Program Review and Investigations Committee


Minutes of the<MeetNo1> 6th Meeting

of the 2002 Interim


<MeetMDY1> November 14, 2002


The<MeetNo2> 6th meeting of the Program Review and Investigations Committee was held on<Day> Thursday,<MeetMDY2> November 14, 2002, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Gippy Graham, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Gippy Graham, Chair; Representative Katie Stine, Co-Chair; Senators Charlie Borders, Brett Guthrie, Ernie Harris, Paul Herron Jr., Vernie McGaha, Dan Seum, and Johnny Ray Turner; Representatives Sheldon Baugh, Dwight Butler, Jack Coleman, Charlie Hoffman, Ruth Ann Palumbo, and Dottie Sims.


Guests:  Gene Wilhoit, Commissioner, Kentucky Department of Education


LRC Staff:  Greg Hager, Ph.D., Committee Staff Administrator, Lowell Atchley, Judy Fritz, Tom Hewlett, Joseph Hood, Margaret Hurst, Dan Jacovitch, Erin McNees, Stacie Otto, Cindy Upton, and Susan Spoonamore, Committee Assistant.


Minutes of the October 10, 2002 meeting were approved by voice vote upon motion made by Sen. Herron and seconded by Rep. Hoffman.

Greg Hager, Committee Staff Administrator for Program Review, provided an overview of the report entitled SEEK Formula for Funding Kentucky’s School Districts.  Dr. Hager explained that Support Education Excellence in Kentucky (SEEK) was created by the Kentucky Education Reform Act in 1991 as a mechanism to provide financial resources to Kentucky’s public school districts. The goals of SEEK were to provide a minimum level of funding regardless of the wealth of a student’s school district; require at least a minimum level of funding effort from each district; make spending more equal by basing state aid per pupil on the wealth of the school district, and keep funding relatively equal but encourage districts to increase education funding. 

Dr. Hager explained that the state determines a guaranteed minimum amount of spending per pupil, which was $3,066 in FY 2002. Adjustments are then made to account for districts having different costs for transporting students and for serving students who have additional educational needs.  He said that the funds are measured by the average daily attendance from the previous school year.

 Dr. Hager explained that SEEK was a formula used to determine funding for a district based on the district’s numbers for variables in the SEEK formula, and that the Governor recommends and the General Assembly enacts a budget for SEEK based on the projections of those numbers. He stated that if the amount that the General Assembly appropriated for SEEK was at least what was necessary to fund the formula based on the projections, then SEEK would be fully funded.  If the amount budgeted was not enough to provide the funding called for under the formula, then SEEK would be underfunded and the calculated amounts to the districts would be reduced.  He said that SEEK would be overfunded if the amount budgeted was too much. 

Dr. Hager explained that accurate data and the procedures used in calculating the SEEK formula were important because the funding of SEEK accounted for over 25 percent of the state’s General Funds, and most of the funding by local school districts was also through the SEEK formula.  He stated that the required 30 cents per $100 of current property assessments was the local share of base SEEK.  He stated that this component of the formula means that districts with greater property wealth bear a greater portion of the costs of educating students.  He said that additional revenues were divided into two tiers:  Tier I, which is partially funded by the state to adjust for the district’s per-pupil assessment relative to the statewide coverage; and Tier II, which is capped and is not matched by the state.  Tier I local funds that are matched may be from property taxes and permissive taxes.  Permissive taxes are taxes on utility receipts and an occupational tax.

He said that the underfunding of SEEK in FY 2002 was a function of a $50 million budget reduction and inaccurate estimates. He stated that preliminary FY 2003 estimates indicated underfunding of SEEK due to adjustments made in the Governor’s Recommendation and the failure to incorporate up-to-date information. Dr. Hager said that results from a survey of superintendents indicated that three quarters of the superintendents reported that their current funding was better than it was before SEEK. A majority of superintendents in districts with relatively high property wealth reported that funding for their districts was worse now than before, and that funding was better in other districts.

 In summary, Dr. Hager stated that staff found that the Kentucky Department of Education provided insufficient verification of the school districts’ attendance statistics; that KDE provided insufficient verification of the school districts’ transportation costs; and that the process used to produce the SEEK calculations should be more automated and integrated. Dr. Hager stated that SEEK was complicated, and that the procedures used by the Kentucky Department of Education (KDE) to verify information and calculate the formula could be improved, which could require more resources. He stated that even a small error could lead to large financial impacts for the state and local school districts.

 Cindy Upton, Program Review staff analyst, presented information regarding flawed data and procedures resulting in SEEK calculations errors.  Ms. Upton explained that the SEEK formula is administered by the Division of School Finance within the Kentucky Department of Education (KDE).  She said that the division has three branches:  Administrative Support, Audit, and Reporting.  The SEEK formula is calculated within the Reporting Branch, which only has a staff of seven individuals who have a number of other duties and responsibilities in addition to SEEK calculations.  She said that the information used by KDE in calculating the SEEK funding formula came from four sources:  local school districts, local taxing authorities, the Kentucky Revenue Cabinet, and the state budget.  She stated that internal reviews by the Division of School Finance had discovered errors in tax information submitted by school districts, which resulted in adjustments to SEEK payments.  She also explained that accurate attendance statistics were critical in correctly calculating the SEEK funding formula.  Staff found that school districts were making errors in reporting attendance counts and transportation costs, and that KDE did not adequately verify the accuracy of the reported statistics on a regular basis.  Ms. Upton stated that staff found that in 57 percent of the schools, the full-day and half-day absences were not recorded correctly. Ms. Upton stated that if the statewide daily average attendance were overstated or understated by just one percent, the effect on SEEK funding to school districts could result in an overpayment from the General Fund of approximately $19.5 million.  For that reason, staff recommended that KDE implement a risk-based approach to auditing school districts’ reported attendance statistics focusing on the risk of significant error in SEEK funding.  Staff recommended that all the audit procedures designed to test the validity of student attendance counts be performed at all the schools in a district. She stated that districts with more students should be audited more often than districts with fewer students, and that testing should not be limited just because a district has high CATS scores. Because of numerous omissions from schools’ entry and exit logs for students arriving late or leaving early, staff recommended that the student be counted absent when the time was not recorded.  Staff recommended that random sampling be used when testing school attendance records to improve the accuracy of the statewide average daily attendance count.  Errors found in initial and follow-up testing should result in adjustments in attendance counts.  Auditors should also review transportation costs when auditing school districts’ attendance.

