School Finance in Iowa

1. School Finance in Iowa Jackie Black, Education Finance Director Iowa Association of School Boards

2. 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.

3. School Finance - Background • The school foundation formula relies on two sources of revenue • State General Fund appropriations • Locally raised property taxes Before discussing the school foundation formula, it is important to have a basic understanding of property taxes.

4. School Finance - Background • Property Tax Background • Assessed vs. taxable valuations • “Rollbacks” • Tie between residential and agricultural property • Assessment growth limitation • Taxing Districts, Taxing Authorities • Tax Rate x Taxable Value = Taxes Levied • Lag between assessments and district budgets.

5. School Finance - Background • Property Tax Credits • Residential - Homestead and Military Service Credits reduce the taxable value by $4,850 and $1,850, respectively. • Elderly and Disabled tax credit based on percentage of income. • Agricultural - Family Farm and Ag Land Tax Credits - difference between regular program tax levy and $5.40 uniform levy.

6. School Finance - Background • Agricultural Property • Different than other classes of property • Taxed based on productivity value • Value in relationship to all other agricultural property in county • Roughly 30% of market value

7. School Finance - Background • Examples- Property tax on three different properties - a home, a business and a farm. All utilize the same levy rate. • Residential property - $1.34 levy on $100,000 home. (.485299-rollback x 100,000) - $4,850 x $1.34 / 1,000 = $58.53 • Commercial property $1.34 levy on $100,000 business. (1.00000-no rollback x 100,000) x $1.34 / $1,000 = $134.00 • Agricultural property $1.34 levy on $250,000 farm. (.690152-rollback x 250,000) x $1.34 / $1,000 = $231.20

8. School Aid - Basics • Purpose of 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.”

9. School Aid - Basics • The “Bright” Line in School Finance • Educational program expenditures are funded and equalized by the state foundation formula. • Facility expenditures are funded locally (with some state assistance) and are not under the finance formula.

10. School Aid - Basics • Foundation formula - ceiling v. 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 a number of lawsuits nationwide. • Iowa’s Constitution does not guarantee educational equity.

11. School Aid - Basics • Basic Principles: • The school aid formula is a child-based formula. • The formula provides funding on a per child basis. • The total amount of foundation formula revenue is the number of children times a cost per child.

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. What is the Purpose of the Foundation Percentage? • Determines how much the state is going to equalize local property tax rates. • If no state foundation percentage, tax rates for highest district would look like:

15. Purpose of Foundation Percentage • If foundation percentage set at 100 percent, the tax rate would look like:

16. Purpose of Foundation Percentage • Regardless of the state foundation percentage, total funding to the district is exactly the same (just who pays is changed).

17. 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.

18. School Aid - Basics • Basic Calculations - District Costs • Regular Program District Cost - budget enrollment times district cost per pupil. 608.4 students x $5,883 = $3,579,217 • 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)

19. School Aid - Basics • Basic Calculations - Allowable Growth Per Pupil • FY 11, last year’s State Cost Per Pupil (SCPP) = $5,883 • FY 12 Allowable Growth Rate = 0%, SCPP remained the same as FY 11, or $5,883 • FY 13 Allowable Growth Rate set at 2% • Example - FY 12 District Cost Per Pupil (DCPP) is same as SCPP, formula = .02 x $5,883 = $117.66, rounds to $118 • So, FY 12 $5,883 + $118 = $6,001 FY 13 • If DCPP is higher than SCPP only get the SCPP fixed dollar increase. • Example: $5,943 DCPP + $118 = $6,061 • Not $5,943 x 2% ($119) = $6,062

20. School Aid - Basics • Basic Calculations - Allowable Growth Per Pupil (cont.) • FY 12 District Costs Per Pupil • Minimum = $5,883 171 districts • Average = $5,916 • Maximum = $6,058 • When is an allowable growth not the actual percentage %? • Common perception is all districts receive the allowable growth % increase in budgets. • In FY 2012, 0% allowable growth resulted in only $39.1 million of new money (-1%), $47.7 million was due to the budget guarantee.

21. School Aid - Basics • Basic Calculations - Budget Guarantee Principle: Districts receive what they received in the prior year for the Regular Program Budget regardless of enrollment changes. • In 2001 – 100% budget guarantee replaced with Scale down (later, phased out by FY 2014), or • 101% budget guarantee adjustment (which remains in place after phase-out ends)

22. School Aid - Basics • Set two separate calculations • Calculation 1: Scale down option • Declining percentage of FY 04 Regular Program District Cost (with adjustment) as follows:

23. 101% Option • Calculation 2: 101% Option • District would be eligible to receive 101% of prior year’s regular program district cost. • Does NOT include any “accumulated guarantee” • Only calculation for budget guarantee after Scale Down option ends

24. 101% (continued)

25. Implications of the Phase-Out • Districts with declining enrollment will see a reduction in their budget authority (and revenues). • The reduction in authority will accelerate for those districts under the scale down option. • Districts on the 101% option will have one year to react to significant reductions in enrollments. • Use tools available on the IASB website to estimate the impact and plan now.

