Senate Finance Education Subcommittee

HB 64 Testimony

Dr. Howard Fleeter

Ohio Education Policy Institute

May 6, 2015

Good afternoon, Chairman Hite, Vice Chairman Sawyer and members of the Senate Finance Education Subcommittee. Thank you for the opportunity to speak to you today regarding House Bill (HB) 64. My name is Howard Fleeter and I am an economist and consultant for the Ohio Education Policy Institute (formerly ETPI).

2015 marks my 25th year researching school funding in Ohio. From my perspective, the current time frame is as challenging as any period I have seen in the past 25 years in terms of school funding. In the past four bienniums we have had four different school funding formulas. At the same time, property values — which are normally very stable — have changed in highly unusual ways, and in different directions in different types of school districts. Furthermore, in the four years from 2010 through 2013 state funding was not based on the typical parameters — district property wealth, number and type of students, and additional factors such as poverty and transportation needs — but according to a series of caps and guarantees that were linked to Fiscal Year 2011 (FY11) and in many cases, FY09 funding levels.

My testimony today will provide a brief review of previous funding formulas, an overview of the current FY14-15 funding formula, and summaries of the FY16-17 funding formulas proposed by both the Governor and the House of Representatives.

A. Brief Summary of Recent Ohio School Funding Formulas

Mid-1980s through FY09: The Foundation Formula and Chargeoff — While modifications to the parameters and the mechanics of the school funding formula typically occur every biennium, from the mid-1980s though FY09 Ohio’s school funding system was a Foundation Formula system with the following elements:

1)  Per Pupil Base Cost Amount (which ranged from $2,530 in 1990 to $5,732 in 2009)

2)  Local Share of Base Funding Determined by a Millage “Chargeoff” multiplied by each district’s total property valuation (the chargeoff millage was initially 20 mills and subsequently increased to 23 mills)

3)  Additional funding of “categorical” programs for additional costs relating to special education, career technical education, economically disadvantaged students, gifted and talented students, and transportation.

4)  In 2002 an additional funding element known as “Parity Aid” was added to provide additional state funding to school districts in inverse proportion to their local wealth.

FY10 and FY11: The EBM — For the FY10 and FY11 school years the Foundation Formula approach was replaced by Governor Strickland’s Evidence-Based Model (EBM) for school funding. The EBM provided funding for all of the components listed above but in a different manner. Rather than revolving around a per pupil base cost figure, the EBM was an input-based model driven by student enrollment, “organizational units” reflecting different grade levels, and staffing ratios. The local share was still determined by a “chargeoff” against district property valuation and the chargeoff millage was lowered from 23 mills to 22 mills. Parity Aid and Economically Disadvantaged Aid were replaced by the Education Challenge Factor.

While the EBM was in concept very different from the foundation formula, the dramatic decrease in state tax revenue caused by the 2009 recession meant that only about 20 districts each year actually received the funding determined by the EBM. The other 590+ districts were either on a guarantee or a cap linked to FY09 funding levels.

FY12 and FY13: the Bridge Formula — The EBM was replaced by the Bridge Formula in FY12 and FY13 after Governor Kasich was elected. Without sufficient time between the election and the presentation of the Executive Budget to develop a new school funding formula, the Bridge Formula was not a funding formula in the traditional sense. Instead of basing funding on district property wealth and student needs, districts received funding in FY12 and FY13 based on their amount of funding in FY11.

B. FY14 and FY15: Return to the Foundation Formula (SSI instead of Chargeoff)

Two years ago the current funding formula was implemented. The FY14 and FY15 funding formula largely resembles the foundation formula approach. The main features of the FY14-15 formula are as follows:

1)  The formula begins with core opportunity aid that establishes a base cost amount of $5,745 per pupil in FY14 and $5,800 per pupil in FY15.

2)  The FY14-15 funding formula includes the traditional categorical funding components (funding for special education, career technical education, economically disadvantaged pupils, Limited English Proficient (LEP) pupils, gifted and talented education programs, K-3 literacy, and transportation).

3)  The funding component previously referred to as Parity Aid is now known as “Targeted Assistance”. Tier 1 of targeted assistance is designed to provide additional funding to the 489 districts (lowest 80%) of districts as measured by property wealth and income per pupil (roughly $182,000 per pupil). Tier 2 of Targeted Assistance is designed to provide additional funding to districts with high concentrations of agricultural property.

4)  The current formula includes both a transitional aid guarantee and an annual “gain cap”. The guarantee assures that no districts receive less funding in FY14 and FY15 than they did in FY15. Current LSC estimates show 198 districts in the guarantee in FY15 at a cost of $195.3 million. The gain cap allowed for a maximum increase in state aid of 6.25 from FY13 to FY154 and 10.5% from FY14 to FY15.

5)  The major difference between the current FY14-15 funding formula and the foundation formula from FY09 and before is that the local share is no longer determined by a millage chargeoff against total district property valuation, but according to an index based on each district’s relative wealth as determined by property value per pupil and in some cases relative median income. The local share, now known as the State Share Index (SSI) varies from a low of 5% in the state’s highest wealth districts to a high of 90% in the state’s lowest wealth districts. While it is not obvious from its construction, the SSI effectively acts as a variable chargeoff, with the local share in most districts ranging from an amount equivalent to 18 to 23 mills of taxation.

Discussion of the State Share Index (SSI) - The SSI provides an alternative approach to determine each districts local and state share of funding by constructing an index based on each districts per pupil property wealth and some districts relative median income. However, the SSI formula is much more complicated than the chargeoff approach and the final step which takes each districts relative wealth per pupil and translates it into a state share percentage ranging from 5% to 90% is impossible to explain without the use of algebra and graphs. In this respect the SSI is a “black box” which lacks the transparency that a funding formula should ideally have.

