Compensatory Funding Runs Released
The 2023 changes to universal meals and hold harmless measures are top of mind as the FY26 budget work has started in school districts across the state. The current law calls for a shift to direct certification in calculating compensatory revenue. This has many districts worried about significant losses of revenue and what it means to the budget planning process. MREA has been pushing for the runs to be released so districts have data to plug into their budget worksheets. MREA has also been strongly voicing the need for a different formula or a hold harmless period. The runs have been released and the Governor included his own hold harmless plan.
So, what does it look like for the state?
Historically, a paper form was collected to identify students who qualified for free or reduced lunch. During COVID, the shift occurred to provide free meals and requirements to collect forms were relaxed. Direct certification came into an expanded role, and some districts saw an increase in compensatory funding. Universal meals were passed in 2023, and there was a hold harmless at the district level, so districts didn’t see a major drop in compensatory funding. Current law shifts from the hold harmless next year and installs funding based on the direct certification student count. This has been a major concern as districts are staring at significant losses in compensatory revenue next year.
The calls from districts and many educational organizations from both metro and rural areas were heard, and MDE worked to release the district runs for compensatory funding just over a week ago. There were many losers and some winners across the state. MREA has created a map showing which districts gained or lost revenue under the current law. See the map here.
An item to note is the amount of compensatory funding statewide has grown from FY24 to FY25 by 8.4% due to the hold harmless law to an amount of $866 million. This is an increase from FY23 of $473.8 million. That is significant growth in a short period of years.
Current law (hold harmless expires and direct cert rules the day) shows FY26 formula providing 89 school districts with an increase in funding and 236 school districts losing funding. The net impact across winners and losers is a net reduction of $48.95 million to school districts. The impact weighs heavily for both the winners and losers. The top 16 districts with losses out of the 236 districts represent 51% of the losses in dollars. The top 10 districts with gains represent 59% of the total gains across 89 districts.
MREA’s collaboration with other organizations has raised the awareness of the legislature, the Governor, and MDE around the issue of compensatory funding. The Governor has proposed a hold harmless plan. Hold harmless in this case does not mean stable funding at the district level. There are still winners and losers at the individual district level, but it is an improvement overall to current law. This helps in the short term, but the Governor also calls for a work group to study the compensatory formula and propose modifications for FY27. This means we will need to stay connected and committed to this issue through the legislative session and beyond.
Some key points about the Governor’s proposal:
- Uses both direct certification and paper forms to determine eligibility
- Uses the greater of eligible pupils in FY24 or FY26
Will be adjusted once the February 2025 forecast is published.
MREA has created a map to illustrate the impact of the Governor’s compensatory funding proposal. See the map here. It is an interesting comparison to the current law’s impact on compensatory funding. It is still important to note that current law is in place. A proposal is just that, a proposal, and the legislature will have to come to an agreement for change to take place.
MDE school finance is looking to host a compensatory revenue webinar for LEAs, hopefully by the end of this week or the following. They know there are many questions they would like to have the chance to answer and provide clarity on the impact of the current law and the Governor’s proposal.
We stay active and focused on this issue as the legislature continues to meet. We will provide updates as there is more to come.
