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.

budget season

New budget gives CPS CEO Janice Jackson opportunity to play offense

PHOTO: Elaine Chen
Chicago Public Schools CEO Janice Jackson announced the district's $1 billion capital plan at Lázaro Cardenas Elementary School in Little Village.

Running Chicago’s schools might be the toughest tour of duty in town for a public sector CEO. There have been eight chiefs in a decade – to be fair, two were interims – who have wrangled with mounting debt, aging buildings, and high percentages of students who live in poverty.

Then there’ve been recurring scandals, corruption, and ethics violations. Since she was officially named to the top job in January, CEO Janice Jackson has had to clean up a series of her predecessors’ lapses, from a special education crisis that revealed families were counseled out of services to a sexual abuse investigation that spotlighted a decade of system failures at every level to protect students.

But with budget season underway, the former principal finally gets the chance to go on the offensive. The first operations budget of her tenure is a $5.98 billion plan that contains some good news for a change: 5 percent more money, courtesy of the state revamp of the school funding formula and a bump from local tax revenues. CPS plans to funnel $60 million more to schools than it did last school year, for a total of $3.1 billion. Put another way, it plans to spend $4,397 per student as a base rate — a 2 percent increase from the year prior.

CPS’ total budget comes out to $7.58 billion once you factor in long-term debt and an ambitious $1 billion capital plan that is the focus of a trio of public hearings Thursday night. When it comes to debt, the district owes $8.2 billion as of June 30, or nearly $3,000 per every Chicago resident.

“The district, without a doubt, is on firmer footing than it was 18 months ago, but they’re not out of woods yet,” said Bobby Otter, budget director for the Center for Tax and Budget Accountability. “When you look at the overall picture (the $7.58 budget), they’re still running a deficit. This is now the seventh year in a row they are running a deficit, and the amount of debt the district has, combined with the lack of reserves, leaves them with little flexibility.”

Earlier this week, standing in front of an audience of executives at a City Club of Chicago luncheon, Jackson acknowledged that it had been an “eventful” seven months and said she was ready to focus on strategies for moving the district forward. “I won’t be waiting for next shoe to drop or wasting time and resources waiting for next problem. I want to design a system to educate and protect children.”

“I’m not in crisis mode,” she added.

Here’s what that looks like in her first year when you just consider the numbers. The biggest line items of any operating budget are salaries, benefits and pensions: Taken all together, they consume 66 percent of CPS’ planned spending for the 2018-2019 school year. Rounding out much of the rest are contracts with vendors ($542.6 million, or 9 percent), such as the controversial janitorial deals with Aramark and SodexoMAGIC; charter expenditures ($749 million, or 13 percent); and spending on transportation, textbooks, equipment, and the like (12 percent).

A closer look at how some of those items are allocated offers a window into Jackson’s vision. The Board of Education is scheduled to vote on the plan July 25.

Investing in choice

Earlier this month, the district announced a nearly $1 billion capital plan, funded by bonds, that would support new schools, technology upgrades, and annexes at some of the district’s most popular campuses. The operating budget, meanwhile, accounts for the people and programs driving those projects. It proposes nearly doubling the staff, from 10 to 17, in the office that manages charters, contract programs, and the creation of new schools. It reestablishes a chief portfolio officer who reports directly to the CEO. And it adds expands access to International Baccalaureate programs and Early College STEM offerings. In a letter at the beginning of the 2019 Budget Book, Jackson said such expansions “move the district closer to our goal of having 50 percent of students earn at least one college or career credential before graduating high school.” 

Advocating for students

The budget seeds at least two new departments: a four-person Office of Equity charged with diversifying the teacher pipeline, among other roles, and a 20-person Title IX office that would investigate student abuse cases, including claims of student-on-student harassment.

Leaning into high schools

Fitting for a budget designed by a former high school principal – Jackson was running a high school before age 30 – the plan leans in to high schools, establishing $2 million to fund four new networks to oversee them. (That brings the total number of networks to 17; networks are mini-administrative departments that track school progress, assist with budgeting, and ensure policy and procedures are followed.) And it earmarks $75 million across three years for new science labs at neighborhood high schools. What’s more, it supports 10 additional career counselors to help campuses wrestle with a graduation mandate – set forth by Mayor Rahm Emanuel – that seniors have a post-secondary plan to graduate starting with the Class of 2020.

Throwing a lifeline to small schools

The budget also sets forth a $10 million “Small Schools Fund” to help schools with low enrollment retain teachers and offer after-school programs. It also earmarks an additional $5 million to help schools facing precipitous changes in enrollment, which can in turn lead to dramatic budget drops.   

Supporting modest staff increases

After a round of layoffs were announced in June, the budget plan adds at least 200 teachers. But the district would not provide a clear accounting of whom to Chalkbeat by publication time. Earlier this week, it announced plans to fund additional school social workers (160) and special education case managers (94).

The district plans to add positions for the upcoming 2018-2019 year.

As Chicago Teachers Union organizer and Cook County Commissioner candidate Brandon Johnson pointed out in an impromptu press conference earlier this week in front of district HQ, the budget is still “woefully short” on school psychologists, nurses, and counselors. And it doesn’t address the calls from parents to restore librarians and instructors in such subjects as art, music, physical education — positions that have experienced dramatic cuts since 2011. “What is proposed today still leaves us short of when (Mayor Emanuel) took office,” Johnson said. “The needs of our students must be met.”

