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Archived Information
School Finance: Chapter 70 Program
Reauthorization of the Chapter 70 School Finance Formula: Some Technical Issues for Discussion
Introduction
One of the key components of the Commonwealth's 1993 education reform law was a new and extensive program of state aid to cities and towns for the operation of K-12 public schools. This program, codified in Chapter 70 of the General Laws, was intended to ensure that every public school system had adequate funding, regardless of the wealth of the local community. To accomplish this goal, the Commonwealth committed itself to extraordinary increases in state education aid over a seven-year period, beginning in FY94 and running through FY00.
Thanks in large measure to the unwavering support of both the Administration and the Legislature, as well as a robust economy, we are on target for meeting the financial goals set by the education reform act for FY00. During this seven-year period, annual state aid for local school operations will have increased from $1.3 billion (FY93) to an estimated $2.8 billion (FY00).
With FY00 set to begin in less than a year, now is the appropriate time to review the Chapter 70 financing formula with an eye to possible changes and improvements for FY01 and beyond. The current formula is far from perfect; it has occasioned considerable criticism and debate within the educational and municipal communities over the past six years. By and large the Legislature has deferred piecemeal changes, expressing a preference for addressing all of the issues in a comprehensive way in conjunction with the formula's renewal for FY01.
The purpose of this paper is to discuss some of the technical issues likely to arise in the Chapter 70 debate. Readers of this paper are strongly cautioned that the observations and opinions expressed here are those of the author alone, and have not been reviewed or endorsed by either the Commissioner of Education or the Board of Education.
Given the amount of money at stake, the debate over the renewal of the Chapter 70 formula is likely to be long and contentious. Before the Legislature and the Governor make their final decisions, they need to hear from state and local educators, municipal officials, professional organizations, the business community, parents, teachers, and taxpayers, each of whom has a unique and important perspective. It is optimistically hoped that this debate can be concluded, and legislative changes enacted, no later than December 1999. If resolution of these issues is deferred until the FY01 state budget is considered by the Legislature in the winter and spring of 2000, municipalities and school districts will have tremendous difficulty in preparing their FY01 budgets. The Formula's Underlying Philosophy
Although the Chapter 70 formula is extremely complex in its details, its basic approach can be expressed fairly simply:
- Set a minimum spending level for each school district.
- Figure out what the local community can afford to contribute.
- Commit state resources to make up the difference.
The underlying philosophy is that the financing of public schools continues to be, in the first instance, a local obligation. We look first to the municipality, and only second to the state, for financial support for the schools. It is possible to construct entirely different formulas using entirely different philosophies. In particular, some critics have suggested that the state, not the cities and towns, should be the primary funding source, shifting the burden away from the local property tax and toward broad-based income and sales taxes.(1) Such a shift would require significant changes in both the state's revenue structure and in Proposition 2½. It is beyond the scope of this paper to analyze these possibilities. But at some point we will need to make the decision as to whether we keep the essence of the current formula, fine-tuning it as needed, or whether we throw it out and start over from scratch. Setting a Minimum Spending Level: The Foundation Budget
As noted above, the first part of the Chapter 70 formula involves setting a minimum spending level for each public school district -- the so-called "foundation budget". The calculation of the foundation budget is relatively straightforward, based on per pupil allowances for each of nineteen spending categories. These per pupil amounts are adjusted annually for inflation and then multiplied by the district's current enrollment. The foundation budget is probably the best understood and most commonly accepted part of the formula.
