Final
Overview of School Finance

SCHOOL FINANCE SYSTEM

Votes:
Action Taken:
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09:21 AM -- Overview of School Finance

John Augenblick, Augenblick, Palaich, and Associates, Inc., a task force member, began his presentation on school finance by providing information about his professional background and his experience in evaluating the equity and adequacy of school finance systems in many states. His PowerPoint presentation was distributed as a hand-out (Attachment B). Mr. Augenblick indicated that he has worked both with plaintiffs and defendants in school finance litigation. He also was involved in the work done developing recommendations for the Public School Finance Act of 1994 in Colorado.


09:26 AM

Mr. Augenblick said he wanted to emphasize that other states are looking at many of the same issues as Colorado. He described his thoughts about what school finance is and said that in his experience, questions are philosophical, technical, or political. He said that in most states, the greatest attention is given to the political or technical issues, and that less may be given to the philosophical issues involved in school finance. He described a particular law passed in Missouri in the 1970s regarding geographic cost differences as an illustration of the political factors involved in school finance. His discussion of the history of school finance began with points regarding the organization of grammar schools in the early days of the country. He indicated that some school districts across the country may be fiscally dependent or they may be independent, with their own taxing authority. Starting with Massachusetts in 1852, states began requiring free, universal education. He reminded the committee that the U.S. Constitution does not mention education. Responsibility for educating students has rested with the states, which have given specific responsibilities to school districts.


9:36 AM

In contrast to the over 100,000 school districts in existence in 1900, today there are about 14,000 school districts. According to Mr. Augenblick, states began to recognize around 1900 that there was a wide variation in the spending and wealth in their communities. As departments of education were organized, states started to set standards for schools and states started to provide funding in the form of flat grants. States began to move to different ways of funding, using a foundation formula, which is still used by states today. This is very different than a flat grant. Then, there began to be decisions that funding needed to be equalized.


09:40 AM

Mr. Augenblick noted that in the 1960s, taxpayers and parents began suing over equity of their state systems of school finance. The federal government began providing money for special needs, and states began to modify their systems to address the fact that some school districts may have special circumstances, such as special needs or low-income students. In the 1970s, states began dealing with tax and spending limitations, beginning in California. There was a feeling that there needed to be some control over property taxes, and the California situation spread. Now, most states have some type of tax or spending limitations that affect school finance.


09:45 AM

In the modern era, Kentucky was the first state to look at standards-based reform in response to a school finance lawsuit. Other states began implementing similar reforms. Standards-based reform changed the role of the state and set expectations for student performance and accountability. The "No Child Left Behind Act" in 2001 strengthened this movement. States were saying that they wanted to equalize, but that they had expectations and would be holding school districts accountable. Now, lawsuits are being filed on the basis of adequacy: Is there enough funding to adequately fund the expectations and mandates set forth by the state and federal government?



09:49 AM

Mr. Augenblick said that in the first cases in the 1960s, school districts were saying that they didn't have the capacity to raise the money to serve special needs students. Originally, lawsuits were filed on the basis of federal constitutional provisions. By the 1970s, plaintiffs started developing new theories concerning violations based in state constitutional provisions for education. Discussions of the variations seen in school district funding could be seen as violations of provisions such as Colorado's "thorough and uniform" language. Policymakers could not decide whether this litigation meant that the same amount needed to be spent on every child or whether property taxes could be used in school finance funding. Mr. Augenblick noted that states may have to be careful about how they use property taxes to fund schools. Mr. Augenblick noted that in the recent string of litigation, plaintiffs have prevailed in some cases, but in other cases, the states have won lawsuits. He said that currently, most school finance systems attempt to be sensitive to the needs of the school districts and the differing capacities of school districts.

09:55 AM

Litigation has moved from simple student equity to more complex taxpayer and student equity effort, and finally to the question of adequacy. Adequacy cases have been successful in challenging whether school districts have enough revenue to provide required "inputs" or to achieve expected outcomes. Mr. Augenblick responded to questions about litigation in other states, and whether courts have explicitly required extra funding. He responded that in most states, the courts have specified levels of funding that have to be provided. New Jersey is a state that illustrates examples of how litigation has evolved. And Kansas is a current example of where the courts have said that the state must provide a certain level of additional funding. Senator Tupa commented on what Colorado would face if the state were ordered to pay a specific, higher level of education funding as a "cure." Senator Tupa asked about states that have appealed court orders, and Senator Anderson responded that once a state supreme court has ruled on a school finance system, there is not another avenue for appeal.


