School Funding Workgroup Sharpens Focus on Wealth Formulas

The Funding Formula Workgroup of the [Kirwan] Commission on Innovation and Excellence in Education today met for the second time in Annapolis. The thirteen-member panel is charged with working through what is perhaps the most challenging portion of The Blueprint for Maryland’s Future—a ten-year plan to make Maryland schools more competitive both nationally and globally—the development of a plan to finance, realign, and apportion the costs of these ambitious, but expensive, goals.

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Specifically, the Workgroup will make recommendations on the distribution of funds, by local education agency and between State and local governments, for the programmatic recommendations in the Kirwan Commission policy report, and recommend specific funding formulas for ongoing costs within the policy recommendations. Further, the Workgroup will prioritize the order of funding for the Commission’s recommendations.

MACo President and Harford County Executive, Barry Glassman, represents counties on the panel.

Click here for Conduit Street coverage of the Funding Formula Workgroup’s first meeting.

Today’s meeting focused on an analysis of state and local education funding since 2002, an overview of the “Study of Adequacy of Funding for Education in the State Of Maryland*,” and a discussion on local wealth and enrollment–along with various options to adjust state and local funding formulas.

*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 (APA), 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 is available on the Adequacy Study website.

The following charts and graphics are from today’s meeting materials.

Adequacy of Education Funding in Maryland Since 2002

Adequacy Targets

According to the State, in order to achieve adequacy in education, funding should be sufficient to acquire the total resources needed to reasonably expect that all students can meet academic performance standards.

The Department of Legislative Services’ (DLS) calculation of adequacy targets

  • Base per-pupil cost of $5,969 in fiscal 2002 inflated by an implicit price deflator for state and local government expenditures.
  • Foundation program adjusted by a regional cost index.
  • Additional costs for at-risk students:
    • Special education student: 1.17 x base per-pupil cost
    • Economically disadvantaged student: 1.10 x base per-pupil cost
    • Limited English proficient student: 1.00 x base per-pupil cost

The DLS calculation includes state, local, and federal funds, as well as retirement funding.

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According to DLS, in fiscal 2002:

  • There was a statewide adequacy gap of nearly $1.1 billion.
  • Four counties achieved 95.0% or above funding of their adequacy targets, including Howard and Montgomery, which exceeded their targets.
  • Another five counties were funded at more than 90.0% of their adequacy targets.
  • Seven counties were funded at less than 80.0% of adequacy.

The Bridge to Excellence in Public Schools Act of 2002

The Bridge to Excellence in Public Schools Act of 2002 established a state school aid formula to ensure that schools and school systems have the resources necessary to provide all children with an adequate and equitable education. The funding system—based on recommendations made by the Commission on Education Finance, Equity, and Excellence (also known as the Thornton Commission after its chair, Dr. Alvin Thornton)—was phased in from 2003-2008.

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Fiscal 2002-2008 Progress

  • The statewide adequacy gap dropped from nearly $1.1 billion in fiscal 2002 to $106.9 million in fiscal 2008.
  • Statewide, adequacy was funded at 98.9%.
  • 14 counties completely eliminated their adequacy gaps.
  • 23 counties achieved 95.0% or more of their adequacy targets, including 16 that exceeded their targets.
  • In the counties that did not completely eliminate their adequacy gaps, the per-pupil gap was reduced by more than $1,000.

The “Great Recession”

The “Great Recession” in the mid-2000s decimated state and local budgets. The recession lasted for 18 months—the longest and deepest recession since World War II.

Fiscal 2008 was the last state budget essentially unscathed by the sudden economic drop in the subsequent autumn and winter months. But as the economy weakened, tax revenues receded, just as demand for many public services grew.

According to DLS’ Principal Policy Analyst, Rachel Hise, “year over year, General Fund revenues were down two years in a row in 2009-2010.” In fact, state revenues declined by 4.8% in fiscal 2009 and 2.4% in fiscal 2010.

In an effort to recover from the recession, the State made numerous reductions in year-over-year funding that impacted numerous programs, particularly noneducation aid to local governments.

