Archived Information
School Finance: Chapter 70 Program
Reforms to Chapter 70 Local Education Aid Formula
January 26, 2001
Proposed Changes to the Chapter 70 Formula
Letter to Superintendents/Mayors/Boards of Selectmen from Secretary Crosby and Commissioner Driscoll:
The Chapter 70 school aid formula has accomplished a great deal since its enactment as part of the Commonwealth's education reform law in 1993. It greatly expanded the state's role in financing local public schools, and it ensured that every school district would have adequate fiscal resources regardless of the wealth of the community.
But the current formula is far from perfect. Over the years we have spent many hours in discussions with you and your colleagues regarding possible changes and improvements. After eight years of operation, it is time to re-visit the structure of the formula and make some of the improvements that have been under discussion.
This week Governor Cellucci and Lieutenant Governor Swift filed legislation to make the first major reforms in the Chapter 70 formula since its 1993 enactment. These recommendations are designed to improve the fairness of the formula as well as to make it simpler and easier to understand. We look forward to discussing these recommendations with the Legislature in the weeks ahead, and we are sure that your input would be valued.
The proposed Chapter 70 allocations contained in the Governor's FY2002 House 1 budget request are based on these recommendations for changes in the formula. Enclosed for your information is a table showing the proposed FY2002 allocations and a description of the proposed formula changes. These items are also posted on the Department of Education's school finance website (http://finance1.doe.mass.edu).
Local officials should understand that these Chapter 70 estimates may be modified as the House and Senate deliberate on the budget. Municipal and regional budgets should incorporate some flexibility to accommodate changes in these estimates that could occur prior to final enactment of the state budget.
On February 26, DOE will issue the complete preliminary Chapter 70 package, including estimates of required local contributions and required net school spending, as well as supporting data on the calculation of each district's state aid. Please note that this information is not available prior to this date.
The final, official Chapter 70 allocations and school spending requirements will be issued as soon as the Governor and Legislature approve either the FY2002 state budget or an earlier local aid resolution. Those final numbers will then match the FY2002 cherry sheets to be issued by the Department of Revenue.
If you have any questions concerning the proposed changes to the Chapter 70 formula or the estimated allocations for FY2002, please contact Kenneth Ardon at the Executive Office for Administration and Finance, 617-727-2040, or Roger Hatch at the Department of Education, 781-338-6527.
Respectfully yours,
Stephen P. Crosby, Secretary of Administration and Finance
David P. Driscoll, Commissioner of Education
Reforms to Chapter 70 Local Education Aid Formula
Summary
The Administration is filing the first major reforms in the Chapter 70 Local Education Aid formula since 1993. The bill establishes a new five-year plan, beginning with House 1.
The new formula spends state money more rationally and more fairly:
The new formula maintains and expands the Commonwealth's commitment to ensure all districts are fully funded for an adequate education. This is accomplished through expansions of the Foundation Budget, the state's measure of the cost of education. The Foundation Budget is expanded to better reflect the fiscal demands of special education. These changes are phased in for FY02, FY03, and FY04. The Foundation Budget will include, for the first time, a separate item for educational technology, at $30/pupil, beginning in FY03. Beginning in FY03, the enrollment figures used in the Foundation Budget calculation will be enrollment projections, instead of the previous year's enrollments, for growing communities.
These increases in Foundation Budget will directly benefit, dollar for dollar, the districts with the least ability to pay - the districts that receive Foundation Aid to close the gap. In addition, for the first time, increases in Foundation Budget will benefit other districts, that are above Foundation.
Among districts that are above Foundation, the new formula targets more state aid to those most in need, based on growth in costs and local ability to pay.
For the first time, the state will pay a share of any district's increase in Foundation Budget costs. These costs are driven by enrollment growth, inflation, and other factors such as the enhancements proposed for special education and educational technology. The state's share will vary from 10% to 25%, depending on the community's ability to pay. Most communities will receive 25% of any increase in Foundation Budget costs. The new formula simplifies the nearly incomprehensible 35-step formula, so that local officials and ordinary citizens can, for the first time, more readily understand their local aid.