10:04 AM

Mr. Augenblick responded to further questions about how adequacy cases are evolving. He said that states are trying to respond to issues of adequacy and in particular, are investigating the costs of serving students with special needs, such as special education or "at-risk" students. For example, how much extra does it cost to adequately educate these students? How much do states need to provide? States are not uniform in the ways they are reforming. States are also identifying other cost factors, such as district size, enrollment changes, or regional cost differences. States are asking how much these factors matter in funding and in meeting requirements for adequate services. Representative Pommer raised questions about the relationship between standards that have been passed and the adequacy litigation. He asked whether Mr. Augenblick thought courts would look at limitations regarding how much mandates can impact the cost to states.


10:12 AM

Mr. Augenblick said states have become interested in how one can measure a school district's fiscal capacity. He also noted that in measuring the wealth of individual school districts, some states include measures of income in their measures of fiscal capacity. Concern about funding charter schools, transportation costs, and capital construction expenditures are also critical issues in states. States are also thinking about how to identify "at-risk" students, specifically as it relates to measures of performance, socioeconomic background, and program eligibility. Other issues currently facing states include the costs of complying with the "No Child Left Behind Act," the costs of virtual schools, and the costs of providing before and after-school programs, which may be important in reaching standards. Additionally, some states are looking at the importance of supporting early childhood education, and several states are studying new revenue sources for school funding, such as gambling or sales taxes.

10:15 AM

Mr. Augenblick concluded his presentation with several final points, including the fact that Colorado is not alone in facing school funding issues and litigation. He said that there is a lot of work to do in terms of studying the issues that are being raised, and reminded the members that some guidance is available from other states. He opined that Colorado should take some time to evaluate where we are and what is and what is not working. He said that it may make sense to progress from the philosophical stage to the technical issues, and later to the political context.


10:17 AM

Senator Tupa shared that when he moved to Colorado from Texas, he had heard that Colorado was progressive in regard to its school finance system. He asked whether only small changes to Colorado's system might be needed, or whether Colorado needs to be looking more comprehensively, relative to what is happening in other states. Mr. Augenblick said that in 1994, policymakers thought that Colorado was putting a pretty good system in place, but that tax and spending limitations and standards-based reform are changing the context in which Colorado's school finance system operates. Problems with the system may exist now, that really did not exist in 1994. Representative King asked how other states are looking at at-risk students. Mr. Augenblick said that Ohio, Maryland, and Wyoming, in particular, have looked at those issues. In Ohio and Wyoming, he said that much has been based on analysis the court has required, though Maryland studied the issue on its own initiative. The relative cost of serving these students, states are finding, runs between 50-100 percent more than a student with no special needs. This is often due to the cost of extra programs, before and after school, the smaller class sizes required, and materials that cost additional money.

10:23 AM

The committee took a recess.


10:42 AM

The committee came back to order.


10:43 AM

Deb Godshall, Assistant Director for Research, Legislative Council Staff, introduced herself and said that she had provided technical assistance in the development of Colorado's 1988 and 1994 school finance acts. Her PowerPoint presentation was distributed as a hand-out (Attachment C). Ms. Godshall noted that she would provide background on the evolution of school finance in Colorado and began her presentation by discussing the importance of school finance.

As noted in her presentation, basic facts of importance include: school finance consumes 41 percent of state taxes and about 31 percent of property taxes statewide; state funding accounts for 72 percent of money received by districts, on average; and last year, the school finance act totaled $4.43 billion in state and local funds. Ms. Godshall reviewed the three school finance acts in the modern, or post-1970 era, and said that each act was part of an evolutionary process in response to changing factors at the time. Over time, more data has become available to analyze factors impacting school funding. The first act in 1973, was a bridge of fiscal equity issues. There were property tax issues raised at the time, including a ballot measure that would have severely restricted the property tax revenue available for schools. An interim committee conducted a two-year study of state and local finance. The resulting act included an equalization formula, guaranteed the revenue-raising capability of a mill, increased funding for lower spending districts at a higher rate, and capped increases in per pupil funding without voter approval. She noted that the 1973 act endured for a relatively long period of time and was upheld by the courts in 1982.


10:51 AM

By 1988, another lawsuit, the Hafer lawsuit, had been filed and an interim committee was established to respond and study the viability of the 1973 Act. The 1988 Act was passed, with the provisions that categorized districts for funding and that treated similar districts the same, regardless of property wealth. The Act was based on classroom units, and a uniform mill levy was introduced. One of the issues that arose was how entitlement funding was calculated.

