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A Separate School District for Mailbu, But How Much Should Santa Monica Give Up?

By José J. Escarce

March 27, 2017 -- In recent years, interest has grown in dividing the Santa Monica-Malibu Unified School District (SMMUSD) to create separate Santa Monica and Malibu districts.

Splitting up a school district is difficult, however, and involves many complex and often technical issues. In early 2016, to explore in detail the financi­al consequences of splitting up SMMUSD, the SMMUSD Board of Education created a negotiating committee, called the Malibu Unification Negotiations Committee (MUNC), and charged it with examining the issues and developing potential solutions.

As the Board saw it, if the MUNC was able to agree on acceptable solutions to the challenges posed by separation, the Board might be able to lend its support to the separation process as it made its way up to Sacramento.

The MUNC included three highly respected, long-time SMMUSD volunteers with financial and legal expertise from Santa Monica, appointed by the Superintendent and ratified by the School Board, and three volunteer experts from Malibu, appointed by the City Manager and ratified by the Malibu City Council. The MUNC presented its report and its recommendations at a Board Study Session on Tuesday, March 7. (The report is available on the SMMUSD website.)

The report clearly reflects the tremendous time and effort devoted to their assignment by the members of the MUNC, who have performed an admirable public service. The members of the MUNC negotiated an agreement that they consider in good faith to provide a solution to the challenges in creating separate districts.

As a former Board member who hoped this process would lead to an agreement the Board could support, however, I believe it’s essential for the Board and the Santa Monica community to consider carefully whether the MUNC’s proposed agreement achieves a key objective set forth in the Board’s charge: elimination of any significant adverse financial effects of separation on a separate Santa Monica Unified School District (SMUSD).

In this commentary, I discuss the implications of the MUNC agreement for a key measure of the financial effect of separation on a hypothetical, separate SMUSD: the difference over time in per-student funding for SMUSD and for the current SMMUSD. I refer to this measure as the “funding gap.” I also discuss how the Board should approach its decision-making process. I do not address other issues that may be equally important to the Board’s decision.

Determining Growth in Revenues

Annual growth in revenues for school districts in California is determined in one of two ways. For nearly 90 percent of districts, annual revenue growth depends on a state formula that involves a cost-of-living adjustment and, in some years, limits to total school funding imposed by Proposition 98.

For the remaining districts, annual revenue growth is determined by the rate of increase in their property tax revenues. These districts, called “basic aid” districts, are funded at higher levels than other districts and, because rates of increase in property tax revenues typically outpace growth rates under the state formula, their revenues often grow more quickly as well.

The current SMMUSD is not officially a basic aid district, but due to a technicality in the state’s funding mechanisms it is funded just like a basic aid district, that is, annual revenue growth is determined by the growth in its property tax revenues.

Similarly, a separate Malibu district would become a basic aid district immediately upon separation. By contrast, a separate SMUSD would be funded under the state formula for a number of years before ultimately transitioning to basic aid status as well. Projections suggest that this would happen approximately 12 years from now, in 2029-30.

To understand the implications of this, it is useful to separate the future into two periods: the period before SMUSD transitions to basic aid and the period thereafter. As a result of the difference in annual rates of revenue growth for a separate SMUSD and for the current SMMUSD in the period before the former transitions to basic aid, per-student funding for SMUSD, while likely growing every year, would lag over time relative to per-student funding for SMMUSD (i.e., relative to per-student funding if the district did not split up).

Under projections examined by the MUNC, the funding gap would amount to $5.3 million ($610 per Santa Monica student) in 2024-25 and grow to $10.1 million ($1162 per Santa Monica student) in 2029-30, the year SMUSD is projected to become basic aid.

The MUNC agreement addressed the funding gap by developing a formula whereby the Malibu district, which would have substantially higher per-student funding than SMUSD upon its creation, would transfer funds to SMUSD each year until 2036-37. Notably, the yearly transfers specified by the MUNC formula fall short of covering the full funding gap.

The MUNC did not project either SMMUSD’s revenues or the funding gap for the years after 2029-30, but it did project SMUSD’s revenues through 2036-37 using the assumption that these revenues would grow at 5.04 percent annually after 2029-30, the rate of property tax revenue growth for Santa Monica reported in the Los Angeles County data for the period 2012-2015.

Adopting the MUNC’s method, I projected the funding gap from 2029-30 through 2039-40 by (1) extending the SMUSD revenue projections for three additional years, and (2) projecting what SMMUSD’s revenues would be between 2029-30 and 2039-40 using the assumption that these revenues would grow at 4.78 percent annually, the rate of property tax revenue growth for SMMUSD reported in the county data for 2012-15.

