School Funding

Critics Call Formulas ‘Complicated,’ Rife With Imbalance
Arizona Capitol Times
Friday, August 26, 2005
Jim Small

By all accounts, Arizona has one of the more confusing funding mechanisms for public education. Instituted in 1980, the system was designed to replace an unfair system based solely on property taxes with one that saw the state chipping in to ensure all school districts were provided funding to allow “general and uniform” education, as required by the state Constitution.

However, instead of being equitable, some legislators, policy-makers and watchdog organizations say there are loopholes that create inequities and allow some districts to have access to greater sums of money.

Throw in the budget overrides and bond elections that school districts seek, they say, and what was once a level playing field for all becomes tilted in the favor of a few districts.

In order to understand where the inequities come from, one must first understand the basics of what Michael Hunter, vice president of the Arizona Tax Research Association, calls “the most complicated school finance system in the country.”

Prior to the 1980 funding reforms, counties established schools, which then banded together into districts and opted to tax themselves to pay for the costs of educating students — “Pretty much like Little House on the Prairie,” says Mr. Hunter, a school finance expert.

This system is rife with imbalance, as a district with large property wealth and a small tax rate could generate huge revenue amounts and make large expenditures, while, conversely, a poorer district could have a much larger tax rate but not generate nearly as much money, thereby having less to spend on students.

In 1976, a California lawsuit — Serrano vs. Priest — precipitated the change of education funding systems around the country after that state’s Supreme Court ruled that the existing practice of funding schools solely on the property wealth within the district violated the equal protection clause of the state Constitution. The court said property tax rates and per pupil expenditures needed to be equalized by the state.

As similar lawsuits popped up across the country and similar funding systems were ruled against by the courts, Arizona leaders in 1980 succeeded in getting education reforms on the ballot; voters approved the equalization plan, ushering in the base system in place today.

Maximizing Local Control

“The [plan’s] intent,” Mr. Hunter says, “was to give more local control to districts” by creating a two-tiered property tax unique to Arizona: primary and secondary property taxes. Primary property taxes can be collected by the state, counties, cities, community college or school districts and are dedicated for operation and maintenance expenditures of the respective jurisdiction. Secondary property taxes may be levied for voter-approved budget overrides, special districts, or to pay for bonded indebtedness.

Equalization of K-12 education funding was to be phased in gradually until the 1985-86 fiscal year, at which point school districts of all sizes and affluency level would have the same per-student funding.

Rather than decrease the amount of money richer school districts collected, the state instead paid poorer districts the difference, leading to tremendous increases in education funding paid by the state.

“Big reform happens by floating everybody’s boat up,” Mr. Hunter said. “You would not have seen growth in state appropriations had it not been for these [funding] formulas dictating.”

In fiscal year 1981, school spending ranged from 112 percent above the base support level (BSL) per student, as determined by the Legislature, to 28 percent below. By fiscal year 1987, the highest spending level was only six percent above the BSL, while the lowest was a mere three percent under.

Most states in the nation today employ a school finance system similar to that in Arizona, where the state fills in the difference after property taxes are collected to give all schools an equitable funding level.

Some states have differences in the fairness of how much money school districts are afforded, mostly due to how individual states have decided to fund English Language Learner, special education and other various subsets of students.

Within states, school districts receive varied funding levels that, initially, are based on the same base amount, but are impacted by variables in student population. One school district may receive more per pupil funding because of a high number of students that don’t speak English, for example.

Arizona is no different: myriad factors alter the funding level a district receives, from ELL students to transportation funding to voter approved budget overrides to teacher retention programs. It is these dynamics that observers and lawmakers say need the most attention.

“What we can do to make more equity — for taxpayers and students — and align ourselves with the constitutional requirement for ‘general and uniform’ is manage better those items that are outside the equalization system,” ATRA’s Mr. Hunter says.

The goal, he says, should be to make whatever changes are necessary to create a “roughly equal system that maximizes local control” and lets district governing boards have as much budgetary freedom as possible.

Lawmaker: ‘Perverse Reward’

For five years, Rep. Steve Huffman, R-26, has been working on an issue he says has allowed some districts to circumvent the funding formulas in statute and have free reign on property taxes with no oversight or approval.

When Tucson Unified School District legally increased its property tax revenue by $10 million in one year with no voter approval, Mr. Huffman says he took notice. He also noticed that there was no oversight of how the money was spent.

After being ordered by the courts to desegregate, TUSD — under state law — was allowed to levy unlimited property taxes in excess of its budget limit to solve the problem.

That a school district would not violate the civil rights of students is an expectation any citizen has of the school system, Mr. Huffman says. What concerns him, though, is the “perverse reward” that any district that gets caught doing so gets access to unlimited funds in perpetuity.

“I think that’s unconscionable,” he said.

Not only does it raise moral issues, it also creates an imbalance in the school funding system that Mr. Huffman believes will, if it is not addressed through legislative reform, lead to a lawsuit and the potential crippling of more than a dozen school districts.