Principal Elias Estrada, who oversees two North Side schools, Alcott Elementary and Alcott High School, said he was still figuring out how the additional staffing would work. He’s getting another social worker – but he oversees two campuses that sit three miles apart, so he figures he’ll have to divide the person’s time between campuses. Estrada asked the board at Monday’s budget hearing to help him understand the criteria it uses to determine which schools get extra staff or additional programs, like IB. “I need a counselor, a clerk, and an assistant principal,” he said; currently those positions also are shared between the elementary and the high school.

After the meeting, he said that schools might have gotten slightly bigger budgets this year, but the increase was consumed by rising salaries and he wasn’t able to add any positions. What’s more, his building needs repairs, but it didn’t get picked for any of the facilities upgrades in the $1 billion capital plan that accompanied the budget.

“What is the process?” he asked. “The need is everywhere.”

At two public hearings on Monday, fewer than a dozen speakers signed up to ask questions of the board, central office administrators, or Jackson.

To see if your school is getting one of the newly announced positions or any funding from the capital plan, type it in the search box below.

School Finance

IPS board votes to ask taxpayers for $315 million, reject the chamber’s plan

PHOTO: Dylan Peers McCoy

Indianapolis Public Schools officials voted Tuesday to ask taxpayers for $315 million over eight years to help close its budget gap — an amount that’s less than half the district’s initial proposal but is still high enough to draw skepticism from a local business group.

The school board pledged to continue discussions in the next week with the Indy Chamber, which released an alternative proposal last week calling for massive spending cuts and a significantly smaller tax increase. The school board rejected the proposal as unrealistic and instead voted to add a much larger tax measure to the November ballot.

If the school board and the chamber come to a different agreement before the July 24 meeting, the board can change the request for more taxpayer money before it goes to voters. Some board members, however, were dubious that they would be able to find common ground.

“While I appreciate the fact that we want to continue to negotiate, I’m pretty sure that I’m at rock bottom now,” said school board member Kelly Bentley. “That initial proposal by the chamber is, unfortunately in my mind, it’s insulting. It’s insulting to our children, and to our neighborhoods, and to our families.”

Chamber leaders, whose support is considered important to the referendum passing, were skeptical about the dollar amount. In a press release, the group said the district was “taking another step towards seeking a double-digit tax increase.”

“We’re concerned that our numbers are so divergent,” said chamber president and CEO Michael Huber in the statement. “We need to study the assumptions behind the $318 million request; clearly the tax impact is significant and the task of winning voter support will be challenging.”

During the board meeting, which lasted more than two hours, district leaders discussed why schools need more money and why the chamber report is unrealistic. They also took comments from community members who were largely supportive of the tax increase.

Joe Ignatius, who mentors students through 100 Black Men of Indianapolis, said that he has seen the benefits of more funding from referendums in other communities.

“This should be a no brainer, to invest in our future for the students,” Ignatius said. “Don’t think about the immediate impact of the dollars that may come out of your pocket but more the long-term impact.”

If the district goes forward with its plan, and voters approve the tax increase, the school system would get as much as $39.4 million more per year for eight years. A family with a home at the district’s median value — $75,300 — would pay about $3.90 more per month in property taxes. (Since the initial proposal, the district reduced the median home value used in calculations on the advice of a consultant.)

The district plan comes on the heels of months of uncertainty. After the school board abandoned its initial plan to seek nearly $1 billion for operating expenses and construction, district officials spent weeks working with the Indy Chamber to craft a less costly proposal. Last month, the board approved a separate referendum to ask taxpayers for about $52 million for school renovations, particularly school safety features.

But the groups came to different conclusions about how much money the district needs for operating expenses.

The chamber released an analysis last week that called for $477 million in cuts, including eliminating busing for high school students, reducing the number of teachers, closing schools, and cutting central office staff. The recommendation also included a $100 million tax increase to fund 16 percent raises for teachers.

District officials, however, say the cuts proposed by the chamber are too aggressive and cannot be accomplished as quickly as the group wants. The administration and board members spent nearly an hour of the meeting Tuesday discussing the chamber plan, why they believe it’s methodology is wrong, and the devastating consequences they say it would have on schools.

Even if the $315 million plan proposed by the district passes, it will come with some sacrifices compared to the initial plan. Those cuts could include: reduced transportation for magnet schools, field trips, and after school activities; school closings; increased benefits costs for employees; and smaller pay increases for teachers and employees.

The district did not make a specific commitment to how much teacher pay would increase if the amount asked for in the referendum is approved, but Superintendent Lewis Ferebee said the funds would pay for consistent raises.

“We would be at least addressing inflationary increases and cost of living, but we hope that we can be higher than that,” said Ferebee. “It would depend a lot on what we are able to realize in savings.”

The school board’s decision to rebuff the chamber’s recommendation puts the district in a difficult position. The chamber has no official role in determining the amount of the referendum, but it could be a politically powerful ally.

Last week, Al Hubbard, an influential philanthropist and businessman who provided major funding for the chamber analysis, said that if the district seeks more money than the group recommended, he would oppose the referendum.

The total tax increase would vary for each homeowner within district boundaries. The operating increase would raise taxes by up to $0.28 for every $100 of assessed property value, while the construction increase would raise taxes by up to $0.03 per $100 of assessed property value.