Part 1 of a 3-part series

Citing a lack of money, increasing numbers of Wisconsin schools are pulling out of a state program credited with boosting the scores of vulnerable poor and minority students.

The number of schools in the Student Achievement Guarantee in Education (SAGE) program has fallen 17 percent in six years, and many of the 480 remaining SAGE schools are struggling to retain the program because state payments have failed to keep pace with rising costs, a Wisconsin State Journal review shows.

The SAGE pullouts across the state come even as poverty rates are rising among the elementary students whom experts say can benefit most from the program's small classes. The cuts are also among the first indications that class size is being sacrificed to balance budgets, the State Journal found in an analysis of the effects of the state's school funding system.

Educators across the state are engaging in their annual ritual of paring programs to conform to state financial limits - part of a chaotic system that this year stands its greatest chance of reform in more than a decade.

Compared to past reductions in music programs and other elective classes and activities, the reductions in SAGE pose a more direct threat to thousands of students who need their teachers' attention - the kind of help that can only come in a small class.

SAGE classrooms allot 15 students per teacher in kindergarten through third grade. When the program is dropped, class sizes often rise about 50 percent, to 22 or 23 students.

Research on SAGE's impact is far from definitive, but a 2004 study of students' performance in reading, language arts and mathematics test scores in the first 50 SAGE schools found the program "had a significant cumulative effect from the beginning of first grade through third grade in all three content areas."

The study found evidence that gains were higher among low-income students and African-American students. Yet researchers were puzzled by indications that gains in the earliest years of school weren't sustained in fourth grade and called for more study.

A growing amount of research also suggests that class- size reductions alone may not be effective unless combined with improved curriculum and training of teachers.

"I believe very deeply in small classes," said Democratic Gov. Jim Doyle, who complained that the Republican- controlled Legislature defeated his attempt two years ago to significantly expand SAGE funding. Partisan control is now split after November's elections. "There's no doubt what the positive effects of SAGE have been."

Madison's options

Beginning this month, the Madison School Board is reluctantly considering reductions in SAGE and other programs that keep classes sizes small.

Madison educators, whose district has received national attention for raising the achievement levels of many low-income and minority students, say they must cut an estimated $10.5 million from current services to balance next year's budget.

They're studying options that could trim as much as $2.4 million by scaling back class- size reductions, which currently benefit 95 percent of the district's low-income students but might reach less than 70 percent in some plans.

"This is the year when things really get tough," Madison School Board President Johnny Winston Jr. said.

The problem spans the state.

"We may drop SAGE in the future," administrators at the tiny Niagara School District, 225 miles northeast of Madison, wrote in a recent report to officials in Wisconsin's education agency, the Department of Public Instruction.

"In order to keep this school open, we will look to larger classes with less teachers than we have now."

Janesville school officials already have scaled back their commitment to SAGE, keeping just two of five schools in the program.

"We do not receive enough dollars from the state to hire extra teaching staff required," Janesville's Jefferson Elementary School officials warned state officials before dropping out of the program this year.

The Baraboo School District, 40 miles northwest of Madison, pulled a school out of SAGE three years ago.

"Our community couldn't afford SAGE," said District Administrator Lance Alwin, who since has been driven by rising local poverty rates to seek readmittance to the program - something not possible under current state practices.

The Phillips School District, about 225 miles northwest of Madison, withdrew its Catawba Elementary from SAGE, although nearly 6 in 10 students live in low-income households.

"It's one of the last things they cut," said Tony Evers, deputy state superintendent of public instruction.

Fragile population

During the dropoff in schools' SAGE participation, the concentration of students considered low-income has risen statewide from about 1 in 4 to 1 in 3. That fragile population is defined by eligibility for free and reduced-cost lunches.

In the current school year, 1 in 6 low-income Wisconsin students attends a SAGE school. The number of low-income students attending SAGE schools is a record 48,527, owing to the growing poverty rates in schools. But overall enrollment at SAGE schools is 92,365, down 8 percent from its peak.

"Unfortunately, we'll see the results of that in student achievement," predicted Julie Underwood, dean of the UW- Madison School of Education, who praised SAGE for helping raise performance in Wisconsin. "The years the kids didn't receive that type of treatment, their achievement scores are going to go down."

The reductions in SAGE dramatize the painful mismatches that characterize Wisconsin's system of paying for schools:

A measure known as revenue caps, or revenue limits, determines how much money school districts can raise from a combination of state aids and local property taxes. Revenue caps have grown at an average rate of about 2.4 percent per year. The starting point was based on what each district happened to spend per pupil in the 1993-94 school year, and the measure was originally intended as a short-term attempt to hold down runaway property taxes - not as a pillar of the state's school-finance system.

A separate measure, known as the QEO or qualified economic offer, requires districts to award teachers an annual increase of 3.8 percent in combined salaries and benefits to avoid arbitration. That increase, in turn, sets the pace for district employees' overall increases in salaries and benefits. That compensation accounts for about 82 percent of education spending, up from 71 percent in 1993.

Districts have little control over increases in other expenses such as gasoline and utilities, yet the state's funding methods fail to fully compensate for the added costs.

Districts' revenue limits are based upon a three-year average of their enrollment levels, and more than 60 percent of Wisconsin's 425 districts are experiencing enrollment declines.

