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March 2010

EQUITY CENTER

Vol. 29, No. 2

News & Notes Standing Up For Texas Children

District Weights and Adjustments in Tier 1

Basic Allotment: The Buck Starts Here

Texas public school funding begins with the Basic Allotment (BA). This dollar amount is set by the legislature. In theory, it represents the minimum per-student cost of a basic education. In reality, it is a negotiated amount primarily determined by the amount of funds deemed available during the preceding legislative session. The BA for the 2009-10 and 2010-11 school years is $4,765 for districts whose M&O tax rates were compressed to $1.00.

The BA for a district whose M&O tax rate was compressed to less than $1.00 is proportionately reduced. (For example, a district with a $0.90

compressed tax rate will have a basic allotment that is 90% of $4,765.)

The BA is adjusted first by a Cost of Education Index (CEI) assigned to each district by the state. The CEI is designed to increase the BA to account for differences in salaries districts must pay due to variations in market costs. (School finance consultant and former State Representative Paul Colbert’s article with detailed CEI information is on Page 2.)

This issue of News and Notes begins a two-part series dedicated to an exploration of the various weights, formulas, and adjustments that determine each district’s Tier 1 formula funding. We intend for the contents to be presented in a manner that is simple and concise. It is not meant to be an exhaustive treatise on the topic, but to make sense to all Texans willing to take the time to read it. This month we focus on adjustments that reflect districtbased costs. Next month, we will look at the student-based weights and formulas that make up the remainder of Tier 1 funding.

The resulting dollar amount after the CEI is applied is called the Adjusted Basic Allotment (ABA). The ABA is further adjusted to account for the higher costs associated with small and mid-size districts. (Bill Grusendorf,

Basic Allotment (BA)

Apply the Cost of Education Index (CEI)

Adjusted Basic Allotment (ABA)

Apply the Small Schools Formula or Midsize District Adjustment, if applicable

Executive Director of the Texas Association of Rural Schools (TARS), provides insight into these diseconomy-of-scale adjustments in a Page 4 article.)

After the CEI and Small/Midsize adjustments are made, each district will have its own Adjusted Allotment (AA). Although the AA is determined for each district individually, districts with similar characteristics will end up with similar, and sometimes the same, AAs. Once established, the AA is the dollar amount used in the various Tier 1 student-based formulas. Student-based weights, formulas, and adjustments will be explored in our April edition. u

Adjusted Allotment (AA)


The Cost of Education Index By Paul Colbert

Paul Colbert is a public affairs and policy consultant in business, strategic planning and problem-solving to numerous clients. He was first elected to the Texas House of Representatives in November 1980 and represented District 132 in Houston until 1992. Representative Colbert served as Chairman for Budget and Oversight of the Public Education Committee and as a member of the Appropriations Committee for eight years. Paul Colbert

What is the Cost of Education Index (CEI), and why is it part of the school finance system?

Texas is a big and diverse state. El Paso is closer to Los Angeles than it is to Beaumont. Amarillo is as close to Des Moines, Iowa as it is to Brownsville. A majority of our people live in cities, but Texas also has the largest rural population of any state, and suburbs are the areas with the fastest growth. No ethnicity is a majority, and while Texas’ economy has fared better than most, over half of our school children are economically disadvantaged.

Economists tell us these variations will cause goods and services to cost significantly different amounts in different market areas, and even within some markets. A system that does not adjust for these uncontrollable cost variations will penalize the students and taxpayers of poorer districts that must face higher costs. In the same way, the failure to adjust for the diseconomy of scale in smaller districts will hurt poorer small districts the most. The current CEI and how it works

The CEI (originally called the Price Differential Index or “PDI”) was created in 1984 “to reflect the geographic variation in known resource costs and costs of education due to factors beyond the control of the school district.” The index has been changed three times since it was first established. The current index was adopted in 1990 and was based on district data from 1989 and earlier. All subsequent attempts to update it have failed. The 1990 index only made adjustments for uncontrollable variations in professional salaries. Adjustments were not made for variations in other costs, such as utilities, insurance and the salaries for clerical and maintenance staff. As a result, the CEI is applied to only 71% of the Basic Allotment (BA), which was the percentage of total operating costs spent on professional salaries and benefits in 1989. The outcome of this calculation is the Adjusted Basic Allotment (ABA).