(Using the rate of property tax revenue growth to project SMMUSD’s revenues could be criticized on the grounds that SMMUSD’s other revenue sources -- e.g., the parcel tax and funding from the City of Santa Monica -- don’t grow as fast as property taxes. This is correct, but I feel justified in doing so for this comparison because the MUNC revenue projections for a separate SMUSD used Santa Monica’s rate of property tax growth despite the fact that the same concern would apply to SMUSD.)

The following graph shows projections for the “net funding gap” -- i.e., the funding gap after adding the transfers from Malibu to SMUSD’s revenues -- through 2039-40. (In the graph, negative numbers mean SMMUSD would have lower per-student funding than SMMUSD.)

Tale showing net funding gap

The net funding gaps from 2022-23 through 2035-36 are not insignificant. Moreover, the net funding gap jumps dramatically between 2035-36 and 2036-37 because Malibu stops making transfers to SMUSD at that point. Consequently, the net funding gap exceeds $1,100 per student in each of the last four years of the projections, and although the gap decreases over those four years, it does so extremely slowly.

In percentage point terms, the projected net funding gaps over the last four years of the projections correspond to 4.1 percent to 4.5 percent of what per-student funding would have been if SMMUSD did not split up.

Naturally, numerical projections for a distant future will always be incorrect. The figures the MUNC and I have projected are the best guesses we can make today and only time will tell how good they are.

What is not in doubt, however, are the fundamental phenomena underlying these projections. A funding gap between SMUSD and SMMUSD is certain to develop in the period before SMUSD transitions to basic aid, which is estimated to occur in 2029-30, and to continue thereafter.

Under the MUNC agreement, the funding gap will be partially mitigated by transfers from Malibu to SMUSD, but the remaining net funding gaps are sizable and the transfers stop in 2036-37. After that point, the trends in the funding gap depend on the relative rates of property tax revenue growth in Santa Monica and Malibu.

Choosing the Path to Take

The current SMMUSD Board of Education is faced with one of the most important decisions in the history of SMMUSD: whether to continue pursuing the possibility of lending its support to separation. There are non-financial advantages to both Santa Monica and Malibu from separating into two school districts.

Whereas a separate MUSD would enjoy considerable financial advantages as well, however, that’s not the case for a separate SMUSD. To be sure, per-student funding for SMUSD would likely grow each year even before SMUSD transitions to basic aid status and almost certainly thereafter. Nonetheless, a separate SMUSD would have substantially lower per-student funding than it would have had under the status quo where SMMUSD does not split up.

The SMMUSD Board of education should address the decision before it in two parts. The first question is whether the Board’s goal to eliminate any significant adverse financial effects of separation on a separate SMUSD can only be met if SMUSD has the same per-student funding that SMMUSD would have had if it had not split up. If that’s the case, there would seem to be no way the Board could ever lend its support to separation.

If the Board chooses less strict criteria for assessing whether its goal is met, however, the question immediately becomes how much is acceptable for SMUSD to give up and when. The MUNC agreement presents one option, but surely the Board could drive a harder bargain before offering its support for separation.

The Board is in a very strong bargaining position. Malibu very badly wants its own school district, and without the Board’s support it is extremely unlikely that any separation effort could be successful.

In my view, the best path for the Board would be the following: Determine how much SMUSD students could give up, relative to SMMUSD, while still having the resources needed to enjoy generally similar opportunities, develop a final proposal based on that principle, and let the chips fall where they may.

Certainly, this will be difficult and any proposal will seem arbitrary, but make no mistake: so is the MUNC agreement. I have no doubt that the Board can develop a proposal much more favorable for SMUSD, yet feasible, viable, and consistent with a successful Malibu district, through careful consideration and reflection and with input from district staff and the Santa Monica community.

Of course, there is a potential trap for the Board as it thinks through all of this: human beings tend greatly to discount the future. After all, it’s so far away, and maybe things will change and everything will turn out better than we think. But this rarely happens in the real world and time flies.

It is certain that 10, 15, 20, and 25 years from now there will be students in Santa Monica attending SMUSD schools with the hope of getting a top-notch education, and the Board must consider their interests as well.

The current SMMUSD Board owes current and future children, parents, and residents of Santa Monica a full and open discussion of the questions before it, including a clear articulation of the justification for any answers it adopts and a thorough explanation of the assumptions underlying those answers, especially their assumptions regarding the impact on future Santa Monica students.

Naturally, residents of Santa Monica bear an important responsibility as well: becoming informed, expressing their viewpoints to the Board, and ensuring that the Board takes a deliberate, thoughtful, and future-minded approach to this enormously consequential decision.

José J. Escarce served on the SMMUSD Board of Education from 2000 to 2016.

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