There are three parts of the foundation budget calculation that have generated a fair number of questions and which should be re-visited:
Special education enrollments - Most of the enrollment data used in the foundation budget calculation is from actual headcounts. The one exception is special education, where instead of using actual counts the formula assumes that 3% of the students will be in-district SPED and 1% will be tuitioned out. In many districts, these assumptions understate the actual SPED enrollments, and so the foundation budget as a whole is understated. This was done deliberately by the law's drafters, in an attempt to provide an incentive to local districts to reduce or eliminate inappropriate SPED placements. Local officials argue that placements have been difficult to control, particularly in the absence of special education legislative reforms. If the continued prognosis for SPED reform legislation is bleak, it might make sense to adjust the assumed percentages to a more realistic level. Enrollment time lag - Due to the timing of the state and local budgeting cycles, a district's foundation budget for a particular school year is based on its enrollment in the prior year. As a result, districts with rising enrollments complain that they are shortchanged each year. (Not surprisingly, districts with declining enrollments never complain.) If we waited to get current year enrollment figures, we would be nearly halfway through the school year before the calculations were completed. Some have proposed using estimates, but what happens if an estimate proves too high? Will a district be willing to give back state aid in the middle of the year? In putting together budgets, timeliness is a key consideration. My recommendation is to leave this part of the formula unchanged, and continue to use foundation reserve ("pothole") funds to assist those few districts with exceptionally high and unexpected enrollment spurts. Wage adjustment factor - The foundation budget contains a factor intended to compensate for the difference in wage levels around the state. Although this makes sense in theory, in practice it has not worked out well. We use the labor market areas defined by the Department of Employment and Training, of which there are currently 21. Dividing a relatively small state into so many labor markets creates distinctions that are hard to justify. For example, Salisbury is placed in the high-wage-rate Boston labor market area, while Avon is placed in the lower-wage-rate Brockton area, even though it is 18 miles closer to Boston than Salisbury. Teaching salaries are affected by many variables, probably the most important of which is the wealth of the local community. We have been unable to find any reliable data that isolates the impact of general wage levels in a region on teaching salaries in a particular town. As a result, it might be best to simply eliminate this factor from the formula.
Aside from these three calculation issues, there are several broader policy questions that should be asked in the context of the foundation budget:
Do we want to further close the gap between rich and poor districts? The foundation budget concept, coupled with large infusions of state aid, has brought up educational spending in the state's poorer communities and has narrowed, but not eliminated, the gap between rich and poor districts. The education reform act guaranteed every district an adequate budget but did not mandate equal levels of funding. We could, if we choose to do so, continue to close the gap by raising the foundation budget higher and higher over time (in terms of real dollars). But many would argue that the millions of dollars in additional state aid which this would require would be better spent in targeted grant programs (for example, early childhood education, literacy intervention, or after-school tutoring) directly aimed at under-performing schools and districts.
Should the state mandate minimum spending in certain categories? The foundation budget includes cost factors for nineteen different spending categories, ranging from teacher salaries to building maintenance to extracurricular activities. But the original education reform law clearly stated that once the total foundation budget was calculated, local school committees had complete discretion in spending the money. The amounts in the foundation budget for each category were considered advisory, not mandatory. Since that time, there has been considerable discussion as to whether certain categories should have minimum (or maximum) spending levels. To date, minimum requirements have been established for professional development and, most recently, building maintenance. This debate reflects an understandable tension between the need for accountability and the difficulty in applying a one-size-fits-all rule to hundreds of local school districts.
Should spending requirements be waived for high-performing districts? The current education reform law contains a provision that allows the Board of Education to waive the minimum spending requirements for districts that meet the state's assessment standards. As a practical matter, this provision will never be used, because it requires a district to forego all of its new Chapter 70 aid. It would be nice to make this a more workable incentive. Perhaps this could be done in conjunction with the debate on mandated spending by category, described above. High-performing districts would earn the right to keep their budget autonomy, while under-performing districts would be subject to spending restrictions. What the City or Town Can Afford: The Minimum Local Contribution
The calculation of the minimum local contribution for each community is the most complex, and perhaps most frequently criticized, part of the Chapter 70 formula. The formula actually begins with a reasonably straightforward (although arguably somewhat high) measure of expected local contribution, the so-called "gross standard." This was determined in the first year of education reform (FY94) by applying a uniform tax rate of $9.40 to each town's equalized property values.
Some would argue that property values should not be a part of the formula, because they are an imperfect measure of taxpayers' ability to pay. This criticism is particularly prevalent in areas such as the Cape, where property values tend to be high in relation to income levels. But I think this is really more a criticism of the property tax system itself than of the Chapter 70 formula. At any rate, the formula does provide a modest income-based adjustment to property values in an attempt to address this concern.
