School Funding Comparison and Analysis: FY15, FY17 (Governor) and FY17 (House) Funding Formulas

Ohio’s current (FY14-15) school funding formula bears a strong resemblance to the formula that was in place in FY09 and earlier. The primary difference is the utilization of the State Share Index (SSI) instead of the millage chargeoff as the method for determining the state and local share of education funding in each school district. While a related article in this newsletter provides more details on the state/local share issue, the purpose of this article is to provide a comparison between the current funding formula and the funding formulas proposed by the Governor and House of Representatives as part of the FY16-17 budget process.

The Current FY14-15 Funding Formula — Table 1 below provides a summary of how the current FY15 funding formula distributes funding across Ohio’s 610 school districts according to the Ohio Department of Education’s (ODE) school district typology categories. The first two columns of Table 1 show that Ohio’s rural and urban school districts all receive an average of over $5,000 per pupil in state aid, while small town districts receive an average of $3,850 per pupil and poor small town districts receive an average of $4,599 per pupil. Ohio’s suburban districts, which tend to be the wealthiest in the state, receive the least state aid per pupil.

Table 1: Comparison of FY15 Computed Formula Aid (Fully Funded, no Cap or Guarantee) with Actual FY15 Foundation Aid by Typology Group (LSC Data)

Table 1 also provides a comparison between the actual aid that districts are receiving (the first two columns) and the state aid that they would receive if there were no transitional aid guarantee or gain caps employed (this is the “Computed Formula Aid” shown in the middle two columns of the table). The rightmost columns of Table 1 show that on average Ohio’s rural and small town districts would receive less state aid if the guarantee and gain cap were removed, while Ohio’s poor small town, suburban and urban districts would all get more state aid than they do currently. In essence, this comparison indicates that under Ohio’s current funding formula, Ohio’s rural school districts tend to be the ones on the guarantee while the urban and suburban districts tend to be the ones on the gain cap. This pattern creates concern, as it is the rural districts in the state that are generally understood to lag behind other types of districts in terms of the educational opportunities provided to their students.

The Governor’s Proposed FY16-17 Funding Formula
The FY16-17 funding formula proposed by Governor Kasich retains the basic structure of the current funding formula and increases the funding parameters for Core Opportunity Aid (from $5,800 per pupil in FY15 to $5,900 in FY16 and $6,000 in FY17), Special Education, Career Technical Education, K-3 Literacy Aid, and Transportation. Under the Governor’s proposal, the gain cap would be 10% in both FY16 and FY17. The current (FY15) gain cap is 10.5%. The main differences in the Governor’s proposal from the current formula are that the SSI is modified to more rationally include median income as a factor in addition to property wealth per pupil, and that the Governor’s proposal would phase down the transitional aid guarantee by a maximum of 1% of a district’s total resources in both FY16 and FY17.

The governor’s budget proposal also includes a continuation of the reduction in TPP replacement payments initially begun in FY12 and FY13. This issue is discussed in more detail below.

Table 2 provides a summary of how the Governor’s proposed FY16-17 funding formula would distribute funding across Ohio’s 610 school districts according to ODE’s school district typology categories. It also provides a comparison of how FY17 funding under the Governor’s plan compares to current FY15 funding levels by typology group.

Table 2: Comparison of Governor’s FY17 Proposed Foundation Formula Aid (After Cap & Guarantee) vs. FY15, by Typology Group (LSC Data)

Table 2 shows that Ohio’s rural districts would on average receive a decrease in funding in FY17 compared to current funding levels under the governor’s proposed funding plan. This is because many of these districts would experience decreases in their guarantee amounts. Poor rural, small town and wealthy suburban districts would receive increases that average between 2.8% and 6.3%. Poor small towns, suburban districts and urban districts would all receive average increases in funding in double digits under the Governor’s plan (the maximum percentage increase would be 21% over the biennium). Urban decreases receive large districts under the Governor’s plan largely because their property values have continued to decline over the past several years.