For example, In 2010, about 90% of local transportation funding was diverted to the State’s General Fund, funding for local health departments was slashed from $60.4 million in fiscal 2004 to $37.3 million in fiscal 2010, and in 2012 the State shifted responsibility for teacher pension normal costs to local school boards (county governments provide funding toward these costs through payments stipulated in State law and included in annual education funding for local school systems).

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Fiscal 2008-2017 Progress

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According to DLS:

  • Statewide, the adequacy gap increased by $443.1 million in fiscal 2017, or 41% since 2002.
  • In six counties, the per-pupil gap increased by more than $1,000.
  • In another three counties, the per-pupil gap increased by more than $500.
  • On a per-pupil basis, seven counties gained ground toward filling the gap.
  • The percentage of adequacy funded increased by 2.8 percentage points.

County Executive Glassman pointed out that the impact of the Great Recession on state and local education spending cannot be understated. “State and local governments experienced a large recession and downfall… I’d like to see if there is a correlation between the recession and the progress that has been made over time,” Glassman said. (DLS plans to provide that data at a future meeting.)

Local Wealth and Enrollment Issues and Overview of Maintenance of Effort (MOE)

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.

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

The second-to-last column in the chart below shows the impact of using November NTI instead of September NTI.

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According to DLS, moving to November NTI will not require increased local appropriations.

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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.

An add-on grant was enacted in 2016 and made permanent in 2018 – disparity grant counties are held harmless from the wealth impacts of tax increment financing (TIF) districts created after May 1, 2016, on State education aid.

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.

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In fiscal 2019, Baltimore City was the only jurisdiction eligible for a TIF grant.

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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.

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As described in previous Conduit Street coverage:

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 “Per Pupil Wealth Amount Used to Allocate State Aid” table shown above, Garrett rates as the 18th 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.

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 $168,500, according to the online real estate site Zillow.

Officials from jurisdictions like Garrett County routinely argue that measuring “ability to pay” based on the 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.)

Policy Recommendation, Take One – APA

APA proposes 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.

Dr. Kirwan was critical of the multiplicative approach, “I can understand why you add the two together, but I cannot for the life of me understand why you would multiply the two.”

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Our take here at Conduit Street: the multiplicative proposal is off the table.

Policy Recommendation, Take-Two – DLS

DLS recommends—if there is interest in modifying the wealth calculation—to use the current additive method and reweight the proportion of income and property wealth to weight property wealth less than current law. Essentially, this proposal recalibrates the relative weights of property and income to more closely reflect the actual statewide use of those two revenue sources in supporting county budgets.

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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 64% 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  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).

Geographic Cost of Education (GCEI) and Comparable Wage Index (CWI)

The Workgroup originally planned to discuss GCEI and CWI during today’s meeting, but most of the analysis was shelved in order to allow DLS time to develop specific data simulations.

The Workgroup is expected to make its final recommendations to the Kirwan Commission this fall. In turn, the Kirwan Commission plans to vote on the Workgroup’s recommendations before the General Assembly convenes for the 2020 legislative session.

County governments share concerns regarding current education funding law, including the State’s wealth calculation, funding of jurisdictions with declining enrollment, and the effect of nonrecurring costs on “maintenance of effort” calculations. MACo will continue to advocate on these issues through its membership on the panel.

The next meeting will be held on Thursday, August 1, 2019; 10:00 am-4:30 pm, at 120 House Office Building (House Appropriations Committee Room), 6 Bladen Street, Annapolis, Maryland.

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

Stay tuned to Conduit Street for more information.

Want to Know More About School Funding and Outcomes?

You’re in luck! We’re offering a featured session at the MACo Summer Conference, talking about school funding on the front burner in Maryland. “The Changing Face of Education” will feature Commission Chair Dr. Brit Kirwan and fellow panelists discussing the direction of this generational effort.

Date/Time: Thursday, August 15, 2019; 12:45 pm – 1:45 pm

The MACo Summer Conference will be held August 14-17, 2019 at the Roland Powell Convention Center in Ocean City, Maryland. This year’s conference theme is “Winds of Change.”

Learn more about MACo’s Summer Conference:

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