Vol. 28, No. 6
News & Notes
Advocating School Finance Equity and Adequacy in Texas
THE PROPERTY TAX ISSUE
It’s Time for Fair Treatment for Texas Children and Taxpayers During the Edgewood school finance litigation in the late 80’s and 90’s, the Texas Supreme Court said the issue of efficiency not only applied to equity in funding levels among districts, but also to the efficient utilization of the state’s resources. An example of the inefficiency in our current system can be found in Glen Rose ISD, which is in the top 2% of wealth. GRISD’s plenteous property wealth stems from the Comanche Peak power plant (a part of globallyowned Texas Utilities), and because our school finance systems have always favored propertywealthy districts, GRISD was able to adopt an M&O tax rate in 2008-09 of just $0.825. The state average for M&O rates that year was more than 25% higher at $1.05, and many low-funded districts were already at the $1.17 level (42% higher than the Glen Rose rate). Because of this inefficient entitlement, Texas Utilities received a very substantial property tax discount, amounting to over $7 million every year—one that isn’t available to locally-owned businesses in the vast majority of districts! But, it gets even worse than that… Just as the resources of Texas are not without limit, the funding that can (or will) be made available for funding public schools is limited as well. Failure to fairly access resources throughout Texas (inefficiency) causes the funding pool available for public education to be smaller by the amount of the inefficiency. This smaller funding pool results in either a lower level of Failure to fairly access resources funding across the board in other districts (to which GRISD throughout Texas causes the will be spared), or in higher property tax rates (to which funding pool available for GRISD will also be spared) as school boards try to fund a quality education. public education to be smaller. There you have it. Inefficiency in a few favored districts results in taxpayers in all other districts being faced with lower funding for their children or a higher property tax rate—and usually, it’s some degree of both. Tables 1 and 2 (page 2), based on our most recent estimates for 2009-10 illustrate the magnitude of this effect. In Table 1, we assigned a $1.06 M&O tax rate to each of the 300 districts with the highest funding levels, and a $1.17 tax rate to each of the 500 districts with the lowest funding levels. Table 2 shows the same effect even when 869 of the 1025 Texas districts are moved to the $1.17 tax rate group and the top 100 districts are left in the $1.06 tax rate group.
(continued on page 2)
It’s Time for Fair Treatment for Texas Children and Taxpayers (continued from FRONT)
Table 1*. 2009-10 School Year. Tax Low, Spend High versus Tax High, Spend Low Table 1*. 2009-10 School Year. Tax Low, Spend High versus Tax High, Spend Low Lowest Highest Number of Lowest Highest Group Number of Assigned Tax Funding Funding Number of Districts in Group Number of Assigned Tax Funding Funding Description Students** Rate Level in Each Level in Each Districts Group in Description Students** Rate Level in Each Level in Each Group Group Group Group Group HighestHighest300 1.4 M $1.06 14,730 Funded per 5,964 300 1.4 M $1.06 14,730 Funded per 5,964 Student** Student** LowestLowest500 2.5 M $1.17 5,149 5,964 Funded per 500 2.5 M $1.17 5,149 5,964 Funded per Student** Student**
Table 2*. 2009-10 School Year. Tax Low, Spend High versus Tax High, Spend Low Table 2*. 2009-10 School Year. Tax Low, Spend High versus Tax High, Spend Low Number of Lowest Highest Group Number of Assigned Tax Number of Lowest Highest Districts in Funding Level Funding Level Group Number of Assigned Tax Description Students** Rate Districts in Funding Level in Each Group Funding Level Group in Each Group Description Students** Rate Group in Each Group in Each Group Highest‐Funded 6,872 100 0.144 M $1.06 14,730 Highest‐Funded per Student** 6,872 100 0.144 M $1.06 14,730 per Student** Lowest‐Funded 869 5.4 M $1.17 5,149 6,870 Lowest‐Funded per Student** 869 5.4 M $1.17 5,149 6,870 *per Student** Data based on most recent estimates for 2009-10.
