Governor’s proposal to merge funds gives some lawmakers pause

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As part of his FY 2020-FY 2021 budget proposal to the legislature, Governor Sununu is recommending an organizational change to how education dollars are recorded on the financial books of the state. Some lawmakers on the House Finance Committee have expressed concern about merging the funds, raising questions about the future ability to fund existing state grants for public education.

In his Executive Budget Summary, Governor Sununu outlines the following request and corresponding rationale:

This budget combines the Education Trust Fund and General Funds. The Education Trust Fund has never functioned as it was originally intended, and in almost every biennium the General Fund is required to bail it out. Combining these funds came at the request of various state agencies and will improve New Hampshire’s financial transparency and reporting. This accounting change will have absolutely no impact on the disbursement of educational support to school districts.

For context, the Education Trust Fund exists for distributing state monies dedicated for primary and secondary education to school districts and approved charter schools. The statement that, “in almost every biennium the General Fund is required to bail it out”, means that under current law (RSA 198:42), if the revenues devoted to fund education (such as statewide property and utility taxes, portions of business and tobacco taxes, and lottery funds) are less than the amount of money appropriated by the legislature for education, this deficit will be balanced by monies from the General Fund.

A new surplus

Since the Education Trust Fund was created in 1999, the fund did not have enough money to completely cover state grants for education. Between 2012 and 2017, a total of about $520 million had to be transferred from the General Fund.

That dynamic changed in 2018. For the first time, the Education Trust Fund ran a surplus of $21 million. The fund is projected to have a $42 million surplus in 2019. A combination of strong revenue growth, primarily from the business taxes that feed the fund, and reduced education spending from declining student enrollment and cuts to education grants have contributed to the surplus.

The Governor is proposing eliminating the Education Trust Fund, taking the $63 million of surplus monies built up in it, and transferring them to a new fund, the “Targeted School Building Aid Fund.” This would provide financial aid to cities and towns, predominantly those that are “property-poor”, to assist them in the construction or substantial renovation of educational facilities.

The Targeted fund would be separate from the school building aid fund that the Department of Education has run since the 1950’s but has been–and would continue to be–on hold since 2007.

Concerns over merging the funds

Currently, the House Finance Committee, specifically Division II, is exploring this aspect of the Governor’s Budget proposal. At their meeting on February 26, committee members expressed concern that merging the two funds could put money intended for public education in jeopardy, and force education to compete with other key state policy needs.

Susan Ford, the Chairwoman of the House Finance Division II Committee, asked Budget Director Mac Zellem why the Governor is seeking to merge the funds at this stage.

One of the difficulties that I see, is that over the last 10 years, the Education Trust Fund has not been enough to fund adequacy, and we have filled it in from the General Fund. That part I understand. Now you have one year where you have an excess of $63 million in the Education Trust Fund, and you want to do away with the Education Trust Fund,” said Representative Susan Ford (D-Easton).

I want to be articulate: our conversation around the decision to combine the two funds started well before there was identified to be a surplus…. We are projecting, going forward, not to have such a significant surplus,” responded Zellem.

Can you guarantee that in five years?,” asked Representative Ford.

I cannot guarantee that,” Zellem told the committee.

That’s the concern that I think many people have,” said Representative Ford.

Other members, including Representative Kate Murray, asked Zellem to clarify the purpose of merging the funds, and he pushed back against assertions that the Education Trust Fund surpluses would be used to fund the needs of other departments.

Why would you take this trust fund away, which has enormous value to the schools and their sense of security?,” asked Representative Kate Murray (D-New Castle).

If the fund had functioned as intended, I would agree with that… I would like to clarify that we are not treating this as a revenue source for other departments. The current balance in the Education Trust Fund, if it were rolled forward to cover the cost of an adequate education, we would be functionally building a rollover to the next biennium. It’s not being shifted anywhere else. We’re trying to ensure with certainty that the revenues of the biennium balance the needs of the biennium, Zellem responded.

We understand that there is some concern around the legislature and with members of the public around what this would mean to the disbursements of educational adequacy grants… and there would be functionally no change. The General Fund, as always, will continue to pick up any differential between what is budgeted for adequacy and what the actual need is,” he continued.

Below is the corresponding language in HB2 that coincides with the assertion by the Governor’s office regarding the General Fund’s obligation to fulfill any obligation of state K-12 education funding.

For the fiscal year beginning July 1, 2005, and every fiscal year thereafter, the amount necessary to fund the grants under RSA 198:41 is hereby appropriated to the department from the [education trust fund created under RSA 198:39] general fund. The governor is authorized to draw a warrant from the [education trust] general fund to satisfy the state’s obligation under this section.

The Statewide Education Property Tax generates $363 million per year for the Education Trust Fund. While the state doesn’t actually collect the money (it is locally raised and locally kept) it would still be recorded in the General Fund and will still be used as a source of funds for public education. The tax rate will not change and will still be set at the state level.

As House Finance continues their work throughout the month of March, Reaching Higher will provide more information regarding this potentially impactful policy change.