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School Finance: Why is it so complicated?


Minnesota school finance is a complicated system which makes it difficult to understand, and communicate. For a school business official it will take a minimum of three years to gain basic knowledge of school finance.

Why is it so complicated? School finance is driven by federal regulation, state rules and statute along with compliance with governmental accounting standards. Each legislative session brings changes to school finance that may change how funding formulas are determined or add new statutes schools must implement. Another complication are the massive amount of mandates (many of which are unfunded) that dictate what programs and services districts must offer, and a large number of regulations that specify how certain funds must be used. Additionally, school finance requires a complex account coding structure that schools are required to adhere to. It just isn't as simple as balancing a personal checkbook or a business' accounting books.

Schools also are required to have annual audit every fiscal year which involves auditing for finances, state and federal compliance along with annual financial statement reporting.

While school finance is complex our intent of this section is to help communicate to our community some of the basics of school finance along with providing our financial information.

School finance basics


International Falls Public Schools budget contains six (6) fund categories. Each fund has a different purpose and restrictions that are set by law. The largest and most important fund is the general fund (fund 01).

General Fund (Fund 01): Is the main operating fund of the District for grades K-12 including athletics. This fund includes state and federal educational funding, the majority of the local levy, and other miscellaneous local revenue. The fund includes all costs of operation including licensed and non-licensed staff salaries and benefits, educational program costs, transportation, capital projects, technology, curriculum, utilities, athletics etc.

Included as part of the general fund is Fund 11 – Donations. The donation fund operates as a subset fund for the purposes of tracking the revenue and expenditure of all donations to the District.

Food Service Fund (Fund 02): Used for the operation of the district’s food service program. This program is primarily funded by federal and state funding through meal reimbursement rates set annually by the federal government. Additional funding is generated through customer sales of meals and ala carte items. This fund is highly regulated under the guidance of the USDA.

Community Service Fund (Fund 04): Used for community education programs and services including Community Education (adult and youth programs), Adults with Disabilities, Early Childhood Family Education (ECFE), and School Readiness (Preschool). This fund is primarily funded by state aid, local levy and participant fees.

Building Construction Fund (Fund 06): Used for construction and renovation projects in district facilities funded by the sale of bonds, capital loans, etc.

Debt Service Fund (Fund 07): Used to pay off bonds previously approved by district voters for building construction and renovations.

Custodial Fund (Fund 18): Used for reporting scholarships funds.

The majority of the revenue that International Falls Public Schools receives comes from the State of Minnesota (approximately 65%), local levy (approximately 22%), federal funding (approximately 8%) and other revenue sources (approximately 5%).

The Districts state funding for the general fund comes mainly from general education aid which determined by a complex formula structure. These formulas are primarily driven by student enrollment. See the section entitled “How does student enrollment fund the District?” for information regarding enrollment funding.

Bi-annually (every 2 years) the state may increase the base general education formula allowance for school districts. Unfortunately, this allowance over time has not kept up with the population declines, therefore, the District receives less funding now that in past decades. “Click here” to see chart showing the disparity over time. (Source: Schools for Equity in Education (SEE)).

Local property taxes is the second largest source at around 22% then federal funding from programs such as Title programs. Other revenue sources include athletic fees, donations, facility rental, etc.

One of the key data elements used in the majority of funding formulas is based on student enrollment which is referred to as Average Daily Membership (ADM). There are different ADM categories which have different reporting and revenue formula uses as determined by statute.

ADM is based on student enrollment which includes the date the student enrolled to the date the student withdraws. For example: A student enrolled on the first day of school to the end of school will generate a 1.0 ADM for the District.

Resident Student ADM (RADM): All resident students living in the District’s boundary. RADM includes students attending the District, students open enrolled out to other Districts or Charter Schools, ALC students, shared time students and tuition students. This number by statute excludes homeschool students and students attending a nonpublic school.

Adjusted ADM: All students enrolled in the District for which the District will receive funding. This includes resident students enrolled in the District, ALC students, shared time students, tuition students and non-resident students enrolled in.

ADM Served: All students the District is serving in their buildings. This includes resident students enrolled in the District, ALC students, shared time students and non-resident students enrolled in.

Adjusted Pupil Units (Adj. PU): Is the weighted calculation of Adjusted ADM. The weighting for students enrolled in grades Early Childhood Special Education (EC), Kindergarten (all day/every day), and grades 1st – 6th is 1.0. The weighting for students enrolled in grades 7th – 12th is 1.2. Minnesota statute determines the weighting for all grades which may be changed by Legislative action.

Adjusted Resident Pupil Units (Resident PU): Is the weighted calculation of Resident ADM (RADM). The weighting for students enrolled in grades Early Childhood Special Education (EC), Kindergarten (all day/every day), and grades 1st – 6th is 1.0. The weighting for students enrolled in grades 7th – 12th is 1.2. Minnesota statute determines the weighting for all grades which may be changed by Legislative action.

Expenditures are tracked using the 10 program categories below as required by the State. Our District spends about 74 percent of its money for staff wages and benefits, 23 percent on purchased services, supplies and materials, and the remaining 3 percent on capital projects categories and other expenditures.