* Data based most recent estimates 2009-10. (WADA) **Students in on Weighted Average Dailyfor Attendance **Students in Weighted Average Daily Attendance (WADA)
In both examples, the highest-funded district in the $1.17 group has less to spend per student than the least-funded district in the $1.06 tax rate group. The inescapable conclusion is that when it comes to financing public education, the vast majority of property tax payers are carrying more than ...the vast majority of property tax payers their share, so that property tax payers in a small group of favored districts can carry less than are carrying more than their share so that theirs. property tax payers in a small group of favored districts can carry less than theirs. It is almost as though the state is saying to this huge majority of regular Texans across the state, “We have made it virtually impossible for your children to have the same educational opportunities as children in higher-funded districts—even when you are paying at the highest possible tax rates—and we aren’t interested in fixing it.” u
Equity Center News & Notes
Taxpayers and Children in 458 Low- and Mid-wealth Districts Benefit from Shifting Pennies of I&S Tax Rates to their M&O Tax Rates Or, one-half of students in Texas public schools—typically those funded at the lowest levels in both M&O and I&S—will have access to better educational opportunities after an “I&S tax rate for M&O tax rate” switch— with absolutely no increase in total tax rate. Or, more likely, some of both. The Root of the Problem The $35 per ADA guaranteed level for facilities has not been increased for more than a decade1 in spite of substantial increases in the cost of constructing school facilities. In fact, the $35 guaranteed level, adjusted for inflation and increases in required building standards, is estimated to be worth less than $20 per ADA today.2 Significantly higher I&S tax rates are required of low- and mid-wealth districts in 2009-10 to construct facilities that are just like the ones they built in 1999-2000. And, the problem could only get worse because the $35 guaranteed level in the Existing Debt Allotment (EDA) applies only to the first 29¢ of an I&S tax rate. After that, there is no state assistance for the last 21¢ of the 50¢ allowed for I&S tax rates, unless the district is eligible for an Instructional Facilities Allotment (IFA). Beyond that, every district must fall back on their own district’s ability to raise funds locally through I&S taxes. But, even if every one of the 50 pennies of I&S tax rate were equalized up to $35 per ADA, a district could raise only $1,750 per ADA ($35 x 50). Property wealthy Andrews ISD can raise that same amount with a 13¢ I&S tax rate. The higher the I&S rate is forced up for low- and mid-wealth districts, the more difficult it is to get voter approval for an increase in M&O tax rate. The Response With the state being unresponsive to the deteriorating conditions, districts were forced to find other ways to keep the total tax rates in their districts as low as possible, but not at the sacrifice of the public school children they serve. The answer they found was to reduce the low-funded pennies on the I&S side and increase the higher-funded pennies on the M&O side. For low-wealth districts, $35 per ADA translates to an average of about $23 per WADA3 . Since the lowest of the three M&O guaranteed levels is $31.95 per WADA (Tier 2, Level 3), a 10¢ I&S tax rate (for example) could be replaced with only 6.7¢ on the M&O side. The average total tax rate for the 458 districts that potentially could benefit from a tax shift is $1.26. The average tax rate for all true recapture districts is $1.13. If the greatest possible benefit were realized by all 458 districts, the $1.26 total rate would be reduced to $1.20—still 7¢ higher than the average for wealthy true recapture districts. Given the difference in yields between M&O and I&S guaranteed level, it would seem to be prudent for low- and mid-wealth districts to always use excess pennies of M&O tax rates to lower I&S tax rates, thereby increasing the resources for the children and/or reducing the burden on local taxpayers. Of course, the benefits that a lower tax rate at a higher yield would bring to these property tax payers and children come at the expense of the state. Some might initially believe that any additional cost to the state is a good-enough reason to not allow low- and mid wealth districts to opt for a lower the total tax rate. (continued on page 4) October 2009
Equity Center News & Notes
However, when one considers that 1. these districts are already paying higher total tax rates; 2. these districts are already funded at lower levels for both I&S and M&O; and 3. the state has refused to correct the underlying problems that have caused these districts to choose this course of action any conclusion other than shifting pennies of tax rate makes an already unfair facilities funding system even worse. u 1 In fact, it will be at least 12 years before the $35 can be increased—and, then only if the legislature takes action in the 2011 session. 2 The exact opposite is true for property-wealthy districts. There is no recapture of I&S collections, so as their yields per penny have grown with the wealth of their districts, the yields not only have risen faster than inflation, they are several times higher than the $35 guaranteed level. Bottom line…high wealth districts can do more than they could in the past, and do it at lower tax rates. 3 Students in Weighted Average Daily Attendance—WADA takes into consideration that some children are more costly to educate than others and are, therefore, “weighted.”
