Archived Information

School Finance: Chapter 70 Program

Proposed Changes to Chapter 70

DRAFT 10/19/99

1. Introduction

   NOTE: This paper is a working draft for discussion purposes only. The proposals under consideration have not been endorsed or adopted by the Department of Education or the Board of Education.

   The 1993 Massachusetts Education Reform Act (Chapter 71 of the Acts of 1993) included a new system for financing public elementary and secondary schools in the Commonwealth. This new system was codified as Chapter 70 of the General Laws and was implemented in fiscal year 1994. Chapter 70 was designed in part to ensure that each school district had the resources needed to educate its students, and it has resulted in a more than doubling of state financial support for schools during the past seven years.

   The formula used in the Chapter 70 program is extraordinarily complex and not without its flaws. The Governor and Legislature have indicated that this is now an appropriate time to review the formula and identify ways in which it can be improved. This draft paper contains a number of specific proposals for changes to the formula, prepared by staff at the Department of Education under the direction of the Board of Education's Budget and Finance Committee, and is being circulated for discussion purposes only. As of this date, neither the Board of Education nor the Commissioner of Education have taken official action to adopt these recommendations.

2. Guiding principles

   1. Work within the basic framework of current formula.

      The current formula is based on a three-part framework: establish a level of spending needed to provide an adequate education (the "foundation budget"); require cities and towns to make a fair contribution based on their existing revenue sources; and use state funding to fill any remaining gap. This proposal attempts as much as possible to work within that framework. It is possible to create other proposals using different frameworks, particularly if one is willing to consider significant changes in the local and state taxing structure.

   2. The formula should be a needs-based formula.

      A critical assumption in this proposal is that the formula's purpose is to meet specific and documented funding needs, and that the funding should be limited to those needs. The formula is not intended to be a general revenue sharing program for the benefit of cities and towns. Although there are strong arguments that the Commonwealth needs such a revenue sharing program, we believe it is best done outside of education reform.

   3. Recognize funding constraints.

      Annual funding for Chapter 70 has increased by more than $1.4 billion over the past seven years, thanks to the unwavering commitment of the Governor and Legislature and aided by a robust economy. It is unrealistic to expect that increases of that magnitude can continue indefinitely into the future. Additional Chapter 70 funding will be competing against other educational needs (for example, increased state aid for special education, continued demand for school building assistance grants, and proposed expansion of full-day kindergarten and other early childhood education programs) as well as other areas of the state budget. It is also unclear whether the current levels of economic growth can be maintained.

   4. Continue to exclude certain high cost items.

      The current formula does not attempt to provide full and adequate funding for capital needs, transportation costs, and extraordinary special education costs, because these costs vary widely by district and are better handled by separate aid programs. This proposal maintains that distinction. We also propose to continue funding for early childhood programs outside of the formula, until such time as there is a consensus for a universal expansion of public education to lower ages.

   5. Give flexibility on inputs, and demand accountability for outcomes.

      Traditionally, intra-governmental grants-in-aid have been accompanied by controls over inputs - myriad rules defining how the recipient can, or cannot, spend the funds. There is little evidence, in education or elsewhere, that such restrictions improve program management. The focus in education reform is now shifting, appropriately, to accountability for outcomes. The goal is increasing student achievement, and there is no single magic formula to reach it. This paradigm shift requires that local officials be given more, not less, flexibility in managing their spending. Where state intervention is required because of deficient performance, spending controls should be imposed based on a district- or school-specific improvement plan, not a generic formula. This, in turn, will require more detailed and more accurate reporting of district spending.

   6. Look ahead to school-based budgeting.

      Nationally, education reform is also evolving toward a focus on each individual school as the basic unit of management and accountability, and the Board of Education has indicated its intent to move in this direction in Massachusetts. Our school finance structure should include the groundwork for future school-based budgeting initiatives.

   7. Keep it simple.

      The incredible complexity of the current formula has been more than just a minor inconvenience. Because of the inability of local officials to understand the calculations, and to explain them to their constituents, the credibility of the formula and support for its objectives has been seriously undermined. It is essential that the new formula be simpler and easier to understand.

