Foundation School Program
Fiscal and Policy Studies

TABLE OF CONTENTS

TABLE OF CONTENTS

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ANALYSIS OF THE BASIC ALLOTMENT AND REGULAR PROGRAM .u.cccccccccccccsccsssssssssssssssssssesceccsssessssssseecees, 7
OVERVIEW OF THE BILINGUAL EDUCATION ALLOTMENT .........cccccccccsscsssccccsccsccsssssssssssssssssesssecsessssssssssssseecce, 11
OVERVIEW OF THE TRANSPORTATION ALLOTMENT o.........scsccscscccsessscsscsceccssssssssssssssssssssssssesusssseesessssssssssesecce, 15
MAINTENANCE AND OPERATIONS TAX RATES .......csssssssccsssssssssssssssecesscessssesesssssssssssssssssssssesesssesssssssssssssseeceess 17

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009 FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES i
FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009
FISCAL NEUTRALITY

Fiscal neutrality, commonly referred to as “equity,” entails a
public school finance system that provides “for substantially
equal access to similar revenue per student at similar tax
effort, considering all state and local tax revenues of districts
after acknowledging all legitimate student and district cost
differences.” (Texas Education Code, Section 42.001 (b)).

This statutory language derives from Texas Supreme Court
rulings on the constitutional requirement that Texas operate
a system of free public schools that is “efficient,” in the sense
that limited resources must be distributed across school
districts in such a way as to achieve a general diffusion of
knowledge. The Texas Supreme Court, in its 2005 West-
Orange Cove decision, held that the state’s school finance
system did not violate the constitutional requirement of
efficiency. That decision was based on the school finance
system as it operated in the 2003-04 school year.

In the West-Orange Cove ruling that upheld the equity of
Texas school finance, the court also found the system
unconstitutional in that it did not provide school districts
with meaningful discretion in setting tax rates, and directed
the Texas Legislature to provide a remedy. In 2006, the
Seventy-ninth Legislature, Third Called Session, responded
by enacting House Bill 1 (HB1), which was implemented in
the 2006-07 school year. This legislation significantly altered
school finance by reducing school district property tax rates
by one-third, linking formula yields to the eighty-eighth
percentile of wealth, establishing a total revenue target for
each district, providing hold harmless funds if local and state
formula revenue did not generate the target, and creating a
$0.17 enrichment tier.

As a significant piece of public school finance legislation,
HB1 had a substantial impact on the equity of the system.
The following analysis presents data to assess the system's
equity, from the years before House Bill 1 beginning with the
2003-04 school year, to current law projections for the
school years of the 2010-11 biennium.

SIGNIFICANT FINDINGS

* Concepts previously central to the measurement of
the equity of a school finance system in Texas, such
as an “equalized system,” are no longer easily defined
under the revenue target mechanism established by

the Seventy-ninth Legislature, Third Called Session,
2006.

* The equity of the public school finance system, as
measured by the analysis presented here, has declined
since the implementation of the related statutory
provisions of the 2006 legislation.

RECOMMENDATIONS

* Fund a school finance system with levels of equity
comparable to that of the system in place for the
2003-04 school year, the year that the Texas Supreme
Court judged the system to be constitutionally
equitable.

* Establish a target revenue floor per WADA per penny
to deliver additional state funds to districts with lower
revenue. This would reduce the revenue gap and
bring districts closer to the statewide average revenue.
Alternately, modify the funding formulas of the
basic allotment to increase the guaranteed yield. This
would free the resulting revenue from constrictions of
the current target revenue mechanism.

DISCUSSION

If one views the traditional funding formulas of the school
finance system—the Tier 1 basic allotment and the Tier 2
guaranteed yield—in isolation, HB1 substantially increased
their level of equity. The dollar amounts at which those yields
were statutorily set under the previous finance system would
have approached the seventy-fifth percentile of wealth in the
2006-07 school year. HB1 increased the yields to the eighty-
eighth percentile, and indexed them to that percentile so that
the yields would increase with property value growth.