In addition, Ms. Upton stated that staff recommended that KDE should assign a knowledgeable employee not involved in SEEK to review calculations internally to identify system problems and correct errors before calculations are released to school districts.  She also stated that top priority should be given to developing an automated and integrated system for SEEK calculations, that the system should be able to produce ad hoc reports at any time, and that KDE staff should be trained to know how all parts of the SEEK calculation process work. 


Dan Jacovitch, a Program Review staff analyst, presented an overview of the budget reductions, increased student counts, and failure to incorporate increased transportation costs into projections that led to recent underfunding of SEEK. He stated that in February 2002, shortly after submission of the Governor’s Recommended Budget, the Kentucky Department of Education (KDE) informed the General Assembly that SEEK was under-funded by $12.9 million in the fiscal year 2002.  He said that a tentative SEEK calculation in early September revealed FY 2003 to be under-funded by at least $23 million.  The actual released figure was $32 million, but it included an $8.9 million error in transportation costs.  Mr. Jacovitch stated that staff found several events affecting FY 2002 under-funding of SEEK. He explained that on September 7, 2001, a $50 million budget reduction to SEEK was implemented and at about the same time, a tentative SEEK calculation indicated a $7.9 million under-funding as a result of the reduction. He stated that in December 2001, a partial restoration of $15.9 million was made to allow for an $8 million increase in Final SEEK. After that, Final SEEK calculations of February 28, 2002 revealed a $20.9 million increase over the Tentative SEEK due to a greater than expected growth factor, and therefore, SEEK was under-funded by $12.9 million. He said that without any budget reductions, Final SEEK for FY 2002 would have been $21.1 million over-funded. 

Mr. Jacovitch also stated that staff found that the Executive Branch adjustments to KDE’s FY 2003 budget projections for student counts and assessments contributed to the short-funding of SEEK in FY 2003.  He said that the Final SEEK calculation in February 2002 showed further increases in transportation costs and student counts, but the information was not incorporated into the versions of the budgets considered by the General Assembly or the subsequent Governor’s Spending Plan.

Mr. Jacovitch stated that staff had concluded that the Kentucky Department of Education’s difficulty in projecting the average daily attendance and Assessments was not a new phenomenon, however, past projection errors were offset by the regular pattern of SEEK over-funding.  He explained that the short-funding of SEEK in FY 2002 appeared to be due to the fact that the budget reduction orders removed the traditional cushion provided by over-funding before newly available data was incorporated into revised estimates, and that a reversal in the ten year trend of declining student counts added to the magnitude of the error.  He said that the short-funding for FY 2003 was the result of adjustments to student counts and assessments made in the Governor’s Recommendation, along with increased transportation costs that had not been incorporated into the projections. 


Sen. Seum asked if the 30 cents per $100 of the current property assessment was the minimum?


Dr. Hager stated that everyone was required to do the 30 cents.


Sen. Seum asked if there was any incentive for those districts who were doing the minimum to increase that at the local level.  He also asked if a district would lose SEEK dollars if the property tax rate was raised. 


Dr. Hager stated that a district would not lose SEEK dollars.


Sen. Seum asked if it was true that a school district in Northern Kentucky lost money when they increased their property taxes.


Dan Jacovitch indicated that increased assessments will reduce state SEEK funding but that increased rates will not. Increase rates may increase state funding to the district if the district is not at its full Tier 1 rate.


Sen. Seum asked if Jefferson County was being penalized for paying 80 cents on the dollar instead of 30 cents.


Mr. Jacovitch stated that the potential for losing money existed more in regard to assessments jumping up to a high amount and causing an increase in the amount produced by the 30 cent effort.  The best way to look at the 30 cent effort is a “share”.  Adjusted guarantee is calculated based on the average daily attendance, then the add-on populations and the transportation costs. The 30 cent local effort goes towards that and the state picks up the rest.


Sen. Seum asked if it was correct that a district with better local effort would get less money from the state.


Mr. Jacovitch stated that Sen. Seum’s statement was correct.  Mr. Jacovitch further stated that what he had referred to was actually the total amount coming in.  If you take total of local and state, a situation can occur that assessments increase by a significant amount and the total can go down.


Sen. Seum asked what the logic was behind a one percent error in attendance and whether it was correct that the higher the attendance, the more SEEK funds that a district gets.


Dr. Hager stated that was correct.


Sen. Seum asked if there was a built-in reason to fudge the numbers.


Dr. Hager stated that the research showed that when errors are made they are more likely to be made in the direction of overcounting.


Sen. Seum asked if the state received federal dollars based on the attendance rate.


Dr. Hager stated that federal funds depend in part on attendance.


Sen. Seum asked if the state would lose federal money if a one percent error was found and corrected at a later time.


Dr. Hager stated that the state could possibly lose federal money, but the federal share of education funding is a lot less than the state’s share. 


Sen. Stine asked what it would take to get accurate information on absences.


Ms. Upton stated that it was important to remember that errors were made both ways, but they were mostly toward the over-count.  It would not be possible to go back and find that information. 


Sen. Stine asked if staff was able to come up with a percentage on how many children were counted as tardy.  She also asked if it was correct that the schools receive money if the children are tardy a half day rather than being counted absent for half a day.


