Indy Explains: The tug-of-war over mining tax revenue for education
Excitement filled the air during the first day of the school year at Winnemucca Grammar School. Parents snapped photos of their children Monday morning before dropping them off at the historic, 94-year-old brick campus.
Some students ran straight for the yellow monkey bars at the playground. A couple of younger students cried as their parents departed.
Humboldt County Superintendent Dave Jensen also felt a mix of emotions as he arrived to greet his students and staff.
As he caught up with school staff and families, his smile hid his concerns about the future of his roughly 3,000-student school district located in north-central Nevada along the Idaho border. Humboldt County School District and other rural districts had to cut their budgets as part of a $27.4 million state sweep of funds they received last year from their counties’ tax revenue collected from mining operations.
State officials say those dollars were destined for the state education fund as part of the transition to the Pupil-Centered Funding Plan, which doles out money to PreK-12 public schools. Nevada Department of Education officials said they assumed school districts knew when this change would begin, given ongoing conversations with superintendents and other district leaders.
But, according to some rural school leaders, they weren’t aware that the transition started with mining tax revenue they had already received before the new funding plan was implemented. As such, several school districts didn’t realize that they couldn’t keep the mining tax revenue — known as net proceeds of minerals — until months after some had already included it in their budgets or invested it.
The situation has led some school districts to trim their budgets by eliminating positions such as classroom aides or choosing to leave vacant positions unfilled.
The school officials worry about the ramifications that the sweep will have on their districts’ financial future, especially as they are still reeling from the effects of the new funding formula, which they feel favors urban school districts over their rural counterparts. Ultimately, the issue comes back to the longstanding debate over Nevada’s per-pupil funding, which has historically ranked at the bottom nationally, and calls for an additional $2 billion for education over a decade to get the Silver State caught up with the national average.
Redistributing education dollars
For years, lawmakers argued over the structure of the state’s education funding formula, which some saw as complicated and inadequate, especially considering the massive growth and demographic changes in Nevada over the past few decades. So in 2019, lawmakers passed SB543, a bill that co-sponsor, Democratic Sen. Mo Denis, said modernized and overhauled the 50-year-old Nevada Plan.
The law, dubbed the Pupil-Centered Funding Plan, melded 80 different streams of school revenue into a single pot, and implemented a system of weighted funding. The concept of weighted funding means that, in theory, students with extra needs would receive more per-pupil dollars.
The law ran into criticism, however, because it didn’t come with new funding for PreK-12 education. It simply reorganized how existing revenue would be funneled to Nevada public schools, which included changing how mining tax money in local jurisdictions was handled.
Counties receive a portion of the tax revenue collected from the mines in their jurisdictions. Prior to the new school funding plan, the counties would pass some of this money to their respective school districts, which the school districts could use the following fiscal year for needs such as updates on aging school facilities.
But the Pupil-Centered Funding Plan redirects the mining tax revenue the counties would have sent to their respective school districts to the State Education Fund.
Jensen wasn’t thrilled about rural school districts losing direct access to the net proceeds, but he made peace with it and knew it was coming. What he takes issue with now, he said, is the lack of clarity surrounding when those funds would be going away.
The transition from the old to new funding formula — an expected massive undertaking — was scheduled to start in the 2021-2022 school year.
In his January 2021 State of the State address, Gov. Steve Sisolak pitched a new start date for the Pupil-Centered Funding Plan. He recommended breaking up the adoption in two parts, with the first phase — modifying the distribution of state revenue — implemented between 2021 and 2023. He proposed full implementation — with changes to the distribution of state and local revenue — would happen during the second phase between 2023 and 2025.
But on May 21, 2021, state lawmakers instead charged ahead with the full implementation of the Pupil-Centered Funding Plan through the passage of SB439. About a week later, they approved the K-12 budget bill, SB458.
It’s here where Jensen, the Humboldt superintendent, believes the misunderstanding over the net proceeds of revenues began, and, as a result, now several rural districts are scrambling to cut their budgets.
Section 16 of SB458 directed that net proceeds of minerals revenue appropriated to a county school district in fiscal year 2020-2021 “shall be deemed revenue in the State Education Fund for Fiscal Year 2021-2022,” without referencing the tax dollars by name.