With the HB1 system, the increased formula yields flow
additional state funds that replace a portion of local revenue
lost due to tax relief. However, to ensure no loss of total
revenue, HB] also guaranteed that districts would receive the
total revenue per student in weighted average daily attendance
(WADA) received in either the 2005-06 or 2006-07 school
years. If the formulas did not deliver sufficient revenue to
meet that target, the system would provide “hold harmless”
funding up to the target amount.

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES
FISCAL NEUTRALITY

The effect of the base-year revenue target, and the hold
harmless funds that flowed from it, was to override the equity
gain in the formula structure and lock in the inequities that
existed in the system in those base years. Some of those
existing inequities are relatively small; for example, there are
34 wealthy districts that, due to a Chapter 41 hold harmless
provision, were allowed to retain some revenue above the
equalized wealth level.

Other inequities have a larger impact. The prime example is
the Available School Fund per capita apportionment; an
annual distribution that, for less wealthy districts subject to
Chapter 42, serves a method of financing their entitlement,
but for wealthy Chapter 41 districts is in addition to the local
revenue they retain. This amount has averaged approximately
$305 per student in average daily attendance (ADA) over the
last 10 years; on a WADA basis, roughly $230 per WADA on
average. Although this distribution has been partially offset
since fiscal year 2004 by a per WADA distribution made
through the General Appropriations Act, it remains a
significant benefit to Chapter 41 districts. Furthermore, in
the 2006-07 school year, one of the years of which a district
could base its revenue target, the per capita apportionment
reached a high water mark of $394 per ADA. This is likely
one reason, among several, why more than 85 percent of
Chapter 41 districts have their revenue target based on the
2006-07 school year.

In addition to perpetuating existing inequities in the system,
the revenue target mechanism added an additional inequity.
Under the previous funding system, state aid or recapture
payments were not adjusted to reflect local revenue growth
until the following year. However, under the total revenue
target mechanism of HB1, any district that had a year of
strong growth in local property tax collections, perhaps due
to strong property value growth, in the 2005-06 or 2006-07
school years received a higher revenue target as a result. As it
happened, in the 2006-07 school year, the year which most
districts based their revenue target, wealthier districts on
average experienced significantly higher property value and
resulting collections growth than poorer districts.

While one can predict the impact that the revenue target
mechanism of HB1 has on equity, the effect of the enrichment
tier is less clear. The enrichment tier comprises the $0.17
above the statewide maximum compressed tax rate of $1.00
This tier consists of two levels:
* the “golden pennies,” which apply to the first $0.06
levied above a district’s compressed rate, are equalized
at the yield generated by the Austin Independent

School District (ISD), and on which there is no
recapture, and

+ the “copper pennies,” which are the pennies remaining
above a district's compressed rate plus the $0.06
(golden pennies), are equalized at $31.95 per penny
per WADA, and on which revenue generated above
this yield are recaptured.

In terms of equity, each of these enrichment levels has
countervailing factors. For the golden pennies, the guaranteed
yield is highly equalized at approximately the ninety-sixth
percentile of wealth, but the 111 or so districts generating
revenue above that level retain everything they collect. For
the copper pennies, on a per penny basis they are equalized
at $31.95 per WADA with full recapture above that level.
However, districts with compressed rates below $1.00 have
access to more copper pennies than do districts compressed
to $1.00 and, on average, districts at the top end of the wealth
spectrum have lower compressed rates than less wealthy
districts.

EQUITY ANALYSIS

This analysis applies a set of standard equity measures to the
school finance system as captured by the Legislative Budget
Board final models for school years 2003-04 to 2007-08,
and by projections from current law models for school years
2008-09 to 2010-11. As noted previously, the Texas Supreme
Court judged the school finance system to be efficient based
on data from the 2003-04 school year. Using this year as a
benchmark does not imply that a less equalized system would
be unconstitutional; rather, the analysis presents the
2003-04 school year as a possible target should the state
want to maintain a school finance system with a level of
equity that is arguably comparable to the one found
constitutional by the Texas Supreme Court.

