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State of Texas School Finance: Property Taxes and Funding Disparities

This article explores the reliance on property taxes in the Texas state budget and the impact on public education funding. It analyzes the state formula, district revenue analysis, and debt service fund. The article also discusses recent sales tax growth and the impact of highway diversion. Additionally, it examines the price of oil and its effect on Texas crude oil production revenue. The article highlights the declining state share of public education and the school tax levy and state aid. It concludes with a discussion on the constitutional implications of the Texas public school finance system.

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State of Texas School Finance: Property Taxes and Funding Disparities

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  1. Agenda • The State of Texas • Revenue & Sources • State Budget • Reliance on Property Taxes • Prior Lawsuits • School Finance 101 • State Formula • District Revenue Analysis • Debt Service Fund

  2. State Revenue by Major Fund Source: Texas Comptroller – Certification Revenue Estimate

  3. State Tax Collections Estimate (2018-19 Biennium) Source: Texas Comptroller – Certification Revenue Estimate

  4. Recent Sales Tax Growth (36 Months)

  5. Sales Tax Collections – 1yr Moving Average Source: Texas Comptroller

  6. Sales Tax Collections – 1yr Moving Average Source: Texas Comptroller

  7. Impact of Highway Diversion * Reflects 2016 and 2017 certification estimates, plus 4.5% growth in each of 2018 and 2019 ** Reflects projected 2016, plus 2017 rate of growth in certification estimate and 4.5% in each of 2018 and 2019

  8. Price of Oil per Barrel – Last 36 Months WTI on Monday of first full week of the month * Comptroller’s estimate based on $50 per barrel in 2018

  9. Texas Crude Oil Production from Oil Wells Source: Texas Railroad Commission, Monthly Oil and Gas Production

  10. Revenue Performance (FY2017) * Growth rate needed to reach FY2017 Revenue Projection

  11. State Budget (2018-19 Biennium) Source: FBISD Finance

  12. State’s Reliance on Local Property Taxes Source: Thompson & Horton LLP

  13. 85th Legislature Reliance on Property Taxes • State GR for Public Education declines by $1.2B • No reduction in State GR for charter schools • Assumes 7.04% increase in 2017 and 6.77% increase in 2018 in local property values • Recapture increases from $3.845B to $4.57B - $725.9M increase (By comparison, lottery is $2.4B) • Local school property value growth saves State $3.6B

  14. State Share of FSP Still Declining Source: Thompson & Horton LLP

  15. Declining State Share of Public Education Source: Thompson & Horton LLP

  16. School Tax Levy and State Aid

  17. State-wide M&O and I&S Contribution per ADA Source: FBISD Finance, TEA Summary of Finance & Equity Center

  18. Fort Bend M&O and I&S Contribution per ADA Source: FBISD Finance, TEA Summary of Finance & Equity Center

  19. FBISD State Share Over Time (M&O and I&S) * 2017-18 Near Final: State Aid adjusted for one-time Harvey Compensatory Education aid Source: FBISD Finance, Forecast5, On-Suite Data, CAFR

  20. Texas Public School Finance

  21. TASA/TASB September 29, 2018 Texas Public School Finance: What You Need to Know

  22. Texas Public School Finance: What You Need to Know • James Rice, Board Member, Fort Bend ISD • George Scott, Board Member, Katy ISD • Charles Dupre, Ed.D., Superintendent, Fort Bend ISD • Steven Bassett, Chief Financial Officer, Fort Bend ISD • Christopher Smith, Chief Financial Officer, Katy ISD

  23. Public School Finance in Texas Has A Direct Foundation STATUTORY 1993: The Texas Legislature Passes Senate Bill 7 “All students shall have access to an education of high quality that will prepare them to participate fully now and in the future social, economic, and educational opportunities available in Texas. The achievement gap between educationally disadvantaged students and other populations will be closed…” JUDICIAL 1995: The Supreme Court of Texas Validates S.B. 7’s Constitutionality “…The Legislature defines the contours of its constitutional duty to provide a general diffusion of knowledge by articulating seven public education goals. These goals emphasize academic achievement. Most notably, the Legislature envisions that all students will have access to a high quality education and that the achievement gap between property rich and property poor districts will be closed…” *While we are not going to address Academic Issues in this presentation; never lose sight of the reality that in Texas, equity drives school finance.