In addition to the lack of transparency, the method by which income is included in the SSI computation is seriously flawed. An income adjustment was first used in Ohio’s school funding formula in the mid-1990s as means by which low income districts were provided additional funding by effectively adjusting their property valuation downward. The logic of this adjustment was that districts with lower income residents will find it more difficult to raise revenues locally than would districts with higher income residents. A logical extension of this argument would have been that districts with higher incomes would see their property valuation adjusted upward but such an adjusted was not made at that time.

The problem with the income adjustment in the SSI is that of the 186 districts that receive the income adjustment, 176 of those districts are districts with higher than average median incomes. In this regard the income adjustment works exactly opposite of how it worked back in the 1990s – instead of low income districts such as Youngstown, East Cleveland, Trimble Local and Southern Local benefiting from the SSI’s income adjustment, districts such as Orange, Beachwood, Upper Arlington and Indian Hills benefit. This is contrary to both fundamental economic principles and basic logic.

A final concern regarding the SSI is that because it is based on each districts relative statewide ranking on valuation per pupil, a district’s state share will be influenced not just by how its valuation changes over time compared to its previous valuations, but also by how it changes compared to all other districts in the state. This phenomenon makes the SSI both harder to forecast over time and potentially less stable as districts will be moved “up and down the ladder” of the valuation rankings instead of just compared to their own past valuation levels.

Table 1 below provides a summary of how the current FY15 funding formula distributes funding across Ohio’s 610 school districts according to ODE’s school district typology categories. The middle two columns of Table 1 show that Ohio’s rural and urban school districts all receive an average of over $5,000 per pupil in state aid, while small town districts receive and average of $3,850 per pupil an d poor small town districts receive an average of $4,599 per pupil. Ohio’s suburban districts, which tend to be the wealthiest in the state receive the least state aid per pupil.

Table 1: Comparison of FY15 Computed Formula Aid (Fully Funded, no Cap or Guarantee) with Actual FY15 Foundation Aid by Typology Group (LSC Data)

Typology Grouping / FY15 Computed Formula Aid / Formula Aid Per Pupil / FY15 Actual Foundation Aid / FY15 Actual Aid Per Pupil / Formula Aid – Actual Aid / Diff Per Pupil
1. Poor Rural Districts / $864,680,157 / $5,500 / $876,901,224 / $5,578 / -$12,221,066 / -$78
2. Rural Districts / $532,027,471 / $5,344 / $573,261,435 / $5,758 / -$41,233,964 / -$414
3. Small Towns / $640,793,497 / $3,786 / $651,566,965 / $3,850 / -$10,773,469 / -$64
4. Poor Small Towns / $965,355,497 / $4,960 / $895,108,348 / $4,599 / $70,247,149 / $361
5. Suburban Districts / $904,973,959 / $2,881 / $791,243,879 / $2,519 / $113,730,080 / $362
6. Wealthy Suburban / $542,185,895 / $2,275 / $447,778,985 / $1,879 / $94,406,910 / $396
7. Urban Districts / $1,342,790,879 / $5,781 / $1,195,380,486 / $5,147 / $147,410,392 / $635
8. Major Urban Districts / $1,603,793,861 / $5,942 / $1,578,845,049 / $5,850 / $24,948,812 / $92
Statewide Totals / $7,397,044,281 / $4,415 / $7,010,693,703 / $4,184 / $386,350,579 / $231

Table 1 also provides a comparison between the actual aid that districts are receiving (the middle two columns) and the state aid that they would receive if there were no transitional aid guarantee or gain caps employed (this is the “computed formula aid” shown in Columns 1 and 2 of the table). The rightmost columns of Table 1 show that Ohio’s rural and small town districts would on average get less state aid if the guarantee and gain cap were removed, while Ohio’s poor small town, suburban and urban districts would all get more state aid than they do currently. In essence, this comparison indicates that under Ohio’s current funding formula, Ohio’s rural school districts tend to be the ones on the guarantee while the urban and suburban districts tend to be the ones on the gain cap. This pattern creates concern as it is the rural districts in the state that are generally understood to lag behind other types of districts in terms of the educational opportunities provided to their students.

C. The FY16-17 Funding Formula Proposed in the Executive Budget

The FY16-17 funding formula proposed by Governor Kasich retains the basic structure of the current funding formula, including Core Opportunity Aid and the categorical components including Targeted Assistance, Special Education, Career Technical Education, Economically Disadvantaged Aid, K-3 Literacy Aid, Transportation, Gifted Funding and LEP Funding. While the funding formula’s primary components are left intact, the Executive proposal increases many of the parameters of these funding components:

i) The core opportunity aid base amount is increased from $5,800 per pupil in FY15 to $5,900 per pupil in FY16 and $6,000 per pupil in FY17.

ii) Special education weighted amounts are increased 2% annually from current FY15 levels.

iii) Career technical education weighted amounts are increased 4% annually from current FY15 levels.

iv) K-3 literacy funding amounts are increased 5% annually from current FY15 levels.

v) Transportation funding will be increased so that the transportation funding formula is fully funded (which it has not been for many years), and the current 60% minimum state share of transportation funding will be reduced to 50%. Supplemental funding for low-density, low mileage districts will be eliminated (the Administration claims that the combination of the first two changes make this component no longer necessary).

vi) Other funding components, including Targeted Assistance and Economically Disadvantaged Aid, are unchanged from FY15 levels.

vii) Under the Governor’s proposal, the gain cap would be 10% in both FY16 and FY17. The current (FY15) gain cap is 10.5%.

Apart from the changes in the finding formula parameters summarized above, the Governor’s school funding formula proposal contains the following major changes: