School Finance Boot Camp

1. School Finance Boot Camp Margaret Buckton, IASB Assoc. Exec. Director, Public Policy Larry Sigel, IASB School Finance Director

2. Welcome!!! • Introductions • Housekeeping – breaks/restrooms, etc. • What do you expect/what are the burning questions you need to have answered before you leave? • Ground rules • No “dumb” questions • Please interrupt!

3. Packet Contents

4. Agenda • Basic school finance overview • Property tax basics • Topics in school finance: • Counts (who, where, when) • Allowable growth • On-time funding • Budget guarantee • Special education • Instructional support levy • Spending authority

5. Agenda… continued • Topics in school finance continued: • Solvency ratio • Facility and other related levies • Categorical Funds • Funding professional development • Summary/wrap-up/reflection • Evaluation

6. School Finance Basics

7. School Finance - Background • Dillon’s rule: • School districts only have those powers expressly authorized by the Code of Iowa • Home rule: • Cities and counties can do anything not expressly prohibited

8. School Finance - Background • The “Bright” Line in School Finance • Educational program expenditures are funded and equalized by the state foundation formula. • Facility expenditures are not under the finance formula and may not be used for educational program expenditures (and vice versa).

9. School Finance - Background • The school foundation formula relies on two sources of revenue • State General Fund appropriations • Locally raised property taxes

10. School Aid - Basics • Purpose of the foundation formula: • Code of Iowa, 257.31: • “…equalize educational opportunity, to provide good education for all children of Iowa, to provide property tax relief, decrease the percentage of school costs paid from property taxes, and to provide reasonable control of school costs.”

11. School Aid - Basics • Foundation formula - ceiling vs. floor • The foundation formula results in a maximum expenditure per pupil and therefore a maximum amount a district can raise and spend (note: not every district has the same ceiling) • Other states’ school aid formulas have created a minimum spending per pupil • This has led to lawsuits nationwide • Iowa’s Constitution does not guarantee educational equity

12. Operation of Foundation Formula • Three components • Uniform Levy - Property tax levy of $5.40 per thousand of taxable valuation • State Foundation Percentage - Amount the state pays in excess of $5.40 - varies by district (87.5% of cost per pupil) • Additional Levy - Property tax levy which funds the difference between the Combined District Cost and the sum of the Uniform Levy and the State Foundation Percentage

13. Operation of Foundation Formula

14. Operation of Foundation Formula • Two factors affecting district Regular Program budgets: • 1. Enrollment - increases or decreases in enrollment affect district budgets • 2. Combined district cost changes (Allowable Growth) • Changes in growth in valuations - uniform levy rate ($5.40) or foundation percentage have no effect on Regular Program

15. School Aid - Basics • Basic Calculations - District Costs • Regular Program District Cost - budget enrollment times district cost per pupil. 608.4 students x $5,546 = $3,374,186 • Combined District Cost - sum of Regular Program plus special education, ELL, media services. • What happens if less is spent? Carries forward as unspent budget authority. Can be used in future (one-time).

16. Spending Authority • Schools must keep two sets of books: • Normal “Fund Balance” set of books (think audit). • Spending Authority set of books • What controls school district spending – cash or spending authority? • Both are important, but spending authority is vital.

17. Which scenario is best for Iowa school districts: • Legislature sets 4 percent allowable growth 18 months in advance and due to low state revenues, an across-the-board cut reduces state aid, or • Legislature sets 2 percent allowable growth 18 months in advance and promises to increase it mid-year should state revenues exceed expectations, or • Legislature waits to set allowable growth until revenues are known - 6 months before the start of the fiscal year.

18. Any questions before we transition into Iowa’s property tax system???

19. Understanding Property Taxes • Handout – Chapter of New School Finance Manual “Property Taxes” • Taxing authorities • Taxing districts • Basic equation • Rate x Value = Taxes Paid • Tax rates • Expressed in dollars per thousand

20. Property Valuation: Assessed value Classes of property Residential Agricultural Commercial/Industrial Gas and Electric Railroad Market value Productivity value Equalization Taxable value Rollbacks Credits Understanding Property Taxes

21. Understanding Property Taxes • Figuring your property taxes • Assessed value • Times: Residential Rollback Percent • Equals: Taxable Value • Less: Credits • Equals:Net Taxable Value • Net Taxable Value x Tax Rate/1,000 = property taxes levied. • Example - $100,000 home ($100,000 x .44545) - $4,850 = $39,695 $39,695 x $13.4120/1,000 = $532.39 property tax levied

22. Exercise 1 • Figuring your property taxes

23. Understanding Property Taxes • Property valuation characteristic of school districts (why we care): • “Property Rich” • “Property Poor” • How is it calculated? • Total Property Valuation / Enrollment • Interaction: • High value = lower property tax rate • Low value = higher property tax rate • A map, perhaps?