This is the Formula for the ABA: Adjusted Basic Allotment (ABA) = Basic Allotment (BA) x (((CEI - 1) x .71) + 1) The requirement to reflect only uncontrollable costs is very important. Because they have more revenue per student, many wealthy districts can and do pay higher salaries, even though the market may not require it. By paying higher salaries, these wealthy districts “buy” the better teachers away from their poorer neighbors. For this reason, CEI studies should use a statistical tool called “regression analysis” to identify all of the different factors that affect salary costs. If done properly, only factors beyond the control of districts would be selected for the index. Otherwise, the “haves” might be rewarded just for “having.” March 2010

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Equity Center News & Notes


The 1990 study identified 15 factors that significantly affected teacher salaries. Adjustments were made for six factors that were considered beyond the control of a district. The most significant of these was the average salary paid for beginning teachers in surrounding school districts, which accounted for as much as a 9% variation in average salary costs statewide. The average daily attendance (ADA) was the next most important factor, resulting in a 7% variation as district ADA increased, up to a maximum of 8,500. Because it is harder to attract teachers to high-poverty schools, a district’s percentage of low income students was found to cause a 5% variation in average salaries. Two district types were each determined to cause a 1% salary difference: rural or independent town. A district in a county of less than 40,000 population also resulted in a 1% variation. The following chart shows how the current CEI was calculated in 1990 for two examples: Red ISD, with the characteristics shown in red in the following table, and Blue ISD, with the characteristics shown in blue were both assigned a CEI of 1.08. (1 + .03 + .04 + .02 - .01 = 1.08 and 1 + .04 + .01 + .01 + .01 + .01 = 1.08 )

Because the CEI is multiplied by the BA, the value of 1.00 represents the value of the BA and each 0.01 that is added is equal to 1% of the BA. There are no partial values awarded – a district with 5,400 ADA gets 1% more money than a district with 5,399 ADA from that part of the CEI. Every district has at least one of these factors and the districts with the least market cost have a CEI of 2% above the basic cost, or 1.02. The districts with the highest uncontrollable costs have a CEI of 1.20, or 20% above the minimum. The index is applied to 71% of the BA. That impact is cut in half in determining weighted ADA for Tier 2 and Chapter 41 purposes. Why did the CEI only adjust for professional salaries? In 1990, salaries and benefits accounted for 85% of school district operating costs, with 71% spent on professional staff. The committee conducting the study felt there was not enough reliable data on the other costs to determine what variations were uncontrollable. They also felt that it didn’t matter much – a 10% variation in something that averaged only 4% of district budgets (e.g. – utilities) would result in only a miniscule change in index value. (continued on page 6) March 2010

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Equity Center News & Notes


Texas Small/Rural Schools and the Diseconomy of Scale By Bill Grusendorf

School finance in Texas was significantly changed in 1949 with the passage of the historically renowned Gilmer-Akin Laws (GAL). The legislation initiated a finance distribution system based on a teacher for every 25 students in average daily attendance (ADA). Various administration and support personnel were added based on the subsequent number of teachers in a given school system. The GAL also required local financial support based on a district’s ability to pay. The “ability to pay” was derived from a complicated formula called an “Economic Index,” based on several factors that did not rely on the district’s only source of income, i.e. the local property tax base.

By 1975, the number of school districts in Texas had been reduced from over 6,000 to approximately 1200, and then Governor Dolph Brisco instituted a Governor’s Office of Educational Research (GOER) under Dr. Richard Hooker, as it had become clear that after 25 years, GAL was not providing the support necessary for the changing needs of the public school system of Texas. (The first Edgewood lawsuit had, by then, worked its way through the judicial system and was in the United States Supreme Court. The Edgewood suit was about equity in school finance, but did not specifically address the diseconomy of scale in small districts.)

Still, this was a significant improvement for the school children of Texas, with the exception of small/rural districts, as the system did not address the “diseconomy of scale” that small schools experience. Hundreds of small Texas school districts did not have at least 25 ADA at each grade level, and some progressively larger districts did not have combinations of 50, 75, or 100 ADA for multiple classrooms at each grade level. Consequently, thousands of small/rural districts closed and/or were consolidated. This was not all bad at the time, since by 1950, Texas was becoming less rural and more urban due to a changing economy and a less labor-intensive approach to agriculture.

