1. (c) 2008 The McGraw Hill Companies 1 School Finance Structures: Formula Options School Finance: A Policy Perspective, 4e Chapter 8

2. (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.Guaranteed Tax Base (GTB) 4.Combination 5.Full-state funding

3. (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

4. (c) 2008 The McGraw Hill Companies 4 Fiscal Federalism multiple levels of govmt finance Advantages: –(1) fiscal capacity equalization;(only state can do this- but little control of how locals spend) –(2) equitable (and adequate) service distribution; –(3) more economically efficient provision of the governmental service – education; (Consolidation and Regionalization) and (4) decentralized decision making authority Intergovernmental Grant Theory (one of two ways the state can influence local behavior- the other is law and regs)

5. (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

6. (c) 2008 The McGraw Hill Companies 6 Intergovernmental Grants Two types: –(1) General or Block Grants (unrestricted) General revenue –(2) Categorical Aid (restricted or targeted) IDEA, Title I Article 31

7. (c) 2008 The McGraw Hill Companies 7 Unrestricted General Aid School Finance Equalization Grants –Increase a districts 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

8. (c) 2008 The McGraw Hill Companies 8 Matching General Grants pp 269-270 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

9. (c) 2008 The McGraw Hill Companies 9 Categorical Grants pp 270-271 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

10. (c) 2008 The McGraw Hill Companies 10 Rules and Regulations of Categorical Grants Maintenance of effort (MOE) 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 (Finance and Program Accountability) - 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

11. (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 students with special needs

12. (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 (state money comes from sources other than prop. tax)

13. (c) 2008 The McGraw Hill Companies 13 State School Finance Structures Allow Local Fiscal Decision Making –Local districts can (and do) spend at different levels –Encourages efficiencies in local school operations –Helps keep state and local costs within reasonable limits (other factors: competition and peer pressure) Typically are designed to increase aid to enough districts to ensure passage of the program (RI debate spring 2010 typical in this regard)

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

15. (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

16. (c) 2008 The McGraw Hill Companies 16 Flat Grant pp 276-282 Value easy to calculate and money in 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 –Not used as a major school finance structure as it was historically Grant characteristics and impacts –minimum spending up to flat grant level Impact on equity: –modest unless really large grant

17. (c) 2008 The McGraw Hill Companies 17 Foundation Program pp 283- 293 Value relatively easy to understand and under local control How it works: –similar to flat grant but jointly funded by state and local –Designed to ensure an education program to meet minimum standards –policy parameters: foundation expenditure and (required local tax effort) RLE –the higher the foundation expenditure, the higher the cost and the better the equity; –the higher the RLE, the lower the state costs –Many states use a variation of this concept

18. (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 –Establishes a state-local relationship (the DOE become more than a fiscal pass through agency) Impact on equity –the higher the foundation expenditure level, the better all equity statistics, but the higher the foundation level, the higher the costs

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

20. (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

21. (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 (politically tough to sell) –PVPP = FEPP/RTR = $2,000/.02= $100,000 Total Revenue = Local revenue FEPP = RTR * PVPP

22. (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

23. (c) 2008 The McGraw Hill Companies 23 Strengths of the Foundation Plan Focuses on the bottom half, 3/4s, etc.(where student need is typically the greatest) 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

24. (c) 2008 The McGraw Hill Companies 24 The Guaranteed Tax Base Program pp 293- 303 Originated early 70s in response to education finance litigation Various names – Guaranteed Tax Base (GTB), Guaranteed Yield, Percentage Equalizing, Resource Equalizing, etc. Value local control, allows for spending differences, access to a tax base How it works: –provides equal tax base, up to GTB (addresses the unequal local tax base issue)

25. (c) 2008 The McGraw Hill Companies 25 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 (e.g. Prop. 2 ½ Mass. S 3050 RI) –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

26. (c) 2008 The McGraw Hill Companies 26 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 Old equity problem: low wealth, low spending with high tax rates, versus high wealth, high spending with low tax rates New equity problem: low wealth, average spending with lower tax rates, versus high wealth, high spending with higher tax rates

27. (c) 2008 The McGraw Hill Companies 27 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) Retains local decision making on spending

28. (c) 2008 The McGraw Hill Companies 28 Guaranteed Tax Base State guarantees a certain tax base Districts can choose the tax rate Total $ = DTR * GTB –DTR = District Tax Rate

29. (c) 2008 The McGraw Hill Companies 29 Guaranteed Tax Base

30. (c) 2008 The McGraw Hill Companies 30 GTB Calculations GTB = $100,000/pupil

31. (c) 2008 The McGraw Hill Companies 31 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

32. (c) 2008 The McGraw Hill Companies 32 Combined Foundation and GTB Programs pp. 303-310 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

33. (c) 2008 The McGraw Hill Companies 33 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

34. (c) 2008 The McGraw Hill Companies 34 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

35. (c) 2008 The McGraw Hill Companies 35 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

36. (c) 2008 The McGraw Hill Companies 36 Full-State Funding and State- Determined Spending Programs pp 311 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)

37. (c) 2008 The McGraw Hill Companies 37 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