26. Understanding Property Taxes • Tax Increment Financing • Municipalities define an economic development need – could be business, residential, or city property • TIF “freezes” a property tax base for length of the TIF (all recent TIFs sunset) • Taxes applied to all growth (increment) in the area pay for economic development improvements or provide revenue stream to municipalities

27. Understanding Property Taxes • Tax Increment Financing School Impact • Costs the state $36 million this year to pay for loss of taxes generated by $5.40 levy (“looks” like increased school funding) • Shifts taxes to other property tax payers in the district since TIF taxes on the increment go to the city (management, cash reserve, instructional support and additional levies) • Loss of revenue to districts with “capped” levies (PERL levy or levies capped by either board promise or politics) • Debt levy is exempt and PPEL levy may be exempt

28. Property Taxes: what can you do? • Follow legislation and tell your district’s story. • Lobby against eroding the property tax base. • Lobby for school district participation and accountability in the TIF process. • Explain school district limits on authority (the state made you do it). • Point out the difference between property tax relief and real school spending increases within the funding formula.

29. Questions about taxes before we go into the detailed topics in Iowa school finance???

30. Detailed Topics in School Finance

31. Counts/Enrollment • Why important? • Each enrollment category has associated revenue • Determines total spending authority • Terminology • Regular program • Weighted enrollment

32. Counts/Enrollment • Headcount – October 1 • Basic v. budget enrollment • Always use prior year enrollment for setting budget • Special education weightings • Levels • Weightings • Supplementary weightings • English Language Learners ELL • At-risk • Pre-school • Senior Year Plus

33. School Finance - Weightings • Why Weight? • Some populations have higher costs than others. Two choices: pay more per student or count students at value greater than 1 • Special education has three weightings: .72, 1.21, 2.74 depending on severity • These are in addition to the 1.0 weight

34. Special Education • Revenue determined by weightings • Iowa’s system is unique • If you spend less than the weightings generate have to send back (>10%) • What happens if spend more? • Creates a “deficit” • Does not cause long term spending from regular education • Deficits may be recouped from property taxes

35. Special Education • Are weightings sufficient? • No, special ed deficits growing statewide • Number of kids increasing • How solve • Adjusting weightings = more state $’s • Adjust annually = less “sticker shock”

36. Counts/Enrollment • Weighted enrollment: • + Budget enrollment • + Supplementary weighting – ELL • + Supplementary weighting – At-risk • + Supplementary weighting – PK, etc • + Special ed weighting • + 0.72 weight • + 1.21 weight • + 2.74 weight

37. Counts/Enrollment • Doing the math • Facts: • October 1 (2), 2006 headcount: 672.6 • Special Education • 6 Level I • 9 Level II • 4 Level III • Supplementary weighting – 12.82 • What is my weighted enrollment?

38. Counts/Enrollment

39. Enrollment: the Punchline • In preceding example, even though serving about 672 children, the funding formula generated almost 712 “children” for the funding formula. • Why important? Remember the credit card analogy? • Our “limit” is being multiplied by 712 and not 672. That’s 40 additional students. • Weighting of students provides additional dollars to cover their unique needs.

40. Allowable Growth • What is it? • Amount per pupil spending may increase • Percent increase => $ increase • Generates spending authority • Tells us how much our credit card limit can go up by • What isn’t it? • Doesn’t differentiate funding sources • Doesn’t guarantee budget increase

41. Allowable Growth • Current year state cost per pupil $5,546 • Allowable growth rate for FY 2010 4.0% • FY 2010 cost per pupil?

42. Allowable Growth • Basic Calculations - Allowable Growth • Last year’s minimum District Cost Per Pupil (e.g., $5,546) • Allowable Growth Rate = 4.0% • This year’s district cost per pupil growth = $5,546 x .04 = $221.84 (rounds to $222) • $ 5,546 + $222 = $5,768 • If District Cost Per Pupil is higher than minimum, only get the fixed dollar - not 4.0%. For example, $5,602+ $222 = $5,824 • Not $ 5,602 x 4% = $5,826

43. Allowable Growth • Basic Calculations (cont.) • Differing District Costs Per Pupil • Slightly over 50% of districts have a cost per pupil above the minimum, although the deviation is less than 4.5%. • Percentage differences will be reduced over time.

44. Allowable Growth • When is 4% allowable growth not 4%? • Common perception is all districts receive 4% increase in budgets. • FY 2004: 2% allowable growth resulted in $32.4 M new money (1.4%) of which $27.5 M was due to the budget guarantee. • FY 2005: 2% allowable growth resulted in $39.2 M of new money (1.7%), of which $31.1 M was due to the budget guarantee. • FY 2006: 4% allowable growth resulted in $71.7 M of new money (3.0%), of which $18.8 M was due to the budget guarantee. • FY 2007: 4% allowable growth resulted in $88.3 M of new money (3.7%), of which $18.8 M was due to the budget guarantee.

45. Exercise 2 • Allowable Growth

46. On-time Funding • Basic Calculations - On Time Funding • Principle - Districts with increasing enrollment have a way of capturing growth. Due to a year delay in enrollment count in the formula - districts with increasing enrollment have shortfalls • Calculation:

47. On-time Funding • Exercise 3

48. Allowable Growth • Basic Calculations - Budget Guarantee • Principle: Districts receive what they received in the prior year for the Regular Program Budget regardless of enrollment changes. • Base Calculation:

49. Budget Guarantee Phase-out • Legislature phasing out the “100%” Budget Guarantee beginning in FY 2005 and completely phased out by FY 2014. • Created two alternate calculations: • “Scale Down” calculation • 101% calculation • Not a choice, automatically get greatest of the two calculations.

50. Districts Receive: • If a district is eligible for some form of Budget Guarantee in FY 2005 or thereafter: • Greater of scale down v. 101% option