The local contribution will be calculated simply as the previous year's contribution, increased by the growth rate of local revenues, as it was under the old formula for most communities. Local ability to pay will be based on updated measures of property values and income. Communities that pay far more than the state average, as a percent of their ability to pay, will not be required to increase their contribution as local revenues rise.
The number of steps in the formula will be reduced by roughly half, and the key steps will be much less complicated. Citizens and local officials will finally be able to go beyond the bottom line to judge the logic and fairness of this important $3 billion program.
In implementing this new formula, each school district will be "held harmless," such that each district receives at least as much Chapter 70 funding as in FY01. The total amount of Chapter 70 aid will be over $3.1 billion, an increase of $171 million. Background
The Chapter 70 Local Education Aid formula has achieved extraordinary accomplishments since its overhaul in 1993. It established, for the first time, a measure of the cost for educational adequacy, the Foundation Budget. The funding formula brought every community up to Foundation Budget by FY00, through a massive hike in state aid, in conjunction with required local contributions. As a result, per pupil spending no longer rests on a local community's income or wealth to anywhere near the degree that it once did. For example, the Commonwealth's struggling urban communities, with low income and property wealth, now equal the state average in per pupil spending, thanks to huge infusions of state aid. Boston, which is not included in this set of urban communities, spends well above the state average per pupil.
The aid formula, however, has not been overhauled since 1993. Since the original funding schedule expired in FY00, a number of groups in the Commonwealth have come forward with suggestions for revising the formula, to rectify a number of shortcomings that have been identified, such as the incredible complexity of the 35-step formula. The Legislature has also convened a Foundation Budget Review Commission to examine the formula and recommend changes. The Department of Education has studied the formula over the last two years and provided a set of recommendations that has informed the Administration's proposals.
In preparation for House 1, the Administration convened a working group last fall to examine the formula, in light of previous work, and to propose reforms for the Governor and Lieutenant Governor. The working group, based in the Executive Office for Administration and Finance, in coordination with the Governor's Education Advisor and Deputy Education Advisor, included technical experts from the Departments of Education and Revenue, and also met regularly with stakeholders on the Governor's Advisory Council for School Finance. The Research and Development Unit of the Executive Office for Administration and Finance, which headed the working group, will issue a full report on its analysis and proposals shortly, but a brief summary follows.
Virtually all of the components of the Administration proposal draw heavily, in spirit or in letter, on elements of the proposals made by various public interest groups, although of course each group has its own distinctive package. These proposals include those of the Massachusetts Municipal Association (MMA), Massachusetts Taxpayers Foundation (MTF), League of Women Voters (LWV), Massachusetts Association of School Superintendents (MASS), and Massachusetts Association of School Committees (MASC). Key Changes:
The New Formula Expands the Foundation Budget.
The new formula phases in several changes to the measure of the cost of providing educational adequacy, the Foundation Budget. The net result is to increase the Foundation Budget for FY02 above what it would be under the current formula, and more so for the years beyond FY02. This is of direct benefit to those districts that receive state aid to come up to Foundation, especially a number of the Commonwealth's struggling urban communities, with low income and property wealth. In addition, because the new formula directly provides state aid for growth in Foundation costs, districts that are above Foundation will also benefit, for the first time, from increases in the Foundation Budget.
Specifically, districts have often pointed out that increases in the budgetary demands of special education have made it more difficult to reduce class size and make other changes with the increase in state aid they receive. This is true for districts that receive Foundation Aid because the Foundation Budget understates the costs of special education, and also for above-Foundation districts, because their aid has been independent of the Foundation Budget, up until now. The new formula increases the Foundation Budget's calculation of special education costs, with changes that begin in FY02 and are further phased in for FY03 and FY04 (these changes closely mirror those proposed by the Massachusetts Association of School Superintendents [MASS], among others).