10:55 AM

The 1988 Act was utilized for the shortest period of time. Questions were raised regarding the validity of assigning school districts to the different categories. A school district could go through a process to change categories, and bills were drafted to help school districts move categories, Ms. Godshall said. There was pressure on state aid during this time due to enrollment increases, with increases in aid going primarily to fund enrollment, rather than to increase per pupil funding. Ms. Godshall stated that another factor during this time was redistricting and reapportionment. The state was buying databases, and data about the "setting categories" became be more available. The legislature passed a bill asking the Legislative Council Staff to look at the setting categories using census data. The study found that the setting categories could not be validated. Subsequently, a new interim committee was created to look at school finance.

11:00 AM

Ms. Godshall reviewed the interim committee recommendations made in 1994 and how they shaped today's law. The premise of the act is that all school districts start with the same base per pupil funding amount, but that then there would be recognition of cost differentials and differences in economies of scale. There was broader recognition, Ms. Godshall said, of costs associated with at-risk pupils. There also was a focus on costs that cannot be controlled by school districts. She reviewed the foundation, starting with base funding, set by the General Assembly each year. This is the number that Amendment 23 regulates. It is currently $4,718 per pupil, and accounts for 77 percent of the money distributed through the school finance act. The biggest adjustment made to the base is the cost of living factor. It is competitive compensation and accommodates community costs. This factor uses a consistent market basket of goods and services. The cost of living adjustment currently ranges from 0.9 percent to 64 percent and recognizes differences in fixed costs. It accounts for 15 percent of the money distributed through the act. It is not necessarily meant to look at how the cost of living changes annually, but rather how schools districts rank relative to each other. It has changed over time and is meant to address the salary component of school district expenditures, so it is only applied to a portion of the base.


11:06 AM

Ms. Godshall continued her discussion and responded to questions from Representative King about the fluctuations in funding the cost-of-living factor. She said that the issue probably concerns changes in methodology in calculating the factor. In recent years, legislative changes have resulted in less funding devoted to the cost-of-living factor. Ms. Godshall indicated that it also has been changed to make it more logical. Representative Pommer asked further questions about having the factor based on the "lowest" district. Ms. Godshall referred to a map indicating how the factor impacts rural and urban school districts, with urban and wealthy districts having the highest factor.


11:12 AM

The size factor is another component of the current act. She said that this factor looks at fixed costs and provoked concern from school districts in the mid-enrollment range. Small districts got increasing amounts of money, as did some of the largest school districts. This "J curve," as it was known, no longer exists. The current adjustment ranges from almost 3 percent to 136 percent. It accounts for 3.6 percent of funding under the school finance act. The next adjustment discussed was the at-risk factor, which attempts to measure a student's potential to perform poorly or to drop out of school. Census data was the basis for developing an at-risk index including measures of children living in poverty, education attainment of adults, and proficiency in English. There was no consistent data available on achievement. It was decided that children who qualify for free lunch would be used as a proxy. This factor provides increased funding based on concentrations of at-risk students. Denver receives an additional bump in funding. Small school districts are not eligible to receive concentration funding.


11:20 AM

Ms. Godshall discussed the special provisions for minimum funding and on-line pupils. The manner in which Colorado pupils are counted was also discussed. Pupils are counted on October 1 within the budget year. The pupil count raises funding issues for declining enrollment districts, and school districts can use four-year averaging in counting pupils. Statewide averages, she said, will always be driven by where enrollment exists: the I-25 corridor. Colorado does not have a long history of directing how school districts spend money; however, earmarking provisions exist for instructional supplies, capital reserve and risk management funds, at-risk funding, and preschool funding.


11:25 AM

There are provisions specifying how Colorado school districts can raise additional money. Voter approval of mill levy overrides is required, and the amount is limited by state statute. Ms. Godshall then provided several wrap-up facts:

11:27 AM

Ms. Godshall responded to questions regarding bonded debt and state restrictions on debt limits. There are some school districts where debt limits severely limit the ability of school districts to respond to capital needs. For operating purposes, school districts use mill levy overrides, and more specifically, may request a 20 percent override. Representative Pommer and Representative King asked questions about the impact of assessed values in school districts and the variations across school districts.
Ms. Godshall was asked about the 20 percent bonded debt limit and provisions in the Taxpayer's Bill of Rights (TABOR). She indicated that over time it has increased from 5 to 20 percent. She said that the debt limit of 6 percent of actual value recognizes the impact of declining rates of total residential assessed values due to the Gallagher Amendment.