In 1975 the Legislature adopted many of the GOER recommendations, including a modest equity component and a diseconomy of scale adjustment in the form of additional teacher units for school districts with fewer than 1000 ADA. Unfortunately, many legislators at that time felt there were still numerous small districts that needed to be consolidated. They created a loweryielding formula for small districts with fewer than 300 square miles that was designed to essentially starve them into consolidation. This created a double standard with respect to diseconomy of scale adjustments in which districts over 300 square miles were considered “sparse” and therefore deserved state support, while

Bill Grusendorf spent 41 years in the public schools of Texas as teacher and administrator. He retired after 20 years as Superintendent of San Saba ISD and currently serves as the Executive Director of the Texas Association of Rural Schools (TARS). Bill was the first president of TARS when it came into existence in 1990. It was organized to help school districts, with less than 1600 students in an agricultural economy to enhance and protect their financial integrity. Bill attended public schools in Waco, Texas, and graduated from Arlington State College AA, 1952 (UT at Arlington now); Texas Christian University, BME 1954; The University of Texas at Austin, MM 1967; and UT Austin, Post Graduate and Superintendent’s Certification. He taught in the school districts of Azle, Sweetwater, Rockdale and Lampasas, all in Texas, before moving to San Saba, Texas, in 1974, to serve as Superintendent of Schools. Bill Grusendorf

He has been active in Texas school finance since 1975, having served as consultant to many members of the Texas Legislature. He was the rural representative to the Equity Coalition, co-chaired by the late Lieutenant Governor Bob Bullock and State Representative Stan Schlueter, which developed most of the current system of school finance established by House Bill 72 in 1984. Bill continues to be in demand as a speaker and consultant on the school finance system of Texas, and the unique features of that system, as they relate to the rural schools of Texas. March 2010

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Equity Center News & Notes


those under 300 square miles were deemed “small by choice,” and funded at a lower amount than the state recognized for diseconomy of scale costs. Those districts with fewer than 130 ADA and 30 miles from the nearest high school were guaranteed one teacher for each grade level taught, with similar guarantees for K-6 and K-8 districts.

small schools. Unfortunately, the 300 square mile penalty continues to place children in these assumed “small by choice” districts at a disadvantage with their peers. The factors in this two-tier system of adjustment continue to be 0.00025 for districts under 300 square miles and 0.00040 for those above that threshold. This 15 point difference is exponentially greater for districts the farther below the 1600 ADA threshold they fall. In other words, the percentage of adjustment loss is greater for a district of 400 ADA than one of 800 ADA. For Example:

There was one other provision during the 1977 through the 1983 legislative sessions that again almost destroyed the rural schools. The GOER statues eliminated the old The Numbers Behind the “300 Square Mile Penalty” Economic Index, and the districts’ ability to pay their (1600-400)*0.00025 = 0.30 vs. (1600-400)*0.0004 = 0.48, thus a 0.18 loss share of the program based solely on their property (1600-800)*0.00025 = 0.20 vs. (1600-800)*0.0004 = 0.32, thus a 0.12 loss tax base. This was as it should be; however, urban and suburban legislators felt that the constitutional Thus, a district of 400 ADA has a 0.06 greater loss for provision to tax agricultural and timber land on the being under 300 square miles than a district of 800 basis of productivity was being abused and that ADA that is under 300 square miles. “tax havens” were being perpetuated. This led to a provision that required a district’s share, i.e. the In 1995, the midsize school adjustment was phased local fund assignment (LFA), to be calculated on the in over a period of five years and thus the state has average of market value and productivity value. With recognized the diseconomy of scale to be currently the impact of land speculation, market values in rural at 5000 ADA and below. This creates a much Texas were exploding at this time and rural schools’ larger number of districts with an interest in this LFAs were artificially inflated. Once again, we were diseconomy. And, unknown to many, the state charter put in an untenable position. schools are also receiving the benefit of the small and midsize adjustment. Therefore, the number of allies supporting increasing diseconomy of scale funding This created a double standard in which is growing each year, particularly as a result of the districts over 300 square miles were increased requirements of the 4X4 curriculum. considered “sparse” and therefore deserved Finally, one of the main priorities of small/rural state support, while those under 300 square districts for the next legislative session, and into the miles were deemed “small by choice” future, is to eliminate the “300 square mile penalty.” and funded at a lower amount... This will cost the state several million dollars, but this In 1984 with the passage of HB 72, in a special session of the legislature, and with the leadership of then Comptroller Bob Bullock and House Ways and Means Chairman Stan Schlueter, the small school adjustment was increased for districts under 1600 ADA and the LFA was returned to productive value for agriculture and timberland. This gave rural/ small districts a “one time” double increase that has been the life-blood for the education of children in March 2010

