School Finance Structures: Formula Options

(c) 2008 The McGraw‑Hill Companies 1

School Finance Structures:Formula Options

School Finance: A Policy Perspective, 4e

Chapter 9


Allocating Funds to Districts

1. Introduction2. Intergovernmental Grant Theory3. Five types of School Finance Formulas

1. Flat Grant2. Foundation3. GTB4. Combination5. Full-state funding


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


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


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


Intergovernmental Grants

• Two types: – (1) General or Block Grants– (2) Categorical Aid


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


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


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


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


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


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 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


State Aid Models

• Flat Grants

• Foundation Programs

• Guaranteed Tax Base

• Combination Programs

• Full State Funding


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


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


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


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


Foundation Program

FEPP = (RTR*PVPP) + SAPP

SAPP = FEPP - (RTR*PVPP) FEPP = Foundation Expenditure Per Pupil RTR = Required Tax Rate PVPP = Property Value Per Pupil SAPP = State Aid Per Pupil


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


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


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


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


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


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


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


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


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


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


Guaranteed Tax Base

• State guarantees a certain tax base

• Districts can choose the tax rate

• Total $ = DTR * GTB

– DTR = District Tax Rate


Guaranteed Tax Base

Total Revenue = local revenue + state aid Local Revenue = DTR * PVPP State Revenue = Total Revenue – Local Revenue = (DTR*GTB) – (DTR*PVPP ) = DTR * (GTB-PVPP) Total Revenue = (DTR * PVPP) + [DTR * (GTB-PVPP)]


GTB CalculationsGTB = $100,000/pupil

Dist.

Tax Rate

AV per Pupil

Revenue Guaranteed

Per Pupil

Local Revenue Per Pupil

State Aid

Per Pupil A 0.01 1,000 1,000 10 990 B 0.01 50,000 1,000 500 500 C 0.01 100,000 1,000 1,000 0 D 0.01 200,000 1,000 2,000 0 A 0.02 1,000 2,000 20 1,980 B 0.02 50,000 2,000 1,000 1,000 C 0.02 100,000 2,000 2,000 0 D 0.02 200,000 2,000 4,000 0


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


GTB Programs Simulation

– Ctrl – G : Takes you to GTB

– Adjustments: • GTB

– Ctrl – Q : Makes calculations

– Ctrl – G : Look at results

– Experiment with the GTB


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


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


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


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


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


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


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)


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

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School Finance Structures: Formula Options

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