By: Corinne Smith, Alaska Beacon
The state of Alaska has filed an appeal with the U.S. Department of Education after federal officials said the state failed a test measuring the differences in funding between school districts, which put more than $80.8 million in federal aid at risk.
Each year, the state receives federal funding called “impact aid” intended to compensate districts with federally owned lands, which reduce the tax base to support schools. The state can put that funding toward its own funding for schools — which the state has done in the past — but only if it can pass what’s known as a disparity test.
Federal law requires there to be no more than a 25% gap between per-student revenue in districts near the highest in funding and districts near the lowest. The department found Alaska’s disparity to be 26.88%, given the state’s complex funding formula.
But Alaska has rejected the finding, filing a formal appeal on July 14 and submitting districts’ finance data to argue their expenditures meet the standard. The test puts federal funding at stake, according to the state, which this year amounts to an estimated $80.8 million.
Deena Bishop, commissioner of the Alaska Department of Education and Early Development, said in an interview last week that she feels good about the state’s accounting and a successful appeal.
“I’m confident that we did meet it,” Bishop said of the requirements. “If I base it off of the last appeal and how Alaska was able to share how transportation costs are truly that disparate, then I think we will do fine.”
The state failed the same disparity test in 2021, based on 2019 state data, and successfully appealed. This time, the state submitted 2024 data for evaluation.
“So a little bit of it is a huge math problem at the beginning,” Bishop said of the appeal process. “We wrapped our arms around it and figured that out, and then made an argument on … why we did it that way, given the background of those costs in Alaska.”
Bishop said Alaska sees high costs in rural school districts — especially for transportation, but also basic supplies and operating costs.
“The cost to do business is highly diverse in Alaska. If you just took the cost of a head of lettuce or a gallon of milk, you know, in Anchorage, as compared to Teller, it’s not just three times (higher in Teller). It could be up to five times. And really building and construction materials, supplies, all of those are such a significant increase due to the way you can only get in by barge or plane. So it’s just … again, understanding why we pay such large differences in different places in Alaska.”
The U.S. Department of Education notified the state that it failed the test on May 16, as first reported by KTOO. Bishop said it will take time to resolve. The 2021 appeal was resolved at the end of that fiscal year, in 2022.
“It is a long process, because I think they’re very careful at it,” she said. “You want to spend the time on it. They did spend the time to understand Alaska.”
In the meantime, the federal impact aid payments will continue to school districts.
DEED spokesperson Bryan Zadalis said by email those funds will continue through the appeal process. “School districts will continue to receive Impact Aid funding directly from US-ED through their regular processes of application approval and funding availability,” he said.
Added uncertainty for education funding
The results of the disparity tests add uncertainty for the state, and for Alaska schools.
That’s based on the state’s complex funding formula for schools – which includes federal, state and local contributions.
Alexei Painter, who directs the division of state government that analyzes the budget for the Legislature, said the Legislature passed a budget that funds whatever the state’s portion is in that funding formula. If the state passes the disparity test, it allows the state to deduct the federal impact aid dollars from the state school funding.
But if the state fails the test, Painter said, “that money doesn’t go away. It just goes directly to those districts.”
If the federal impact aid isn’t flowing through the state government, it no longer is distributed based on the state funding formula. That’s potentially a big problem for the state.
“If we fail, we can’t make that deduction,” Painter said in an interview Wednesday. “The result of that is that what the state would owe to pay the full formula would go up by $80 million.”
That’s because the state would still be required to distribute the remaining state aid according to formula, but it would have less revenue to do it.
Painter explained that the issue is further complicated by Gov. Mike Dunleavy’s budget veto of $50 million for the state’s education funding this year.
Under the original budget bill passed by the Legislature, the state had an open-ended commitment to provide school funding according to the formula. But in issuing the veto, Dunleavy crossed out the language, replacing it with a dollar amount.
“The governor vetoed that appropriation from an open-ended one to a fixed dollar amount,” Painter said. That means that if the state fails the disparity test, “that cost goes up by $80 million, and now the veto impact is $130 million.”
The Legislature is set to take a vote on whether to override Dunleavy’s veto of school funding during a special session, scheduled for Aug. 2.
Painter said that if the Legislature votes to override the veto, it would fund the education formula – including the $80.8 million.
Depending on the override vote and the appeal, the impacts to school districts could vary widely across the state, he said. The division issued a memo in June on the potential impacts.
Some districts that receive the federal impact aid because they include federal lands, like the Lower Kuskokwim or Fairbanks school districts, could see millions more. But others, like the Matanuska-Susitna or Anchorage districts could see millions less, as the state would not have enough money to fully balance its part in the funding formula.
“I would just assume the Legislature will address this in some way,” Painter said. A veto override would be one way to address it. Another way would be to provide more money for school districts after the Legislature reconvenes for its next regular session, in January, in a supplemental budget bill.
If the state loses its appeal and the Legislature doesn’t act, it could be a problem for districts.
“Otherwise there’s just a lot of uncertainty for districts,” Painter said. “Even if the department’s ultimately successful, in the meantime, it just adds uncertainty for districts.”
Sen. Löki Tobin, D-Anchorage and chair of the Senate Education Committee, said in a phone interview that she was glad the state has appealed. But she argued that the disparity is being driven by a lack of funding on the state’s part for public schools.
“That is ultimately on the shoulders of our state and also of our local communities, and with a decade of flat funding, it is clear why our school districts’ budgets are getting tighter, the deficits are getting larger,” and the disparity is growing, Tobin said.
Zadalis said no date has been set yet for a hearing on the appeal.
