(c) 2008 The McGraw ‑ Hill Companies 1 School Finance Structures: Formula Options School Finance: A Policy Perspective, 4e Chapter 9

(c) 2008 The McGraw ‑ Hill Companies 2 Allocating Funds to Districts 1.Introduction 2.Intergovernmental Grant Theory 3.Five types of School Finance Formulas 1.Flat Grant 2.Foundation 3.GTB 4.Combination 5.Full-state funding

(c) 2008 The McGraw ‑ Hill Companies 3 Overall School Finance Issues Equal spending or equal access to tax base Zero aid district, or equalization up to what tax base level State and local costs, and how different formula designs can vary them Equity impacts, including adequacy Winners and losers

(c) 2008 The McGraw ‑ Hill Companies 4 Fiscal Federalism Advantages: –(1) fiscal capacity equalization; –(2) equitable service distribution; –(3) more economically efficient provision of the governmental service – education; and (4) decentralized decision making authority Intergovernmental Grant Theory

(c) 2008 The McGraw ‑ Hill Companies 5 Intergovernmental Grants Two ways the central government (state or federal) can influence the decisions of school districts in order to capitalize on the advantages of fiscal federalism: 1)Mandate changes in the way local services are provided, or… 2)Use intergovernmental grants to influence local behavior

(c) 2008 The McGraw ‑ Hill Companies 6 Intergovernmental Grants Two types: –(1) General or Block Grants –(2) Categorical Aid

(c) 2008 The McGraw ‑ Hill Companies 7 Unrestricted General Aid School Finance Equalization Grants –Increase a district’s revenue but do not place restrictions –Least effective in getting districts to change behavior in line with expectations –Allow districts to use funds for local needs and priorities –Districts typically use a portion of unrestricted aid to reduce taxes and a portion to increase overall spending

(c) 2008 The McGraw ‑ Hill Companies 8 Matching General Grants Link the level of state general-aid assistance to the level of effort made by the local school district, as well as to its fiscal capacity Most common approach is the Guaranteed Tax Base (GTB) –Often also called percentage equalizing, guaranteed yield, or district power equalizing The goal is to equalize the revenue-raising ability of each school district, at least up to some point. Analyzed in terms of how they change the relative tax prices districts pay for educational services

(c) 2008 The McGraw ‑ Hill Companies 9 Categorical Grants Provided to school districts for a specific purpose Often come with strict application, use, and reporting requirements Used to ensure that school districts provide services deemed important by the state or federal governments –E.g., to meet the needs of a specified population such as Title I or specific district function such as transportation Districts receive based on a socio-demographic characteristic (e.g., incidence of poverty) or the number of children meeting a specific criterion (e.g, learning disabilities) or some specific need, such as transporting students to and from school

(c) 2008 The McGraw ‑ Hill Companies 10 Rules and Regulations of Categorical Grants Maintenance of effort provision - requires districts to prove that spending on the supported program from its own funds does not decline as a result of receipt of the grant Audits and evaluations - to ensure that recipient districts establish programs designed to meet the purpose or goals of the grant Many also have specific reporting requirements that help the government monitor use of the funds

(c) 2008 The McGraw ‑ Hill Companies 11 The Impact of Categorical Grants Research shows categorical grants usually stimulate educational expenditures by at least the level of the grant and sometimes more Present a different trade-off between equity and efficiency than do general grants More centralized Designed to provide assistance on the basis of some characteristic; categorical grants generally are not designed to equalize fiscal capacity, but they can be with, for example, extra weights for special needs students

(c) 2008 The McGraw ‑ Hill Companies 12 State School Finance Structures Compensate for varying local property tax capacity Reduce disparities in state and local revenues per pupil –Federal funding not included Often provide property tax relief

(c) 2008 The McGraw ‑ Hill Companies 13 State School Finance Structures Allow Local Fiscal Decision Making –Local districts can spend at different levels –Encourages efficiencies in local school operations –Helps keep state and local costs within reasonable limits Typically are designed to increase aid to enough districts to ensure passage of the program

(c) 2008 The McGraw ‑ Hill Companies 14 State Aid Models Flat Grants Foundation Programs Guaranteed Tax Base Combination Programs Full State Funding

(c) 2008 The McGraw ‑ Hill Companies 15 State Aid Models: Basic Equations Total Rev = Local Rev + State Aid State Aid = Total Rev - Local Rev Does not include federal funds If property tax is the sole revenue source then Total Rev = Local Rev Assuming the only local tax is the property tax, Local Rev = TR x property wealth