   8. Avoid focusing on "winners" and "losers".

      Because financial resources are not unlimited, every change in the formula, and every change in external circumstances, results in some districts getting more or others getting less. One of the lessons we have learned during the past seven years is that our attempts to hold districts harmless, not only with respect to last year's aid but also with respect to every other proposal on the table, has resulted in unnecessary spending, inappropriate changes to the formula, and a move away from fairness and equity. We believe local officials are ready to accept a truly fair and equitable formula, and are prepared to accept the results, whether positive or negative for their own district.

3. Foundation Budget

   1. Study the adequacy of the foundation budget amount, with recommendations for possible implementation in FY2002.

      The foundation budget in the current Chapter 70 formula was an input-driven model, using various assumptions regarding class sizes, teacher salaries, and other cost elements to build up to a total amount. It is now time to evaluate the foundation budget, not in terms of inputs, but measured against student, school, and district performance. It is only now, as we enter the third year of MCAS testing and the first year of school and district evaluations, that we have reasonable benchmarks to gauge acceptable performance. If we are to propose an increase in the foundation budget, we need clear and convincing evidence that a well-managed district is unlikely to achieve acceptable levels of student performance at the current funding level. We also need to re-visit the original formula's assumption that secondary schools require a higher level of funding than primary schools. Based on what we now know about early childhood learning, it may be appropriate to move to a uniform per pupil amount regardless of grade level. We recommend that these issues be studied under the aegis of a reconstituted foundation budget review commission (see below), with the study to be completed by September 30, 2000, and to include recommendations for implementation in FY2002.

   2. Use estimated enrollments for high growth districts

      The current formula uses prior year enrollment data to calculate the foundation budget. This chronically underfunds districts with high enrollment growth. We propose allowing districts to use a projected rather than actual enrollment figure, based on enrollment trends over the prior three years. (Districts with declining enrollment would not be required to project a continuation of those trends.)

   3. Incorporate state ward enrollment into the foundation formula.

      Currently districts receive a small amount of additional state funding for state wards, under a separate reimbursement program which is administratively cumbersome and often inaccurate. We propose to incorporate state ward funding into the Chapter 70 formula by adding an increment to the foundation budget for each state ward enrolled. Funds currently received under the state ward program would be added to each district's Chapter 70 base.

   4. Clarify the bilingual and vocational enrollment category definitions.

      Currently, extra weight is given in the foundation budget for students with limited English proficiency only if they are enrolled in a transitional bilingual education (TBE) program. This should be changed to provide additional weighting for all limited English proficiency (LEP) students regardless of their instructional program. The definition of vocational enrollment also needs clarification to limit it to students in full-time high school programs approved under Chapter 74. Students in full-time academic programs who take an occasional "career education" course would not be included.

   5. Provide greater flexibility in calculating low income enrollment.

      The current formula provides extra funding for low income students, who are defined as those students eligible for free or reduced cost school lunches. Because this factor depends on the school lunch participation rate in each district, it may be appropriate to allow for other indicators of student income levels. We propose giving the Commissioner the administrative authority to adopt such additional indicators as appropriate.

   6. Modify the wage adjustment factor calculation.

      It is appropriate to recognize geographical differences in labor costs, but the current wage adjustment factor does not work well in practice. We recommend using fewer labor market areas; basing the adjustment on area-wide wages rather than wages in individual towns; and eliminating the bonus for towns with below-average per capita incomes (which undercuts the purpose of the wage adjustment factor).

   7. Eliminate the functional categories in the foundation budget calculation.

      The functional categories in the current formula were useful in the initial development of the foundation budget, but there has been a growing tendency to treat them as spending mandates or targets, which was never originally intended. Eliminating the use of these categories, in favor of consolidated per pupil factors, would make the foundation budget calculation much simpler and ensure that districts would have maximum flexibility in their spending decisions. Actual spending would continue to be reported by functional category (using the more useful categories in the End-of-Year report), and the Department should issue reports comparing each district's categorical spending to state averages and like districts. Such comparisons would be more meaningful and useful than comparisons to the arbitrary benchmarks currently in use.

4. Local Contribution

   1. Simplify the calculation of the minimum required local contribution.

      The local contribution is perhaps the most convoluted part of the current formula, involving more than a dozen different factors and calculations. This, in turn, has created a large number of inequities, with towns of comparable size and wealth being asked to contribute widely differing amounts.