The problem as Mr. Huffman sees it is that, of the 19 districts that have unabated access to the property tax base — either by a court order to desegregate or an agreement with the federal Office of Civil Rights — only two are required to use the money: TUSD and Phoenix Union High School District.

That the other 17 districts continue to access the property tax revenue they are entitled to by law does not concern Mr. Huffman — after all, in order to avoid running afoul of the courts or Office of Civil Rights again, the programs put in place to solve the violation must continue to be funded. He says he is most alarmed at the potential abuse of the system by school districts that could raise taxes at any time and the lack of oversight of how the desegregation/OCR money is spent.

Court Challenge?

He believes the downfall of the current system will be a court challenge to the inequity the current mechanism engenders. Most every school district has to spend money to teach ELL students English; Mr. Huffman says the vast majority of desegregation/OCR money is used to fund such programs. Schools that never violated civil rights are at a disadvantage to those that have and that now can raise taxes to pay for the programs on a whim.

“I believe there will be a lawsuit filed in the next few years challenging the constitutionality of current desegregation funding and I think the state will lose,” he says. “Overnight, the state would have a major financial problem to deal with.”

Rep. Martha Garcia, D-13, is also the president of the Cartwright Elementary School District governing board. In fiscal year 2004-05, her district spent $4,140,780 in desegregation money. In order to comply with English immersion laws approved by voters in recent years, she says the money has mostly been dedicated to ELL programs.

“What we’re doing is we’re revamping [the spending] because we have to follow today’s laws,” she said.

Without access to that desegregation money, Ms. Garcia said, finding the necessary funding for the ELL programs would be impossible.

Mr. Huffman says the best long-term solution for all parties involved — school districts, parents, students and taxpayers — would be for a change in the law to regulate and oversee desegregation expenditures so the state has a constitutional leg to stand on in the event of a lawsuit.

“We need to find a way that’s fair to all our kids,” he said, “that doesn’t reward for breaking our kids’ civil rights.”

It’s a lofty goal, though Mr. Huffman admits his success in convincing school districts to see it his way has been less than stellar.

“I am rapidly becoming convinced that the only way these school districts are going to take this issue seriously [is if] it gets to court,” he says. “There’s nothing we can offer them that’s a better deal than the availability of unlimited money.”

Rep. Huffman: Governor ‘Has No Interest In Reform’

For five years, Mr. Huffman has sponsored legislation to introduce reform to the state’s desegregation funding laws. Last session, he was successful on one of his attempts: H2497 (Laws 2005, Chapter 159) ups the reporting of desegregation data from biennially to annually and requires reports be more in-depth, with expenses justified educationally.

His other bill, H2498, would have required legislative approval for future desegregation spending above the current level. Governor Napolitano vetoed the bill, saying it placed an artificial cap on spending and failed to account for student population growth and that the bill would not have stood up in court.

Because the governor “has no interest in long-term reform,” Mr. Huffman said he doesn’t plan on introducing similar legislation next year.

“Anything we get up on her desk will just be instantly vetoed,” he said.

Transportation Funding

When the 1980 funding reforms were passed, lawmakers struggled with how transportation costs to school districts should be funded. Some districts, especially those in rural areas where students are spread out over a larger area, had considerably higher expenses than districts in which students were clustered together.

In order to avoid hamstringing districts with higher costs, the decision was made to hold current transportation funding levels the same and the Transportation Support Level, or TSL, was created. As student transportation costs rose or fell, the TSL formula would reflect that.

The reforms also created the Transportation Revenue Control Limit, or TRCL, to hold districts harmless for rising costs due to growth. It is calculated by the previous year’s TRCL adjusted by growth — if there is any — in the TSL. Basically, if the TSL grows, the TRCL grows by the same amount; if the TSL holds steady or declines, the TRCL remains the same, creating a ratchet-effect of sorts.

In the 25 years since the TSL and TRCL were created, the latter has outpaced the former in many districts. The Arizona Tax Research Association estimates the hold-harmless funding mechanism places the TRCL $54 million higher than the TSL statewide.

ATRA supported legislation last session to limit TRCL growth, largely because of the impact the gap has on property taxes. While the state’s equalization formula recognizes the lower TSL when determining how much money districts receive, the budgets adopted by the school districts include the higher TRCL. Essentially, the $54 million difference results in local property taxpayers picking up the tab instead of the state.

The bill, H2682, would have prohibited increases to the TRCL if the calculated amount exceeds 120 percent of the TSL. It was defeated in the House by a March 24 floor vote of 26-33.

Mr. Hunter of ATRA said the current formulas don’t recognize actual spending, but rather are used merely as a way to divvy up monies.

Rep. Linda Lopez, D-29, voted against the bill. As a board member of the Sunnyside Unified School District in Tucson, she said she sees the deficiencies in the law ATRA sees, but doesn’t think their plan was a solution.

“It was an attempt to undermine public education by limiting money in the formula for transportation,” she said. “The problem is the formula needs to be revamped so that schools are reimbursed for the actual costs of transporting students.”

Resolving the disparity between the transportation funding formulas is a top priority for ATRA, Mr. Hunter said, and the organization is working on gaining support for the issue at the Capitol.