Ms. Upton stated that staff did not look into truancy because it would not affect the daily attendance.  She said that tardiness would be more of a truancy issue.


Sen. Stine asked if schools would be entitled to count a student who was absent for a half a day.


Ms. Upton stated that the school would be able to receive credit for half of a student.


Sen. Stine asked that if the absence was recorded as being tardy, would the school receive credit for a whole day?


Ms. Upton stated that was correct. 


Sen. Stine asked if there was a clear description of what would be considered tardy versus being considered absent half of a day.


Ms. Upton stated that there was a computer system set up  to do those calculations, but the time has to be entered in order for it to be calculated correctly. 


Sen. Stine asked if the attendance calculation for the group of exceptional children was audited.


Ms. Upton stated that the SEEK formula puts a lot of emphasis on attendance counts, and the auditors should look at student records to see if the information shows that they are in fact disabled and that the school deserves the certain level of funding based on that level of disability.


Sen. Stine asked if Kentucky’s error rate was in line with the U.S.D.A.’s national estimates of students who were not eligible for free lunches. 


Ms. Upton stated that staff did not look at that. 


Sen. Stine asked if schools received federal funds for school lunches.


Dr. Hager stated that the free lunch funding was not part of the SEEK formula.  He said that the school lunch money was distributed based on an eight-month average daily attendance. 


Sen. Stine asked if schools received federal and state funds by virtue of the information being included in the SEEK formula for that population of students. 


Dr. Hager stated that it was his understanding that if an at-risk-student was misclassified, then yes they would be paid both ways.


Sen. Stine stated that it appeared that the system needed to be simplified for better understanding.  She asked how much it would cost to tighten up the system of data collection.


Ms. Upton stated that she did not know how much it would cost to simplify the system.  She said that a better system would help to free people from doing manual transferring of data, and it would also help to provide more up-to-date and accurate data to the Governor’s Office and the General Assembly. 


Dr. Hager explained that the labyrinth of departments within the Kentucky Department of Education was at least partly the result of  a complicated statute. 


Sen. Stine asked if a school was required to refund any monies to SEEK if their daily average attendance dropped.  She also asked if the statute addressed that specific problem or would it be a judgment call.


Dr. Hager stated that a school was not required to refund any money for that particular year.  He said that the final average daily attendance at the end of the year would be used for calculating SEEK for the next year.  Dr. Hager stated that he thought it was part of the statute.


Sen. Stine stated that it was her understanding that the transportation graph encouraged efficiency, but she asked if it could also discourage efficiency for those that fall below the line of less costs.


Dr. Hager stated that the incentive would be to be more efficient and have more costs reimbursed.


Sen. Stine asked if that would be true if the school was being paid more than what the actual costs were.


Dr. Hager stated that everyone below the line was not compensated at exactly the same rate. 


Sen. Stine asked if it was based on the transportation costs of similar situated districts.


Dr. Hager stated that the Kentucky Department of Education would be better able to address those questions.  He said he did not think there would be an incentive to bump up the transportation costs because of reimbursement.


Sen. Stine asked what permissive taxes were not calculated into the formula, but were actually occurring in the local revenue.


Dr. Hager stated that the surcharge on the state income tax liability was one other allowable permissive tax that was not being used. He stated that the utility and occupational taxes are included in the calculation.


Sen. Stine asked what revenue sources could a school be receiving which might give that school an advantage over other schools, that were not being calculated in SEEK. 


Gene Wilhoit, Commissioner, Kentucky Department of Education stated the utility and occupational taxes are being used, but the surcharge on the state income tax liability, which could be used, is not being used. 


Sen. Stine asked why there was no attendance growth shown for 2003.


Mr. Jacovitch stated that the chart reflecting no growth for 2003 is only a tentative chart. 


Commissioner Wilhoit stated that the current trends are indicating that there will be a growth factor, so the numbers will be higher.


Sen. Stine asked if KDE had any recommendations on how property should be assessed.


Mr. Jacovitch stated that the variability of assessments was an issue and it would be good to find a way to level it out.


Sen. Guthrie asked if he was correct in understanding that districts with higher assessments and lower rates are penalized because they are getting less state dollars and their lower rates are not providing as much revenue to make up for it.


Commissioner Wilhoit stated that was correct.


Sen. Guthrie asked if KDE was for raising revenue locally.


Commissioner Wilhoit stated that he agreed that there was an incentive to increase local revenue as long as the district stayed within the Tier I and Tier II calculations. At that point a local district would have to weigh the relative improvement that they get from their public school system and the revenue that is coming in from that local community. They get to keep it all and it is used in the local community and supposedly it goes for the use of the children in that district.


Sen. Guthrie asked if a declining district would be penalized if student enrollment declined over the summer months. 


Commissioner Wilhoit stated that when the formula was created there was a concern because districts had to commit based on the numbers that were known at the time their budgets were set. All KDE knows at the time is that year’s figures.  If adjustments are made, those districts which were losing students would be in a situation where they have committed to either 60 percent, 70 percent, or even up to 75 percent of their budget to salaries and then have a reduction in the SEEK funds would be undue harm to those districts.  So the provision was put in to allow for that one year cushion.


Sen. Guthrie asked if that was by district or by school.


Commissioner Wilhoit stated that it was by district. 


Sen. Guthrie asked that if a student chose to switch to another school, would that child have a $6,000 estimate from the state for that child’s education for that year.


Commissioner Wilhoit stated that the money for that child would be included in the district that the child transferred to. 


Sen. Guthrie asked whether or not the state could actually be paying twice for that child. 


Commissioner Wilhoit stated that most of the movement in Kentucky was from district to district. The Department felt that some of the increases in the student population could be because people were moving back in to Kentucky, or moving from private schools into public schools. He stated that some of the movement is from a declining district to an increasing district and those generally are economic decisions that families are making. He said that in essence, the Department was holding that over for one year for the declining district. He stated that when the growth was calculated in December, then it was added to the district that was receiving the student. 


