Chapter 70 Working Group
Report
The Chapter 70 working group was formed pursuant to
section 607 of the FY04 budget, with a charge as follows:
There shall be a house and senate working group to develop legislation to reform chapter 70 of the General Laws. The working group shall be made up of the president of the senate or his designee, the speaker of the house or his designee, the senate and house chairs of the joint committee on education, arts, and humanities, the chairs of the senate and house committees on ways and means and the minority leaders of the senate and house, or their designees. The working group shall address matters including but not limited to aid and required local contributions determined under chapter 70 and shall consider how best to allocate state funds equitably to cities, towns, and regional school districts. The working groups shall consider the appropriate balance of property value and income measures in setting local spending requirements, and shall recommend ways to reduce arbitrary discrepancies in required local contributions and state aid levels of similar districts.The working group shall draw on the expertise of interested parties including but not limited to representatives of the department of education and organizations representing educators, school administrators, and local officials. The working group shall submit preliminary recommendations to the joint committee on education, arts, and humanities on or before December 12, 2003.[1]
Throughout the fall, members of the working group and
their staff have met to discuss education funding reform. A hearing at the State
House on October 22 gathered public input. The working group submits this preliminary
report to inform members of the Legislature and the interested public of the substance
of the working group’s discussions and areas of developing consensus on guidelines
for Chapter 70 reform.
Educators, municipal and state elected officials, and
other advocates for education and for taxpayer equity have advanced countless
proposals on education funding in recent years.[2]
Many of these proposals share a belief that Chapter 70 aid should allocate similar
aid to similar communities with similar enrollments and demographics, while reducing
arbitrary discrepancies in local required spending amounts – although when the
time comes to define “similar” and to grapple with the spending limits effectively
imposed by Proposition 2 ½, that consensus becomes less firm. The working group’s
report on these issues reflect both the consensus over goals and the uncertainty
over details that have been present in the debates of the past few years.
The working group broadly agrees that communities
of similar fiscal strength should receive similar aid and have similar spending
requirements. The working group is still struggling with defining a municipality’s
resources, choosing a defensible formula which would link the municipality’s resources
with a guaranteed aid level, and detailing and implementing the goals of a fairer,
more rational system for distributing aid to districts. In many ways, the group
has discovered that over the past several years, significant consensus has been
reached on overall goals for chapter 70 reform, but very little consensus has
been attained about the technical and statistical measures to be used in any transition,
in part because discussions and testimony have not had the specificity necessary
to produce a detailed consensus proposal. The group hopes to rectify that through
its call in this document for more specific input on these measures in order to
draft reform legislation.
The working group is also keenly aware of the state’s
fiscal challenges. Budget constraints leave little hope for significantly increased
education funding in the near future. Thus the working group intends first to
lay out a framework for how greater equity might be brought to the calculation
of local contributions, and how aid might be more progressively and fairly allocated
in an enrollment sensitive manner to districts with net school spending above
the foundation budget level. Reaching a fairer, more rational distribution of
aid is a transition requiring controversial discussions of overall funding levels
and measurement of communities’ resources and abilities to pay.
Members of the working group are deeply committed to
addressing inequities in Chapter 70 aid and local spending requirements. In light of the current fiscal challenges,
some of the issues which have been identified by and to the working group will
not be resolved in the FY05 budget, but it is our hope that this report helps
build the parameters for reform. In addition, we hope to advance the dialogue
on the statistical and technical details necessary for reform. The working group welcomes feedback on this
report.
This
report identifies areas in which the working group is particularly interested
in opinions on the advisability and technical feasibility of changes to the formula.
The working group asks the Education Committee to use this report and the discussion
it engenders in its development of any future finance reform legislation.
The working group requests that comments be directed to the Joint
Committee on Education, Arts and Humanities (Room 473G, State House, Boston, MA
02133) or emailed to ssmith@senate.state.ma.us and kathleen.devlin@hou.state.ma.us
by January 15, 2004.
Foundation
Budget
The foundation budget is the state’s legal calculation of the cost of running any school district, given its particular enrollment and demographics. Assuring that state aid gets all districts to foundation, regardless of local resources, is the core of Education Reform.
The foundation budget and the state’s commitment to assure that the sum of local and state spending in every district is at or above foundation is at the center of Chapter 70. In light of the working group’s primary mandate, however, and also in recognition that the Superior Court is currently reviewing the adequacy of the foundation budget in the Hancock case, the working group has not addressed the definition of the foundation budget.