The new formula also adds, for the first time, a separate technology item to the calculation of the Foundation Budget. This allocation, of $30/pupil (the figure proposed by MASS), will be added in FY03.
Another change to the Foundation Budget calculation addresses a concern of growing districts. The current calculation is based on enrollments from the previous year, since that is all that is available at the time the formula is being calculated. The Chapter 70 amendments filed by the Administration propose the adoption of enrollment projections for growing districts, starting in FY03. This will be fairer to those districts that lose from the one-year lag in enrollment figures that enter the Foundation Budget calculation.
Finally, the new formula makes a technical correction to the calculation of inflation. The current system uses a reasonable price series, but it uses it in a rather idiosyncratic fashion that induces year-to-year volatility in the measure. For example, in FY00 the measure of inflation used was only 0.34%, despite the fact that the year-to-year measure that most economists would use for the same series ran at 1.56%. In other years, the calculation worked the other way, artificially raising the measure of inflation. Overall, the differences have cancelled each other out over the years, but the system has introduced unnecessary volatility. The technical fix introduced in the new formula has the effect of slightly reducing the inflation measure for FY02. However, this is outweighed by the other changes, which raise Foundation Budget in FY02 and beyond, above what it would otherwise be.
The New Formula Funds Growth Directly and Progressively.
Over the years, as more and more communities were brought up to and above Foundation Budget, the growth of these communities' aid has rested on the component known as "Minimum Aid." This component of aid is built into the base, and is therefore the additionto aid each year for many above-Foundation communities. It is distributed on a strict per pupil basis, and has risen over the years to $150/pupil. It is distributed independently of the community's growth in costs and of its ability to pay.
For example, if two districts each have 1,000 students, but one is growing from 950, while the other is declining from 1050, each district's aid nonetheless grows by the same $150,000. Clearly this makes little sense. Also, if one community has high income and property wealth, while the other does not, they still receive the same increment in aid, per pupil. This tends to reduce the formula's progressivity.
The new Chapter 70 formula provides state aid to growing districts, based directly on the district's growth in costs, as measured by the Foundation Budget. Specifically, for districts which exceed Foundation, the state will contribute from 10-25% of the growth in Foundation Budget, while the per pupil increment is reduced to $50. The precise share of growth funded by the state is determined in a progressive fashion, depending on the district's income and property wealth. Most communities will receive 25% of any increase in Foundation Budget costs.
To see the effect of this change, consider a typical high-income-and-wealth community that receives base aid of $1,000/pupil. (See table below.) With minimum aid at $150/pupil, this district's aid would grow by about 15%, even if its enrollment is stable or dropping, with little or no growth in the cost of meeting its Foundation Budget. There are currently a number of well-off districts with a profile similar to this. Consider, by contrast, a town of more modest means, which is more dependent on state aid, at $3,000/pupil. Suppose it has growing enrollments, which, in conjunction with inflation, raises the Foundation Budget by 12%. With minimum aid at $150/pupil, this district's aid would grow by about 5%, despite 12% growth in costs, a considerably slower growth in aid than the wealthy community's growth of 15%, with no rise in costs.
Under the new formula, the wealthy district would still receive $50/pupil in minimum aid, or an increment of about 5%, despite 0% growth in costs. The more modest community would receive about 8.7% rise in aid ($50/pupil plus 25% of the growth in foundation, at $7,000 Foundation/pupil) to help cover its 12% rise in Foundation costs. That is, under the new formula, the high-growth district, of more modest means, would at least receive a more rapid increase in aid than the zero-growth district of more ample means. The new formula is more rational and more equitable.
| Illustrative Example |
| |
Wealthy District, No Growth |
Modest District, High Growth |
| Base Aid/Pupil |
$1,000 |
$3,000 |
| Growth in Foundation Cost |
0% |
12% |
| Growth in Aid: Old Formula |
15% |
5% |
| Growth in Aid: New Formula |
5% |
8.7% |
The New Formula Is Greatly Simplified.