Sen. Guthrie asked if those funds were a substantial part of the $12.9 million.


Mr. Wilhoit stated that he thought that a substantial part of that amount was from the movement of students from declining districts to increasing districts.


Sen. Guthrie asked whether having the different way of estimating growth in the declining districts could contribute to the $12.9 million underfunding.


Mr. Wilhoit stated that the legislature faced that same dilemma when the formula was created.  They wanted to be fair to those who were declining and also to those districts that were growing, so the compromise resulted for that type of situation.


Rep. Baugh asked if transportation costs were figured the same for county systems as well as city systems.


Dr. Hager stated that there are separate graphs for county districts and for independent districts because of the disparity in the geographic areas.


Rep. Baugh asked if the SEEK formula was impacted by Pre-School and Kindergarten or just grades 1 through 12. 


Commissioner Wilhoit stated that it was impacted from K through 12, but not Pre-School.


Rep. Baugh asked if the local districts had to find the funds for Pre-School.


Commissioner Wilhoit stated that the funds for Pre-School would come from a different funding source outside of SEEK.  He said that whether the state formula would provide all the resources for a Pre-School program would be another issue.  He said that many districts do assume the additional costs. 


Rep. Baugh stated that there were some districts who simply did not have the funds to take care of Pre-School programs.  He said that economically disadvantaged  and/or at-risk students were accepted in the program when other students were not accepted. 


Commissioner Wilhoit stated that the funds were derived from two sources, Federal Headstart Programming, which provided attendance criteria and was centered around poverty, and the state funding formula also included poverty and disability categories. He said that there were several working families who would not meet the criteria under those categories and would not be eligible for the program.  He also said that the federal government was considering some changes in the criteria which would allow some of those families to be eligible.


Rep. Baugh stated that in his opinion, the criteria created problems for families.


Commissioner Wilhoit stated that the criteria did create problems for working families. 


Sen. Harris asked if KDE looked at growth for the whole state or at the school districts who were growing at such a fast rate that they could not keep up with the school construction costs.


 Mr. Jacovitch stated that staff did an analysis at the district level, but that question did not arise.


Sen. Harris asked if the Department had examined the formula to see what could be done to help the districts that were growing so rapidly and needed to expand.


Commissioner Wilhoit stated that the Department had been looking at solutions that might add resources to the facilities fund for the rapidly growing districts, but the Department would have to see how the proposed solutions would affect other school districts.  He stated that there were two types of districts in obvious need of more facilities: districts with buildings ranked at Levels 4 and  5, which are unacceptable; and rapidly growing districts.


Sen. Harris asked if the Department would be able to present new solutions to the General Assembly in the 2003 Session, or the 2004 Session. 


Commissioner Wilhoit stated that it would be difficult to have anything put together for the 2003 Session, but the Department would have something ready for the 2004 Budget Session.


Sen. Borders stated that accountability and the reliability of data appeared to be issues that needed to be addressed by the Department. He stated that the Department was accountable for not making the legislature aware of ongoing problems with SEEK, and that the Department should find ways to improve the SEEK funding calculations, and present those solutions to the General Assembly. 


Sen. McGaha asked if there was more than one way to calculate transportation costs.


Dr. Hager explained that separate calculations were used for independent districts and county districts.


Sen. McGaha asked if the Density and Transportation Costs chart in the report contained information from both districts, and what did the line indicate on the chart.


Dr. Hager stated that it was a county chart for FY 2002. He also said that the line represented the best representation of what typical costs were for districts of similar pupil density per geographic area.


Sen. McGaha asked if payments were made according to the chart.


Dr. Hager stated that if a district followed exactly along the line, then that district would get paid exactly for what the reimbursable costs were.


Sen. McGaha asked whether it was accurate to say that some districts were making money and some were losing money.


Dr. Hager stated that some districts were being reimbursed more per dollar and some districts less.


Sen. McGaha asked if there was a more accurate way to reimburse transportation costs. 


Commissioner Wilhoit explained that the formula attempted to compare one district’s transportation costs against other similar districts, and for the Department to provide an incentive for those districts to conserve on transportation costs. 


Dr. Hager stated that several superintendents commented, when replying to the  survey, that the transportation formula needed to consider other things besides the pupil density per geographic area. He said that some superintendents would argue that the districts with worse roads and more hills would have higher costs for picking up pupils.


Commissioner Wilhoit stated that in looking at the chart, more districts in the eastern part of the state, which aligned with the mountainous terrain, were paying more out of local funds for the costs of transportation. He said that based on the chart, the Department would take a look at the transportation plan.


Sen. McGaha asked if any of the attendance audits were done randomly outside their scheduled audit.


            Ms. Upton stated that based upon discussions with the folks in the Division of School Finance, normally the schedule is adhered to but a district can ask for a special audit.


            Commissioner Wilhoit stated that the audits were announced, on a schedule, and  predictable.  This is an issue that the Department can look into.


            Sen. McGaha asked if staff found information which would raise the possibility of a one-percent over reporting of attendance.


            Ms. Upton stated that it was a possibility, but staff did not have a hard number on the over-attendance reports.


            Sen. McGaha stated that while the school systems were struggling to maintain a school system, it would be hard for a school administrator to choose between counting a student tardy or as a half day student strictly because of how the definition would affect their average daily attendance reports. He asked why the auditors had not been checking the at-risk child counts.


            Commissioner Wilhoit stated that the Department does some checking through their Division of Special Education on IEPs and on the students that are classified, but the Department agreed that the at-risk child counts should be audited.


            Sen. McGaha asked if the high CATS scores was related to attendance or the scores in general.


            Dr. Hager stated that it was just performance on the CATS test.