The analysis reflects the following methodology:

* Use a per WADA basis. Analysis is done on a
revenue—per-weighted student basis (WADA), thus
incorporating student and district cost differences
expressed by those weights. As a result, the analysis
presumes that the array of weights, allotments, and
other cost adjustments in the current system are,
by the terms of the Texas Education Code Section
42.001(b), “legitimate”; that is, appropriate and
representative of true cost differences between student
groups and district types.

2 FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STUFF — MARCH 2009
FISCAL NEUTRALITY

* Include enrichment. In West-Orange Cove, the
court noted that revenues generated above an
adequate level needed for the general diffusion of
knowledge are supplemental and therefore exempt
from a consideration of equity. Some may argue
that the enrichment tier established by HB1 should
be considered as such, and only the school finance
system under districts’ compressed tax rates should
be examined. However, since the 2006-07 school
year, the revenue capacity of this “compressed tier”
has only increased to the degree population has, and
there is evidence that districts have faced significant
inflationary costs beyond student growth during this
period. As a result, for the purposes of this equity
analysis, the enrichment tier is included.

¢ Assume the maximum tax rate. Districts, and their
voters, have discretion over the number of pennies of
enrichment tax effort they wish to levy. Consequently,
an analysis based on actual district revenue amounts
per WADA will be affected by individual district
decisions on tax effort, which could obscure the equity
of the school finance system. To remove the effects
of variable tax effort across districts, amounts shown
are based on what district revenues would be at the
maximum maintenance and operations (M&O) tax
rates of $1.50 in school years 2003-04 to 2006-07,
and $1.17 in 2008 and beyond.

MEASURES OF EQUITY

Prior to HB1, the three measures used to determine equity
were:
* the percentage of students within the equalized
funding system;

+ the percentage of total Foundation School Program
(FSP) revenue within the equalized funding system;
and

+ the gap in total revenue between districts at the top of
the wealth spectrum, and those below the guaranteed
yield level.

In the school finance system established by HB1, the
“equalized funding system” used by the first two equity
measures is difficult to specify. First, as discussed previously,
each district has a unique total revenue target, based on the
best of three calculations from two different funding years.
Equalized formula levels within the system are effectively
superseded by “hold harmless” state aid, which funds a

significant portion of many districts’ entitlements; statewide,
this hold harmless funding is estimated to represent
approximately one-third of total state aid for M&O.

Given the uncertainty regarding the definition of an
equalized funding system, this analysis begins with a
calculation of the remaining equity measure from the
previous funding system—the “revenue gap.”

Consistent with the methodology employed by prior fiscal
studies, the revenue gap compares the total M&O revenue
per WADA, on a weighted average basis, in districts with
property wealth below the Tier 2 guaranteed yield threshold
with that of districts with property wealth equal to or greater
than the equalized wealth level. As discussed above, this
analysis is calculated assuming all districts are taxing at the
maximum allowable rate.

There are two caveats to note regarding the revenue gap
analysis. First, for school years 2003-04 to 2005-06, there
was a gap between the Tier 2 guaranteed yield level of $27.14
per penny/WADA and the equalized wealth level of $305,000
($30.50 on a per penny/WADA basis); districts with yields
in this gap are excluded from the analysis. For each of these
years, at least one of the two largest districts in the state
(Houston ISD and Dallas ISD) fell into this gap. The second
caveat is that for school years 2006-07 to 2008-09, this
analysis determines the eighty-eighth percentile yields
calculated with latest available property values and weighted
student counts. The actual implementation of the school
finance system for the 2008-09 biennium required the
establishment of the eighty-eighth percentile at set dollar
amounts in the General Appropriations Act (2008-09
biennium) which, due to property value growth and student
counts that diverged from what was projected, are lower than
current data indicate.

These caveats are important because they suggest weaknesses
in the revenue gap as an equity measure. First, the exclusion
of the districts between the guaranteed yield and the equalized
wealth level entails ignoring the equity impact of the school
finance system on a sizeable portion of the student
population—over 12 percent in certain years. Additionally,
even after the 2005-06 school year when HB1 eliminated
the gap between formula yields and the equalized wealth
level, a small change in the wealth level of one of the larger
districts could push it from Chapter 42 status to Chapter 41
status (or vice versa). This could potentially alter the average
revenue per WADA of both groups in a way that does not
reflect the change in the equity of the system as a whole.