26. School Aid - Basics • Basic Calculations - On Time Funding • Principle - Districts with increasing enrollment have a way of capturing growth. Due to year delay in enrollment count in funding formula - districts with increasing enrollment have shortfalls. • Calculation:

27. School Aid - Basics • On-Time Funding (Cont.) • Senate File 203 made the on-time funding permanent. • Districts requesting the authority must adopt a resolution and notify the SBRC by November 1 each year.

28. 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.

29. School Finance - Spending Authority • Spending authority is the sum of: • Combined District Cost (property tax and state aid) • Miscellaneous income – anything not above • Unspent balance from previous years • Why important? • Districts cannot exceed spending authority • Not a measure of cash • Why allow districts to carry forward unused spending authority?

30. Building Blocks of Spending Authority

31. School Finance-Combined District Cost Regular Program Cost + Budget Guarantee (Budget Adjustment) + Weighted Enrollment Funding + Dropout Prevention Program Funding + AEA Program Funding + State Categoricals (New in FY 2010) + SBRC Funding___________________ = Combined District Cost

32. School Finance - Spending Authority

33. School Finance - Spending Authority

34. School Finance - Spending Authority Comparison of Concepts Cash and Unspent Balance

35. School Aid - Funding Programs Educational Program Levies • Instructional Support Levy (ISL) • Only levy available to schools to increase General Fund budget. • Maximum of 10% of Regular Program Budget. • Can be either property taxes or income surtax, or combination. • Can be board-approved (maximum five years - subject to petition) or voter-approved (maximum 10 years).

36. School Aid - Funding Programs • ISL may be used for any General Fund purpose except: • Dropout prevention programs • Talented and Gifted programs • PPEL uses • Management levy uses • Special education deficits • For FY 12 ISL generates nearly $186 million statewide • 46% income surtax / 54% property tax/ no state aid appropriated FY 12 • 334 districts

37. School Aid - Funding Programs • Cash Reserve Levy • Reserve for the General Fund of the school district. • Generated by property tax via school board action annually. • Used to fund spending authority but does not directly generate spending authority.

38. School Aid – Other Levies • Management Levy • Used to pay unemployment benefits, insurance (not employee benefits), judgements against the district, early retirement benefits.

39. School Aid - Facilities • Facility related levies: • Board-Approved Physical Plant and Equipment Levy (PPEL). Maximum $0.33 / thousand. • Voter-Approved PPEL. Maximum $1.34 / thousand. Maximum 10 years. Caution - allowable uses slightly different (simple majority). Can use income surtax as well.

40. School Aid - Facilities • Facility related levies (cont.): • Public Education and Recreation Levy (PERL). Maximum $0.135 / thousand. Public use playgrounds/recreation facilities. • Library Levy (AKA Amana Library Levy). Maximum of $0.20 / thousand. Used for joint library facilities if no local public library available.

41. School Aid - Facilities • Facility related levies (cont.) • Bonded Debt • Requires 60% majority - onetime election to go up from $2.70 to $4.05 • Maximum of $4.05 / thousand • Maximum 20 years • Best time to vote is October, November and December.

42. School Aid - Facilities • State Penny For School Infrastructure • Replaced the School Infrastructure Local Option (SILO) tax effective July 1, 2008 • Sunset 12/31/2029 • Need a Revenue Purpose Statement (RPS) vote prior to expiration of existing SILO ballot OR if district wants to borrow against time period between expiration and 12/31/2029 • District election rather than county election • 50% plus one simple majority to pass

43. School Aid - Facilities • State Penny For School Infrastructure (cont.) • Current Revenue Purpose Statement or ballot is valid until expired or replaced • Law requires lowering certain levies if a RPS is not approved: • Debt • Voted and Board PPEL • PERL • Schoolhouse Levy • Once levies are reduced, revenue can be used for any lawful purpose

44. School Aid - Facilities • State Penny For School Infrastructure (cont.) • Other Issues • Certificate of Need required for using supplemental funds for districts below 250 enrollment or 100 in high school. • State Penny revenue must be on hand to lower debt – can’t anticipate next year’s revenue

45. School Aid - Contacts • Jackie Black, jblack@ia.sb.org, Iowa Association of School Boards, 800-795-4272, ext. 231 • Galen Howsare, ghowsare@ia-sb.org, Iowa Association of School Boards, 800-795-4272, ext. 230 • Department of Management, Lisa Oakley, 515-281-8485

46. School Aid - Web Resources • IASB: www.ia-sb.org/Finance.aspx • Department of Education: http://educateiowa.gov/ • Legislature - bills, amendments, etc. www.legis.iowa.gov/index.aspx • Legislative Fiscal Bureau: www.legis.state.ia.us • Department of Management: www.dom.state.ia.us/local/schools/index.html • Dept. of Revenue: www.iowa.gov/tax/locgov/locgov.html