            Commissioner Wilhoit stated that the General Assembly passed a bill asking the Department to exempt high performing districts from paperwork and reduction of oversight and to give them greater leeway. He said that past history is taken into account and in many cases, the high performing districts also have very effective management systems and control. He said that in light of staff’s findings, the Department would go back and check on over-adjustments in those areas.  He said high population districts would be receiving more frequent audits and the Department would be doing more audits of at-risk data and on the information around transportation.  That would require the Department to use that as a primary basis for doing the audit work as opposed to other variables.  That would probably fall to the wayside, although the Department is still trying to find ways to relieve these districts from some of the oversight and paperwork.


Sen. McGaha stated that he did not think that the scores from CATS are a reason to not go in and do an audit or exempt them from the responsibility.


Sen. McGaha asked what caused the spike in the 2003 transportation costs.


Mr. Jacovitch stated that staff had limited information to work with.  Staff used an extract from the KDE budget system to examine transportation expenditures by category for 1999 through 2002. Fifty-four percent of the dollar change between 1999 and 2000 was in salaries and personnel services. The following year, 46 percent of the change was in salaries and personnel services. However, the data was at a greatly aggregated level.


Commissioner Wilhoit stated that the Department had looked at it to some degree and it appears to be salary increases and that some of the schools are getting better with the technology and reporting the actual costs that have been charged.  Some of the schools were assuming those within their general budget costs and now they are able to pinpoint it better with the technology.


Sen. McGaha asked if there was discussion between the Department of Education and the Governor’s Office when the Governor’s Office changed and increased the projections and assessments to 5% instead of using the Department’s projections and assessments of 3.8%.


Mr. Jacovitch stated that staff met with GOPM staff and there were not specifics available but it was acknowledged that the projections should come up from assessments because of the way they behave.  There is big difference if you use the three year trailing trend line versus a five year trend line.  The actual approach was not specifically discussed or available.


Sen. McGaha stated that in the current economic situation, it is questionable because most of the PVAs are not going to ramrod an assessment of any great magnitude at this particular time. 


Rep. Butler asked for more specifics regarding the $8.9 million error that was found by staff.  He asked if it was hard to find or was it obvious.


Mr. Jacovitch stated that the error was caused in a manual action where the wrong information was cut and pasted from one report into another report. 


Rep. Butler asked if staff was surprised to find that significant of an error.


Mr. Jacovitch stated that it was not unexpected in terms of the magnitude of  the total dollars of SEEK. 


Commissioner Wilhoit stated that from time to time districts will inappropriately respond. The Department does run trailers on all those systems. This was an error in a tentative calculation. Again, this points to the complexity of all the variables that flow into the SEEK calculation. The Department is taking steps to develop a technology system that will allow some of the errors to be eliminated. 


Rep. Coleman stated when the legislature left here in the special session, there was an assumption made about fully funding the 2.7 in both years.  Rep. Coleman further stated that some of the problem was based on the forms and calculations.  In one district, the 2.7 was about $82 but yet about 8 or 9 lines down there was a take-away of quite a substantial amount of money so the district actually got less funding.  Is that part of the presentation today?


Commissioner Wilhoit stated it is not. All the changes in receipt of resources for the schools were not a part of this calculation.  For example, we had some changes that resulted in Medicaid reimbursement, we had some other areas where districts had some resources that were no longer available to them outside the SEEK formula.  So when districts come to you and talk about reductions, it is not limited to the SEEK issue.  There were other kinds of reductions that occurred during this very tight economy.


Rep. Coleman stated it was his opinion that the school facilities program never recovered from having the money taken from that account to use towards the Family Resource Centers. 


Commissioner Wilhoit stated he was not familiar with that issue because it happened before he became Commissioner. 


Rep. Coleman stated that there were still several programs outside SEEK that tend to be targets, such as gifted and talented programs or school facilities.  He would like to see those programs rolled back into SEEK.  It is going to take a lot of money though.


Commissioner Wilhoit stated that superintendents like the idea of folding as much as possible into the SEEK formula.  The original intent of SEEK was to pull those programs out because they were so different than normal practice. There were no pre-school programs and no ESS after-school programming, so the intent was to put those programs in place until they were institutionalized. The idea was that at some point they would be folded into SEEK.  The reality is that those programs are still present 12 years later. Another important discussion relates to those programs outside the SEEK formula and what should be done with those in the future.  Are they substantial enough that they should be folded into the  general formula?


Rep. Coleman stated that local districts could hypothetically actually take the 4% in the high growth and individual tax bills could possibly go down.  Rep. Coleman further stated that this discussion appeared to be a House Bill 44 issue versus a SEEK issue and that those can get confused.  He asked Commissioner Wilhoit if he had any proposals.


Commissioner Wilhoit stated that the Department would be coming with something to try to correct that to relieve the pressure, at least the cap that is on those districts to allow them to recapture what they actually assess in the local community.


Rep. Coleman stated that it would be very important and that it would take care of the majority of the problems that have been discussed over the last several months.


Chairman Graham asked Commissioner Wilhoit if he had any comments regarding the report and the recommendations.


Commissioner Wilhoit stated that the report was outstanding in that it was presented and written in an unbiased manner.  He said that the Department would not be able to put every recommendation in place right now because of the financial and staffing implications.  He stated that in general, the Department’s reaction to the report and the recommendations was positive.


Chairman Graham gave a brief summary of each recommendation and asked that committee members voice objections or suggest amendments at that time.


Commissioner Wilhoit referred committee members to the Kentucky Department of Education’s prepared response that was distributed earlier. He stated that the Department was in agreement with most of the recommendations, but would like to take some time to go over each recommendation thoroughly and present a more comprehensive response to the committee at a later date (a copy of the Kentucky Department of Education’s Response can be found in the LRC Library file).