Revenues tend to fall faster than districts can cut expenses. For example, when an enrollment decline of 25 students is spread across all grade levels, it's difficult for district officials to eliminate a single teacher to make up for the lost revenue, and such expenses as bus routes and utilities aren't reduced.

The gap between districts' revenue and their expenses has widened each year since 1994. The gap between the growth in the revenue cap and QEO now stands at 18.8 percentage points, a State Journal analysis shows.

Never-ending cycle

The revenue caps and QEO are transforming the operations of public schools, pushing school officials and the public into a never-ending cycle of cuts, compromises and referendums.

Most districts reduced the number of academic courses, laid off school support staff and reduced programs for students at the highest risk of failure, according to a survey of 278 superintendents during the 2004-05 school year by groups representing administrators and teachers.

Public schools, the most expensive single program in Wisconsin, account for about 40 cents of every dollar spent out of the state's general fund.

In the old days, school boards wanting more money for school operations could simply raise taxes, and risk retribution from voters if they went too far.

Revenue caps stripped school boards of that power, requiring them instead to seek the permission of voters in ballot questions.

"We're literally governing by referendum," complained Nancy Hendrickson, superintendent of the Pecatonica Area School District in Blanchardville, 35 miles southwest of Madison.

Pecatonica voters approved referendums in 2000 and 2004 and likely will be asked in 2008 to support a third ballot measure.

Statewide, voters approved 428 referendums and rejected 471 since 2000, state Department of Public Instruction records show.

The budget shortfalls are intensified by two additional mismatches:

Government-mandated programs, such as special education and help for students with limited English proficiency, require school districts to provide certain services, but the funding matches just a fraction of the cost - about 30 percent in the case of special education students.

Funding for many state education programs, such as SAGE, has failed to keep up with inflation and growth in demand. SAGE schools receive $2,000 per year in state support for every child eligible for a free or reduced lunch. But the amount hasn't been increased since SAGE was established a decade ago and would need to be about $2,500 to account for inflation over that period.

Educators say that except in areas with very high levels of poverty, the $2,000 payments - which come on top of regular state aid - often don't cover the additional costs involved in creating small class sizes for all students in kindergarten through third grade. Teachers' pay is the largest expense, but sometimes schools have had to spend money to create additional classrooms, too.

The funding is scheduled to increase to $2,250 per student in the fall, and Doyle said his upcoming budget proposal will include that additional money.

"I would much rather have it at $2,500, and I hope we're going to find some further growth for SAGE," Doyle said.

DPI officials say they lack authority and money to add additional schools to SAGE. The agency has requested funding to allow about five schools to join the program in 2008. Doyle will include that funding in his budget plan.

A money-saving option favored by some educators and legislators would be to allow districts more flexibility to offer SAGE to fewer grade levels, or for just portions of the day. But others, including Doyle, oppose this, saying that watering down SAGE would reduce its effectiveness.

'The death spiral'

On the western edge of Dane County, Wisconsin Heights School District officials and residents worry about what's coming next.

The district, which serves Mazomanie and Black Earth, has lost a fifth of its students since 2001 - by far the biggest loss experienced by any Dane County district - and more declines are expected.

With six in 10 districts facing dwindling enrollments, many such as Wisconsin Heights also fear that it could hasten an exodus of families who use the state's open-enrollment law to obtain greater opportunities in nearby districts.

In turn, most of the state aid follows those students out of their home districts, leading to more cutbacks.

"We call it the death spiral," said Stan Johnson, president of the Wisconsin Education Association Council, the 96,000- member union of teachers and staff.

Public attention focused in 2005 on the rural northern Wisconsin Florence School District, which was on the verge of dissolution until voters approved a referendum to provide $4.75 million over five years.

"They saved themselves in Florence, but the Florence story can be seen all over the state," Johnson said.

Wisconsin Heights school officials are avoiding talk of dissolution or consolidation - for now.

But the district's future is in doubt as, for the first time, leaders ask voters to bail out the district's operating budget.

"The upcoming weeks are among the most critical weeks in the history of the Wisconsin Heights School District," District Administrator Larry Black last month wrote to residents.

The Wisconsin Heights School Board has scheduled a Feb. 20 referendum. Voters will be asked to allow the district to exceed state revenue limits by $1.4 million a year for four years to maintain existing programs and services.

If the measure fails, budget cuts will be implemented, district officials say. The cuts will mean larger classes and fewer class choices, decreased support for struggling students and fewer opportunities for others.

But a group of about 20 residents has begun meeting to oppose the referendum, saying it's too expensive and the district needs to improve its management practices to avert crises.

"There is no demonstrable plan to address this thing as the money is being extracted from the taxpayers at an exorbitant rate," said referendum opponent Norman Frakes, who served as the district's administrator from 1993 to 1997.

If approved, the referendum would minimize the need for substantial cuts for four years, but it would cost taxpayers an additional $177 to $224 per $100,000 of assessed property value on school property taxes for each of the next four years.

After that? The district's preliminary forecast for 2011-12 shows a $2.4 million deficit.

Squeezing Schools: A 3-part series

Part 1: Cuts threaten vulnerable students

Part 2: Should Wisconsin throw out its school finance system?

Part 3: Signs of change at the Capitol