  24. Questions We’ll Explore on Constitutional Finance HAS THE TEXAS LEGISLATURE created a public school finance system that requires higher and higher property values and ever increasing property tax collections by local school districts to even assert that the STATE is meeting its constitutional burden to close the academic equity gap for at-risk and economically disadvantaged students, dominated by children of color? IS THE TEXAS LEGISLATURE dependent upon higher local property values and property tax revenues from local school districts to equalize funding between rich and poor school districts in a scheme that reduces expenditures from the state treasury so that diverted money can be spent on non-public education needs of the state?

  25. Questions We’ll Explore on Constitutional Finance HAS THE TEXAS LEGISLATUREcreated a “bait and switch” financial scheme that depends upon higher property values and increased property tax collections at the local level to reduce public education spending from the state treasury as another “bite at the property tax apple” to subtract from or minimize the state’s financial burden to achieve constitutional finance and constitutional academic equity? DOES THE TEXAS LEGISLATURE through state law and regulation protect schemes utilized in the Appraisal Review Board property tax protest process which diminish genuine, independent oversight accountability for all taxpayers by imposing value determination processes that are heavily weighted in the favor of central appraisal districts producing higher property values?

  26. Robin Hood & Equity:The Texas Legislature ‘Loves’ Local Property Taxpayers 1994: 34 Districts paid recapture ($131 million) 2018: 191 Districts paid recapture

  27. WHAT IF … State Funding Had Held at 47%? The Texas Legislature Says “Thanks For Saving Us Money”

  28. Recapture Recapture is shown in this TEA slide as a contribution of State Funds

  29. The Texas Legislature Maintains A Property Tax Central Appraisal District System For Which Genuine Questions of Independent Quality Control Over The Appraisal and Appraisal Review Board Protest Process Are Commonly Understood Within The NON-GOVERNMENT Segment of the Industry • Absence of Genuine Independence in Selection Processes for Key Positions: • Chairman of the Appraisal Review Board • Taxpayer Liaison Officer • Legal Counsel for the Appraisal Review Board • Absence of Rigorous Quality Control Over: • Key Modeling and Mathematical Processes for Both Original Appraisal & Protest of Value Procedures • Actual Compliance Evaluation on Components of the 3-Member ARB Protest Panels

  30. WHY IS THIS IMPORTANT? • Practical Cost Thresholds to Even Reach Courthouse or Arbitration For Rank & File • $50,000 DIFFERENCE IN VALUE for Arbitration • $250,000 DIFFERENCE IN VALUE for Pre-Trial Litigation Mediation • $1,000,000 DIFFERENCE IN VALUE for Actual Trial

  31. Education Funding-School Finance 101

  32. Overview of Education Funding Primary funding sources for public education • Local property taxes • State contributions • Federal Funds Foundation School Program (FSP) • Primary source of state funding • Designed so all districts receive “substantially equal access to similar revenue per student at similar tax effort” • Formula driven using both local property tax collections and state general funds • Key feature: as local property tax collections increase, state funding decreases

  33. Funding for Public Education in Texas • Totaled $61 B in 2017–18 • Included local property taxes (53%), state funding (39%) and federal funding (8%) • Local revenues make up 58% of funding when federal funding is excluded, the state share is 42% $61B

  34. Local Revenue • Property taxes are the largest funding source for the Texas public school system • School property taxes are made up of two rates • Maintenance & Operations (M&O): funds ongoing operations (teacher salaries, utilities, etc.) • Interest & Sinking (I&S): funds debt service payments on bonds issued for construction of new facilities and other capital items (land, buses, renovations etc.)