Jensen said he and other superintendents whose districts were affected by the sweep weren’t aware that this language was inserted among the bill’s 40 pages. Though budget details are discussed throughout the 120-day legislative session, the actual bill form of SB458 was introduced and passed out of the Legislature in a frantic, five-day period before the end of the session.
“Nobody caught this,” said Jensen, who’s also a member of the state’s Commission on School Funding, which was created as part of SB543.
That also included lawmakers such as Assemblywoman Alexis Hansen (R-Sparks).
“In the closing days of the legislative session, and in particular with the funding bills, it is difficult to keep up on all the modifications to various bills as everything comes to a rapid close,” she said in an emailed statement. “In this case, specific discussion regarding the impact of SB 458 and (net proceeds of minerals) was not expressly discussed.”
To complicate matters further, the mining tax revenue that the state education department is asking the school districts to send back to the state were collected from mining operations in 2020. That revenue was sent to some school districts weeks before the start of the implementation of the Pupil Centered-Funding Plan on July 1, 2021. That date also marked the beginning of the 2022 fiscal year, when the funds were available for expenditure.
As such, school officials in Humboldt, Lander and Elko counties said they believed that these fiscal year 2021 payments were theirs to use, and that net proceeds payments from fiscal year 2022 would be the first to start going into the State Education Fund.
The Elko and Lander school districts said the Nevada Department of Education didn’t reach out to them to ask about the 2021 fiscal year net proceeds until April of this year, after some had already included the funds into their budgets or invested them.
School districts blindsided
Jensen first heard about the state sweep of net proceeds during a phone call in April of this year with the Eureka County School District Superintendent, Tate Else. Jensen said Else told him that the state education department had asked his school district to revert the $8 million they received from net proceeds back to the state. Jensen said Else also told him Lander County School District received a similar request from the state, and needed to revert just over $6 million back to the state.
By this time, Jensen said his district hadn’t been contacted by state education officials, so he took it upon himself to reach out. Sure enough, his school district was included in the sweep.
But it was too late.
The Humboldt County School District was already nine months into its fiscal year, and had committed nearly $5 million in net proceeds to its operating budget. The district was already working on a tentative budget for fiscal year 2023 when it heard about the sweep, and projected an ending-fund balance of 8.7 percent, right around its annual target. An ending-fund balance is essentially a reserve pot of money not earmarked for other specific purposes.
But because of the sweep, the district now expects to have an ending balance of just above 4 percent, the state’s minimum before placing school districts under corrective action.
“I'd be a lot less cranky about this if … we'd been communicated to and given the opportunity to build budgets and to make decisions that reflected that,” Jensen said. “That didn't happen until all of those funds had been committed and moved forward.”
To the east, the Elko County School District faced a similar dilemma. Superintendent Clayton Anderson and his chief finance officer, Julie Davis, said they were blindsided when state education officials reached out to their district.
“Literally not one district understood that they would be losing their money this year … and that after this year, we could expect not to receive those directly anymore, but rather, they would go to the State Education Fund,” said Anderson, who became the district’s official superintendent earlier in April, and had previously served in an interim capacity.
The state education department informed the Elko County School District that the department would recoup the $4.1 million the district owed in mining tax revenue by deducting money from its May, June and July state funding payments.
“From my perspective, what that meant was we budgeted all year to have that money and then they said, ‘No, you don't have that anymore,’” Else said.
West of Elko, the Lander County School District superintendent, Russell Klein, ran into a different problem. His school district had already invested its $6.2 million worth of 2021 mining tax revenue into government securities to maximize operational cash flow before the state contacted them on April 29.
The Lander County School District deemed the deduction process too harmful because it typically receives about $1 million per month from the state, so doing so would have essentially stopped those payments, Klein said. Instead, the district chose to pay the amount in full by liquidating the money from financial assets. The move cost the Lander County School District $15,000 in lost interest and penalties, in addition to the $6.2 million it had to give back to the state, Klein said.
In contrast, the White Pine School District, located south of Elko, found itself in a better position when it heard from state education officials. Unlike the others, the White Pine County School District wasn’t confident that it would be able to keep its $1.23 million in mining tax revenue. So the school district set it aside until it got confirmation that the money indeed needed to go to the State Education Fund.