  1. District Level Administration - expenditures for the school board, superintendent, along with expenditures for the administration of individual schools, including the cost of principals, and administrative assistants.
  2. School Level Administration – expenditures for business office, and technology department including staff salaries and benefits, technology costs for District, and associated costs.
  3. Regular Instruction - expenditures for elementary and secondary classroom instruction including teacher and paraprofessional staff salaries and benefits, and classroom supplies and materials including technology expenditures. Included under regular instruction is Student Extra-Curricular Activities and Athletics. These expenditures are for district-offered extra-curricular activities and athletics including clubs, fine art activities, and sports.
  4. Career and Technical Instruction - expenditures for courses and activities which develop knowledge skills, attitudes and behavioral characteristics for students seeking career exploration and employability.
  5. Special Education - expenditures including special education teacher and paraprofessional staff salaries and benefits, required student services and activities providing learning experiences for pupils who qualify for special education services.
  6. Community Education Programs – programs included in fund 04 such as adult and youth programs, adults with disability program, early childhood family education (ECFE), school readiness.
  7. Instructional Support Services - expenditures for dean of students, library centers, staff development, and Indian education department.
  8. Pupil Support Services - expenditures include services provided to students such as counseling, guidance, health services, social work services, mental health services and student transportation.
  9. Operation Maintenance and Other - expenditures for operation, maintenance, improvement and repair of district buildings, grounds and equipment. Includes expenditures for maintenance/transportation director, custodian staff salaries and benefits, capital projects, fuel for buildings, electricity, repairs and maintenance, and utilities.

The District has six different fund balance types that are specific to each fund category. Under the Governmental Accounting Standards Board (GASB) the District is required to have a fund balance policy that determines the order of use and minimum fund balance the District maintains it their general fund unrestricted fund balance.

The following are the definition of each fund balance type:

  1. “Assigned” fund balance - amounts are comprised of unrestricted funds constrained by the school district’s intent that they be used for specific purposes, but that do not meet the criteria to be classified as restricted or committed. In funds other than the general fund, the assigned fund balance represents the remaining amount that is not restricted or committed. The assigned fund balance category will cover the portion of a fund balance that reflects the school district’s intended use of those resources. The action to assign a fund balance may be taken after the end of the fiscal year. An assigned fund balance cannot be a negative number.
  2. “Committed” fund balance - amounts are comprised of unrestricted funds used for specific purposes pursuant to constraints imposed by formal action of the school board and that remain binding unless removed by the school board by subsequent formal action. The formal action to commit a fund balance must occur prior to fiscal year end; however, the specific amounts actually committed can be determined in the subsequent fiscal year. A committed fund balance cannot be a negative number.
  3. “Nonspendable” fund balance -amounts are comprised of funds that cannot be spent because they are either not in spendable form or are legally or contractually required to be maintained intact. They include items that are inherently unspendable, such as, but not limited to, inventories, prepaid items, long-term receivables, non-financial assets held for resale, or the permanent principal of endowment funds.
  4. “Restricted” fund balance - amounts are comprised of funds that have legally enforceable constraints placed on their use that either are externally imposed by resource providers or creditors (such as through debt covenants), grantors, contributors, voters, or laws or regulations of other governments, or are imposed by law through constitutional provisions or enabling legislation.
  5. “Unassigned” fund balance - amounts are the residual amounts in the general fund not reported in any other classification. Unassigned amounts in the general fund are technically available for expenditure for any purpose. The general fund is the only fund that can report a positive unassigned fund balance. Other funds would report a negative unassigned fund balance should the total of nonspendable, restricted, and committed fund balances exceed the total net resources of that fund.
  6. “Unrestricted” fund balance - is the amount of fund balance left after determining both nonspendable and restricted net resources. This amount can be determined by adding the committed, assigned, and unassigned fund balances.
The minimum fund balance policy for the unassigned general fund is 2.5 months of unassigned general fund operating expenses.

Every property owner pays property taxes for the various taxing jurisdictions in which their property is located. These jurisdictions include county, city or township, school district, and any other applicable special districts. Koochiching County collects the taxes from property owners and distributes the funds to the appropriate taxing jurisdiction.

Each year the different jurisdictions set their own tax levy as allowed by law. School districts are the only government entity that must hold an election to increase the amount of taxes collected; all other entities can simply increase the amount without voter approval.

Voter-Approved Levies:

The amount of taxes collected by a school district is based on voter-approved levies, which are proposed to residents, voted on during elections, and must be approved by the majority. There are three types of voter-approved levies.

  • Operating Levies: can be used to pay for any operational expense of the district including salaries, classroom supplies, utilities and transportation. The duration of an operating levy can last up to 10 years. School districts are forced to rely more and more on operating levies due to state funding not keeping pace with the rate of inflation.
  • Bond Levies: provide one-time revenue for the purpose of new facility construction, additions, or renovations.
  • Capital Projects Levies: provide a designated amount of revenue for up to 10 years for a specific project.
Other Local Levies:

Per state law, Minnesota school districts can levy for specific programs such as board-approved referendums, location equity, health and safety, community education and others. They have very specific calculations set by law and most offer minimal compensation.

There are a number of factors that determine how much in taxes property owners pay to a school district each year. Additionally, the amount you pay in school district taxes will likely increase or decrease year to year due to changes to the factors described below.

  1. Amount of levies (set by the school board and/or approved by voters) - amount is set during the Truth in Taxation hearing each year. The amounts can decrease as bonds are paid back or operating levies expire, or amounts can increase if new levies are approved.
  2. Taxable market value of your property - this is set by the County Assessor and will change yearly. Your specific taxable market value is looked at as a percentage of the total community's taxable market value; so as new businesses and families move in, our tax base grows resulting in the levies being spread over more properties and lessoning the percentage you pay.
  3. State Equalization Aid - each legislative session it is determined how much the state will provide in aid, which can offset the tax burden on local taxpayers.
Student Enrollment - some levies are funded on a per-pupil basis, so amounts can increase or decrease depending on how many students are enrolled.