Local Spending
Requirements
Through Chapter 70, the state mandates a minimum amount that each city and
town must appropriate for its schools. Spending
requirements vary by community and are intended to reflect the state’s estimate
of local ability to pay.
- Goal: To rationalize local
spending requirements in relation to communities’ abilities to pay and to set
similar spending levels so that similar communities have similar tax rates for
educational purposes.
- Issues Discussed by Working
Group:
Equity
in Local Spending Requirements and Implicit Tax Rates
The major issue regarding local spending requirements is ensuring that the state’s requirements for each community corresponds fairly with that community’s ability to pay. The method of determining which communities have relatively high and low spending requirements is vital to the process of narrowing the range of spending requirements for similar communities. The working group searched for a framework for comparing communities’ spending requirements in a way that properly accounts for wealth and income levels. The implicit tax rates that would result from such a framework could be used to create more uniform local spending requirements.[3] The methods discussed as possible ways to calculate implicit tax rates were:
·
Calculating
implicit tax rates using non-adjusted equalized valuations as determined by the
state Department of Revenue.
·
Adjusting
required spending per $1,000 EQV[4]
by median income as a percentage of state average.
·
Applying
an income adjustment only to residential properties and not adjusting commercial
properties.
·
Adjusting
property values downward for communities of below average income but not making
income adjustments to communities of above average income.
·
Applying
the downward-only method only to residential properties only.
Once
the best adjustment factor is determined, the goal would be to bring every community’s
implicit tax rate to within a certain range over a period of time. This would
moderate both the very high and the very low spending requirements and ensure
that communities of similar fiscal strength had spending requirements within a
defined range, as measured by their tax rates. The question of how to require
increased spending in historically low effort communities is problematic, particularly
in light of Proposition 2 ½ limits which fix in place low and high tax rates alike.
Net
School Spending
Also
discussed was limiting required net school spending amount to a percentage of
the foundation such as 110% to 125% of foundation. Communities wanting to spend
more would be free to do so, but the state could not require any school district
to exceed the maximum. This approach would allow wealthy communities to maintain
tax rates below the usual range if they were able to generate the revenue needed
to meet their required net school spending at these tax rates.
The
working group is aware that introducing a ceiling on local spending requirements
and limiting required net school spending would allow for decreases in spending
in some districts. For example, a town which currently has a required school spending
of $16,000,000 on a taxable base (adjusted for income) of $1,000,000,000 in property,
for a rate of $16.00 per $1,000 adjusted EQV, might be permitted to reduce its
required local contribution if the state average rate were well below that $16.00
rate. If the local district had required net school spending of 130% of foundation
even after the rate reduction, the district required spending could be reduced
further. Aid would not necessarily be increased to offset
the reduction.
Whether
to continue or eliminate an excess debt provision is also being considered. The
excess debt allowance in current law allows above foundation communities who have
higher than average capital costs per student to reduce their net school spending
by that amount, provided spending does not drop below foundation.
- Proposals for Adjusting
Local Spending Requirements:
While broad agreement exists among the working group that rationalizing local contribution requirements is important, no final decision was reached about what exact measures should be used. The following are measures the group found appealing:
·
Retain
a system of local spending based primarily on maintenance of prior year effort,
but work to reduce spending requirements for the cities and towns with the highest
tax rates for schools and to raise requirements for the cities and towns with
the lowest tax rates for schools.[5]
·
Identify
the extent of variation in local spending requirements through the determination
of an implicit tax rate for every community (required spending per $1,000 EQV,
adjusted in some manner by median income per taxpayer). The goal would then be
to bring in both low effort and high effort outliers into a finite band of implicit
tax rates.
·
For example, if the state average
implicit tax rate were $10.00 per $1,000 EQV, over a period of time, communities
well above or well below would adjust their local spending to be within a defined
range, such as $7.50 to $12.50. Required local contributions would be the product of local adjusted
EQV and a rate within this band.
·
Over time, this band of implicit
tax rates could be narrowed as the state’s fiscal condition and Proposition 2
½ constraints allow. The initial effort, however, would focus initial and meaningful
contribution relief on the communities with the most egregiously excessive contributions
rather than providing modest to negligible relief on every community even slightly
above state average.
· For the purpose of comparing implicit tax rates, the working group looks favorably at a “downward only” income adjustment, in which lower than average income would be used to adjust downward the available tax base, but no adjustment would be made to the EQV of towns with income above the state average.
·
By using the “downward
only” method, the state would not underestimate the tax rates of wealthy communities
with median incomes above state average . At the same time, communities with below
average income would have this constraint on ability to pay taken into account
when determining their required local contribution. In this manner, a low income
city’s spending requirements could be relaxed in light of low income without exaggerating
the property wealth of a high income town.
