A piece of federal law that saves Alaska millions of dollars in state education spending is at the root of a dispute between the state education department and the Juneau School District.
Earlier this year, the Juneau Assembly gave the school district $2.3 million to resolve deficits – some of which had been growing for years – related to transportation, child care and community classes.
Then, days before the end of the 2023 fiscal year, the Alaska Department of Education and Early Development sent a letter to the district saying the money was not allowed because it fell outside what’s called “the cap” — a limit on city funding set by the state.
“Labeling funds as ‘outside the funding cap’ and identifying the allocation to a special revenue fund does not make it compliant,” DEED School Finance Manager Lori Weed wrote. “It is not acceptable for a municipal school district to circumnavigate the local contribution funding calculation.”
Juneau School Board members pushed back in a letter sent July 28. They said after-school child care and community classes are community services that aren’t part of providing free K-12 education. Therefore, they argued, those programs aren’t subject to the state’s cap.
Board president Deedie Sorensen said the district has received supplemental funding from the city for decades, and it’s never come up as an issue in the audit process. She called the letter from DEED “provocative.”
“It’s implying that there’s something afoot, and there’s not,” Sorensen said.
District leaders are still waiting on a response from DEED. But whether or not that money applies to Juneau’s local contribution cap, the state’s reason to limit outside-the-cap funding is twofold. On one hand, it ensures that school districts are funded as fairly across the state as possible. On the other, it allows the state to avoid paying millions of dollars to schools — through a practice used by no other state in the country.
Statewide fairness
The law at the heart of the dispute involves two things: federal impact aid and the disparity test.
Federal impact aid goes to school districts where students live on federal property or “Indian lands.” In Alaska’s case, that includes military bases and Alaska Native Claims Settlement Act land. The impact aid is meant to help school districts make up for lost tax revenue, because federal land is exempt from property taxes.
The disparity test measures whether a state’s school funding is shared evenly among all school districts. Alaska passes that test if there’s less than a 25% funding difference between the highest- and lowest-funded districts, after taking out the top and bottom 5%.
Passing the test doesn’t just indicate fairness – it helps reduce state spending on schools. The state has to give school districts a certain amount of money each year, but if the state passes the disparity test, the federal government lets the state put 90% of Alaska districts’ federal impact aid toward that amount.
That’s a good thing for districts that aren’t eligible for federal impact aid – it means they have a chance to get some of that money. That’s because, instead of going directly to just the districts eligible for it, federal impact aid goes into a pot of money distributed to all districts in the state.
That distribution follows Alaska’s school funding formula. The formula gives more money to districts if they have students with intensive special needs, offer vocational and technical training or meet other variables that might make it more expensive to run schools.
Alaska Senate Education Committee member Sen. Jesse Kiehl, D-Juneau, said the intent is to help districts across the state meet the unique needs of their students rather than simply disbursing the federal money to districts with federal lands.
“The formula money that the Legislature puts into education is distributed in a formula that aims at statewide fairness,” Kiehl said. Without the formula, he said, “The impact aid money is going to go to districts just based on federal presence in those districts, not based on what it costs to educate kids there. Not based on how tough it is to build a kid’s future there.”
The state has fought to keep the state compliant with the disparity test in the past. Alaska initially failed the disparity test in fiscal year 2022, when the federal government included state transportation money in its calculation of districts’ revenue. DEED successfully appealed, and since then, the federal government hasn’t included transportation in the disparity test because needs vary so widely across the state.
Juneau school district leaders say if the state is excluding transportation money from its disparity test, districts should be able to exclude it from their local funding cap.
“There is no reason for disparate treatment of locally funded pupil transportation versus state funded transportation in federal law because the source of funding does not change the geographical isolation basis for the exemption,” Sorensen and board clerk Will Muldoon wrote.
In a letter sent to all districts in July, Weed said that if districts continued to use funding outside the local cap, the state would reduce its funding in order to pass the disparity test.
“If it is determined that local funds continue to be applied to special revenue funds to circumvent the local cap and are not refunded appropriately, then state aid will be reduced to maintain compliance with the federal equalization,” she wrote.
A smaller check
Keeping money within the formula helps ensure that it’s distributed fairly. But passing the disparity test also “means the state writes a smaller check,” Kiehl said.
In fiscal year 2022, that check was $73 million smaller.
The loss to affected districts varies. In the Anchorage School District, for example, the state deducted more than $5 million in federal impact aid from its funding contribution. It deducted $7 million from its Fairbanks North Star Borough School District contribution and $10 million from the Lower Yukon School District.
In other districts, like the Matanuska-Susitna Borough and Juneau, the state doesn’t deduct any impact aid.
“I have not seen a session go by in 25 years where there isn’t a training session on the education funding formula, and the education funding formula walkthrough always includes this step about deducting 90% of impact aid,” Kiehl said. “Legislators with significant federal presence in their districts say, ‘Wait, you do what?’ And legislators without major federal infrastructure in their district go, ‘Mm-hmm, what’s the next step?’”
The fiscal year 2024 disparity test is based on audits from 2022. That year, Alaska had a disparity of 24.13%. That means Alaska can count federal impact aid as state aid this year. Weed didn’t respond to an inquiry about whether she expected Alaska to fail the 2025 and 2026 disparity tests based on the budgets districts submitted last year and this year.
According to the U.S. Department of Education, Alaska is the only state that counts federal impact aid as state funding. In 2021, the governor of New Mexico signed legislation to end the practice there, freeing up more than $60 million in federal money for eligible districts. A separate, annual allocation of $67 million was meant to ensure that no districts in the state would face financial harm from the change.
“Money designed to offset the impact of federal property in a district should go in full to that district without adversely affecting its state funding,” Gov. Michelle Lujan Grisham said in a statement when she signed the bill into law.
Kiehl said the risk of failing the disparity test could have been avoided if Gov. Dunleavy hadn’t vetoed half of the school funding increase approved by the Legislature. Kiehl said all of the districts would have gotten the funding boosts they needed – not just the ones that get more money from their city governments.
“The old saying is, ‘A rising tide floats all boats,’” he said. “But that veto leaves the kids who are in a dinghy to start with bailing as fast as they can, and they might get swamped by this thing.”
This story has been updated with deductible impact aid data from fiscal year 2022.