(c) 2008 The McGraw ‑ Hill Companies 16 Flat Grant Value — the bottom and local control How it works: –State gives a grant of the same amount per pupil to each district –policy parameters: just the level of the flat grant –the higher the flat grant, the higher the cost Grant characteristics and impacts –minimum spending up to flat grant level Impact on equity: –modest unless really large, raises the mean, so CV falls as flat grant rises

(c) 2008 The McGraw ‑ Hill Companies 17 Foundation Program Value — the bottom and local control How it works: –similar to flat grant but jointly funded by state and local –policy parameters: foundation expenditure and RLE –the higher the foundation expenditure, the higher the cost and the better the equity; the higher the RLE, the lower the state costs –zero aid district

(c) 2008 The McGraw ‑ Hill Companies 18 Foundation Program Grant characteristics and impacts –minimum spending up to some level –joint state and local funding eases fiscal burden –grant size is linked to local fiscal capacity Impact on equity –the higher the foundation expenditure level, the better all equity statistics, but the higher the foundation level, the higher the costs

(c) 2008 The McGraw ‑ Hill Companies 19 Foundation Program

(c) 2008 The McGraw ‑ Hill Companies 20 Foundation Program Example A State guarantees districts total revenues of $2,000 per pupil if they set a property tax rate of 2%. District A has $60,000 PVPP Local Rev = 2% x $60,000 = $1,200 State Aid = Total Rev - Local Rev = $2,000 - $1,200 = $800

(c) 2008 The McGraw ‑ Hill Companies 21 Foundation Program Example B District B has $100,000 PVPP Local Rev = 2% x $100,000 = $2,000 State Aid = Total Rev - Local Rev = $2,000 - $2,000 = $0 This is the Zero Aid District –PVPP = FEPP/RTR = $2,000/.02= $100,000 Total Revenue = Local revenue FEPP = RTR * PVPP

(c) 2008 The McGraw ‑ Hill Companies 22 Foundation Program Example C District C has $500,000 PVPP Local Rev = 2% x $500,000 = $10,000 State Aid = Total Rev - Local Rev = $2,000 - $10,000 = $-8,000 Recapture: state collects the extra $8,000 Usually no recapture: District keeps excess District can choose to set a lower tax rate –1% x 500,000 = $5,000

(c) 2008 The McGraw ‑ Hill Companies 23 Strengths of the Foundation Plan Focuses on the bottom — half, 3/4s, etc. Provides a minimum spending level State aid is linked to local wealth Can be tailored to differentially impact low and high wealth districts Most directly linked to the adequacy issue Helps fix the “new” school finance problem

(c) 2008 The McGraw ‑ Hill Companies 24 Foundation Program Simulation Ctrl – F : Takes you to Foundation Program Program parameters: –Foundation Level –Tax Rate (in Mills) Ctrl – Q : Makes calculations Ctrl – F : Look at results Experiment with the Foundation Program

(c) 2008 The McGraw ‑ Hill Companies 25 Foundation Program Variations In running the 20 district simulation, explore impacts of various foundations programs on the zero aid district, state/local costs, equity, winners and losers when you: –raise foundation expenditure level –raise foundation expenditure level by $100 increments –raise RLE, and at different foundation expenditure levels — who wins, who loses

(c) 2008 The McGraw ‑ Hill Companies 26 The Guaranteed Tax Base Program Various names – Guaranteed Tax Base (GTB), DPE, Guaranteed Yield, Percentage Equalizing, etc. Value — local control, allows for spending differences, access to a tax base How it works: –provides equal tax base, up to GTB –policy parameters: GTB and any cap

(c) 2008 The McGraw ‑ Hill Companies 27 Guaranteed Tax Base Grant characteristics: –fiscal capacity equalizing –jointly state and local funded, but higher cost as GTB rises unless tax rate caps for aid –aid linked to both local wealth and level of spending –local district decides on spending level –lowers “price” of education services, so is a stimulus to spending on education

(c) 2008 The McGraw ‑ Hill Companies 28 Guaranteed Tax Base Equity impacts: –enhances all equity statistics in state with the “traditional” school finance problem –exacerbates equity statistics in state with the “new” school finance problem

(c) 2008 The McGraw ‑ Hill Companies 29 Strengths and Weakness of the Guaranteed Tax Base Focuses on core school finance problem — unequal access to a tax base State aid linked to fiscal capacity (and level of spending) Can make a minimum expenditure if require minimum tax rate (do via foundation in simulation) Retains local decision making on spending