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FISCAL NEUTRALITY

Lastly, a comparison of the weighted average revenue of these
two groups can mask substantial variations within each
group. To address these shortcomings, this analysis computes
the coefficient of variation, which is an additional measure of

equity.

The coefficient of variation measure begins with the standard
deviation for total revenue per WADA for each district,
weighted for the size of the district’s student population. The
standard deviation is a measure of how widely spread districts
are across the spectrum of total revenue per WADA, with a
smaller number indicating more districts are grouped more
closely to the average total revenue, and a larger number
indicating that more districts have total revenue amounts
farther from the average. Assuminga fairly normal distribution
of districts around the statewide average revenue,
approximately 68 percent of students will fall within plus or
minus one standard deviation of the average, and about 95
percent will be within plus or minus two standard deviations
of the average.

The coefficient of variation is simply this measure of
dispersion divided by the statewide weighted average total
revenue per WADA, which gives a comparable calculation
across years. A smaller coefficient indicates a higher level of

equity.

ANALYSIS RESULTS

Figure 1 shows the trend in average total revenue per WADA
across all districts. First, it should be noted that HB1
markedly increased the overall capacity of the school finance
system, increasing maximum average revenues per WADA

under $4,800 in the 2005-06 school year to just under
$5,900 in the 2007-08 school year, the first full year of
implementation. This capacity has a bearing on the equity
question in that comparisons of revenue gaps and measures
of dispersion across school years should be viewed
proportionally to the size of the system.

Figure 2 shows the first measure, the revenue gap, increasing
from school years 2005-06 to 2006-07, the first year of HB1
implementation. Analysis of district revenue targets suggests
that this is due primarily to the dis-equalizing effects of the
revenue target calculation mentioned above. This gap
increases slightly from 2007 to 2008, perhaps due to a
property value growth-driven jump in the number of effective
pennies on which the yield is paid. The model estimates
another small increase to the gap in fiscal year 2009 as the
golden pennies are expanded to six, but a moderation of the
gap thereafter as effective tax rates in the enrichment tier
decrease with slowing property value growth. The revenue
gap as a proportion of the average total revenue per WADA
for Chapter 42 districts, after its initial jump from the pre-
HB1 to the post-HB1 system, stays relatively stable
thereafter.

Similarly, Figure 3 shows an increase in the coefficient of
variation between pre-HB1 and post-HB1 school years, and
then a steady equity level thereafter. One may expect this
level of equity to continue in the out years; the only factor
that can substantially affect the system’s revenue distribution
(at the maximum tax rate) under current law are fluctuations
in effective tax rates in the enrichment tier, and the increase
of the golden penny yield, set to Austin ISD’s yield, relative

FIGURE 1
EQUITY ANALYSIS OF MAXIMUM M&O TAX EFFORT (INCLUDING ENRICHMENT), FISCAL YEARS 2004 TO 2011

2004 2005 2007 2008 2009* 2010* 2011*
Average Total Revenue per WADA $4,609 $4,710 $4,779 $5,793 5,898 $5,948 $5,965 $5,969
(All Districts)
Average Total Revenue per WADA $4,532 $4,621 $4,668 $5,698 $5,795 $5,841 $5,868 $5,873
(Chapter 42)
Average Total Revenue per WADA $4,970 $5,183 $5,263 $6,527 $6,655 $6,730 $6,736 $6,746
(Chapter 41)
Revenue Gap between Chapter 41 $438 $562 $596 $829 $860 $889 $868 $873
and Chapter 42 Districts
Revenue Gap as Percentage of 9.7% 12.2% 12.8% 14.6% 14.8% 15.2% 14.8% 14.8%
Chapter 42 Revenue
Standard Deviation $336 $325 $348 $493 $504 $513 $516 $510
Coefficient of Variation 7.3% 6.9% 7.3% 8.5% 8.5% 8.6% 8.6% 8.5%
*Projected.
Source: Legislative Budget Board.
4 FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES LEGISLATIVE BUDGET BOARD STUFF — MARCH 2009
FISCAL NEUTRALITY