  35. Local Revenue • School districts authorized to levy an M&O tax rate of up to $1.17 per $100 value • Value of one penny can vary greatly between districts depending on local property values • Key factors influencing local property tax revenues • Tax rate • Revaluation of existing property • Value from new growth • Collection percentage • Frozen values

  36. Key Factors Influencing State Aid • Basic allotment (Tier 1) • Comptroller Property Tax Division (CPTD) estimate of local values (Tier 1&2) • Austin yield (Tier 2) • Weighted Average Daily Attendance (WADA) (Tier 1&2) • Student demographics (Tier 1)

  37. Chapter 41 & Chapter 42 Districts • Ch. 41: Because value of a penny can vary, provides a guaranteed yield on each penny of M&O tax effort levied by property-poor districts • Property wealthy districts whose wealth per student exceeds an established Equalized Wealth Level (EWL) are subject to recapture ($319,500) • Ch. 42 wealth per student is less

  38. Property Tax Rate 101 • Compressed rate • Enacted by state legislature in 2005 for property tax relief • Legislature guaranteed school districts would be held harmless • For FBISD, compressed rate = $1.00 • Golden pennies • First six cents of tax effort over the compressed rate of $1.00 • Generates the highest level of funding (based on Austin Yield) • Not subject to recapture • FBISD currently has four golden pennies in its M&O rate and can add two additional golden pennies with tax ratification election • Two pennies projected to be worth $10.6m in additional State revenue • Copper pennies • Any tax effort over $1.06 • Generates lower level of supplemental funding • Subject to recapture

  39. Equalized Wealth Levels * Requires legislature to fund guaranteed yield on equivalent tax rate at same yield as AISD

  40. 11 “Copper” Pennies Equalized to $31.95 Recaptured above $319,500 per WADA Voter approval required Equalized Wealth Levels $1.04: maximum M&O tax rate allowed without voter approval 6 “Golden” Pennies Equalized to Austin ISD [$106.28] Not Recaptured Voter approval required for 5th and 6th pennies Golden penny yield is estimated to be $106.28 for the 2018-19 school year Tier 2

  41. Foundation School Program Maintenance & Operation (M&O) Generally, the costs of running the school district Interest & Sinking (I&S) To make bond payments Tier 1 Basic Instructional Program Tier 2 Enrichment State Funding Local Funding Regular Program Allotment 9 Special Purpose Allotments Tier 2: Level 1 Golden Pennies Tier 2: Level 2 Copper Pennies Instructional Facilities Allotment (IFA) & Existing Debt Allotment (EDA) Ad valorem or Property tax collections generated by a locally-adopted I&S tax rate • - Special Education • - Compensatory Education • Bilingual Education • Career & Technology Education • Transportation • New Instructional Facility (NIFA) • - Public Education Grant • High School Allotment • Gifted & Talented First 6 pennies of adopted M&O tax rate above compressed tax rate; called golden because high funding level and no recapture All pennies of M&O tax rate above the golden pennies (at least 11); called copper because low funding level and recaptured Source: Equity Center

  42. Tier 1 • Basic allotment of $5,140/student plus 9 special purpose allotments (Comp Ed, SPED, BIL, GT, et al.) • Set by state legislature each biennium • Cost of Education Index (CEI) applied • Used to adjust allotments to districts based on size and regional cost differences • “Adjusted allotment” is larger than basic allotment and unique to each district • District “Local Fund Assignment” determined by using CPTD estimate for property value applied to the M&O rate • As CPTD grows, districts receive less state aid • Tier I subject to recapture if district portion is more than entitlement allowed by state

  43. FBISD Tier 1 Funding: 2018–19 Adopted Budget Source: FBISD

  44. Tier 2 Funding • Known as Enrichment or “Guaranteed Yield” to Supplement Tier 1 Funding (Basic Allotment) • Districts are authorized to tax above the compressed tax rate up to an additional $0.06 upon Board discretion • State equalizes revenue of each penny above the compressed rate • $0.06 Guaranteed to receive the same value per WADA as Austin ISD ($99.41) – Golden Pennies • $0.11 Guaranteed at $31.95 – Copper Pennies

  45. Golden Penny / Austin Yield $106.28 Property Value Students $66.20 $110,302,808,080 Students =$1,062,800 or $106.28 Property Value Students $106.28 $36,955,726,755 Students =$400,789 or $40.08

  46. Golden Penny / Austin Yield As wealth rises, State contributes less, but still to Austin Yield. $106.28 $26.20 Property Value Students $110,302,808,080 Students =$1,062,800 or $106.28 $80.00 $106.28

  47. If wealth rises higher than Austin ISD, no recapture of M&O tax collections. Golden Penny / Austin Yield $20.00 $106.28 $106.28 $106.28

  48. FBISD Tier 2 Funding 2018–19 Adopted Budget Source: FBISD

  49. Local Assignments 2018–19 Adopted Budget

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