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.

Alliance

Memphis just gained an important ally in its legal battle with Tennessee over school funding

PHOTO: MNPS
The board for Metropolitan Nashville Public Schools voted Tuesday to become a co-plaintiff in Shelby County Schools' funding lawsuit against the state of Tennessee.

For more than two years, a funding lawsuit by Memphis school leaders has been winding through the state’s legal system.

Now, as the litigation inches closer to a court date next year, Shelby County Schools has gained a powerful ally in its battle with Tennessee over the adequacy of funding for its schools and students.

The board for Metropolitan Nashville Public Schools voted unanimously Tuesday to become a co-plaintiff in the case.

The decision ends almost three years of talk from Nashville about going to court.

In 2015 at the urging of then-director Jesse Register, the district’s board opted for conversation over litigation with Gov. Bill Haslam’s administration about how to improve education funding in Tennessee.

But Register moved on, and the board’s dissatisfaction grew as the percentage of state funding for the district’s budget shrank. Adding to their frustration, Haslam backed off last year from an enhanced funding formula approved in 2007 during the administration of his predecessor, Phil Bredesen.

“We’ve just come to grips with the harsh reality that we are a chronically underfunded school system,” said Will Pinkston, a board member who has urged legal action.

Nashville’s decision is welcome news for Memphis. A statement Wednesday from the state’s largest district called the lawsuit “the most important civil rights litigation in Tennessee in the last 30 years.”

“When you have the two largest school districts in Tennessee on the same side, I think it’s very powerful,” added former board chairman Chris Caldwell, who has championed the lawsuit in behalf of Shelby County Schools.

Both boards are working with Tennessee-based Baker Donelson, one of the South’s largest and oldest law firms. It has offices in both cities.

“We believe that our original case had a strong message about the inadequacy of education funding in Tennessee,” said Lori Patterson, lead attorney in the case from Memphis. “We believe that having the second largest district in the state join the suit and make the same claims only makes the message stronger.”

PHOTO: TN.Gov
Gov. Bill Haslam

Haslam’s administration declined to comment Wednesday about the new development, but has stood by Tennessee’s funding model. In a 2016 response to the Shelby County lawsuit, the state said its formula known as the Basic Education Plan, or BEP, provides adequate funding under state law.

But Shelby County, in its 2015 suit, argues that not only does the state not adequately fund K-12 schools, it doesn’t fully fund its own formula. And the formula, it charges, “fails to take into account the actual costs of funding an education,” especially for the many poor students in Memphis. To provide an adequate education, the lawsuit says the district needs more resources to pay for everything from math and reading tutors to guidance counselors and social workers.

States often get sued over funding for schools — and frequently lose those cases. In Tennessee, state courts heard three such cases from the late 1980s to the early 2000s, siding with local districts every time. Those suits keyed in on built-in inequities in the state’s funding formula that cause some districts to get more money than others.

This time, the argument is about adequacy. What is the true cost of educating today’s students, especially in the shift to more rigorous academic standards?

Tennessee is also the defendant in a separate funding lawsuit filed in 2015 by seven southeast Tennessee school districts including Hamilton County Schools in Chattanooga.

Pinkston said Nashville opted to join the Memphis suit because its arguments are most applicable to the state’s second largest district. “Our student populations are very similar in terms of high socioeconomic needs,” he said.

transportation

Parent concerns prompt Denver Public Schools to change how it’s spending a chunk of tax dollars

PHOTO: RJ Sangosti/Denver Post
An RTD bus heads downtown along Colfax Ave. in 2016.

Denver Public Schools is changing course on how it will spend $400,000 in local tax dollars earmarked for student transportation after parents and community organizations claimed the district had not followed through on a promise to increase options for high school students.

The dollars are part of a $56.6 million tax increase voters approved in November. This school year, the district allocated $273,000 to buy bus passes for 630 additional students at two schools: Northfield High and Denver School of Innovation and Sustainable Design. However, it earmarked the remaining $127,000 to pay for transportation for special needs students.

Superintendent Tom Boasberg announced Monday evening that the $127,000 set aside for special needs transportation would be immediately reallocated so that all $400,000 is being spent on bus passes for high school students.

“We’ve heard loud and clear from the community,” Boasberg said.

Parents and other advocates say that while the reallocation is a move in the right direction, it doesn’t relieve all of their worries about how the money will be spent.

“That’s great,” parent Karen Mortimer said. “But what is your next step?”

Transportation is a hot-button issue for Denver Public Schools. The district has been nationally recognized for its school choice system, which allows its 92,000 students to request to attend any one of its more than 200 schools. However, DPS does not provide transportation to most students who choose a school that is not the assigned school in their neighborhood.