More problematic is that the uniformity represented by the original gross standard has been lost over time, due to at least three factors. First, the gross standard itself is adjusted each year using a different factor for each municipality, reflecting the revenue constraints of Proposition 2. Second, the formula is somewhat inconsistent in its approach toward above-foundation spending. If a town has the fiscal capacity, should we require it to spend more than its foundation budget? If a town was spending above its foundation budget at the start of ed reform, the formula generally expects it to maintain that level of spending. But if spending was below foundation, the formula only expects enough local increases to get it to foundation, even if that is still well below the gross standard. There is no expectation that all towns will have to reach their gross standard.
Third, the original formula provided temporary "overburden" aid to some poorer communities to give them extra time to bring up their local spending to the expected level. The intent was that this extra state aid would be phased out over several years as municipalities received increased lottery revenues, which they could use to meet their educational spending targets. But the phase-out of overburden aid never occurred, despite the record-setting levels of lottery aid during the past several years.
The end result of these factors is that economically-similar communities can have widely varying minimum local contributions, and the reasons for the differences are extremely difficult to understand due to the complexity of the formula. This in turn has created a widespread perception of unfairness, and has made it harder in some communities to maintain public support for education reform. The formula would benefit from a more straightforward measure of required local contribution, one which is understandable to the public and which is supported by our colleagues in the municipal finance sector.
A related question is whether there should be an upper limit to state-mandated spending, with spending beyond that limit strictly a matter for local option. A recently enacted amendment to the formula does exactly that for regional vocational schools, setting a limit of 150% of the foundation budget. State Aid: Making Up the Difference
The Chapter 70 formula has its flaws, but we should not lose sight of its outstanding success in meeting its statutory goal: by next year (FY00), educational spending in every city and town in the Commonwealth will be at or above the foundation budget. We have made up the difference between what our schools need and what our cities and towns can afford.
Nonetheless, several issues need to be considered with respect to Chapter 70 aid:
Foundation aid. Now that we've gotten everyone to foundation, I assume we will want to make a continuing commitment to keep them there. A significant amount of new foundation aid will be required each year, for the foreseeable future, simply to accommodate enrollment growth and offset inflation. Rather than pre-determine the annual funding increases, as was done in the original law, it probably makes more sense to run the numbers each fall, using the latest enrollment and inflation statistics and a 100% foundation factor (i.e., everyone at foundation), to determine the required appropriation increase for the following year.
Base aid. One of the most frequently heard criticisms of the Chapter 70 formula relates to the wide variance in state aid per pupil from one district to the next. Some of this variance is legitimate and intended, reflecting differences in the wealth of local communities. But a significant portion of it results from the concept of base aid.
Base aid was intended to provide the "hold harmless" feature common to many of our local aid formulas, guaranteeing each community that it would get at least as much in aid each year as it received the previous year.[2] In the first year of education reform (FY94), the allotments from the old Chapter 70 local aid formula were carried forward to become the starting point for base aid. This amount is then adjusted upward each year based on the prior year's new Chapter 70 aid.
Because of its cumulative nature, base aid is the largest single component of Chapter 70 aid (currently 84%). This amount is entirely a function of historical factors, ranging from last year well back into history. There is no direct connection between base aid and current enrollment, so it should not be a surprise that there is no consistency in the amount of aid per pupil. For this reason, districts with high enrollment growth rates have felt especially short-changed.
One logical option would be to change the base aid calculation to a per pupil basis. The hold harmless guarantee would be that the amount of Chapter 70 aid per pupil would not decrease from one year to the next. This would result in a logical shift of dollars over time from districts with declining enrollments to districts with growing enrollments.[3]
A more draconian approach would be to eliminate the concept of base aid entirely, allowing us to purge all the inequities built into the historical numbers. Under this approach, we would do each year's distribution de novo: first bring all districts up to foundation, then distribute the remainder of the money based on current enrollment.
