tax dollars but operate independently of the traditional school district system, is a contentious issue in many states. Charter schools in Colorado have enjoyed bipartisan support, but the 2017 debate over how to fund them hit on thorny issues, especially the state’s constitutional guarantee of local control of schools.

The legislation that ultimately passed, which had broad bipartisan support but faced fierce opposition from some Democrats, requires school districts by 2020 to equitably share voter-approved local tax increases — known as mill levy overrides — with the charter schools they approved.

The bill also created a system for lawmakers to send more money to charter schools, like New America in Thornton, that are governed by the state, rather than a local school district.

Unlike district-approved charter schools, which were always eligible to receive a portion of local tax increases, state-approved charter schools haven’t had access to that revenue.

Terry Croy Lewis, executive director of the Charter School Institute, or CSI, the state organization that approves charter schools, said it is critical lawmakers complete the work they started in 2017 by boosting funding to her schools.

“It’s a significant amount of money,” she said. “To not have that equity for our schools, it’s extremely concerning.”

CSI authorizes 41 different charters schools that enrolled nearly 17,000 students last school year. That’s comparable to both the Brighton and Thompson school districts, according to state data.

Hickenlooper’s request would be a small step toward closing the $18 million gap between state-approved charter schools and what district-run charter schools are projected to receive starting in 2020, CSI officials said.

“Gov. Hickenlooper believes that working to make school funding as fair as possible is important,” Jacque Montgomery, Hickenlooper’s spokeswoman, said in a statement. “This is the next step in making sure that is true for more children.”

If lawmakers approve Hickenlooper’s request, the New Legacy charter school in Aurora would receive about $580 more per student in the 2018-19 school year.

Jennifer Douglas, the school’s principal, said she would put that money toward teacher salaries and training — especially in the school’s early education center.

“As a small school, serving students with complex needs, it is challenging and we need to tap into every dollar we can,” she said.

The three-year old school in Aurora serves both teen mothers and their toddlers. Before the school opened, Douglas sent in her charter application to both the Aurora school board and CSI. Both approved her charter application, but because at the time her school would receive greater access to federal dollars through CSI, Douglas asked to be governed by the state.

Douglas said that her preferred solution to close the funding gap would be to see local tax increases follow students, regardless of school type or governance model. Until that day, she said, lawmakers must “ensure that schools have the resources they need to take care of the students in our state and give them the education they deserve.”

For Hickenlooper’s request to become a reality, it must first be approved by the legislature’s budget committee and then by both chambers. In a hyper-partisan election year, nothing is a guarantee, but it appears Hickenlooper’s proposal won’t face the same fight that the 2017 charter school funding bill encountered.

State Rep. Jovan Melton, an Aurora Democrat who helped lead the charge against the charter school funding bill, said he was likely going to support Hickenlooper’s proposal.

“You almost have to do it to be in alignment with the law,” Melton said. “I don’t think with a good conscious I could vote against it. I’m probably going to hold my nose and vote yes.”

Payment dispute

Fired testing company seeks $25.3 million for work on TNReady’s bumpy rollout

PHOTO: TN.gov

Tennessee officials won’t talk about the state’s ongoing dispute with the testing company it fired last year, but the company’s president is.

Henry Scherich

Henry Scherich says Tennessee owes Measurement Inc. $25.3 million for services associated with TNReady, the state’s new standardized test for its public schools. That’s nearly a quarter of the company’s five-year, $108 million contract with the state, which Tennessee officials canceled after technical problems roiled the test’s 2016 rollout.

So far, the state has paid the Durham, North Carolina-based company about $545,000 for its services, representing about 2 percent of the total bill, according to a claim recently obtained by Chalkbeat.

Measurement Inc. filed the claim with the state in February in an effort to get the rest of the money that it says it’s owed. Since then, lawyers for both sides have been in discussions, and the company filed a lawsuit in June with the Tennessee Claims Commission. The commission has directed the State Department of Education to respond to the complaint by Nov. 30.

“We’re moving forward,” Scherich told Chalkbeat when asked about the status of the talks. “… We’re simply asking to be paid for the services we provided.”

