Why $2B in New School Funding Is Leaving Minnesota Districts Scrambling for Cash

Political leaders told voters schools got a ‘historic’ boost in state aid — but left out the fine print showing nearly half will go to new mandates.

This is a photo of Gov. Walz speaking at a podium outside.
(Nikolas Liepins/Official Governor’s Office)

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When the Democratic “trifecta” in control of Minnesota’s House, Senate and governor’s office announced last spring’s K-12 education finance bill, there weren’t enough superlatives in the thesaurus to fuel the sound bites. The more than $2.2 billion in “new” spending on public schools was “historic.” The number of initiatives funded was “sweeping,” the predicted outcomes for students and teachers “life-changing.”

Now, district leaders statewide are scrambling to explain to their communities that, in fact, they are facing massive cuts. In many places, balancing the budget will mean layoffs or school closures. 

Like their counterparts throughout the country, Minnesota school systems are facing the one-two punch of the end of COVID recovery aid and enrollment losses — in many places, going back years — that means less per-pupil state money. School funding experts call this a fiscal cliff.

“That is No. 1 with a bullet on any superintendent’s whiteboard,” says Kirk Schneidawind, executive director of the Minnesota School Boards Association. 

The state’s second-largest district, St. Paul Public Schools projects a $150 million deficit for the 2024-25 academic year. Minneapolis Public Schools anticipates a $116 million shortfall. Even the most prosperous Twin Cities suburbs are stuck explaining the disconnect to families who moved there for their well-funded schools.

The confusion among members of the public who think the schools are awash in cash has real consequences, says Schneidawind. Last year, half of school system funding referenda failed at the ballot box, depriving districts of millions more.

Billions in new state funding and a fiscal cliff: How can both be true? Here are four critical — and much misunderstood — aspects of the looming crisis.

More Money, More Strings

With Democrats in control of the Capitol for the first time in more than a decade and a $17 billion surplus in state coffers, most policymakers assumed the question wouldn’t be whether education would see a spending boost in 2023, but how big it would be and how the pie would be divided. 

“My messages to families, to students, to teachers, to support staff is, ‘This is the budget for many of us who taught for decades, this is the budget we’re waiting for,’ ” Gov. Tim Walz, a former teacher, said at the start of the session, according to the Star Tribune newspaper. “This is the transformational moment.” 

As he signed the education finance bill into law in June, Walz called it “The Minnesota Miracle 2.0” — a reference to a sweeping school finance reform measure of the 1970s that earned then-Gov. Wendall Anderson a photo on the cover of Time magazine. 

Yet even before the ink on Walz’s signature was dry, school leaders were bemoaning the fine print. In the end, the change to the basic revenue formula increased per-pupil funding from $6,863 in 2023 to $7,281 in 2025. 

Eight months, later, they’re still doing the math, but the Minnesota School Boards Association, the Association of Metropolitan School Districts and others estimate that up to half the $2.2 billion had already been earmarked for as many as 65 new mandates, ranging from free meals for all students to menstrual products in school restrooms.

Lawmakers also extended unemployment insurance to cover bus drivers, some substitute teachers, cafeteria workers, classroom aides and other seasonal workers. This made Minnesota the first state to mandate this benefit for hourly employees, but it was unclear who will pay the premiums in the long term.

After a grueling fight, the legislature allotted $135 million to pay for the first year of unemployment insurance premiums, promising to revisit funding in the future. District leaders were only partly appeased, noting that even if the state subsidized the premiums going forward, the employees who typically staff summer programs could choose not to.

Nearly $75 million is allotted to help fund a new law requiring science-backed literacy curriculum and instruction. There is $45 million for new school librarians, $15 million to support “full-service” schools — which provide health and social services to families — and money for new ethnic studies materials, Naloxone and efforts to retain teachers of color. 

Funding for K-12 education, which makes up nearly a third of the state budget, is $23.2 billion for fiscal years 2024 and 2025.

Welcome though the money and new benefits are, says Schneidawind, districts will still have to scramble to cover some costs. Part of the difficulty of calculating just how much that will be is that school systems keep discovering new ways that the costs are showing up. The private companies that supply substitute teachers, for instance, are passing along their new state benefit costs.

Most likely, the cavalry is not coming. Like many state legislatures, Minnesota’s meets on a two-year calendar. Last year was the current cycle’s budgeting year; when the 2024 session begins Feb. 12, lawmakers will focus on capital and infrastructure bonding bills. 