“From our perspective, if we were wrong, and we got to keep the money, then that's awesome,” said Paul Johnson, the district’s chief financial officer, who also serves on the state school funding commission. “But if we were right, and they were taking the money, then we didn't lose anything.”
Johnson’s hunch paid off. When the school district did get the answer from the state education department, it was able to write a check with the mining-related money and close that chapter.
Other school districts weren’t as lucky.
The Lander County School District chose to cut additional instructional aide positions, which were supposed to help teachers bring students back up to speed academically two years into the COVID-19 pandemic.
The Humboldt County School District also had to make some tough choices to save money. One solution it found: covering some allowable costs, such as mental health supports and school resource officers, with its federal COVID-19 relief dollars, known as the Elementary and Secondary School Emergency Relief (ESSER) funding. This maneuver relieved some pressure from its general fund and got the district’s projected ending fund balance above the state’s minimum, 4 percent.
“In the absence of these federal stimulus dollars, we’d all be in a lot worse shape than we currently are,” Jensen said.
Aside from this, Jensen said there wasn’t much else the district could do because it already negotiated salary increases for the current school year, and the district doesn’t have a mechanism to change those increases. It had also extended contracts and offered positions for the 2022-2023 school year.
Even though the COVID-19 relief funds are helping the Humboldt County School District stabilize its ending-fund balance after the sweep, Jensen said the district wasn’t left completely unscathed.
The district has cut one position so far, and may leave other open positions unfilled while relying on long-term substitute teachers and aides to fill those gaps in the classroom.
“That's going to help us meet this fiscal shortfall,” Jensen said, adding that other expenses that are not personnel-related such as the purchase of vehicles or technology will now be placed under a microscope.
These financial readjustments ultimately will be felt by Humboldt County students, whom Jensen said may be denied opportunities the district otherwise may have provided them through the ESSER dollars. He is also concerned about the district’s financial outlook once the COVID relief funding is gone, and it doesn’t have that money to fall back on.
“Without an adequate ending-fund balance and revenue stream to operate, we're not going to be able to sustain those positions,” Jensen said. “So in the short term, we just look tight on our revenue stream and in the long term, we're not going to be able to provide the supports that our students need to be successful.”
State officials thought it was obvious that the mining tax revenue that school districts received last year would need to be sent to the State Education Fund this year.
Heidi Haartz, the state’s deputy superintendent for the student investment division, said she felt the timeline for the transition were clearly stated in SB543, the 2019 law that created the Pupil-Centered Funding Plan, and the K-12 funding bill from 2021.
In addition, Haartz said state education officials had numerous conversations with superintendents, school district chief financial officers and entities such as the Commission on School Funding, which Jensen and Johnson are part of, about how the implementation would unfold.
“So I think there was a lot of information available to folks,” she said.
When asked why the state education department took months to claim the money from the school districts, Haartz said the department didn’t notice the money was missing until going through its regular reconciliation process where it tracks its revenue and expenditures.
“So we reached out with our partners not only within, for example, the state treasurer's office and the state comptroller's office in taxation, but also to the school districts to clarify that process that needed to occur,” Haartz said. “And certainly in this year, we've been working closely with the treasurer's office. He's been working with county treasurers to help them understand that some funds that they normally or historically had cut at the local level now need to come to the state education funds.”
State Sen. Mo Denis, who took a lead role crafting SB543, felt it was natural that some mistakes would occur as the state transitioned from one education funding mechanism to another.
“I think everybody was still used to the way the old funding formula did things, but the new one is clearly different,” he said. “So we knew that there was going to be some growing pains in the transition, but like I said, moving forward, we're not going to have an issue.”
A plea for more funding
Back in Humboldt County School District, Jensen finished up his campus visits worried about what the rest of this academic year and future years would look like given the budget shortfall caused by the state sweep of mining tax revenue — not to mention other ramifications of the new funding formula.
The Pupil-Centered Funding Plan has a built-in “hold harmless” provision, meant to prevent school districts from receiving less money under the new formula going forward than they are receiving this school year. But some rural lawmakers argue it will freeze some districts’ funding levels, not allowing funding to increase to reflect enrollment growth during the transition to the new formula.
The only solution that Jensen sees?
“We're going to have to get to a point as voters and legislators of saying we cannot tolerate inadequate education funding, and if that doesn't happen, I don't see an avenue for the rural school districts to climb out of this,” Jensen said.