Education Commissioner Candice McQueen declined last week to discuss the dispute, which she called “an ongoing pending lawsuit.” A spokesman for the attorney general’s office also declined to comment on Monday.

Scherich said he and other company officials have not been called to Nashville for hearings or depositions.

“Our lawyers and the state’s lawyers are still skirmishing each other,” he said. “…They argue about lots of things. It’s kind of like we’re establishing the ground rules for how this process is going to proceed.”

PHOTO: Grace Tatter
Education Commissioner Candice McQueen announced the firing of Measurement Inc. and the suspensions of most testing in April 2016.

Tennessee’s dramatic testing failure started on Feb. 8, 2016, when students logged on during the first morning of testing and were unable to load TNReady off the new online platform developed by Measurement Inc. The fallout culminated several months later when McQueen fired the company and canceled testing altogether for grades 3-8. In between were months of delays after McQueen instructed districts to revert to paper-and-pencil materials that would be provided by Measurement Inc. under the terms of their contract. Many of those materials never arrived.

The company’s claim suggests that the state was hasty in its decision to cancel online testing and therefore shares blame for a year of incomplete testing.

The Tennessee Department of Education “unilaterally and unjustifiably ordered the cancellation of all statewide electronic testing that occurred on February 8, 2016, following a transitory slowdown of network services that morning,” the claim says.

(In an exclusive interview with Chalkbeat the day before his company was fired, Scherich said Measurement Inc.’s online platform did not have enough servers for the 48,000 students who logged on that first day — a problem that he said could have been fixed eventually.)

The claim also charges that McQueen’s subsequent order to substitute paper test materials was “unnecessary and irresponsible” and impossible to meet because of the logistical challenge of printing and distributing them statewide in a matter of weeks.

In her letter terminating the state’s contracts with Measurement Inc., McQueen describes daily problems with the company’s online platform in the months leading up to the botched launch. “This was not just a testing day hiccup; the online platform failed to function on day one of testing,” she wrote.

McQueen said those experiences contributed to her department’s conclusion that Measurement Inc. was unable to provide a reliable, consistent online platform and left her with no option but to order paper and pencil tests. She also cited the company’s failure to meet its own paper test delivery deadlines for her ultimate decision to terminate the contracts and suspend testing.

The last sentence of the four-page termination letter says the state would “work with (Measurement Inc.) to determine reconciliation for appropriate compensation due, if any, for services and deliverables that have been completed as of the termination date after liquidated damages have been assessed.”

In addition to its invoices for work under the contract, Scherich said his company is owed another $400,000 for delivering test-related materials to the state after its contract was ended.

“We didn’t want to be a company that stood in the way of the programs of the state of Tennessee, so we provided all the information they requested,” Scherich said. “We were told we would be paid, we provided the information, and then we’ve not been paid.”

Founded in 1980, Measurement Inc. had been doing testing-related work for Tennessee for more than a decade before being awarded the 2014 TNReady contract, its biggest job ever. The company had a fast deadline — only a year — to create the state’s test for grades 3-11 math and English language arts after a vote months earlier by the legislature prompted Tennessee to pull out of PARCC, a consortium of other states with a shared Common Core-aligned assessment.

Scherich said the loss of the TNReady contract was “a major hit” for his company, but that Measurement Inc. has paid every employee and subcontractor who worked on the project. “We have had to go into debt to keep ourselves viable while we wait for this situation with Tennessee to be resolved,” he said, adding that the company continues to do work in about 20 other states.

To pursue its claim, Measurement Inc. has hired the Tennessee law firm of Lewis, Thomason, King, Krieg & Waldrop, which has offices in Nashville and Knoxville.

“I’m sure we’ll work out something amicable with the state over time,” he said. “I’m an optimistic person. But I think our lawyers and their lawyers will have to have a lot of negotiations.”

Below are Measurement Inc.’s claim against the state, and the state’s letter terminating its contracts with the company.

Editor’s note: This story has been updated with details about the claim’s status.