Rep. Hoffman asked Commissioner Wilhoit to select a specific date for reporting back to the committee with a full and comprehensive response to the report and recommendations. 


Chairman Graham noted that upon the adoption of a report and the recommendations, the Committee would revisit the issue and the Department for Education would be required to make a formal response to the recommendations at that time.


The report and recommendations of The SEEK Formula for Funding Kentucky’s School Districts: An Evaluation of Data, Procedures and Budgeting was approved by roll call vote upon motion made by Sen. Harris and seconded by Rep. Baugh.


Sen. McGaha stated that he wanted the Department to pay particular interest to Recommendation 3.3.  He said that the Districts should not be penalized for funding because of human error oversight. 


Upon a short recess, Chairman Graham called the meeting back to order.


Lowell Atchley, Program Review staff analyst, presented the first part of the report entitled Public Funding of Gubernatorial Campaigns in Kentucky and Other States.  He explained that the staff had been requested to review the 1992 Kentucky Public Financing Campaign Act, with three objectives in mind:  describe the current system of financing gubernatorial candidates in Kentucky; assess whether the goals of the Act had been achieved; and describe other states’ programs and compare those to Kentucky’s.  Mr. Atchley stated that the funding program matched every $1 raised by slates of candidates for governor and lieutenant governor with $2 in public funds, within certain limits.  He said that Kentucky’s only publicly financed governor’s race took place in 1995, with three Democratic slates in the primary and the two party nominees using public funds in the general election.  He said that funding had been available in the 1999 governor’s race but no slates had received public money because not enough slates qualified.

Mr. Atchley pointed out that the Kentucky Act did not contain a preamble or statement of intent to lend guidance regarding the goals of the program.  He stated that staff reviewed videotaped legislative debate from the 1992 session, and it was determined that limiting the increasing expenditures in races for governor and lieutenant governor was the primary reason for enactment. The reports showed that combined spending by candidates for governor and lieutenant governor totaled approximately $24 million in each of the 1987 and 1991 elections.

He stated that with the exception of amendments, the Public Finance Campaign Act had largely remained intact since passage ten years ago, and had also survived legal challenges in both state and federal courts.

 He said that candidates running in slates for governor and lieutenant governor could receive up to an estimated $1.42 million in the 2003 primary and general elections, subject to a spending limit of $2.13 million for each election.  He stated that the Kentucky Registry of Election Finance administered the gubernatorial campaign finance program, along with other agencies that played lesser roles.  He explained that the program derived revenue from two sources:  General Fund appropriations and restricted funds, which come from a variety of election-related fees.  He said that the Governor’s FY 2002-2004 recommended budget would have provided a total of $9 million from the General Fund for the program, and that the restricted fund account had a current balance of approximately $804,000.  Under a regulation, matching funds will become available to qualified slates in mid-January 2003.  He stated that it was unclear how much money would be needed to fund gubernatorial slates in 2003.  He said that the trigger provision, which allowed participating slates additional funds if a nonparticipating slate exceeded the spending limit, could increase payments significantly, and if runoff elections were held for one or both party primaries, that would also raise the amount of state funding.

In a brief overview of state public funding programs, Mr. Atchley stated that Kentucky was among fifteen states with programs that made public funds available to finance gubernatorial campaigns. He said that eleven of the gubernatorial finance programs—including Kentucky’s—offered partial public funding; another four had predominant public funding of their systems. He said that there was no single model of how states provided money to gubernatorial candidates. He also said that most of the programs were created in the 1970s or 1990s, and that state legislatures enacted most of the public funding systems. He stated that the programs were generally limited to top state offices, such as governor, lieutenant governor, other statewide offices, and in some cases, legislative offices. 

He said that Kentucky ranked high among the states in the amount of funds its program would have available for the next election. In other states, their programs were funded through various means, including appropriations; taxpayer donations; and receipts from assorted fines, penalties and fees. He also stated that in some other states, the program was underfunded and at least one did not have any funding available for the 2002 election.

In concluding, Mr. Atchley stated that two objectives of this report were to identify the stated goals of the Kentucky Financing Campaign Act and to determine whether those goals had been met.  He said that if reducing the costs of gubernatorial elections was the primary reason for public funding, then Kentucky’s one publicly funded gubernatorial campaign (1995) could be considered a success, although one election’s worth of experience was not sufficient to evaluate the program. He said that given the scarcity of data available to staff, any conclusions from such a small number of states for such a short period of time would be tentative. Mr. Atchley stated that the first step in making public financing work would require that candidates accept public funding and its accompanying limit on total expenditures. He said that candidates did this for Kentucky’s 1995 gubernatorial election and it was reasonable to think this happened because the elements of Kentucky’s program made it appealing to candidates, which resulted in a competitive election with a strong group of candidates. In summarizing, he stated that a better understanding of public funding of campaigns required much more information than what was available at the time of this study.  He said that time would help as other states with public financing gained more experience.  He stated that it was also unfortunate that information on expenditures by parties and other groups were publicly unavailable, therefore making it difficult to determine whether public funding or any other campaign reform, affected total campaign spending.


Rep. Palumbo asked for an explanation for combination of funding and also, was Kentucky the only state that did not have check-offs? 


Dr. Hager replied that Kentucky was the only state without a check-off.  He stated that there is an income tax check-off, but the money goes to political parties, not to the gubernatorial campaign fund.  He also stated that Arizona, Maryland and North Carolina did not have appropriations.  Michigan has a tax check-off but the money has to be appropriated, it is not automatic.


Rep. Palumbo asked what were the fines, penalties and fees?


Dr. Hager stated that fines were for violation of campaign finance rules, and fees are for filing fees.


Rep. Palumbo asked how other states compared to Kentucky’s fines, penalties and fees.


Dr. Hager stated that he did not recall the exact numbers for other states, but he did not think that the fees, penalties and fines were much higher than Kentucky.  He also said that the money derived from the fines, penalties, and fees was not a substantial amount of money.   