Under the Governor’s plan, before reductions in TPP replacement payments are considered, 278 districts would receive less state aid in FY17 than they do in FY15.

The House of Representative’s Proposed FY16-17 Funding Formula
The House of Representatives FY16-17 budget proposal (HB 64) maintains all of the funding formula parameter changes contained in the Governor’s proposal (Core opportunity aid per pupil amounts, special education and career technical education funding amounts, etc…), and also makes seven major changes to the FY16-17 school funding formula initially proposed in the Executive budget. These changes are summarized below.

1) Transitional Aid Guarantee – The House proposal formula eliminates the reductions in the guarantee proposed by the Governor and assures that all districts will receive at least as much formula aid in both FY16 and FY17 as they did in FY15.

2) State/Local Share Calculation – The House plan makes two changes to the method for calculating the state and local share of funding. First, the use of property valuation per pupil is replaced with a chargeoff approach based on total property valuation. Each district’s property valuation is then multiplied by 20 mills to determine an unadjusted local contribution. The return to the chargeoff approach is expected to provide more stability to the funding formula because each district’s state and local share depends only on its own valuation change over time rather than how valuation changes in comparison to all other districts in the state as is the case with the SSI approach.

Second, under the House proposal, each district’s local contribution is multiplied by an income ratio based on the district’s median income compared to the statewide median income. The income ratio is capped at 1.315 in the highest income districts. In addition, the income adjustment for districts above the statewide median income is phased in at 50% in FY16 and 60% in FY17. As is the case currently and under the Governor’s proposal, all districts receive at least 5% state aid.

The result of the House proposal is that the local contribution is essentially an income-adjusted chargeoff that varies from roughly 11 mills in the lowest income district to a maximum of 23.15 mills in FY16 and 23.78 mills in FY17. While it is not widely understood, the current SSI also functions as a variable chargeoff with most districts ranging from 18 to 23 mills. The House state share calculation merely makes this phenomenon more transparent and easier to understand.

3) Addition of Tier 3 of Targeted Assistance – The House proposal includes a new funding component which is based on the ability of districts to raise revenue from 1 mill of local property taxation. Districts are ranked from low to high in terms of their local revenue generating capacity, and then provided aid on a per pupil basis at a decreasing percentage. Aid is provided to all districts below the median revenue raising capacity (roughly $220,000 in FY17). The district immediately above the median only receives a small amount of supplemental aid. This component is included as “Tier 3” of Targeted Assistance.

The rationale for the inclusion of this funding component is that some districts in Ohio raise as little as $40,000 or $50,000 from one mill of taxation. This amount of money is barely enough to hire a teacher and such a small increase in resources hardly justifies the time and expense of a levy campaign. No aspect of Ohio’s current funding formula addresses this particular issue.

4) Gain Cap – The House proposal contains a gain cap of 7.5% in both FY16 and FY17. The Executive proposal included a gain cap of 10% in each year. The gain cap in FY14 was 6.25% and is 10.5% in FY15.

5) Six-Year averaging of Property Valuation in Agricultural Districts – The House proposal provides that districts whose percentage of Agricultural property to total real property is greater than 20% will have their property wealth averaged over a six-year time period instead of a three-year time period. The reason for this change is that Agricultural property is more volatile than other types of property wealth and the longer time frame smoothes out district valuation changes. This volatility has been in evidence by the large increases in recent years in CAUV valuations.

Because the local contribution is based on a charge-off type approach rather than a valuation per pupil index, the adoption of six-year averaging for Ag districts does not adversely impact non-Ag districts.

6) Minimum Per-Pupil Aid – The House proposal provides an additional funding component that when fully phased in would ensure that no district receives less state aid per pupil than 20% of the Core Opportunity Aid per pupil amount. As the Core Opportunity Aid amount is $5,900 per pupil in FY16 and $6,000 per pupil in FY17, this provision would ensure a minimum of $1,180 and $1,200 per pupil in FY16 and FY17, respectively. This provision is phased-in at 50% in the FY16-17 biennium.

