Joint Task Force on Local Effort Assistance

1. Joint Task Force on Local Effort Assistance July 16, 2002 Bill Freund, Consultant To The Task Force

2. Outline of Presentation • Washington’s K-12 Finance System • Origin of the levy lid and levy equalization • Levy lid and levy equalization mechanics • Other levy equalization topics including • Number receiving • Cost and reasons for cost increases • Review of 1997 Joint Legislative Levy Equalization Study

3. Washington’s K-12 Finance System

4. Currently Washington’s school districts receive about 70 percent of their general fund revenues from the state and 15 percent from local taxes. 2001-02 Budgeted Revenues Source$ in 000s* State $5,093,394 Local Taxes 1,068,227 Federal 629,915 Other 481,084 Total $7,272,670

5. The situation was different in the 1974-75 school year when school districts relied on M&O levies for a large part of their funds. 1974-75 K-12 Revenues Source$ in 000s State* $ 522,426 Local Taxes 327,670 Federal 92,609 Other 82,866 Total $1,025,572 * Includes state Teachers Retirement System Contributions.

6. In the 1974-75 school year, large differences existed among districts in levy revenue and property tax rates.

7. The state’s main allocation formula (apportionment) was also very different than today’s formula. PRE 1978 K-12 FINANCING SYSTEM WEIGHTED PUPIL GUARANTEE (for school year 1977-78) @ $600 PER WEIGHTED PUPIL

8. This high levy percentage dropped for 1976 collections due to levy failures and resulted in a lawsuit against the state and the 1977 Doran decision. • Prior to 1977: • No limit on amounts school districts could raise from local levies. • The Seattle School District levy and those of 64 other districts failed in 1975 for 1976 collections, prompting a law suit against the state. • 1977 Doran Decision: • State must define and fund basic education through regular and dependable tax sources and could not rely on local excess levies for that funding.

9. The School Funding I lawsuit was based on Article IX of the Washington State Constitution. • Article IX, Section 1: “It is the paramount duty of the state to make ample provision for the education of all students…” • Article IX, Section 2: “ The Legislature shall providefor a general and uniform system of schools…”

10. The 1977 and 1983 school funding cases established a series of funding principles for the state. • Education is the “paramount duty” of the state and takes precedence over all other state financial obligations. • The Legislature must define basic education and provide adequate funding for those programs. • Programs considered basic education are: • Regular Apportionment Vocational Education • Special Education Most of Pupil Transportation • Transitional Bilingual Education Learning Assistance • The most important factors in determining adequate funding are staff compensation and pupil/staff ratios.

11. Funding principles continued • It is the Legislature’s obligation to establish a sufficient salary to attract and retain competent teachers. • Once the Legislature has established what is considered to be 100% funding of basic education needs, it cannot reduce that funding level due to state revenue problems. • The funding formula is not “cast in concrete”; it is the continuing obligation of the Legislature to review the formula as the education system evolves and changes. • Local school operations levies may be allowed as long as they enrich programs outside of the legislative definition of basic education and are not used to reduce the state’s obligation to fund basic education.

12. The 1977 legislature responded to the K-12 funding lawsuit by passing three key pieces of legislation. • The Basic Education Act, which defined basic education in terms of a minimum staffing ratios to be funded by the state, and district obligations to provide curriculum offerings and program hours. • The Appropriations Act, which explicitly defined the state’s definition of basic education in terms of staffing ratios and cost factors. • The Levy Lid Act, which limited school district M&O levies to 10 percent and set a four year timeline for all districts to get down to that level.

13. Current state budget architecture: six basic ed programs account for about 90% of state funds. 2001-03 K-12 State Funds Budget

14. The main basic ed formula, apportionment, is a staff per student formula with various formula elements.

15. There is a small school factor in the apportionment formula which allocates “bonus units”. • This formula recognizes diseconomies of scale by providing additional staff for districts with: • K-6 enrollments of less than 60 students • 7-8 enrollment of less than 20 students • Small High Schools of less than 300 students • Remote and necessary schools of less than 25 students • Of the 138 districts that are receiving a state small school allocation, 93 also receive levy equalization and 45 do not. • The cost of the small school factor was $40.4 million in the 2000-01 school year, not including levy equalization.

16. The small school formula* sets a minimum staffing floor for districts with low enrollments. * Organization and Financing of Washington Public Schools published by SPI contains formula detail on pages 45 and 46.

17. The state allocation for certificated instructional staff varies by school district.

18. There are 34 districts with state funded salaries above the state salary allocation schedule.

19. Each school district’s salary allocation by employee group is specified in the appropriations act using LEAP Document 12E.