How ‘New Money’ Becomes a Cut

Every year, after the legislative session gavels to a close, lawmakers of both parties go back home to boast that they boosted K-12 spending by adding to the state’s general fund. They rarely mention that school funding has, by many calculations, not kept up with inflation. 

One way this has traditionally been accomplished is by cutting or not increasing funding for services paid for out of other parts of the budget, such as special education and English learner instruction. School districts must then divert the “new” money to make up the shortfalls, in what’s referred to as a cross-subsidy. For the current fiscal year, Minnesota schools are spending $750 million just to fill the special education funding gap — by far the largest.

Districts have long pushed to end the practice, which many say may aid officials’ re-election efforts but has cloaked a steady erosion of state funding. With a budget surplus estimated at $17.5 billion, lawmakers last year said it was time to fully fund the cross-subsidies. 

Gov. Tim Walz, however, only wanted to reduce the special education gap by half, preferring to spend more on required paid family leave and other new programs. In the end, though, that didn’t happen. The funding set aside to offset special education losses was reduced to cover just 44% of the gap — freeing up almost the exact sum needed to cover seasonal workers’ unemployment benefits for one year.

The upshot: Historic infusion notwithstanding, Democratic lawmakers say there is still an $800-per-pupil gap between funding levels 20 years ago and today, adjusted for inflation. That does not reflect recent cost increases in transportation, labor and other areas, says Scott Croonquist, executive director of Minnesota’s Association of Metropolitan School Districts. 

The Democratic head of the House Education Finance Committee, Rep. Cheryl Youakim defended the outcomes, saying the 2023 increases closed the inflationary gap by one-third. “There has been 20 years of underfunding in education and that can’t be turned around overnight,” she says. “Our districts still do have needs.”

Bad News at the Ballot Box

In November, the Rochester, Minnesota, public school system lost a technology funding referendum by 318 votes. As tiny as the margin was, the impact was tectonic. 

The levy would have generated $10 million a year for a decade, freeing up $7 million a year the cash-strapped district currently spends on technology to reduce class sizes and stave off the impact of falling enrollment. In short order, Superintendent Kent Pekel announced that the district had no choice but to close three schools and cut transportation costs by changing attendance boundaries. 

Three weeks later, the Mayo Clinic stepped forward with a $10 million donation intended to stave off the pain — but only for a year. District leaders will use that time to prep for a do-over, hoping 2024’s presidential election draws more voters than the referendum did and that a majority will agree to the tax.

When Pekel took over as superintendent in July 2021, he realized that years of eroded state funding was only one factor wreaking havoc on his budget. The district had been adding staff but losing students for a decade, albeit at a slower rate than many school systems. Instead of using federal COVID aid to close the gap, which would have postponed the fiscal reckoning, he cut $7 million in 2022 and $14 million last year.

In addition to the technology levy that failed at the ballot box last fall, the district depends on revenue from a larger operating levy. If it can’t get that approved, Rochester leaders will have to find another $10 million to cut in 2024 and $17 million in 2025. 

According to the school boards association, voters rejected half of operating levies on the ballot throughout the state last year. Perhaps anticipating this, lawmakers last year allowed districts to renew levies once without going to the voters. Schneidawind anticipates 50 school systems will take advantage of the new law this fall.

The Other Postponed Reckoning

Pekel is one of a few Minnesota superintendents who decided not to use pandemic relief funds to close pre-existing budget gaps. Many districts spent large swaths of their COVID recovery aid staving off tough issues posed by declining enrollment. Faced with a competitive labor market, many boosted educator pay. For example, despite years of shrinking enrollment, Minneapolis Public Schools added 400 jobs.

In addition to explaining to families and staff about the imminent loss of federal funding, many districts must now grapple with how to communicate why the boost in state aid won’t head off cuts.

Next door to Minneapolis, the Robbinsdale Area School District is predicting it could end the current fiscal year $2.1 million in the red and may need to cut $17 million to balance the books next year. This can’t be accomplished without layoffs. 

In January, school board member Kim Holmes acknowledged that decisions by the board and district leadership will make balancing the budget especially painful.
“We misstepped,” the suburban news site CCX Media quoted Holmes as saying. “This board misstepped, the administration misstepped. If we weren’t tracking historical decreased enrollment — and one of the biggest things they told us not to do with [COVID] dollars was hire positions — and we did it. So we have to come out and take some ownership.”

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