The rationale for this provision is that Ohio provides more than $1,000 per pupil in state assistance to non-public schools and should provide a comparable amount to all public schools.

7) TPP Supplement – The House funding proposal adds $36.0 million in FY16 and $65.7 million in FY17 (total of $101.7 million) as a “TPP Supplement” to 93 school districts that would have received a net reduction of formula aid + TPP replacement payments compared to FY15 levels as a result of the phase-down of the TPP payments.

Table 3 provides a summary of the House school funding proposal as compared to current funding levels using the ODE district typology categories. Table 3 shows that FY17 funding levels under the House plan are a 13.0% increase over FY15 funding levels, with all typology groups receiving at least a 9.0% increase on average. The rightmost column of the table shows the percentage increases for each typology group under the Governor’s proposed funding formula that were shown earlier in Table 2.

Because of the elimination of the guarantee phase-down proposed by the Governor and the inclusion of the TPP supplement, no district loses state funding under the House plan in either FY16 or FY17 as compared to FY15.

Table 3: Comparison of House’s FY17 Formula Aid vs. FY15 Formula Aid, by Typology Group (LSC Data)

Resumption of the Phase-out of TPP Replacement Payments
The Governor’s FY16-17 budget proposes the resumption of the phase-out of TPP replacement payments initially begun in the FY12-13 budget. In FY12 and FY13 fixed rate operating levy replacement payments were reduced by a maximum of 2% of total resources per year. Separate calculations were made for business TPP (from HB 66 in 2005) and public utility TPP (from SB 3 in 2001). Thus in FY12-13 a district could theoretically lose up to 4% of state and local resources if it were receiving significant business and TPP replacement.

In FY16 and FY17, a single calculation will be made for combined business and public utility TPP replacement payments (there are only 5 districts currently receiving public utility TPP payments). Districts in the lowest (poorest) property wealth quintile will see TPP replacement payments reduced by a maximum of 1% of total resources. Districts in the highest (richest) property wealth quintile will see TPP replacement payments reduced by a maximum of 2% of total resources. Districts in the three wealth quintiles in between will see TPP replacement payment reduction of 1.25%, 1.50%, and 1.75%, respectively.

Replacement payments for current expense (operating) levies are currently $420.1 million in FY15. Both the Governor’s and House’s funding proposals would reduce these payments to $282.5 million in FY16 and to $182.4 million in FY17. In FY11 these TPP payments were $985.9 million. Thus, the Governor’s proposal would take current expense TPP operating levy replacement payments down to 18.5% of their original level.

Table 4 provides a comparison between FY15 and the Governor’s proposed FY17 funding plan when both the funding formula and TPP replacement payments are considered. After TPP is taken into account, under the Governor’s plan 287 districts would have more funding in FY17 than in FY15 and 323 would have less. Rural and wealthy suburban districts would, on average, have less total formula + TPP replacement payment funding under the Governor’s plan than under the current formula.

Table 4: Comparison of Governor’s FY17 Formula Aid + TPP Replacement vs. FY15 Formula Aid + TPP Replacement, by Typology Group (LSC Data)

Table 5 provides the same data for the House proposal and also includes the percentage changes in funding under the Governor’s plan from Table 4 for comparative purposes. Table 5 shows that all categories of school districts fare better under the House proposal than under the Governor’s proposal when formula funding + TPP replacement are totaled. This it be expected as the House proposal eliminates the reduction of the guarantee and also provides the TPP supplement to forestall district losses due to the continuation of the TPP replacement phase-out. Under the House proposal, because of the TPP supplement no district would receive less funding in FY16 or FY17 than in FY15.

Table 5: Comparison of House FY17 Formula Aid + TPP Replacement Payments) vs. FY15 Formula Aid + TPP Replacement Payments, by Typology Group