      Determining a fair and equitable local contribution is more of a municipal finance issue than an educational issue, and it is our hope that the municipal community will offer their own consensus approach on this component. Until such a consensus is reached, we suggest consideration be given to the following three alternatives:

      • Option 1:Apply a uniform school funding rate to each town's equalized property valuation (EQV). A rate of $8.95 would result in approximately the same statewide level of required local spending as in the current formula.

      • Option 2:The same as option 1, but apply an income adjustment to each town's EQV, so that towns with higher personal incomes would have a larger contribution and towns with lower personal incomes would have a smaller contribution. In this case, a rate of $8.05 would result in approximately the same statewide level of required local spending as in the current formula.

      • Option 3:Using a methodology based on the League of Women Voters proposal, set each town's local requirement as a percentage of its foundation budget, using EQV per pupil as the primary measure of wealth. Towns with above average EQV per pupil would contribute a higher percentage, those below average would contribute a lower percentage. A contribution rate of 74% for a town at the statewide average would result in approximately the same total required local spending as in the current formula.

      Each of these alternatives would use up-to-date EQVs. It should be noted that there is a very high statistical correlation between a municipality's EQV and its total municipal revenues. Each of these alternatives would result in an increase in required contribution in some towns and a decrease in others, in order to bring every town to a uniform standard of effort. Overall, there would be no further shift of education funding from the local level to the state level. Such a shift would likely require significant changes to the Commonwealth's tax structure, which are beyond the scope of this proposal.

   2. Allow extra time to phase in large increases in required contributions.

      If a required increase in local contribution is extremely large, allow the town to phase it in over a period of two to five years (depending on the size of the increase).

   3. Retain and modify the excess debt allowance.

      This proposal would continue the credit for excess debt, but would limit it to above-foundation spending. The excess debt credit would not be allowed to drop spending below the foundation budget level.

   4. Simplify and fix the regional allocation process.

      For municipalities which are a part of more than one school district, it is necessary to allocate the required local contribution among those districts. The current Department procedure for doing this allocation is unnecessarily complex and leads to some inequitable results. We propose to replace this with a simpler and fairer process - each municipality's local contribution will be allocated to its school districts in proportion to the foundation budget for the students attending each district. For example, if a town belongs to two districts, and the students attending district A represent 40% of the town's total foundation budget, district A will get 40% of the town's required local contribution and district B will get 60%.

5. State aid

   Replace the current six aid categories with two.

   1. Carryover aid

      Carryover aid replaces the old base aid and minimum aid categories. It is calculated using three steps:

      • Start with last year's total Chapter 70 aid.
      • Calculate the percentage of last year's foundation budget covered by Chapter 70 aid.
      • Apply that percentage to this year's foundation budget.

      This calculation provides a more rational "hold harmless" feature than the current formula. Each district is guaranteed that it will receive at least the same percentage of its foundation budget in state aid that it received in the preceding year. Because the foundation budget includes enrollment and cost of living factors, carryover aid will provide a hedge against enrollment growth and inflation.

      In actual dollars, some districts would get more and some would get less compared to the current base aid plus minimum aid calculation, depending on whether the district's enrollment was increasing or decreasing. It recognizes that a fair formula must shift state aid over time in response to enrollment shifts.

   2. Foundation aid

      The new foundation aid category replaces the old foundation aid, overburden aid, equity aid, and choice aid categories, all of which were designed to help districts in various circumstances reach their foundation budget targets. The calculation of the new foundation aid is simple: if the sum of the district's required local contributions and carryover aid is less than its foundation budget, new foundation aid is provided to make up 100% of the difference. This ensures that no district can fall below foundation. The amount of foundation aid received in any year will become part of the following year's carryover aid calculation.

      We are not proposing to guarantee that above foundation districts will stay there (although the carryover aid calculation does provide these districts with some financial hedge against inflation and enrollment growth). We believe it would be inappropriate, and possibly contrary to the McDuffy principles, to guarantee some districts an above-foundation level of funding while others are only guaranteed a foundation level.

6. Net school spending requirements

   1. Set upper limit on mandated spending

      In rare instances the current formula results in a mandated spending level far in excess of the foundation budget, and the proposal to base local contributions on EQV could exacerbate this problem. Although we certainly want to encourage cities and towns to spend more than the bare minimum which the foundation budget represents, reason dictates that there should be an upper limit for the state's mandate, which we are proposing to set at 150% of the foundation budget. Spending above that point would be strictly a local decision.