20. The remaining basic education programs have funding formulas of varying complexity.

21. Origins of The Levy Lid And Levy Equalization

22. The 1975 Miller Report which was a K-12 finance study commissioned by the legislature concluded the following:

23. Why did the legislature limit levies in 1977? The 1977 bill report on the levy lid act cited the following rationale: • Under the state constitution the legislature has the responsibility to “provide for a general and uniform system of public schools”. • The legislature implemented a four-year phase-in to full state funding for basic education to eliminate the inequities that exist due to reliance on excess special levies. • Excess tax levies for common schools should therefore have restrictions placed on them to insure property tax reductions in relationship to the proposed increases in state funds. • After full funding is achieved, special levies would be required only for enrichment.

24. As a result of the levy lid act, levies as a percent of total revenue dropped dramatically. But, since 1981, the percent has been increasing.

25. Since 1977 the legislature has made various changes to the levy lid act increasing district’s levy authority.

26. Currently 91 districts have levy authority percentages that exceed 24 percent.

27. Refer to map identifier code sheet for school district numbers

28. Levy Lid and Levy Equalization Mechanics The basic levy components: • Levy Base • Levy Lid Percent • Assessed Value • Property Tax Rate

29. There are some common factors between levies and levy equalization. • The levy base for both is most state and federal allocations to the district. • The amount a district can raise in local levies is decreased by the amount of levy equalization it receives. • A school district’s maximum levy lid is equal to the following: (Levy Base x Levy Authority Percentage) minus State Levy Equalization Allocation • The levy authority percentage is 24% for 205 districts, and higher for 91 “grandfathered” districts.

30. Purpose of levy equalization – as added to the law in 1999. “ The purpose of these funds is to mitigate the effect that above average property tax rates might have on the ability of a school district to raise local revenues to supplement the state’s basic program of education. These funds serve to equalize the property tax rates that individual taxpayers would pay for such levies and to provide tax relief to tax payers in high tax rate school districts. These funds are not part of the district’s basic education allocation.” RCW 28A.500.010 Note: The language up to the last sentence was added to the levy equalization statute in 1999.

31. Mechanics of Levy Equalization -- Definitions • Adjusted Levy Base = Most state and federal revenues from the previous school year, with various adjustments. • One adjustment is the per pupil inflator which is specified in the appropriations act. It serves to take account of the lag in the levy calculation due to the use of the prior school year as the base. • Another is for students served by one district that are resident in another. • 12% Levy = 12% of a district’s adjusted levy base. • 12% Levy Rate = the property tax rate needed to raise a 12% levy. 12% Levy Rate = 12% levy amount divided by assessed value times $1000

32. Mechanics of Levy Equalization • A district is eligible for state levy equalization if its property tax rate for a 12 percent levy is higher than the state average property tax rate for a 12 percent levy. • A district’s maximum levy equalization amount is based on the difference between the district’s 12% levy rate and the state average 12% levy rate, divided by the state average levy rate, times the district’s 12% levy amount. • To receive levy equalization, a district must have passed a local M&O levy. • A district’s maximum levy equalization allocation is reduced proportionately if the district has not passed a levy with a levy rate that reaches the state average rate for a 12% levy.

33. While levy authority is capped at 24%* of a district’s adjusted levy base, the levy equalization formula equalizes the tax rate necessary to raise a 12 percent levy. *Ninety-one grandfathered districts have higher levy lids.

34. The adjusted levy base and district assessed value determine eligibility and amount of levy equalization. Appendixes B and B1 contain this data for all school districts.

35. Levy base per student differences are one reason for differing property tax rates and differences in levy equalization per student. Appendix A1 ranks school district levy bases from high to low.

36. Statewide, two state education programs account for almost 82 percent of the levy base for 2002 levies.

37. Factors in the levy base with the greatest per student variation are: small schools, transportation and federal programs.

39. Differences in assessed value per student are another reason for differences in levy rates for equivalent percent levies. Appendix E compares assessed value per student and eligibility for levy equalization.

40. Of the 228 districts eligible for LEA, about 70% have above average levy bases per student, and about 87% have below average assessed value per student.

41. Other Levy Equalization Topics • Number of districts receiving levy equalization, 1990-2002. • State average levy rates for a 12% levy 1995-2003. • Cost of levy equalization 1995-2005. • Reasons for cost increases in levy equalization. • 1997 joint legislative levy equalization study – findings and recommendations.

42. Over 70% of school districts are receiving levy equalization funding this year. • 210 districts are receiving levy equalization in CY 2002. • 68 percent of the students are in districts receiving levy equalization funding. • Of the 86 districts that do not receive levy equalization, 18 are eligible but do not qualify because they did not pass a levy.

43. Refer to map identifier code sheet for school district numbers.

44. The levy rate per $1,000 of Assessed Value for a 12 percent levy has been dropping. Estimated

45. The cost of the levy equalization program has increased substantially since 1995.

46. Increases in the levy base account for almost half of the increase in the cost of levy equalization from FY 1995 to FY 2003.

47. King County assessed values have been growing faster than the rest of the state.

48. The 1997 legislation that provided levy equalization at 12% for certain districts also required a joint House and Senate study of levy equalization.

49. 1997 Levy Study Recommendations