·
The working group
is inclined to support an approach which does not distinguish between residential
and commercial property when comparing the tax bases of cities and towns.
- Areas for Comment:
·
What
rate of growth in required local contribution should the state impose on very
low spending cities and towns? How should the limits of Proposition 2 ½ be taken
into account?
·
To
what extent should the state allow very high spending towns to reduce local contributions?
Should every town above the state average be considered high spending or only
those above a certain percentage of the state average?
·
What,
if anything, is a reasonable limit on required net school spending as a percent
of foundation? 110%? 125%? Higher or lower?
·
Is
the “downward only” income adjustment described above advisable? Is the current
measure of residentially adjusted EQVs more understandable or accurate?
·
Should
there be adjustments to required local contribution for excess debt as under present
law, or in some other manner?
·
Is
the municipal revenue growth factor (MRGF) an accurate representation of municipal
revenue growth? If not, how should it be altered?
State Aid
Chapter 70 organizes the distribution of over
$3 billion in state funds to cities and towns. Aid levels are not less than the
difference between the local foundation budget and local required spending. Aid
amounts are also influenced by variable spending requirements and historical patterns
of aid distribution.
- Goal: To maintain districts
at foundation while attempting, as much as possible, to provide those districts
which are of similar wealth and income levels and are spending at or above foundation
with similar aid as a proportion of their foundation budgets.
- Issues Discussed by Working
Group: The basic structure of Chapter 70 is to calculate the foundation
budget, set local required spending levels, then allocate state aid, which must
be at least enough to get all districts’ net school spending (state plus local funds) to the level of foundation.
The working group supports this general structure, but recognizes the concerns
of districts that receive dramatically different shares of their foundation budgets
as aid as a result of the formula’s reliance on historic aid levels, its lack
of responsiveness to enrollment change, and the “hold harmless” aid, which collectively
undermine rational distribution of aid.
A major technical concern in distributing aid in an equitable manner is the method used by the state to assess local fiscal strength. Discussion has centered on what factors and methods should be used to best reflect a community’s fiscal capacity. The following possibilities were considered:
·
Use
only equalized property value (EQV). The rationale for this method is that the
amount of revenue a town can generate, regardless of its income level, is determined
primarily by its property taxes; therefore property values most accurately indicate
a town’s tax base.
·
Use
a combined measure of property wealth and income. If setting local contribution
requirements in strict proportion to taxable property value helps standardize
tax rates, it also can overstate the extent to which residents can access wealth
tied up property when they are paying their taxes. This can be a particular problem
for residents whose properties have appreciated dramatically in value while their
income has changed little.
·
If
an income adjustment is deemed appropriate, a choice must be made about the relative
merits of using median versus average income. Average income is a measure which
makes a town look excessively wealthy as a result of a single high income household,
or a handful of such households, which median income avoids. Note that the data
sources are different, with average income data most readily available from the
U.S. Census every ten years, while median income data is available from the Department
of Revenue, but only for those who are required to file income taxes.
·
One
way of adjusting wealth for income is simple multiplication. For example, if a
town’s income as a percent of the state median income were 82%, then its equalized
valuation would be multiplied by 82%, with that total compared to the state average.
An alternative method is to average wealth and income such that a town with wealth
at 95% of the state average and income at 85% of the state median would have a
fiscal strength of 90% of state average.
·
A
third issue that must be addressed is whether the final judgment of wealth should
be based on wealth per student, a better reflection of the town’s ability to pay
specifically for education, or wealth per resident, potentially a better reflection
of public intuitions about which towns are wealthier or poorer.
·
Finally,
any income adjustment can be made to all property, or alternatively, only residential
property. Income is of direct relevance
to residential property owners, but local businesses are also affected by local
income levels. Failing to adjust for non-residential property for income in above
average income towns wrongly gives the impression that towns with some commercial
tax base have less capacity to tax than those with entirely residential property.
While there has been no resolution on this matter, discussion centered on adding what has been called a “target share” approach to determining how much state aid a district receives, provided that every district is first guaranteed enough aid for spending to be not less than foundation. In order to establish a basis for comparing aid to similar communities, the state could create a sliding scale linking fiscal strength to levels of state aid as a percentage of foundation budget For example, any town with average fiscal strength would receive a fixed percentage of its foundation budget in state aid, while a relatively better off town might receive a lower percentage.