FIGURE 2

AVERAGE TOTAL REVENUE PER WADA, CHAPTER 41, CHAPTER 42, AND ALL DISTRICTS,

SCHOOL YEARS 2003-04 TO 2010-11

$7,000 - -
$6,750 - te dc A.
$6,500 —<——

$6,250 LZ

$6,000

$5,250

A
L = : .
= LS
_f ff

$5,000 ne ze

x
$4,750 ——— a fv
$4,500 -

$4,250 + { t : :
2003-04 2004-05 2005-06 2006—07 2007—08 2008—09* 2009—10* 2010-11*
—S— All Districts —st— Chapter 41 —#— Chapter 42
*Projected.
Source: Legislative Budget Board.
FIGURE 3
COEFFICIENT OF VARIATION IN AVERAGE REVENUE PER WADA, SCHOOL YEARS 2003-04 TO 2010-11
10%
9% =
8% ZO
, i ad
7% —[=—
6%
5% t t t t + t
2003—04 2004-05 2005-06 2006-07 2007-08 2008—09* 2009—10* 2010—11*
*Projected

Source: Legislative Budget Board.

to the yields of those districts above Austin ISD. These
represent a very small share of total revenue in the system.

It is interesting to note that the enrichment tier, specifically
the copper pennies, increases the level of equity in the
school finance system. The six golden pennies have a
negligible effect on the overall equity of the system, as
measured by the coefficient of variation. It appears that the
positive equity impact of the high Austin ISD yield largely
negates the negative equity effect of the additional local
revenue kept by districts above that yield, at least relative to
the rest of the school finance system. That un-recaptured

revenue is about 6 percent of the approximately $2.1 billion
in potential total revenue the golden pennies are projected
to generate in the 2009-10 school year.

Conversely, including the copper pennies reduces the
coefficient of variation by approximately 0.4 percent. The
fact that, on average, wealthier districts have approximately
two additional copper pennies compared to the statewide
average is more than offset by full equalization at $31.95 per
WADA per penny. In the 2009-10 school year, the copper
pennies are projected to generate a maximum amount of
approximately $2.3 billion in total revenue.

TEXAS SCHOOL PERFORMANCE REVIEW

LEGISLATIVE BUDGET BOARD 5
FISCAL NEUTRALITY

RECOMMENDATION

The Legislature should make changes to the public school
finance system to restore its equity to the level it exhibited in
the year the system was last deemed constitutionally efficient
by the Texas Supreme Court. Proposals to achieve this goal
could be analyzed in terms of their coefficients of variation in
total revenue per weighted student, and those coefficients

could be compared to that of the system as it operated in the
2003-04 school year.

School finance changes that enhance the equity of the system
could operate within the target revenue mechanism or could
supersede it. For example, the Legislature could establish a
target revenue floor per WADA per penny. This method
would deliver additional state aid to districts at the lowest
end of the revenue spectrum, shrinking the revenue gap and
pulling districts more tightly around the statewide average
revenue. Alternatively, the current law mechanisms of the
basic allotment and/or guaranteed yield could be significantly
increased, and revenue delivered through those formulas
could be freed from constrictions of the target revenue
mechanism.

6

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STUFF — MARCH 2009
ANALYSIS OF THE BASIC ALLOTMENT AND REGULAR PROGRAM

This analysis identifies projected public school district
expenditures and revenues attributable to an accredited
regular education program. For the purpose of this analysis,
accredited districts are defined as those earning a rating of
“Academically Acceptable,” “Recognized,” or “Exemplary”
under the state’s educational accountability system. The
analysis compares projected expenditures per regular program
student in average daily attendance in accredited districts
with projected Foundation School Program revenues
generated by regular program attendance in the same group
of districts. Projected revenue per regular program student
for fiscal years 2010 and 2011 assumes tax effort to be the
greater of each district’s adopted 2007 tax rate for maintenance
and operations or $0.06 plus the district’s compressed
maintenance and operations rate, with compressed rate
calculated as the district's adopted 2005 tax rate multiplied
by 0.6667.

