School Funding, Part 2: Money Changes Everything (The Wealth Formula)

An important element in Maryland’s school funding formula is determining county “wealth.” Here, we review how that’s currently done, and what changes could be in store as the State considers far-reaching formula changes.

This article is number two in a series on Conduit Street, featuring elements of Maryland’s current school funding debate. For more general information on school funding formulas today, see “School Funding: This is How We Do It” from 22 May 2019.

The basics of Maryland’s funding formulas are, in essence:
School Funding TLDR Graphic

  • determine a funding amount needed to offer a successful school;
  • assess the county’s ability to pay toward that via local wealth;
    and
  • back out the state share toward those costs

Then, the determination of “county wealth” is central to determining the state funding levels for schools in each jurisdiction.

Why Does Maryland Wealth-Equalize?

Maryland is like most states in using wealth-adjustment as a means to promote funding equity. Overall, the policy goal is to ensure that all students receive appropriate school funding, regardless of the local “ability to pay” of their county tax bases. So, the state role reduces funding disparities.

In addition to serving a noble purpose, this funding mechanism has been judged as an essential role for state that, like Maryland, guarantee public education as a state constitutional right. In Maryland’s constitution, the key phrase is:

Maryland Constitution Article VIII

Education
Section 1.
The General Assembly, at its First Session after the adoption of this
Constitution, shall by Law establish throughout the State a thorough and efficient
System of Free Public Schools; and shall provide by taxation, or otherwise, for their
maintenance.

Maryland has, in the past, been sued over its effort to promote “equity” in school funding — on the grounds that the state was not doing enough to provide the “thorough and efficient” education enshrined in the Constitution. Numerous other states have been similarly sued, and in some cases have had massive judicial-enforced revisions of school funding approaches.

School funding equity is an essential goal, and wealth-adjusted formulas are the principal means to effect it.

The Kirwan Commission, So Far

Right now, issues with the wealth formulas are “on hold.” They are wrapped up in the formula changes, which were separated from the 2019 policy-focused legislation, and carved out for further deliberation this year.

However, we can dial back to the brief presentation the Commission heard in October of 2018. For a portion of the back half of one day of their two-year-plus efforts, the Commission heard a staff review of current funding formulas and how they work. (See Conduit Street‘s full coverage from that time)

So, here are the absolute basics, for the last two fiscal years:

WealthBasics

The state uses two factors to determine each county’s “wealth” – a blended value of the county’s property assessments, and the total net taxable income for county residents.

Details on the property tax blending are visible in this DLS exhibit. For practical purposes, it reasonably represents the value of property available to be taxed – with the arguable exception that property assessed but excluded from taxation (owned by tax-exempt institutions, or subject to special conditions such as tax increment financing) creates a skew in these figures – making jurisdictions with such property appear more wealthy than it is in actual practice.

Notice that the relevant figures are per-pupil, so they are already scaled to the size of the county, or at least its public school population.

Why Revisit the Wealth Formula?

However – the specifics of the current wealth formula have come under scrutiny. A longstanding concern has been that the combination of property and income tax bases represents some jurisdictions unfairly – especially those where there is a wide disparity between the relative wealth bases.

Consider Garrett County. In the table shown above, Garrett rates as the 19th most wealthy county in terms of taxable income. This is no surprise, the cost of living is lower in more rural parts of the state, and there is a lower density of large employers, high technology, and other high-paying jobs in the Appalachian region than, say, the metropolitan center of Maryland.

img-blogimg-350-1310
apologies to Ms. Lauper for the article title…

However, Garrett is home to Deep Creek Lake, and a substantial share of vacation-related real estate and leisure properties. Many of these are not principal residences, but they do contribute to the county’s property tax base – raising it to the 4th highest in the state. This, despite the fact that the median home value in the county is a mere $165,200, according to the online real estate site Zillow.