change can be phased in over a reasonable period of time to avoid creating a one-time large outlay. Budget experts predict a $12 to $19 billion deficit for the 2012-13 biennium. If so, this necessary change, along with others, could be addressed but not implemented until the following biennium. Equally important, vigilance is required to protect the constitutional right to use productivity only as a means to determine the value of agricultural and timberland and to calculate a district’s wealth and therefore assign the LFA of the Foundation School Program (FSP). u

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Equity Center News & Notes


The Cost of Education Index (continued from page 3)

What’s wrong with the current CEI? Why should it change?

For starters, it’s over 20 years old. Districts that were once small are now large; some that were larger have now shrunk. Districts that were rural are now suburban. Districts that were middle-class are now majority low-income districts. The CEI does not reflect any of these changes, let alone any changes in the marketplace between communities. Second, the existing CEI was politically “tweaked” in several ways. Most notably, it was “shrunk to fit” the cost of the previous PDI, distorting its results. Third, there were many technical problems with the methodology. For example, a 1% change in a district’s Tier 1 cost is a lot of money per student – a district should have gotten partial amounts as their values moved between the cutoffs. By making arbitrary cutoffs for each 1% of index value, two nearly identical districts barely on either side of each of the cutoffs could receive significantly different CEI values. Because of the methodology problems, I testified against the current CEI’s adoption in 1990, as did the Equity Center, the Texas Association of Rural Schools and the Texas School Alliance. We all also testified that a CEI was necessary. Why hasn’t the CEI been changed in so long?

Of particular concern, these most recent studies failed to control for the impact of wealth, providing an edge to wealthier districts that the old index didn’t give.

The principal reason has been the repeated “it can’t cost more than the old index” guidelines. If it’s a zero-sum game, then districts that would get higher index values from the changes can only gain if other districts lose money. With so many districts already inequitably funded, any loss of funds would be catastrophic. The most recent studies suffered from the “shrink to fit” mandate and from even more serious problems in methodology. Of particular concern, these studies failed to control for the impact of wealth, providing an edge to wealthier districts that the old index didn’t give. What needs to be done?

It is important to create a new CEI. It’s embarrassing and unfair to be using an index that is so out of date. Just scrapping the CEI altogether isn’t the answer. Having no adjustment would likely prove even more unfair than the old CEI. However, it is critical that a new index be done right. A new CEI must not be a mechanism for rewarding wealthy districts for having more money by giving them even more. u

What I should tell my legislator to consider when making adjustments to the CEI? It shouldn’t be artificially adjusted to meet predetermined outcomes, including artificial cost limitations. Most important, controllable costs, particularly the ability of wealthy districts to pay high salaries, must be controlled for in developing a new index. An accurate CEI cannot merely reflect current spending. March 2010

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Important Rules For Any New CEI Study It must reflect all uncontrollable costs that can reasonably be quantified. It shouldn’t be artificially adjusted to meet predetermined outcomes, including artificial cost limitations. It must make sense. If a rational economic argument can’t be made for a factor, it may likely be a statistical quirk and should be excluded. Factors should be carefully constructed to make sure that the same phenomenon isn’t “paid for” more than once (controlling for co-linearity in variables). Factors that don’t have a big impact statewide but that have a large impact on certain types of districts, such as extreme isolation, should be included. Arbitrary cutoffs should not be included. It should be recognized that just paying enough to fill a position isn’t a sufficient measure. If a teacher is not certified to teach the subject, if the turnover rate is high or if the teacher is unable to generate quality learning, the salary has not “bought” enough. Most important, controllable costs, particularly the ability of wealthy districts to pay high salaries, must be controlled for in developing a new index. An accurate CEI cannot merely reflect current spending.

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Equity Center News & Notes


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March 2010

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Equity Center News & Notes

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