Mark your Calendar for the 10th Annual Equity Center School Finance and Legislative Workshop Sunday, January 24, 2010 Austin Convention Center, Ballrooms F & G, 11:30 am-5:00 pm Don’t let your EC Xpress emails expire... be sure to renew your 2009-10 membership!
CORRECTION: Gremlins Will Be Gremlins—By Paul Colbert In last month’s “Facilities” issue of News & Notes, a funny thing happened on the way to the printer. The last table (on page 9) in my article clearly shows the pattern of declining state support for facilities, both in total dollars and particularly in dollars per student. Somehow, between the final proof and the actual printing, three numbers disappeared from the table. The only possible explanation is that gremlins chewed the ink off the page. Below is the full version of the chart, which has also been updated on the website:
As you can see, last year’s state assistance for IFA and EDA was about 10% less than the $750 million it averaged in the first few years and per student aid is nearly 20% lower. Just to maintain the original perstudent funding would require an increase of $150 million in state support, with another $160 million needed to merely make up for the impact of 3% inflation. Of course, inflation in construction costs has actually been far greater. The Supreme Court previously cited inequity in facilities funding as a flaw that could make the system unconstitutional. We may rapidly be approaching that point again. u October 2009
Equity Center News & Notes
M&O Used for Debt Service? Request Made to AG for Clarification on Appropriate Use of M&O and I&S Tax Revenues Ray Bonilla is a partner in the Austin law firm of Ray, Wood & Bonilla. Mr. Bonilla’s practice is focused in the areas of state and local taxation, school finance, election law and ethics. He represents school districts and other clients before various state agencies and in related litigation, and has extensive experience in administrative hearings as well as judicial appeals of state agency decisions. Prior to joining the firm in 1998, Mr. Bonilla served as general counsel of the Texas Comptroller’s Office. He is an honors graduate from both the University of Texas at Austin (B.B.A. in Accounting) and the University of Texas School of Law.
As everyone in the school district community knows, the target revenue system perpetuated by HB 3646 has created a situation where many school districts are faced with incredibly tight budgets this school year. The outlook for upcoming years is even less favorable in many cases. Numerous districts were forced to use available fund balance to avoid making cuts in important programs and services. Ray Bonilla
In this environment, there has been tremendous pressure on districts to look for creative ways to expand funds available for operations, and there has been a great deal of talk about “tax swaps” and the appropriate use of M&O and I&S tax revenues. In obvious response, on August 17, 2009, Commissioner of Education Robert Scott requested an opinion of the Attorney General on three important issues. The questions presented to the Attorney General are: 1. May current year M&O tax collections be used to pay debt service on school district bonds? 2. May school districts pay debt service on bonds from unrestricted fund balance? 3. May school districts pay debt service from Tier 1 funds received from the State? In our role as outside counsel to the Equity Center, we have submitted a letter brief to the Attorney General encouraging him to answer all three questions in the affirmative. The Equity Center recognizes the financial pressures on its member districts, and believes that the flexibility afforded by a positive AG opinion has the potential to provide at least some relief to many school districts.
Numerous districts were forced to use We emphasize in our letter brief the opinion of the Beaumont Court of Appeals in the 1939 case of Madeley v. Trustees of available fund balance to avoid making Conroe Indep. Sch. Dist. In that case, the court concluded that cuts in important programs and services. surplus maintenance funds could be used to pay for capital expenditures. The relevant statutes have not changed in a material way. We contend that the operative question, then, is not whether maintenance taxes are current but whether they are needed for the support and operation of the schools. If not, they are surplus and can be used for debt service. As for the use of unrestricted fund balance to pay debt service, we believe that such funds may be used for any constitutionally permissible purpose. That certainly includes payment of debt service on bonds issued by the district. Similarly, a review of the relevant statutes, as well as the legislative and administrative history relating to the permissible uses of Tier 1 funding, makes it clear that Tier 1 funds can be used to pay debt service costs. We have detailed that history for the Attorney General, and are optimistic that he will reach the same conclusion. If you have any questions about Commissioner Scott’s request for an opinion of the Attorney General, please do not hesitate to contact me, Buck Wood or Doug Ray. u October 2009
Equity Center News & Notes
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Equity Center News & Notes