SIGNIFICANT FINDINGS

* The Foundation School Program funding system
generates sufficient revenue per student to fully

fund projected regular program expenditures for the
2010-11 biennium.

+ Expenditures attributable to the regular program
increased 8 percent from fiscal year 2005 to fiscal
year 2007, largely due to increased expenditures
for compensation. Expenditures for compensation
increased 7 percent over the two-year period,
accounting for 72 percent of the growth in
expenditures per regular program student during that
time.

RECOMMENDATION
* Based on the comparison of projected Foundation
School Program revenue to regular program
expenditures, the current basic allotment at the
eighty-eighth percentile of wealth per weighted

student should be maintained.

DISCUSSION

The basic allotment is the fundamental Foundation School
Program (FSP) mechanism that generates revenue for the
regular education program. FSP was significantly revised

through the enactment of House Bill 1 (HB1), Seventy-ninth

Legislature, Third Called Session, 2006. Changes made by
HB1, revising the basic allotment froma stated dollar amount
to a referenced equivalent of the amount generated by $0.86
of tax effort at the eighty-eighth percentile of wealth per
weighted student. Figure 4 shows the basic allotment for
fiscal years 2001 to 2011.

FIGURE 4
FOUNDATION SCHOOL PROGRAM BASIC ALLOTMENT
AMOUNT, FISCAL YEARS 2001 TO 2011

FISCAL YEAR BASIC ALLOTMENT
2001 $2,537
2002 $2,537
2003 $2,537
2004 $2,537
2005 $2,537
2006 $2,537
2007 $2,748
2008 $3,135
2009 $3,218
2010* $3,693
2011* $3,834

*Projected.

Source: Legislative Budget Board.

The property tax reduction provisions of HB1 also interact
with the function of the basic allotment within the FSP. FSP
revenue is generated directly by the basic allotment for
compressed tax effort operating in conjunction with each
school district’s revenue target.

Under HB1, the basic allotment continues to be a primary
factor in the calculation of weighted average daily attendance
(WADA). Specifically, the components that form the
calculation of WADA attributable to the regular program are
regular program ADA, the cost of education index, scale
adjustments applicable to certain districts, and the basic
allotment. The calculated result from these components,
WADA, is key to revenue generated under the FSP’s
guaranteed yield structures. For compressed tax effort,
revenue is generated via a guaranteed yield per penny per
WADA and operates together with Tier 1 FSP revenue in
conjunction with each district’s revenue target. For tax effort
levied above each district’s compressed M&O rate, additional

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009 7
ANALYSIS OF THE BASIC ALLOTMENT AND REGULAR PROGRAM

revenue is generated via guaranteed yield structures on a per

penny per WADA basis.

SCHOOL DISTRICT EXPENDITURES ATTRIBUTED

TO THE REGULAR PROGRAM

The analysis of school district regular program expenditures
is based on fiscal year 2007 actual financial data from the
Texas Education Agency’s Public Education Information
ManagementSystem (PEIMS). For this analysis, expenditures
attributable to the regular program include those specifically
reported as regular program expenditures and a proportional
amount of each district's undistributed expenditures reported
for the same functions and objects. Functions associated
with the regular program that correspond to the revenue
examined include instruction, instructional resources,
curriculum and staff development, instructional and campus
leadership, guidance counseling, social work services, health
services, general administration, plant maintenance, and
data processing. Expenditures per student for this analysis
represent annual expenditures for each district rated
Academically Acceptable, Recognized, or Exemplary divided
by regular program average daily attendance for the same
districts.

Based on this methodology, the fiscal year 2007 average
regular program expenditure per student among districts
rated at least academically acceptable was $4,617. For the
same year, the average expenditure per regular program
student by districts rated Recognized or Exemplary was
$5,237. In general, districts rated Recognized or Exemplary
in 2007 tended to be smaller and tended to have both a
higher expenditures and higher revenue per student than
districts earning the academically acceptable rating.