Even if a common definition of local resources can be agreed upon, significant decisions must be made about how to translate those wealth levels into guaranteed levels, and about what mathematical formula should be used in that endeavor. Here the working group did not reach final resolutions, as significant questions are presented by the attempt to define this formula:
·
A
formula may be written so that towns of greater wealth get steadily and proportionally
less aid as a percent of foundation. Graphically, this is represented as a line,
and tends to be very expensive. (figure 1 below)
·
A
formula may be written corresponding to a curve. Even at this point, choices are
infinite. A curve can be drawn in such
a manner as to give the poorest towns sharp increases in percentages of guaranteed
aid or to give dramatic increases to wealthy towns currently receiving very low
aid percentages (figure 2 below). Drawing such a curve requires technical decisions
about what percentage an average community should receive, what slope the line
should have above and below that point, and how much is available to fund any
such formula.
·
The
formula can be written to generate a wide variety of costs. Target share curves
can be drawn so high that almost every district receives more aid, which is prohibitively
expensive for the state, or so low that no district requires more aid, which makes
the proposal undesirable to districts. (figure 3 below)
·
Finally,
if a curve is draws in the middle of the present distribution, legislators face
yet another set of decisions. One choice is to use the curve only for aid increases
for districts presently below the curve and not for aid cuts for those above.
This makes any target share proposal more expensive. The second choice is to bring
every district receiving less than its share up to targeted levels of funding
while reducing the aid of any district receiving more than its share. This makes
a formula with generally higher target shares less expensive, as allowing reductions
helps make the whole formula revision more cost neutral.
Figure 1 Figure 2 Figure 3
A subsidiary but
important part of the group’s discussion was the possibility of establishing both
a floor and a cap on how much aid each districts receives as a percent of foundation.
In the first instance, each district would be guaranteed aid in the amount of
10-15% of its foundation budget. On the positive side, this is a simple, easy
to explain proposal that addresses the considerable concerns of those districts
most aggrieved at the low levels of support they currently receive. On the negative
side, it directs money at the very wealthiest districts in the state.
The
second proposal was to establish a cap on how much aid a district can receive
as a percent of foundation. Non-operating districts, in particular, often receive
aid well in excess of 100% of foundation as a result of aid being held harmless
despite dramatic reductions in the number of students served, and even, in some
instances, the loss of every student previously being served by the non-operating
district.
- Proposals for Aid Distribution:
The working group supports maintaining foundation aid
as the core of Chapter 70, while attempting, as much as possible, to rationalize
the distribution of aid.
·
Keep
spending in all districts at least at foundation should remain the state’s top
priority.
·
The primary determinant of
state aid for many communities would remain the amount necessary to fill the gap
between foundation and required local spending.
·
An
approach which over time directs similar aid to similar communities would improve
the present distribution.
While broad agreement exists among the working group
that such an approach represents an important step in rationalizing state
aid to above foundation districts, no final decision was reached about what exact
measures of wealth should be used, nor the exact formula used to calculate the
resultant aid. The following are measures the group found most appealing:
·
Use
an average of income and EQV (as opposed to a product of the two) to compare local
fiscal strengths.
·
Use
median income per capita when determining income (as opposed to average income
per capita).
·
Treat
residential and commercial EQV in the same manner when assessing wealth (as opposed
to applying an income adjustment to residential but not commercial property).
·
Use
EQV per resident when determining wealth (as opposed to EQV per pupil).
·
The
working group looks favorably on a floor and a ceiling for aid to any district
at some percentage of the foundation budget.
- Areas for Comment:
·
Should
the state directly link aid levels to local resources, with the aim that similar
communities be allocated aid equal to the same percentages of their foundation
budgets? How?
·
When
comparing districts’ local fiscal strength, should wealth be measured per pupil
or per resident, and why?
·
Is
median (as opposed to average) the best measure of local income?
·
What
should be the formula for (i.e. the shape of) any sliding scale tying aid to local
resources? What share of foundation budgets should an average wealth district
receive as aid? What should be the slope of the curve above and below that point?
·
For
the purpose of drawing a sliding scale, what are the profiles of communities most
in need of more aid? (E.g. should new aid go to communities receiving the lowest
percentages of the foundation budget from the state, even if many of these communities
have strong local tax bases? Or to communities
of below average wealth and income, even if those communities have receive the
greatest share of state aid in the past?)
·
Should a sliding scale approach be used to implement
cuts to districts above the target share curve? If not, what is the fairest basis for reductions
in aid if such reductions are needed to balance the state budget or increase distributions
to historically underfunded districts?
Regional Schools
The state specifically mandates that a town appropriate no less than a given
amount to support regional school districts of which that town is a member.
