Payment shifts force a third of schools districts to borrow money

by Tom Scheck, Minnesota Public Radio
November 23, 2009

St. Paul, Minn. — A Minnesota Public Radio News analysis finds that more than a third of the school districts in the state have been forced to borrow to pay their bills.

In normal years, some school districts borrow money because of low cash flow but education experts say many more districts are borrowing this year because of Gov. Tim Pawlenty's budget action.

This summer, the Bemidji Area School District was forced to borrow nearly $9 million, but not long-term debt for things like new buildings.

Long-term borrowing has to be approved by district voters. Instead, districts are using short-term borrowing for things like teachers' paychecks and other monthly operating expenses, and that comes with a cost.

"Our total cost of borrowing is going to cost about $70,000 over the course of this year," said Chris Leinen, director of business services at Bemidji Schools.

Leinen said the school district made the decision to borrow after Pawlenty delayed $1.2 billion in state payments to schools as a part of his plan to balance Minnesota's budget. It's an accounting trick that delays a portion of state school payments until the next budget cycle to balance the current budget.

Leinen said the shift means the school district is coming up short about $1 million a month.

"You certainly don't want to borrow more than you need and the danger of being short is pretty significant," he said. "The last thing you want to do is say 'Gee, we'll make payroll in a couple of weeks because we don't have it right now.'"

Bemidji's schools are not alone. While some districts can tap reserve funds to meet cash flow needs, an MPR News query of the four brokerage houses that arrange loans for school districts found that 126 districts have borrowed nearly $300 million since June.

Greg Abbott, communications directors for the Minnesota School Boards Association, said that's nearly three times more money than schools borrowed last year. He said the interest school districts pay for borrowing would otherwise be dedicated to the classroom.

"The most efficient use of taxpayer money for schools is to put all of the money that you possibly can into the classroom. If your school district has to borrow, now you're spending on interest rates," Abbott said.

Abbott said the Minnesota School Boards Association sets up a borrowing pool every year so schools can band together and get a low interest rate. For all the schools that borrow, the rate varies from 0.5 percent to no more than 2 percent.

Total interest costs for all of the schools that borrowed money is $2.8 million and rising. Under state formulas that's enough money to educate 538 students for a year. The amount of interest is rising because at least eight more school districts will borrow another $40 million in December.

One of the school districts set to borrow is Anoka-Hennepin -- the largest district in the state. As Superintendent Dennis Carlson walked the halls of Coon Rapids High School, he discussed the decision to borrow nearly $30 million in December. Carlson says the total borrowing cost will be about $200,000, which he says will force the district to make cuts that he hopes doesn't impact students.

Carlson says the borrowing is a better alternative than an outright cut to school funding, something Senate Democrats proposed during the legislative session. But he says flat funding from the state or any more payment shifts will make things much harder.

"In order for us to get through a year or two, we can do this," Carlson said. "If it starts stretching to three, four, five years, then we're going to have some decisions, tough decisions to make as a school district on how to deal with those kinds of cuts. That's going to be extremely difficult."

For his part, Pawlenty minimized the impact of the shift and the borrowing costs to schools.

"The interest rate that they're getting is approaching zero. It's some pressure, but it's not unbearable pressure," Pawlenty said. "The context for all of this is these are the worst economic circumstances since World War Two, and so there's going to be some extraordinary steps. The expectation can't be that everything should be normal because it's not."

Pawlenty has also repeatedly said that he wasn't the only one to propose a shift in school payments.

The House and Senate's final budget bills also delayed payments to schools, but it was Pawlenty who vetoed the DFL plan and set the stage to balance the budget on his own.