(c) 2008 The McGraw ‑ Hill Companies 30 Guaranteed Tax Base State guarantees a certain tax base Districts can choose the tax rate Total $ = DTR * GTB –DTR = District Tax Rate

(c) 2008 The McGraw ‑ Hill Companies 31 Guaranteed Tax Base

(c) 2008 The McGraw ‑ Hill Companies 32 GTB Calculations GTB = $100,000/pupil

(c) 2008 The McGraw ‑ Hill Companies 33 GTB Programs Strengths/Weaknesses Strengths –State grant increases linked to local property tax rate increases –Equalizes the tax base for all districts with property values at or below the GTB –Permits localities to set their own tax rates Weaknesses –Level of state aid out of control of state actors Can reduce this problem by capping the maximum tax rate –Often fail to reduce the link between spending and wealth Education inelastic for poor, elastic for wealthy –No minimum spending level

(c) 2008 The McGraw ‑ Hill Companies 34 GTB Programs Simulation –Ctrl – G : Takes you to GTB –Adjustments: GTB –Ctrl – Q : Makes calculations –Ctrl – G : Look at results –Experiment with the GTB

(c) 2008 The McGraw ‑ Hill Companies 35 Impact of Various GTB Programs What happens are zero aid, state/local costs, equity, winners and losers when you: –Raise or lower GTB –Raise or lower GTB with tax caps for aid, which limits GTB aid up to certain spending levels

(c) 2008 The McGraw ‑ Hill Companies 36 Combined Foundation and GTB Programs Value: combines concern for the bottom half and local choice How it works: two-tiered, usually a foundation with a GTB on top Grant characteristics and impacts: ensures a minimum base spending level and equal education spending per pupil for equal tax rates above the foundation required tax rate Impact on equity: the GTB tier Examples: Missouri, Texas and Kentucky

(c) 2008 The McGraw ‑ Hill Companies 37 Combination Program For the foundation portion: SFAPP = FRPP - (RTR * PVPP) SFAPP = state foundation aid per pupil FRPP = foundation expenditure revenue per pupil RTR = the local required tax rate PVPP = local property value per pupil

(c) 2008 The McGraw ‑ Hill Companies 38 Combination Program For the GTB portion: SGTBAPP = (DTR - RTR) * (GTB - PVPP) SGTBAPP = state GTB aid per pupil DTR = local district property tax rate RTR = required tax rate for the foundation program (GTB aid is provided only for tax rates above the foundation required tax rate) GTB = the tax rate guaranteed by the state, in thousand dollars of property value per pupil PVPP = the local district property value per pupil

(c) 2008 The McGraw ‑ Hill Companies 39 Combination Programs Strengths/Weaknesses Strengths –State grant increases linked to local property tax rate increases –Equalizes the tax base for all districts with property values at or below the GTB –Permits localities to set their own tax rates –Sets a minimum level of education quality Weaknesses –Allow different spending levels –Often fail to reduce the link between spending and wealth Education inelastic for poor, elastic for wealthy

(c) 2008 The McGraw ‑ Hill Companies 40 Combination Programs Simulation Ctrl – K : Takes you to Combination Program Adjustments: –Foundation Level –RTR –GTB –GTB Cap Ctrl – Q : Makes calculations Ctrl – K : Look at results Experiment with the Combination Program

(c) 2008 The McGraw ‑ Hill Companies 41 Full-State Funding and State- Determined Spending Programs Value: horizontal equity How it works: sets an equal expenditure per-pupil level for all districts Grant Characteristics and Impacts: can take several forms: –The state sets the expenditure level and districts cannot spend any more or less than this amount (Hawaii) –The state requires a uniform statewide property tax rate for schools and sets state aid as the difference between what that would raise and the total revenues needed to provide the equal spending level (New Mexico & Vermont)

(c) 2008 The McGraw ‑ Hill Companies 42 Full-State Funding and State- Determined Spending Programs - Revenue Limit Program - the state sets a base spending per-pupil level for each district and finances it with a combination of state and local property tax revenues (California). -The state has a combination foundation and GTB program, but the GTB program has an absolute maximum tax-rate cap. Since most districts are at the cap and the GTB is higher than the wealth of most districts, comes close to a full-state funding program (Florida). Impact on Equity: these programs achieve perfect or almost perfect equity