Critics argue that not providing transportation to all students leaves families who don’t have a vehicle or the means to transport their children across town with no choice at all.

Nearly half of the district’s 20,623 high school students — 9,256 — don’t qualify for DPS transportation because they don’t attend their assigned schools, according to numbers presented to the school board at a work session Monday night.

Another 4,394 don’t qualify for transportation because they live within three and a half miles of their assigned schools, a distance the district considers walkable.

In a bid to reduce those numbers, a committee of 75 parents, students, teachers and taxpayers tasked with recommending how to spend the tax revenue suggested earmarking $400,000 each year for a “new effort to increase high school students’ access to high quality schools and educational opportunities through greater transportation options.”

Whereas most ideas for how to spend the $56.6 million in tax revenue came from DPS staff, the idea to expand transportation originated with the committee members.

The final recommendation, which was adopted by the school board, said DPS would “work with community stakeholders to secure matching funds, and design and implement a test effort to positively impact students,” which has not yet happened.

If the test effort wasn’t working, the recommendation said, the district could use those funds “for other efforts to increase access to educational opportunities.”

In a statement Friday, Superintendent Tom Boasberg said the district was using the funds “as promised,” a contention advocates disputed, to pay for transportation for high school students and students with special needs. DPS saw an increase this year of 78 students whose needs exceed the district’s capacity to serve them and who are being bused elsewhere by third-party companies, according to a district spokeswoman and information provided to the school board.

But Boasberg said Monday that as of this month, the $127,000 that was earmarked for special education transportation would be spent on high school students instead. District officials estimated that sum would buy an additional 370 bus passes. Boasberg said they “look forward to a discussion with the community” about how to distribute them.

Meanwhile, community members said they’re still confused about how DPS distributed the 630 additional passes it already purchased with the $273,000 in tax revenue.

“The community was left out of the loop,” said Matt Samelson of the Denver-based Donnell-Kay Foundation, which has been pushing for the district to come up with a plan for how to use the $400,000 before February, when families must make their school choices for next year. (The foundation is a financial supporter of Chalkbeat).

District spokeswoman Nancy Mitchell told Chalkbeat that most of the 630 passes went to students at Northfield High, a comprehensive high school that opened in northeast Denver in 2015. The district had been providing yellow bus service to Northfield because the Regional Transportation District didn’t serve the area. But it does now, Mitchell said, so Northfield students who meet the district’s criteria for bus passes got them this year.

To qualify for transportation, high school students must attend their assigned schools and live more than three and a half miles away. District policy allows other students to receive transportation, too. That includes those learning English as a second language, for example, or those attending certain types of schools, including magnet and Montessori schools.

Students at Denver School of Innovation and Sustainable Design, which also opened in 2015, received a portion of the 630 passes because the district “determined DSISD most resembles a pathway school for purposes of transportation, as they do not have an enrollment boundary,” according to a statement from DPS spokeswoman Jessie Smiley.

“Pathway” schools are alternative schools that serve students who’ve struggled elsewhere. DSISD is not a pathway school. It was rated “blue” this year, the highest rating on the district’s five-color scale.

Not counting the students who received the 630 extra passes purchased with the tax money, 2,565 high school students were eligible this year for Regional Transportation District bus passes, according to district officials. That’s up from 2,376 last year. In addition, nearly 5,000 high school students qualify for yellow bus service because they attend a school in an “enrollment zone,” which is essentially an enlarged boundary that contains several schools.

Boasberg said that while the district would like to provide transportation to even more students, it must balance spending money on buses with spending money in classrooms. DPS already spends $26 million of its nearly $1 billion budget on transportation, according to information provided to the school board. Even if it wanted to hire more drivers, district officials said they’re having a hard time finding them in a thriving economy; DPS is down 40 drivers this year.

To come up with a solution, Boasberg said the district must collaborate with the city and the Regional Transportation District, which has commissioned its own task force to come up with new pricing recommendations. DPS officials have been participating in that group.

“Ultimately, RTD has assets and abilities as a transportation entity to specialize in what they specialize in,” Boasberg said at Monday’s school board work session. “Our specialty is in educating students. The more we can be collaborative with RTD … the better.”

But advocates said participating in other agencies’ processes isn’t enough. DPS should be leading its own investigation into how to expand transportation options by gathering parents, students and community members to come up with ideas, they said.

“There have been lots of conversations but DPS hasn’t led any of them,” Samelson said.

Unlike other programs and initiatives funded by the tax increase and suggested by district staff, the transportation expansion proposal hasn’t gotten the attention it deserves, he said.

“We’re trying to help the district increase access to schools for students but we feel pushback, we feel stonewalled, we feel like we have to argue our way into this premise that increased transportation is good for kids,” Mortimer said. “We just don’t understand it.”