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HELENA — At the beginning of the current school year, public schools in Baker, with its 400 kids, had $43.5 million in reserve funds, more than any other school district in the state.

This mountain of cash is courtesy of oil-and-gas production taxes, a portion of which go to school districts where the production occurs, to help deal with impacts from petroleum development.

About one-third of Montana's school districts, mostly in northern and Eastern Montana, receive this money. But only a handful, such as Baker, have reaped and continue to reap large amounts because of extensive, sustained production within their borders.

As schools elsewhere in the state face tight budgets, policymakers in search of funds have cast their eyes toward the oil-and-gas money. A school funding plan that the Legislature will vote on this week would take about $11 million a year of these funds and distribute it statewide.

The proposal before the Legislature also would restrict how schools can spend the oil and gas money, begin to limit the amount of reserves that school districts can hold and restrict the reserve accounts' usage.

"I understand fully the importance of having reserves, especially in a growing school population," says Sen. Ryan Zinke, R-Whitefish and the sponsor of the school funding bill. "(Oil-and-gas) schools want to get ahead of the curve rather than behind the curve, and I applaud them for that. But there's no reason to be $43 million ahead of the curve."

School districts with oil-and-gas production now get to keep their entire share of production taxes. They budget for a certain amount and any excess can be routed into various reserve funds, including the "flex fund," a catch-all reserve with few restrictions.

A half-dozen oil and gas districts have more than $1 million in their flex funds, and Baker has the most of any district in the state, about $10.2 million.

Don Schillinger, superintendent of schools in Baker, said the district plans to use its reserves for a variety of building projects to upgrade schools that are anywhere from 43 to 57 years old. An $8.5 million remodeling and expansion of the school for grades four, five and six and a gymnasium is scheduled to begin this spring, he said.

"We've tried to get some projects that we are going to need in the long run in our school system," he said.

Baker, a farming community 13 miles from the North Dakota border, has had declining enrollment, and benefits primarily for older oil-and-gas wells that are still producing.

In Sidney, about 100 miles to north, oil production is booming, and the school and community are dealing with an influx of more families and children, tight housing and a tight job market, making it hard for Sidney and surrounding schools to recruit and retain employees.

Dan Farr, the superintendent of schools in Sidney, said he understands that some of the oil-and-gas revenues that flow now to his district and other area schools will be siphoned off by the state to help pay for public schools statewide.

"From the onset, we recognized that oil and gas was going to be part of the funding," he said. "That has remained the case. ... Is it workable? It is. Does it allow us to continue work on our impacts? Yes. Is everybody excited about it? No."

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The proposal before the Legislature says school districts can keep oil and gas revenue up to 130 percent of their annual general fund budget. Any amount beyond that goes to the state. Only eight school districts would be affected by the cap this year.

The plan also says that as of July 1, a district's flex fund can be no more than 100 percent of the district's general fund budget. Any excess must be transferred to other funds for specific uses.

And as for other reserve funds, districts won't be able to hold a cumulative total of more than 300 percent of their general fund budget, but will have until 2016 to get under that ceiling. Building and debt funds will be exempt, because those usually hold money approved by voters for building projects.

"These (limits) are designed to address the criticism, to make sure that money is not on the sidelines, but is working for kids," said Lance Melton, executive director of the Montana School Boards Association.

Although the 2011 Legislature appears poised to pass a school funding plan that tackles the issue of oil and gas revenue, Farr said the proposal is still just a short-term solution.

He and Schillinger say they'd like to see a wider discussion in the future, considering all natural-resource funds that go to various districts, so that the money is distributed fairly and local communities impacted by mining or drilling still have some funds to help deal with those boom-and-bust impacts.

"Let's have all the money placed into pools -- metal mines, tourism, property assessments that different towns get," Schillinger said. "Have them all thrown into the pot and come up with a funding plan."

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