Kirwan Commission Mulls Changes to Education Funding Formulas

The [Kirwan] Commission on Innovation and Excellence in Education held its most recent meeting today in Annapolis. Known as the Kirwan Commission because it is chaired by former University System Chancellor Brit Kirwan, the Commission considered a Maryland Department of Legislative Services analysis of an education consultant’s recommendations to adjust state and local education funding formulas.

Noting the Commission’s December deadline, Montgomery County Councilmember Craig Rice, a MACo representative on the Commission, expressed concerns over whether the Commission should begin to consider changes to complex funding formulas. “Is it wise for us to delve into something that will ultimately be a major debate in the General Assembly? Are we spinning our wheels here?”

Augenblick, Palaich and Associates (APA), the education consulting firm hired by the State to study adequacy in education, recommended keeping the basic structure of the school finance system in Maryland, with adjustments to the funding formulas and changes to calculating enrollment, regional cost differences, and local wealth.

Calculating Local Wealth and Enrollment

Source: Department of Legislative Services

Net Taxable Income

Net taxable income (NTI) is used as an indicator to measure wealth within the education formulas. In 2013, determination of NTI was changed to account for taxpayers who file later in the year, and in turn, cause the calculation to increase for certain counties and therefore reduce their per-pupil foundation amount.

To address this issue, the General Assembly in 2013 passed legislation to measure NTI based on tax returns filed by November 1 of each year, instead of September 1. Because the change results in a redistribution of funding from more wealthy jurisdictions to those of less wealth, those jurisdictions that would be receiving less funding receive hold harmless grants to maintain their funding.

After a phase-in period, the grant now provides 100% of the greater of State education aid resulting from using either September 1 or November 1.

Source: Department of Legislative Services

APA recommended eliminating the add-on grant and using only Nov. 1 NTI to capture a jurisdiction’s income wealth. DLS concurs with APA’s recommendation.

Source: Department of Legislative Services

 Combining Income and Property Wealth

Currently, a county’s wealth includes both the income of county residents (NTI) and a portion of the assessed value of the property in the county. These two amounts are added together to calculate the overall wealth of a county.

Source: Department of Legislative Services

APA recommended a multiplicative approach, whereby each county’s percent of the State average NTI is multiplied by each county’s property wealth. The overall effect of this approach will magnify the disparities in wealth between all 24 counties and significantly alters the distribution of State aid.

Source: Department of Legislative Services
Source: Maryland Department of Legislative Services

Should the Commission desire to modify the wealth calculation, DLS recommends using the current additive method and reweight the proportion of income and wealth to reflect the proportion of actual revenues collected by the counties. This approach weights property wealth less than the current formula.

Source: Maryland Department of Legislative Services
Source: Maryland Department of Legislative Services

Tax Increment Financing

Tax-increment financing (TIF) is a tool used by several Maryland counties to encourage economic development. TIF is a public financing method that is used as a subsidy for redevelopment, infrastructure, and other community-improvement projects.

Chapter 258 of 2016 provides grants, for fiscal 2018 and 2019, to counties that establish a tax increment financing (TIF) development district after May 1, 2016, and that qualify for State disparity grant funding. State education aid must be calculated twice for eligible counties: once including the assessed value of property in a TIF district and once excluding the increase in the value of property in the TIF district.

A county receives a State grant to ensure it receives the higher amount of State aid for education between the two calculations. Legislation passed in 2018 repeals the grant’s termination date.

APA made no specific recommendation in its adequacy study. DLS recommends adjusting for TIF districts in the wealth calculation and eliminating the add-on grant.

Source: Department of Legislative Services

Declining Enrollment

Nearly all state education funding is distributed on a per-pupil basis, meaning that the more students a school system serves, the more funding it receives.

By contrast, when the number of students declines, schools can experience a sudden drop in funding. School systems often strive to offer equivalent courses and programs, even with fewer students.

This dynamic can strain local budgets – reflecting the reality that not every dollar spent in a school system is truly a “variable cost.” A 1% drop in students across a county school system may mean some cost savings in bus transportation and meals service – but may not have any effect on the majority of system-wide costs for education and administration.

To help offset the sudden drop-off in education funding to jurisdictions with declining enrollment, the General Assembly approved an enrollment-based supplemental grant to provide funding if a county’s most recent prior three-year average full-time enrollment (FTE) is greater than the FTE in the previous school year. This legislation is only effective for fiscal years 2018 through 2020 as a stop-gap measure.

Source: Maryland Department of Legislative Services
Source: Maryland Department of Legislative Services

DLS concurs with APA’s recommendation to use this “greater than” calculation in the Foundation program, thus eliminating the need for the grant program.

Next Steps

Citing the need for more information, the Commission did not vote on any of the proposed changes, and will instead consider the recommendations at a future meeting.

The 2016 Commission on Innovation and Excellence in Education was created by legislation introduced in the General Assembly. The Commission membership parallels that of the earlier Thornton Commission.

The Commission was originally set to complete its work in time for the 2018 session of the General Assembly, but last October asked for an extension when it became clear the deadline was not realistic. Prior to breaking for the 2018 legislative session, the Commission released a preliminary report detailing its preliminary recommendations.

MACo is entitled to two representatives on the Commission, under the legislation. Montgomery County Councilmember Craig Rice, MACo’s Education Subcommittee Chair, and Allegany County Commissioner Bill Valentine, MACo’s Education Subcommittee Vice Chair, represent MACo on the Commission.

The Commission’s next meeting will be held on Wednesday, November 14, 2018; 9:30 am-5:30 pm, at 120 House Office Building (House Appropriations Committee Room), 6 Bladen Street, Annapolis, Maryland.

Materials from today’s meeting are available on the General Assembly website and the meetings are viewable online by searching the House Appropriations Committee room on the dates of each meeting.

Stay tuned to Conduit Street for more information.