Officials from jurisdictions like Garrett County routinely argue that measuring “ability to pay” based on static value of property, rather than transactional income, overstates the practical capacity of the jurisdiction and its residents to support public services.

Further, there’s an intuitive argument that the cost of providing education – especially employee salaries – is far more closely connected to the local income level than to the property tax base potentially altered by non-residential property. (For Garrett, it’s the $165,000 home that matters for hiring a teacher, not the vacation chalet on the lake)

This argument carried weight, and has driven some analytical work in advance of the Kirwan Commission’s formation.

Policy Recommendation, Take One – APA (Consultants)

The first attempt to pursue a change in the wealth formula came through a process even earlier than the beginning of the Kirwan Commission. The “Study of Adequacy of Funding for Education in the State Of Maryland” was created to pursue long-term recommendations from the Thornton Commission of 2001, and was widely seen as engaging in the preliminary work leading up to the Kirwan Commission.

The state-hired consultants, Augenblick Palaich, and Associates (see their MD Proposal) were retained to lead the quantitative assessment of Maryland’s current funding adequacy. Along the way, they coordinated with a set of stakeholders (including MACo) with various presentations – each of which are available on the Adequacy Study website.

Following that thorough process, APA issued a final report featuring a wide range of policy recommendations – including one to dramatically alter the wealth formula. The APA proposal was to change the current “additive” wealth formula to a “multiplicative” one – where each jurisdiction’s income and property base, per pupil, would be normalized into an index, and then multiplied together to create a composite wealth factor.

By mathematical necessity, shifting to a two-part multiplicative factor means:

  • the two factors, property and income, would be weighted as equally important; and
  • jurisdictions farthest from the mean in both tax bases would have that difference exaggerated by the formula

To take a simple calculation… a jurisdiction with 20% more of both property and income wealth per student would currently receive an indexed wealth of 1.20 x the state average. If multiplies, that number would elevate to 1.20 x 1.20 = 1.44x, meaning that jurisdiction would receive dramatically reduced state funding. The reverse example would boost state funding to lowest-wealth jurisdictions.

Our take here at Conduit Street: the multiplicative proposal seems to have lost steam. None of the discussion about it since its initial publication has been particularly favorable – it seems unlikely to get incorporated into any final proposal.

Policy Recommendation, Take-Two – DLS (Maryland Legislative Staff)

The policy recommendations from APA, including the discussion of the wealth formula mentioned above, were largely shelved during the first year or more of the Kirwan Commission. The Commission directed its energy and time on other school funding matters, and left formula changes until far later in their discussions – and matters lie the wealth calculation were taken up only in the fall of 2018.

During that presentation, a general review of current formulas and policy considerations was presented, but not deeply debated by Commission members. However, the Department of Legislative Services staff did prepare and suggest a modification to the current wealth formula: recalibrate the relative weights of property and income to more closely reflect the actual statewide use of those two revenue sources in supporting county budgets:

DLSonWealth

The DLS analysis continued, with a clearer illustration of how this would alter distributions, county-by-county, using FY 2019 figures:

DLSonWealthTable

So – Garrett is (unsurprisingly) among the counties who would benefit from this revised calculation- as noted earlier, their property base is far higher than their income base, and this realignment would lessen the weight of the property tax base.

However- for the vast majority of counties, this modest shift from weighing the property base at about 65% to 60% is a trifling change of less than 1% in total. Even Worcester and Talbot Counties, frequently cited as aberrations for the wealth formula, do not see a dramatic compensation for their perceived imbalance in tax bases.

If the DLS recommendation represents the likely tenor of the considerations for the Kirwan Commission workgroup… most counties are advised that alterations in the wealth formula are unlikely to salve over grievances with the share of funding provided by the State. Only a very dramatic shift in the wealth formula – say, to a fully income-based model – would present dramatic changes for many jurisdictions (creating material “winners and losers” among counties).

Michael Sanderson

Executive Director Maryland Association of Counties
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