Rep. Palumbo asked about the five states that granted public funding to candidates, and then the states that have the trigger provisions.


Dr. Hager stated that there were five states with no trigger provision at all: Hawaii, Maryland, New Jersey, North Carolina and Vermont.  The states that could receive additional funding were Arizona, Florida, Kentucky, Maine and Massachusetts.  So that means in the other states, if the trigger is activated the candidates can raise more private funds, they just do not get additional public money.


Rep. Palumbo asked about the states with gubernatorial elections in 2002 in which candidates opted for public funding and the three states in which the candidate accepting  public financing won.


Dr. Hager stated that the three states in which they won were Michigan, in which both the major party candidates accepted public funding, Minnesota, in which both major party candidates accepted public funding as well as some third party candidates who actually qualified.  Arizona had a public funded candidate running against a private funded candidate and the public funded candidate won.


Rep. Palumbo asked if there were twelve states where candidates could have opted for public financing, but only six states where they did,  was money just not available?


Dr. Hager stated that was the case in Vermont, and Nebraska, which has never funded an election because its law says that there has to be a certain amount in the fund before they can fund candidates and they have a priority list of candidates who get funded before the governor’s race is considered.


Rep. Palumbo asked if state legislators’ races were funded in Nebraska.


Dr. Hager stated that the type of candidates is broader than that; the Board of Regents of the University of Nebraska is eligible for funding.  They have a very diverse group of candidates who are allowed to get funding and under their procedures, those races get funded first, presumably because they are cheaper.


Rep. Palumbo asked if candidates run for those positions in Nebraska.


Dr. Hager stated that they do run for those positions and there was actually a  scandal involving someone running for Regent for the University of Nebraska and the issue is a familiar one, whether independent expenditures spent on behalf of that person should count and whether that person violated the spending limit. Maryland was another state that had an election this year and Dr. Hager did not think they had enough money. Hawaii is a very expensive state in which to run campaigns, more expensive than Kentucky,  and they did not have any candidates who accepted funding in 2002. 


Rep. Palumbo stated that it seemed that a lot of states had not implemented these programs because they had been underfunded. 


Dr. Hager stated that some states had not implemented the programs because they are underfunded, which is the case in North Carolina and Nebraska. Some states have enough money in some years and not enough money in other years.


Mr. Atchley stated that in Vermont, the Legislature did not fund the program for this year.


Rep. Palumbo asked if the program was a new relatively phenomenon. She also asked whether other states are dealing with the same issues that Kentucky has dealt with, specifically a shortage of money.


Dr. Hager stated that it was not uncommon for states not to have sufficient funding in place to finance candidates.


Rep. Palumbo asked if the other states kept their programs alive in case money was ever available. 


Dr. Hager stated that staff research did not find where any other states repealed their programs, although Massachusetts did substantially change their program.


Rep. Palumbo asked how and why Massachusetts changed their program.


Dr. Hager stated that their program did not provide a great deal of money to the candidates and it also appeared that the threshold was very low in qualifying for money.  There were lots of candidates qualifying for small amounts of funds. It seemed that the program was encouraging people to run for office who had little chance of winning and did not provide much money for more viable candidates. Massachusetts replaced that program with something similar to what other states are doing. Other states require more stringent qualifications for getting the money and then provide more substantial amounts of money to candidates. He also said that some legislators had been active in getting it put on the ballot as to whether Massachusetts should keep the program. The changed program was voted down. The Legislature did not fund the program and the case has actually been to court with the court threatening to sell furniture from legislative offices to pay for the program. This was the first year that candidates used money from the new program. 


Dr. Hager resumed the summary of the report by explaining the impact of  public funding in other states. He stated that staff was able to find several different reasons for implementing public funding programs, but the most common reasons were that public funding would reduce campaign expenditures, would make spending among candidates more equal, would encourage more competition, and would encourage a more diverse group of people to run for the governor’s office. He said that because the programs were so new, it was not possible to compare states with public funding to states with private funding, nor was information available to compare the elections before and after states implemented public funding. He stated that there was very limited information on public funding in the United States at the state level.  Michigan, Minnesota and New Jersey do have relatively long histories of public funding.  He stated that the problem with examining public funding based on three states was that it was just three states. He said that staff found two states, Ohio and Pennsylvania, which had private funding, to compare to Michigan, Minnesota and New Jersey. He said that the similarities of those five states included above average populations and personal income. Dr. Hager further stated that they were all northern states with diverse economies, but more importantly, they were all similar politically. The only major difference was that three of them provided public funding and the other two had private funding. He stated that one of the big reasons for having a public funding program was to reduce total expenditures and to make spending more equal among candidates. He stated that in looking at the information for Michigan, Minnesota, New Jersey, Ohio, and Pennsylvania, it was not obvious that public funding reduced expenditures. He said that in looking at the distribution of candidate expenditures, the spending between the top two candidates  was more equal in the public funding states. He said that, unfortunately, staff was not able to come up with enough information regarding party expenditures and independent expenditures. He said that most states kept good records for the past twenty years on spending by candidates, but most did not provide accessible information on spending by parties. He stated that information was even more limited regarding independent expenditures by organizations other than the parties. He said that there was an effort by a company who is starting to track how much is spent on independent spending. He said that staff was able to find good information on state party spending for at least two gubernatorial election years in electronic form from Alabama, Illinois, New Jersey, North Carolina, Ohio, Oregon, and Washington. He stated that staff was able to determine from those states that there was substantial increases in party spending at the state level. He stated that in Alabama from 1994 to 1998, party spending increased over 900%, Illinois increased over 500%,  and in New Jersey, the only public funded state, party spending increased 175%. He said the other common goal of public funding programs was to make elections competitive. He stated that staff looked at five states and found that there was no obvious distinction between public funding and private funding for producing competitive elections. He also said that there was no difference in the number of candidates seeking office. He stated that the only obvious difference between public funding and private funding was that in each of the public funding states an incumbent lost and elections were very close for incumbents. He said that there was no incumbent losses in the private funding states. He stated that it was possible that public funding had an effect on competition involving incumbents. He said that the third common goal of public funding was that it was supposed to encourage more diversity of candidates to run for the governor’s office. He stated that staff found no obvious differences in the backgrounds of gubernatorial candidates during the last five election years for either public funding or private funding.  He stated that there was one obvious exception, and that was when Jesse Ventura, a professional wrestler, ran for and was elected as Governor of Minnesota.