   2. Permit waivers of net school spending penalties for non-operating districts

      Non-operating districts are those small towns which tuition their students to other public school districts rather than operating their own schools. In some instances, the mandated spending levels for these districts exceed the tuition costs. Under the current statute these districts are subject to financial penalties, although the Department has not enforced this provision. We propose that the Commissioner be given the authority to adjust the spending requirement for non-operating districts if he determines that the governing tuition agreement is fair and equitable.

   3. Begin transition to school-based budgeting

      As a first step in transitioning to school-based budgeting, the Department is planning to collect spending and foundation enrollment data at the school building level starting in FY2000. The foundation budget review commission should develop recommendations regarding school-level foundation budgets for FY2001 and beyond. This may include the need for additional training for principals in financial and business management. We should also consider grants or other financial incentives for districts which voluntarily adopt school-based budgets at an earlier date.

7. Miscellaneous provisions

   1. Add funding set-aside for one-time bonus payments to exemplary schools and districts

      Because a primary purpose of the Chapter 70 formula is to equalize funding disparities among districts of unequal wealth, we have not recommended a performance-based component to the formula. It does not seem appropriate, and might very well be contrary to McDuffy, to reduce a district's funding due to poor performance. This might be seen as punishing the students for the shortcomings of the administrators and teachers. Instead, we propose setting aside a small portion of the Chapter 70 appropriation to fund annual cash incentive awards to exemplary schools and districts, in conjunction with the Board's recently approved school and district accountability program. These bonus awards would be separate from the basic formula and would not be included in the carryover calculation for subsequent years.

   2. Add funding set-aside for Department administrative costs

      The Department's administration of the Chapter 70 program and related school finance programs (financial reporting, school choice tuition, charter school tuition, transportation aid, etc.) requires a significant effort which cannot be adequately funded from the Department's small central administrative appropriation. The proposed shift to school-based funding will exacerbate this problem. The Chapter 70 line item language should include a small set-aside for Department administrative costs.

   3. Eliminate waiting period before release of preliminary estimates

      The current statute prohibits the Department from publicly releasing the preliminary Chapter 70 estimates until 30 days after they have been submitted to the House and Senate committees on ways and means. This provision was intended to give the Legislature the opportunity to enact changes to the formula before the estimates were released. In practice, it has proven unworkable. Because of the size of the Chapter 70 program and its impact on the rest of the state budget, the Legislature has always deferred making its changes until the budget is adopted in late spring. Eliminating the mid-winter waiting period will allow the preliminary estimates to be released in time to assist towns preparing for spring town meetings.

   4. Eliminate exemption for high-scoring districts

      The current statute allows districts with high MCAS scores to opt out of the Chapter 70 financing requirements. In practice this has not offered any tangible benefit, as the district must also agree to give up all of its post-1993 state aid increases. We recommend that this unworkable provision be replaced by the proposed high-performance bonus program described earlier.

   5. Eliminate required district reporting for over/underspending in certain categories

      The current statute requires districts to provide explanations of over- or underspending in certain foundation budget categories (a requirement which has not been enforced by the Department due to staffing shortages). The proposal to eliminate the foundation budget categories would negate the need for this requirement. In its place, the Department will require underperforming schools and districts to provide much more detailed information on their programmatic needs and funding patterns as part of the mandatory improvement plans.

   6. Reconfigure and refocus the foundation budget review commission

      The focus of the foundation budget review commission has become somewhat fuzzy in recent years. We propose reconfiguring the commission's membership to include designated representatives from the Department of Education, the Department of Revenue, the Executive Office for Administration & Finance, the Mass. Municipal Association, the Mass. Association of School Committees, and the Mass. Association of School Superintendents, as well as some at-large members, and providing the commission with its own appropriation to fund contracted studies and incidental expenses. The commission's work would be focused on (a) reviewing the current level of the foundation budget and determining whether schools and districts can provide an adequate education at that funding level, and (b) developing recommendations for ensuring adequate funding at the school building as well as school district level. The commission would be required to submit a final report on its findings to the Governor and Legislature by September 30, 2000.