The state also allocates aid directly to regional schools.
·
Goal: To make the state’s
requirements for regional school assessments reasonable and fair for both member
municipalities and regional districts.
·
Issues Discussed by Working
Group: The working group acknowledges that regional
spending requirements allocate local dollars to regional schools in a manner reflecting
history more than regional needs or local obligations. State aid has offset regional spending irregularities
to some extent – but, as a result, has also incorporated some of the variability
of spending requirements. The group discussed
the following points:
· The current system for setting regional spending requirements is unresponsive to enrollment changes, and unrelated to the enrollment shares of each member of the region, which prior to 1994 defined each members’ contribution under regional agreements. As a result, different members of the same regional face very different per student required spending amounts.
·
The variability is particularly wide for members of some vocational
districts because of the large swings in percent terms from year to year in the
number of students any given town sends to its vocational district.
It may be preferable to set local spending requirements for vocational
districts on a per-student basis.
·
The allocation of a municipality’s contribution to the districts
is not directly related either to the share of the municipality’s students who
attend that district, nor to the share of the town’s overall foundation budget
represented by that district. Although modest steps have been made in recent years
to use foundation share as the basis for allocation, they have not uniformly remedied
the problem, and, in some cases, may never do so. Because contribution levels
drive aid decisions, misallocating contribution automatically misallocates aid,
providing excessive foundation aid to districts receiving too little of the town’s
required contribution, while a district receiving too much of the town’s required
contribution may never be judged in need of aid. Thus, regional aid and spending
requirements in many cases create dramatically different state/local shares for
the different districts of which a town is a member – one town may pay 30% of
the foundation budget of its local district, and much more or much less of the
foundation budget associated with its students attending regional academic and
vocational districts.
·
Some of the discrepancies in spending
requirements and aid can be reduced by
swapping state and local money on paper such that a town gets from the state as
near as possible the same percent of the foundation budgets associated with its
students at each of the districts of which it is a member. Where aid is shifted from a local to a regional
district, local dollars can be shifted from the regional to the local district
to fully net out the impact on required net school spending for both districts.
·
Proposals for Addressing
Regional Issues: The working group has had only preliminary discussions of
what changes could and should be made to how the state sets spending requirements
for and allocates aid to regional school districts. More information is needed
on this subject, and the working group is particularly interested in comments
from regional school districts and their members on regional issues.
·
The working group has an interest in smoothing historical discrepancies
in aid and spending requirements as much as possible. The working group looks favorably on the “zero-sum
shift” outlined in the Foundation Budget Review Commission report from 2001.
- Areas for Comment:
·
Are
there technical or other impediments to swapping local and state dollars on paper
via a “zero sum shift” in order to even out differences in aid allocated to the
various districts of which a town is a member? What is the appropriate way to
allocate regional district aid to member towns when assessing what proportion
of the foundation budget consists of state aid for each district of which a town
is a member?
·
Whether or not a zero-sum shift is used to iron out variations in
aid on a one-time basis, what is the best way in the future to allocate required
local spending to regional districts such that discrepancies between a town’s
contributions to each of its districts do not widen over time?
·
Should the state attempt to calculate the foundation budget associated
with each sending town by incorporating that sending town’s actual students (low
income, bilingual, etc) rather than pro-rating the foundation budget according
to a town’s share of total enrollment?
·
Is
it advisable to treat vocational districts differently from all other districts
in setting required contributions at a uniform amount per student for all sending
districts? Is there a better alternative?
·
Does
it make sense to set required contributions for vocational districts on a per
student basis, perhaps using a three year running average of enrollment? Should the per student amount be set at a uniform
rate for all sending municipalities of any given vocational district?
If not, how should per student required spending be adjusted to account
for differences in ability to pay of sending cities and towns?
·
Should spending requirements
for regional academic and/or vocational school districts be linked to varying
percentages of the foundation budgets associated with students from each sending
town such that towns’ spending requirements are more directly linked to ability
to pay?
MEMBERS OF THE WORKING GROUP
The
Honorable Robert A. Antonioni,
Chair, Joint
Committee on Education, Arts, and Humanities
The
Honorable Marie P. St. Fleur,
Chair, Joint
Committee on Education, Arts, and Humanities
Designee of the Senate President
The
Honorable Peter J. Larkin,
Designee of the House Speaker
Chair, Senate Committee on
Ways and Means
Chair, House Committee on Ways
and Means
Designee of the Senate Minority
Leader
The
Honorable Paul J. Loscocco
Designee of the House Minority
Leader