Formerly First in the Nation: Part 3 – Figuring out the formula is only half the trouble

By Bob Eschliman
Editor

 

On the surface, the education funding mechanism in Iowa sounds fairly straight forward: count up the students, figure out how much there is to hand out, then distribute it evenly to all of the school districts.

But, reality is never as simple as it may seem.

As required by Iowa Code, every two years, the governor recommends a state percentage of growth – formerly referred to as “allowable growth” – for the next two fiscal years. Then, the General Assembly debates the issue and either approves the governor’s proposal or takes up one – or in the case of this cycle, two – of its own.

The state percentage of growth is used to determine the district cost per pupil, as we learned last time. However, once the district cost per pupil is determined, the funding formula then determines the “foundation level” per equivalent pupil, based on 87.5 percent of the state cost per equivalent pupil.

For the current year, Fiscal Year 2015, the state cost of $6,366 per equivalent pupil would result in an 87.5-percent foundation level of $5,570. That portion is then funded in two ways:

• the statutory “uniform levy” of $5.40 per $1,000 taxable valuation in the district, and
• “state foundation aid” from the state’s General Fund, which makes up the remainder, no matter how much or little the uniform levy generates.

The remainder of the district cost per equivalent pupil – at least $796 per equivalent student to cover the minimum district cost – must be covered by an additional local property tax. This is the biggest factor in determining a school district’s tax levy rate.

There are some exceptions to this funding mechanism. Special education students are not funded through the uniform levy, so instead the entire foundation level is covered by state foundation aid. Also, area education agencies, which receive a portion of money from each of the school districts they serve – $280 per equivalent pupil in FY 2015 – of which 79 percent (the foundation level for AEAs) comes from direct state aid.

Also, beginning with last school year (FY 2014), the General Assembly now provides property tax relief by covering the amount of increase in district cost per equivalent pupil that is created by the state percentage of growth.

In addition to the district cost per equivalent pupil, school districts may enact some discretionary spending in their annual budgets. These sources are generally limited in duration, as well as in scope.

The Instructional Support Program allows a district to spend up to 10 percent of the amount of its regular program budget for five or 10 years (depending on whether or not it is board- or voter-approved). It is funded through a mix of local tax and state aid, although no state funding was appropriated for the current fiscal year.

The local funding mechanisms for the instructional support fund come from either a property tax, or through an income surtax.

School districts may also levy a cash reserve property tax, which can be used to provide additional cash flow, to assist with property tax shortfalls, or as modified supplemental funding. Those funds go into the district’s General Fund.

Over the past five years, the number of districts participating in the cash reserve process has been reduced by more than 27 percent.

Other discretionary levies include:

• District Management Levy – use restricted, but rate not limited – to fund liability insurance premiums, tort judgments, self insurance costs, loss of property, unemployment benefits, and early retirement funds;
• Physical Plant and Equipment Levy. which may consist of a board-approved levy of $0.33 per $1,000 of taxable valuation and a voter-approved levy of $1.34 per $1,000;
• Public Education and Recreational Levy (formerly referred to as the Playground and Equipment Levy), which is a levy of up to $0.135 per $1,000 taxable valuation to fund playground and recreational equipment upgrades, must be approved by voters;
• Debt Service Levy – which may be approved for a maximum of 20 years per bond issue – cannot exceed $4.50 per $1,000 of taxable valuation; and
• Secure an Advanced Vision for Education sales and use tax (formerly the School Infrastructure Local-Option Sales Tax – requires a voter-approved revenue purpose statement), which is statewide and distributed on a per pupil basis with excess funds going toward property tax relief.

Income surtaxes is another funding source for local school districts in Iowa. More than 80 percent of the school districts in Iowa have implemented the surtax option. It can be used to replace property tax revenue for any of the following purposes:

• PPEL,
• Instructional Support Program, and
• Educational Improvement Program

Regardless, the entire school funding process is directly impacted by the taxable property valuation of each local school district. Those with higher taxable valuations receive less state support than those with lower taxable valuations.

But, in general, the current funding mechanism handicaps “property-poor districts.” That’s because they don’t generate as much revenue from capped levy rates, and they must raise taxes higher to generate the same revenue as equally sized “property-rich districts.”

If your mind is blown, don’t worry. Here’s a simplified example:

District ABC and District XYZ each have a certified enrollment of 1,000 equivalent pupils, which generate about $5.8 million through the state’s funding formula. District ABC is property-rich, generating about $750,000 in taxable valuation per equivalent pupil, while District XYZ is property-poor, generating only $150,000 in taxable valuation per pupil.

In the case of District ABC, the uniform levy generates $4.1 million of the $5.8 million in total funding. District XYZ’s uniform levy only generates $800,000 in revenue. The state must come up with the additional $3.3 million in the form of supplemental state aid to meet the foundation level.

Both districts require $700,000 in additional levy revenue to meet its $5.8 million budget obligation. District ABC is able to do this with an additional levy rate of $0.961 per $1,000 of taxable valuation, while District XYZ must levy an additional $4.807 per $1,000 of taxable valuation.

The difference is $3.846, or roughly $321.53 per year in additional taxes on a residential home with an assessed value of $150,000.

But the example goes beyond just the regular program cost. PPEL and the Management Levy are both tied directly to property valuations.

In the case of PPEL, both districts have enacted both the board- and voter-approved levies, for a total PPEL of $1.67 per $1,000 of taxable valuation. But District ABC is able to generate $1.25 million per year, while District XYZ is only able to generate $250,000 a year – a difference of $1 million per year.

The management levy is not statutorily limited, but being districts of equal size, they both have the same management costs – approximately $150,000 – they must levy to cover. In the case of District ABC, the management levy is $0.20 per $1,000 of taxable valuation, while it is $1.00 for District XYZ.

The cherry on top, so to speak, is the nearly $300 million local school districts in Iowa receive from the federal government (the U.S. government provides about $2.7 billion a year in funding to post-secondary education in Iowa, including Pell Grants). In the current fiscal year, it amounts to $276.37 million; next fiscal year it is estimated to be $287.06 million, an increase of 3.9 percent.

Those federal funding sources include:

• grants to school districts, including those for school improvement programs, to assist the funding for state programs for “education for the disadvantaged,” which include migrants and neglected and delinquent children, as well as for teacher quality improvement, education technology, math and science partnerships, and career and technical education;
• “impact aid,” which is broken down to basic support payments, payments for children with disabilities, and construction aid;
• 21st Century Community Learning Centers grants;
• state assessments grants;
• the Rural and Low-Income Schools Program;
• the Small and Rural School Achievement Program;
• English Language Acquisition grants;
• Homeless Children and Youth Education grants; and
• special education grants.

And that is where the money “comes from” in terms of funding education in Iowa. But in reality, whether the funds come from the left pocket (state General Fund, local levies) or the right (federal grants and aid), it’s important to remember they all come from the same ultimate source: you.