The old formula is codified in a highly convoluted 35-step procedure (see http://finance1.doe.mass.edu/chapter70/chapter_01_yellow.html), which few people in the state actually understand. The greatest complexity arises in the calculation of the required local contribution. To simplify this, the new formula begins with the proposal of the Massachusetts Municipal Association (MMA) that each municipality's local contribution should grow at the same rate as local revenues, as measured by the Municipal Revenue Growth Factor (MRGF). This means that for each community the share of municipal revenues that must be dedicated to local education is constant over time.
For about 70% of the state's localities this is effectively the same as under the old formula. For others, a variety of complications arise, including two aid categories: Overburden Aid and Equity Aid. As the MMA suggests (and also the MTF, MASS, and LWV), these categories of aid are folded into base aid for FY02 (and therefore made permanent), and discontinued henceforth.
The new formula makes two other changes affecting the local contribution. Under the old formula, the MRGF is capped at a rate equal to the growth of Chapter 70 funding, as of the time of House 1. This cap is unrelated to the average growth of municipal revenues. Last year, the cap was actually slightly below the average MRGF, a result that would seem hard to defend, since it meant that any community with MRGF equal to or greater than the state average was allowed to reduce its share of municipal revenues allocated to education. Following the suggestion of the MASS, the new formula sets a more reasonable cap. Specifically, the MRGF cap is set at 1.5 times the state average MRGF (a rate which already triggers a waiver under current law), or 6.75%, whichever is lower (6.75% is lower for FY02). As a result, most communities are required to maintain a constant share of municipal revenues devoted to education, but no community is required to increase its local education spending by more than this reasonable cap.
Another cap comes into play for towns that are paying excessive amounts compared to their local tax base. Under the old formula, the concept of Gross Standard of Effort was based on a hypothetical, or implicit tax rate ($9.40 per thousand) applied to 1992 property values, as adjusted for 1989 income (from the 1990 Census), and grown to the present day by the MRGF. The new formula improves the measure of ability to pay, by using current property values and the most recent income data available from the Department of Revenue, rather than relying on the decennial Census. The income adjustment will also now be restricted to residential property values, since the tax capacity for commercial and industrial property is unrelated to local income.
Using this updated and refined measure of ability to pay, implicit tax rates can be calculated and a new Gross Standard can be set. The statewide implicit tax rate is $6.80 per thousand this year. Communities that pay more than 2.2 times that rate will not be required to increase their contribution as local revenues rise. Although this offers relief in the local contribution for very few communities in FY02, the legislation phases in a lower ceiling over time, dropping to 2.1 times the state average in FY03, and 2.0 in FY04. This re-introduces some complication to the formula, but it is necessary to maintain a degree of fairness in the required local contribution, based on ability to pay.
The net result of all these changes is a much simpler formula. The number of steps in the calculation will be reduced by approximately one-half, and further reduction in complexity is achieved within a number of these steps. This will finally provide a certain measure of transparency for ordinary citizens and local officials who wish to go beyond the bottom line, to judge the logic and fairness of this important $3 billion program. Conclusion
Chapter 70 Aid has achieved remarkable success since its last overhaul in 1993: massive amounts of state aid have brought all communities up to Foundation Budget, attaining educational funding adequacy. For the next phase of Education Reform, accountability must be coupled with a funding formula designed for an era where the Foundation has already been reached. This requires a formula that maintains and expands adequacy, while improving the fairness of aid among above-Foundation districts. The new formula targets those most in need, based on growth and ability to pay, providing a more equitable and rational distribution of aid. Along with a greatly streamlined, and more readily comprehensible calculation of the required local contribution, the new Chapter 70 formula should serve the Commonwealth well for the critical five-year period ahead.
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