Q&A on the Maintenance of Effort: Waiver Process, Escalator Effect

The state law requires counties to fund school systems at maintenance of effort: compared to the prior year. Fiscal uncertainty leaves that obligation more uncertain than ever. Here are details on the waiver process, and the provision still in the law driving many counties to do more than “maintain.”

While the full financial impact of the COVID-19 pandemic likely will not be fully understood for some time, the public health crisis will undoubtedly wreak havoc on state and local finances.

Counties are making significant financial investments to address immediate public health and safety needs. At the same time, counties are experiencing massive and unprecedented declines in revenue as a result of the economic downturn. This one-two punch to local finances will likely undermine county revenue structures and support for education, public safety, roadway maintenance, and other essential services.

Counties are the principal unit of local government in Maryland, and, unlike in many states, counties in Maryland are responsible for funding public schools, libraries, and local community colleges. While local boards of education develop local school budgets and oversee education-related spending, they are dependent on financing from county governments.

Q: What is Maintenance of Effort?

A: County contributions towards K-12 education are currently tied to certain mandatory minimums under the State’s maintenance of effort law. The maintenance of effort (MOE) law (currently in Section 5-202 of the Education Article, but being moved to Section 5-235 in the Kirwan legislation from 2020) requires each county to provide the same amount of funding, on a per pupil basis, as they did the prior year.

Maintenance of Effort is a floor, not a ceiling. This year (FY20) counties exceed the required MOE funding by at least $85 million. For the most part, that funding is built into the “base” and required to be maintained in each subsequent year.

Q: What is the Maintenance of Effort Escalator?

A: In 2012, the General Assembly approved a law that creates the potential for automatic increases in maintenance of effort amounts. The increases are not based on how much funding is needed for students in a certain school district, but rather they are based on how wealthy a county is, according to the State’s calculations. “Effort” is defined as school funding as a percentage of wealth, calculated by the Maryland State Department of Education. The escalator clause provides that if the County’s “effort” in the given year is less than the statewide average for the previous 5-year period, the County may have to provide additional funding. The additional amount is equal to the lesser of the County increase in per pupil wealth, the State average increase in per pupil wealth, or 2.5%.

While the escalator is being repealed – is it not immediate. Amendments to the Kirwan bill, as passed and sent to the Governor, would leave the escalator in place through FY 2023.

Q: If our tax bases are in decline right now, does the Escalator still take effect?

A: Yes, the escalator calculations for FY 21 (shown on the table above) are set and final.

The escalator law, technically, looks at tax bases from the prior year, not the coming year. Counties facing a potential decline in the tax bases used to determine “wealth” and to calculate the resulting required increase (based on the rate of growth in state and local wealth) may be chagrined to see this robust increased finding requirement alongside grim revenue forecasts for the coming year.

Q: What happens if a county fails to meet its required funding under the MOE law?

A: In essence, Maintenance of Effort is a firm state requirement – without a waiver the state will redirect county income taxes (collected by the state) to satisfy any funding shortfall. There’s a process involved, but that’s the bottom line.

According to state law, if a county does not meet the MOE funding requirement (or receive a waiver), the State Superintendent or the State Board of Education will notify the State Comptroller. Pursuant to 5-213 of the Education Article, the Comptroller shall intercept local income tax revenue from the county, in the amount by which the county failed to meet the MOE, and distribute the withheld funds directly to the county board of education.

Q: How can a county apply for a waiver from the MOE funding requirement?

A: In order to qualify for a waiver for a fiscal year, a county shall make a request for a waiver to the State Board by the earlier of the seventh day following the end of the legislative regular session or April 20 of the prior fiscal year.

Under state law, the State Board of Education may grant a waiver if a county’s fiscal condition significantly impedes the county’s ability to fund the maintenance of effort requirement; there is an agreement between the county and the county board to reduce recurring costs; or a county’s ability to meet the maintenance of effort requirement is permanently impeded.

The factors considered by the State Board of Education include:

  1. External environmental factors such as a loss of a major employer or industry affecting a county or a broad economic downturn affecting more than one county;
  2. A county’s tax base;
  3. Rate of inflation relative to the growth of student population in a county;
  4. Maintenance of effort requirement relative to a county’s statutory ability to raise revenues;
  5. A county’s history of exceeding the required maintenance of effort amount . . . ;
  6. An agreement between a county and a county board that a waiver should be granted;
  7. Significant reductions in State aid to a county and municipalities of the county for the fiscal year for which a waiver is requested;
  8. The number of waivers a county has received in the past 5 years; and
  9. The history of compensation adjustments for employees of the county board and county government.

If a waiver request is filed, the State Superintendent must provide a preliminary assessment of the waiver request to the State Board. Before acting on a request for a waiver, the State Board must hold a public hearing in accordance with its own regulations.

Stay tuned to Conduit Street for more information.