The General Assembly wants to boost K-12 spending by $466 million over the next two years, nearly double the amount proposed by Gov. Mike Pence.

CHICAGO - When an Indiana school district defaulted on a bond payment in January, the superintendent blamed a combination of an unfair school funding formula and onerous property tax caps.

Indiana lawmakers this spring have tackled one of the two complaints, sparking a major debate in the midst of a budget-writing session.

The General Assembly is pushing an overhaul of the state's school-aid funding formula in an effort to provide more money to growing suburban districts.

Lawmakers have also proposed a strong boost in overall new money for the K-12 budget, nearly double the amount that Gov. Mike Pence proposed in his spending plan. Some say the move is designed to win positive headlines after a session overwhelmed by an unpopular religious freedom bill.

But the formula overhaul has sparked its own flood of criticism, including complaints from public school officials in urban districts that are expected to see deep cuts under the measure.

Even the superintendent of the School Town of Munster, the district that defaulted on a bond payment earlier this year, expressed reservations.

"We're excited because it would be the first new money we've had in five years," said Jeff Hendrix, Munster's superintendent.

Hendrix said the House plan would give his district an additional $1.1 million a year and the Senate proposal an additional $800,000.

But he added that the plan to shift money away from urban school districts, such as Indianapolis, which is among the state's largest school issuers, is far from ideal.

"I disagree with that. I think with a $2 billion state surplus we could just increase the [base funding] level and not harm anybody," he said. "It burdens those districts further and further taxes what little resources they have."

The House and Senate versions differ, but both would give more money to growing suburban districts and less money for urban and rural districts with declining enrollment. The Senate version is expected to soften the cuts to impoverished districts slightly more than the House version.

The revamp would mean more challenges for struggling districts like Indianapolis, the largest in the state, and others with a high number of impoverished children, critics say. It would also mean more money for charter schools than traditional public schools, which Pence has named as a priority.

For the bond industry, the overall boost in the base funding level is good, and it's too early to predict the impact on districts in the future.

"We still don't know the winners and losers," said O. Roderick Wilson, a senior vice president at Indiana-based underwriter City Securities Corp. who focuses on school finance in northeast Indiana. He noted that lawmakers have two weeks to hammer out a final deal.

"But certainly the formula is the most critical thing this year," he said. "The attitude to provide more money is something that will help all school districts and provide more money for school operations, and that's a good thing."

The House passed its legislation in late February. The Senate is expected to vote on its version on Wednesday. The bills will then head to conference committee. Both plans boost overall K-12 funding by $466 million, part of a nearly $32 billion, 2016-2017 budget. The triple-A rated state enjoys a $2 billion surplus.

A revenue estimating conference will be held Thursday, giving lawmakers final figures to craft the roughly $32 billion budget for 2016 and 2017.

The legislative session ends April 29.

The funding boost is partly an effort to generate positive headlines in a legislative session that has been overwhelmed by the passage of the so-called religious freedom bill. That measure, which critics said legalized discrimination against gays and lesbians, brought a national storm of anti-Hoosier sentiment that Pence and lawmakers battled for weeks.

"I think that both houses are saying, 'We want to put more money into education to make that a very positive [thing] in this session'," said Dennis Costerison, a public school lobbyist and executive director of the Indiana Association of School Business Officials.

The $466 million boost would mean K-12 funding would increase by 2.3% in 2016 and 2017. "We haven't been above 2% since 2009," Costerison said. "So it doesn't sound like much, but it looks good to us."

The new money would apply to the so-called foundation amount, which is the baseline fixed funding for all schools on a per-pupil basis.

The controversial element of the funding revamp is the complexity index, which used to be called the at-risk factor. That formula provides more money to those districts with a higher percentage of low-income students. Both chambers are expected to lower that amount of money, meaning cuts to more than 100 of the state's 300 schools, most serving the state's poorest children.

Indianapolis, Gary, East Chicago, Hammond and others are all expected to suffer steep cuts. Rural districts that have seen declining enrollment and rising poverty also face steep cuts, according to Costerison.

"It always used to be the large urban districts like Indianapolis or Gary that were always kind of at the bottom, because they were losing so many students," he said. "Now we're finding at the bottom of the pile are rural districts that are losing students probably at a quicker rate than the urbans, and where there's a lot of poverty in our rural districts."

Meanwhile, another headache for Hoosier schools looms.

A high-profile property tax overhaul enacted in 2009 under former Gov. Mitch Daniels has already pressured districts and a 2012 law means more pressure, public school officials warned.

Local property taxes fund four areas for schools: debt service, bus replacement, capital improvements, and one for transportation. When property tax caps were first enacted, districts were allowed to tap the debt-service fund to cover costs in the other funds.

But a three-year-old state law now requires districts to pay their debt service first once they hit their cap and not use the fund for any other expenses.

That means that districts with low property tax dollars because of the caps face even tighter restrictions, Costerison said.

Three schools districts so far, all in Marion County, have run out of money for anything but debt service, he said, leaving no money to pay for transportation, busing or capital improvement funds.

"It's extraordinarily important," said Costerison, saying about a third of the state's districts are facing the problem. "If there's no change in the law, they will end up paying 100% of their property taxes for debt."

It's going to be a problem even in relatively affluent districts like Munster, said Hendrix.

Hendrix said the district lost $254,000 last year from the property tax caps and the figure could reach $1 million a year by 2019. The Munster school board voted on April 13 to stop busing to students who live within a mile of the district to bring down the cost of offering buses to all students.

"I barely get enough money to buy one bus a year," Hendrix said.

The General Assembly last year agreed to delay implementation of the law until 2017, a move that has bought struggling districts time, according to Costerison. He said his association and other public school officials are working with Pence and the Department of Local Government Finance to gain some flexibility in the law.

"This doesn't start until 2017 so we've got a little reprieve," he said. "But we've got to figure out a solution to this."

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