Agenda for a Better New York

Funding a Sound Basic Education for All New York's Children

David Gaskell
Frank J. Mauro
Jennifer McCormick
Trudi Renwick

January 99
35 pp. 
Plus appendices and tables. 

Fiscal Policy Notes

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EXECUTIVE SUMMARY

This paper sets forth an approach to reforming New York State's system of financing elementary and secondary education that has the potential to provide a significant amount of property tax relief to the residents of school districts with relatively low levels of ability to pay per pupil. Under the reform approach proposed in this paper, a uniform state property tax rate would be applied, with the state then financing the difference between the yield of that tax and the amount necessary to provide a "sound basic education" for each pupil attending a district's schools. The paper examines the distributional impact of this plan with particular attention being given to 45 districts that have been identified by the Board of Regents as "high need" districts because of concentrations of poverty and of pupils with limited English proficiency.

The new statewide educational finance system proposed in this paper is consistent with the principles established by the Campaign for Fiscal Equity (CFE). CFE is a coalition of parent organizations, community school boards, concerned citizens and advocacy groups, which, for the last six years, has been involved in a legal challenge to the way in which New York State funds elementary and secondary education. In 1995, the Court of Appeals - New York State's highest court - upheld CFE's right to pursue a constitutional challenge to the current system on the basis of its claim that many children in New York are being denied their right to a "sound basic education." The case, CFE vs. State of New York is expected to go to trial this year. In conjunction with extensive preparation for the trial, CFE has undertaken a far-reaching public engagement process which produced a set of principles that could be used to guide the formulation of a fair system for funding a sound basic education for schoolchildren throughout the state.

This paper focuses on the financing aspects of a sound basic education. It accepts virtually all the findings of the four major publicly-funded, multi-year studies of the state's school finance system that have been completed in the last 30 years (the Fleischmann Commission, the Rubin Commission, the Salerno Commission, the Moreland Act Commission), and of the many reports on the subject of school finance reform that have been published by the Office of the State Comptroller and the New York Board of Regents. This paper, however, attempts to build upon these previous studies and reports by developing a specific, comprehensive, formula-based plan for funding public education in New York State in a way that would achieve the dual objectives of school finance reform and property tax relief. It also recommends appropriate revenue sources for funding these proposals.

Rather than trying to create logic and equity from within the existing state system, this paper proposes that virtually all of the current hodge podge of aid formulas be replaced with two powerful and understandable formulas. The first, referred to as "basic operating aid," would

apply to all students in all school districts. The second formula - "special needs aid" - would recognize the special needs and costs of educating those students at risk as a result of poverty, limited English proficiency, and/or residence in a rural area.

Basic Operating Aid Formula

The basic operating aid formula proposed in this report is designed to be rational, fair, simple and understandable. It achieves the objective of targeting aid to poor districts by supplying the difference between the cost of providing the basic operations component of a sound basic education and a standardized "required local effort." School districts would not be rewarded for increasing expenditures, but every school district would be required to spend enough to achieve a sound basic education. School districts would have the discretion to raise and spend funds above the required level.

The paper does not attempt to determine a statewide average cost of providing the opportunity for a sound basic education but instead uses $8,000 per student as a proxy for the specific amount which, according to the CFE Fair Funding Principles, should be determined by the State. The basic operating aid formula incorporates regional differences in the cost of educational inputs using an index of school costs developed for the National Center for Educational Statistics by Jay G. Chambers.

A minimum required local effort establishes a floor from which state aid would be calculated. This analysis primarily examines a required local effort of $11.00 per $1,000 full value but includes consideration of local efforts of $9.00 and $13.00 per $1,000 full value. The minimum required local effort chosen largely determines the State's share of the total costs. Each district's basic state operating aid equals the difference between the amount estimated to be necessary to finance a sound basic education (number of students ´ adjusted sound basic education cost level) and the amount of revenue that would be generated by applying the threshold local effort (tax rate ´ full value ) and federal basic operating aid.

Aid for Students with Special Needs

The amount of State funding for special needs aid is directly related to the amount of basic operating aid. Special needs aid would be 15% of the total statewide basic operating aid, but the distribution among school districts would be quite different. The special needs aid formula would calculate each district's aid using a special needs index based on the number of high?risk students (based on current State Education Department definitions of poverty, limited English proficiency, and district population sparsity) adjusted by a wealth factor (the state share of the adjusted sound basic education aid).

Advantages of the Proposed Aid Formulas

The proposed basic operating aid and special needs aid formulas accomplish the objectives sought in educational finance reform and provide the funding necessary for a sound basic education. First and foremost, equity is achieved between rich and poor districts. State aid fills the gap between the required local effort threshold and the State-determined cost of a sound basic education. This funding scheme preserves both the importance of local effort and the ability of local districts to set the upper limit of school spending.

Even with a significant increase in total state aid, some school districts receive more state aid currently than under the proposed basic operating aid formula because of the current inequitable distribution of state aid. Hold-harmless aid can prevent any district from receiving less in basic operating aid than it now receives.

Both the basic operating and special needs aid formulas have few variables and are relatively straightforward. The state variables are the cost level established for a sound basic education and the minimum required local effort used in the state basic operating aid calculation. The district-level variables are the number of students (enrolled and attending, including summer school), the number of students at risk, current federal aid, the property tax base and the adjustments to recognize local differences in the cost of educational inputs.

The basic operating and special needs aid formulas are also stable. A school district could approach each new school year with confidence in its state aid expectations. The State Executive Budget for education would no longer be subject to the now customary unpredictability and wide variation in the year-to-year dollar and programmatic changes. School districts could return to their primary mission of educating children without being driven programmatically through state aid changes and without having to increase spending in order to get more state aid. The Board of Regents and the Department of Education could stay focused on educational outputs and on insuring that educational standards are being met. This study uses revenue and expenditure data for the 1996-97 school year. Based on the 1996-97 financial data, the following observations are made if the proposed basic operating and special needs aid formulas had been in place in 1996-97.

* the State's share under the proposed basic operating and special needs aid formulas would grow to 54.6% (including a provision for hold harmless aid) from the current 39.3% share

* the additional State dollars required to fund a sound basic education would total $5.192 billion

* local property taxes would decrease by $2.137 billion

* the net effect on funding of a sound basic education would be an increase in expenditures of $3.056 billion.

Funding a Sound Basic Education and Recent Changes in State Aid and School Tax Relief

Since the 1996-97 school year, significant increases and changes have occurred in state aid, and the STAR program providing school tax relief has been enacted. Total education aid has increased by $1.7 billion and another $1.0 billion has been promised. The STAR program will cost $2.7 billion when fully implemented. The sum of this additional aid is significantly greater than the additional money that would have been required in 1996?97 to fully implement the proposed reforms.

The plan proposed in this paper distributes school aid much differently than the increases enacted in 1997 and 1998, which only exacerbated the inequities between wealthy and poor districts. The 45 school districts defined by the Department of Education as "high need" received 47% of 1996?97 state aid (excluding building and transportation); they will receive 34.4% of STAR money and they received 56.6% of the increased aid (that could be broken down by district) in 1997 and 1998. If STAR and the additional aid could instead be distributed using the proposed plan, those 45 high?need districts would receive 66.2% of that money.

Alternative Revenue Sources

The final section of this report examines alternative sources of revenues and concludes that given the significant cost of financing education, only a broad-based tax can provide sufficient revenues to meet State educational financial obligations. The report outlines the advantages and disadvantages of property taxes, the personal income tax, business taxes and consumption taxes and concludes that the preferred source of additional funds for education is the personal income tax.

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