Preliminary Compensatory Funding Formula Raises Alarm
MREA and all major state-wide education organizations are calling for a Compensatory Revenue Hold Harmless for FY27, similar to what occurred for FY 25 and FY26. The Minnesota Department of Education (MDE), in releasing their Preliminary FY2027 Compensatory Revenue run the week before session begins, may have presented Exhibit A as to why a third Hold Harmless is needed.
First, MDE made clear in webinar presentations that they left $48 million unallocated, because they are waiting for an attendance appeal to be settled and the effects of some charter school closings to be worked out. By statute, not less than $857,152,000 must be distributed (MS 126C.05 Subd 3 (g)).
Here is their breakdown of the distribution to categories of public schools and cooperatives.
In their presentation, they stated that 272 districts would see a reduction, 56 would see gains, and overall districts in this run see a net loss of $83 million. They do expect fewer districts to go negative when the $48 million is allocated. Interestingly, MDE did not release their FY 26 data that gives those comparisons. MDE did provide a formula to estimate a building site’s final distribution which you will find towards the end of this post. MDE stated they would release final numbers per site based on current law by June 30.
District Comparisons
MREA has replicated the district comparisons by using Compensatory Revenue projections from the Revenue Disparities FY26 report. This report was produced by MDE in December 2024, and MREA compared that projection with MDE’s FY27 run. Statewide, the comparison totals to a $90 million loss for all districts. This could be because MDE in their FY27 preliminary run did not include Compensatory Pilot Funds which affect some larger school districts, and presumably the Fiscal Disparities report did.
These maps should be taken as illustrative. Check with your district office for a more accurate FY26 revenue number and do the math with MDE’s preliminary number. These maps do not show the Compensatory Revenue generated at each building site, which are in the MDE run. The districts’ totals are the sum totals of all the building sites within districts.
Compensatory Revenue Task Force
Second, there is a Compensatory Revenue Task Force working on this issue which will issue a final report in October.Chris Mills, MREA Board Member, Superintendent of Thief River Falls, and member of the task force, said of the MDE preliminary run, “It is critical to hold school districts harmless until the work of the Compensatory committee is complete. The impact on our neediest children is too great!”
Matt Grose, Superintendent of Grand Rapids Public Schools and member of the task force, echoed and amplified those concerns, “Last year districts spoke loud and clear about how the change in the law to only count direct-certified students would affect them. Districts across Minnesota, rural and urban, large and small, would see decreases in funding used to help struggling students, while others would see an increase, not because the need changed, but because the formula did. A task force was formed to study the issue, and they’ve been busy doing that work. It only makes sense to extend the hold harmless provision until the work of the task force is complete.”
Direct Certification Language
Third, the issue is in large part caused by this statutory language adopted in 2023: “Beginning October 1, 2024, the commissioner shall determine the number of children eligible by means of direct certification to receive either a free or reduced-price meal on October 1 each year. Children enrolled in a building on October 1 …” (MS 126c.10 Subd3b)
In one sense it makes sense. The state was moving to universal meals, and there would no longer be a direct benefit to a family to fill out a free and reduced meal application. But there is an educational benefit to their child’s school in Compensatory Revenue. For some districts this benefit was significant as can be seen in FY25, the last year that individual family paper applications were used for Compensatory Revenue distribution.
Another rural school superintendent with a history of significant family paper applications said during the MDE webinar, “If we do not include paper applications at my school district, we are looking at a $700,000 reduction in our revenue. We have difficulties in getting families to go through the direct cert route, and the county doesn’t really want to increase the number of individuals on county programs due to the impact on their budgets.”
These are complex issues because compensatory calculations are complicated. Free and reduced-eligible students create Compensatory Revenue Pupil Units (CRPUs) and the ratio of CRPUs to a building site’s students served (APUs) create a weighting factor. For more information about these calculations and their effect on building site revenue, check out this MREA post from two years ago.
MDE’s formula to better estimate a building site’s FY27 revenue is to take the sites CRPUs, which MARSS coordinators can located, multiply by $400 and add that to the preliminary number in their run.
The Complex Conclusion
MDE’s Preliminary FY27 Compensatory Revenue and the complexity of the issue now with universal meals and current statutory requirement to use only direct certification of student eligible for Free and Reduced meals only reinforces MREA’s position in our 2026 platform to “Stabilize Compensatory Funding” with a Hold Harmless for FY27 and give our best wishes to the Compensatory Revenue Task Force to come up with a more permanent solution.
We are grateful that MDE provided this early warning of the changes using the current statute language, however, we all must realize that the numbers of students in poverty, the numbers of students in a building site all change. Therefore, compensatory revenue is going to change: go up, down, or sideways no matter what the formula and who gets counted.