In conclusion, Dr. Hager stated that an obvious step in getting public funding to work was that candidates must accept public funding and its limit on total spending. He stated that it would be reasonable to think that this did happen in Kentucky in 1995, but that was for only one election. He said staff could not be sure how well it would work if there were more qualifying candidates, or how the trigger mechanism would work in practice, or how much the program would cost in future years, and whether or not party spending would increase substantially in Kentucky. 


Dr. Hager stated that there were a lot of questions regarding Kentucky’s one public funded campaign, but a lot more information would be needed to answer those questions, and one election cannot provide that information. 


Rep. Palumbo asked the name of the group who was tracking commercials and keeping record of the time slots.


Dr. Hager stated that it was a corporation who would presumably sell the information to candidates who would like to know how much the independent groups are spending to support their opponents.


Rep. Palumbo asked if the same parties and entities have to file in their states with a Registry of Election Finance similar to Kentucky’s Registry.


Dr. Hager responded that in every state they are required to file documentation.  States are under no obligation to make that information readily accessible, especially over the Internet or through electronic means, which is what staff were trying to get. Even when that information is provided in electronic form, staff found that it was often incomplete. 


Rep. Palumbo asked if other states were as good as Kentucky in putting their information on the Internet.


Dr. Hager responded that most states were not very good at putting information on party and independent expenditures on their websites, but he thought it was getting better. A lot of the states did have the most recent election data available.


Rep. Hoffman stated that he thought one of the reasons that Kentucky’s gubernatorial financing laws had been questioned in the past was the failure in 1992 to include a statement of intent of why public financing was passed. He stated that the need for public financing still exists, but the funding mechanisms and budget restraints may warrant a temporary suspension.


Sen. Stine asked if staff was unable to find any indices of independent expenditures.  She also asked if there was no methodology for tracking those type of expenditures.


Dr. Hager stated that it was theoretically possible to track those things, however, staff did not find any state that systematically measured how much was spent by different types of groups. In most states, it would be necessary to look at paper copies of every spending report by every group for every reporting period and then add up those numbers. He said that it would be extremely difficult and expensive to track those numbers now.


Sen. Stine stated that when you have independent expenditures they do tend to skew the whole picture.


Sen. McGaha stated that in looking at the states who do have some type of program, it is notable that Kentucky ranks third from the top in the amount of money that is made available to candidates.  He asked how many other states used the CPI index.


Dr. Hager stated that most of the other state programs use CPI. New Jersey actually uses a very sophisticated index that takes into account how much candidates spend on media and makes separate adjustments for the costs of media. 


Sen. McGaha stated that in looking back at the very reason why public funding was put into place, it was probably a good thing that no statement of intent was added as we probably would have been ashamed to print the truth. 


Rep. Baugh asked if staff issued any recommendations in the report.


Dr. Hager stated that the report contained no recommendations.  The report was informational only.


Rep. Baugh asked if there was a way to put a value on endorsements/editorials of a candidate.


Dr. Hager stated that he could not think of a way to do that.


Rep. Baugh stated that a major paper could endorse a particular candidate and by doing that, put the other candidate at a disadvantage.  He asked if the media had to provide any accounting of their editorials and whether an editorial could be considered a contribution.


Dr. Hager stated that if the newspaper made an independent expenditure where they say, support this candidate or do not support that candidate, then they would have to declare how much they are paying for the advertisement.  The difficulty with the newspaper is the “free press” issue. He further stated that he did not know of any way to put a dollar amount on the endorsement or editorial.


Rep. Baugh stated that he had been the beneficiary of the editorials, both ways and it is one thing to report the news, but it is another thing to write an editorial, which is only the opinion of the person writing the editorial/endorsement. He asked if endorsements/editorials would be “in-kind” contributions.


Dr. Hager stated that those type of things are going to happen whether candidates are public funded or privately funded.  


Rep. Baugh asked whether editorial writers take a stand on behalf of the subscribers or take a stand on behalf of the editorial writer.


Mr. Atchley stated that as a former editorial writer, it was the custom of the writers to get together and make the decision as to who was the most qualified candidate.


Sen. Borders stated that the hour is getting late and he would attempt to be brief, but that he always thought that if the editorial page writers said something kind about his opponent or endorsed his opponent, that he (Sen. Borders) should have to declare that expenditure in his favor.  Nevertheless, Sen. Borders stated he wanted to go back to Rep. Hoffman’s observations. Sen. Borders further stated that he had been in the Legislature since 1990 and served six counties, five of which are heavily Democratic. He pointed out that the polls show that 81 percent of the people were opposed to public financing.  He further stated that he found, going back into a Democratic district and being a registered Republican, that when the full impact of public financing was explained, the poll number would not have been 81 percent, but somewhere between 95 and 99 percent. 


Sen. Borders stated that in the Senate, where public financing was removed, all 18 Democrats voted with 19 of the 20 Republicans.


Chairman Graham stated that a quorum was needed to vote on the adoption of the report, and the committee would take formal action at its December meeting.


Chairman Graham asked the Committee to consider moving the regular Program Review meeting date from January 9th to January 16th


Meeting was adjourned.