Overburden aid. This was discussed earlier in connection with the calculation of the minimum required local contribution. Other Issues
School buildings. The education reform law did not change the long-standing obligation of cities and towns to provide school buildings. For the most part, the financing of school buildings is outside of the Chapter 70 formula, which focuses on school operations, but the line is not bright. Excess debt, extraordinary maintenance, and facility rentals are three areas where capital needs can be financed at least in part from the operating budget. This has created some tension between municipal and school officials. The city or town says it is hard pressed to finance capital needs because of the constraints of Proposition 2, and tries to shift as much as possible to the school budget. The school committee resists, arguing that it needs the full amount of its operating allotment to bring about the educational improvements mandated by the reform law.
Of particular concern is the funding for major repair projects. It is believed by some that more spending in this area would extend the useful life of existing buildings before they need to be replaced or totally rehabilitated. Some repair projects can be funded through the foundation budget's extraordinary maintenance category, but Board of Education regulations currently limit this to $50,000 per project per school. Larger repair projects are theoretically eligible for partial state funding through the school building assistance program, but this SBA category has not been funded for a number of years. As a result, the ability to keep up with building repair needs currently depends in good measure on the availability of other municipal funds.
Vocational schools. Regional vocational schools create a special problem under the current formula. Typically only a small proportion of a town's students will be enrolled in a regional vocational district. As a result, it is not uncommon to see large shifts in vocational enrollment from year to year, measured on a percentage basis. These large enrollment shifts, coupled with the hold harmless provisions of the aid calculations, can create large variances in the per pupil aid provided to each of the member towns within a single district. This in turn creates large variances in the amount of local contribution required from each town, variances which cannot be explained by differences in the towns' ability to pay. In some extreme cases, a member town may have no required local contribution at all.
There is considerable sentiment that we should allow regional vocational districts to return to their regional agreements in assessing local contributions, in order to better reflect shifts in enrollment from one town to the next.[4] If this change was adopted, the regional district would still have to meet its overall foundation budget target, and member towns would still need to meet their overall spending requirements.
Non-operating districts. Some smaller towns neither operate their own schools nor belong to a regional district. Instead, the town pays tuition to send its children to a nearby school district.[5] The current formula still imposes a minimum spending requirement on these towns. Because the tuition payment is usually linked to the number of students, but the minimum spending requirement is not, declines in enrollment can cause the minimum spending requirement to far exceed the tuition cost.
As a practical matter the Department has not enforced the spending requirement in these instances. Typically the number of students involved in these arrangements is not large, although the extra spending requirements which the law imposes could be significant for a small town. Consideration should be given to exempting non-operating districts from the minimum spending requirement. The Transition to a New Formula
Any proposed changes to the Chapter 70 formula are likely to encounter some opposition from those municipalities and districts which would be less well off as a result of the changes. Theoretical discussions of fairness and equity tend to go out the window when one is discussing one's own budget. In the case of Chapter 70 aid, an expectation seems to have developed that a town or district is "entitled" not only to the amount it received last year (the traditional hold-harmless measure in local aid discussions), but is also "entitled" to whatever increaseit would have received under the current formula. We need to consider carefully how we can deal with this problem.
One "solution" I hope we will not adopt is to calculate the aid using both the old and new formulas and pay whichever is higher. Such an approach would be costly to implement, would make the formula even more difficult to explain, and most importantly would exacerbate rather than fix the perceived inequities.
Prepared by
Jeff Wulfson
Chief Financial Officer
Mass. Department of Education
8/24/98
Notes:
In FY97, local property taxes accounted for 43% of total spending on public schools in Massachusetts. Because not every category of Chapter 70 aid goes into base aid, the hold harmless feature does not work 100% of the time. A more complicated but technically preferable approach to this option is to hold constant the Chapter 70 aid as a percent of the district's foundation budget. This would compensate not only for overall enrollment changes, but also for shifts in each individual enrollment category. Legislation passed in 1996 allowed regional districts to adopt such a change as a local option. But the law required unanimous consent, so it could be blocked by one member Such arrangements require the annual approval of the Board of Education.
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