To project regular program expenditures per student for the
2010-11 biennium, the State and Local Government
Deflator, a price index produced by the U.S. Department of
Commerce Bureau of Economic Analysis, was applied to
2007 expenditures. Figure 5 shows projected expenditures
for fiscal years 2010 and 2011.

COMPARING REGULAR PROGRAM REVENUE

TO AVERAGE EXPENDITURE

The primary purpose of this analysis is to determine whether
the FSP generates regular program revenue that is comparable
to regular program expenditures. Two FSP revenue streams
contribute funding attributable to regular program students
in average daily attendance (ADA)—the portion of FSP
applicable to the compressed tax effort and each district’s
revenue target and the portion of the FSP applicable to tax
effort above the compressed rate.

FIGURE 5
ACTUAL AND PROJECTED REGULAR PROGRAM
EXPENDITURES PER STUDENT, FISCAL YEARS 2007 TO 2011

ALL ACCREDITED HIGHEST RATED
FISCAL YEAR DISTRICTS DISTRICTS

2007 $4,617 $5,237
2010* $5,426 $6,155

State and Local

Government Factor 1.175 1.175
2011* $5,704 $6,470

State and Local

Government Factor 1.235 13235

*Projected.

Source: Legislative Budget Board.

Within the portion of the FSP governed by compressed tax
effort and revenue targets established under HB1, revenue
generated for the regular program was determined by
calculating the portion of Tier 1 funding generated by
applying the basic allotment adjusted for the cost of education
index and district size (scale) to regular program ADA. Based
on the Tier 1 amount, regular program WADA was calculated
and compared to total WADA to establish the proportional
amount of Tier 2, Level 1 funding attributable to the regular
program. The total of Tier 1 and Tier 2, Level 1 funding was
divided by regular program WADA and compared to the
district's revenue target per WADA to determine the
proportion of additional state aid for property tax relief or
“dragback” attributable to the regular program. Regular
program ADA in grades 9—12 was extracted to proportionally
attribute each district’s high school allotment amount to the
regular program. State aid for increases in the minimum
salary for teachers, counselors, nurses, and librarians was
proportionally attributed to the regular program based on
each district’s count of full-time equivalent (FTE) teachers

serving the regular student population versus the district's
total FTE teachers.

For the portion of the FSP applicable to tax effort above the
compressed rate, total revenue per penny per WADA was
attributed to the regular program on the basis of each district’s
ratio of regular program WADA to total WADA. Figure 6
compares FSP regular program revenue per student to the
average expenditure per regular program student for the
2010-11 biennium. Expenditures are projected by using the
State and Local Government Deflator, while revenues are
projected based on current assumptions of tax effort
combined with growth in student enrollment and district
property values. As described previously, tax effort is assumed
stable across both years as the greater of a district’s adopted
2007 M&O rate or $0.06 above compressed rate.

8 LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES
ANALYSIS OF THE BASIC ALLOTMENT AND REGULAR PROGRAM

FIGURE 6

COMPARISON OF REGULAR PROGRAM EXPENDITURES TO CURRENT LAW REVENUE, FISCAL YEARS 2010 TO 2011

FISCAL STATE AND LOCAL REGULAR PROGRAM FOUNDATION SCHOOL PROGRAM

YEAR COST FACTOR EXPENDITURE PER ADA REVENUE PER REGULAR PROGRAM ADA DIFFERENCE
DISTRICTS THAT WERE ACADEMICALLY ACCEPTABLE OR HIGHER IN 2007

2010 1.175 $5,426 $5,971 $545
2011 1.235 $5,704 $5,977 $273
DISTRICTS THAT WERE RECOGNIZED OR EXEMPLARY IN 2007

2010 1.175 $6,155 $6,625 $470
2011 1.235 $6,471 $6,632 $161

Note: FSP revenue Includes enrichment under current assumptions of the greater of adopted 2007 M&O or $0.06 + compressed M&O.

Source: Legislative Budget Board.

For the 2008-09 biennium, school districts received an
additional $23.63 per WADA from an appropriations rider
for educator salary increases. Because funding is specific to
the 2008-09 biennium, it was not included in projected
revenues for fiscal years 2010 and 2011.

As shown in Figure 6, the FSP generates sufficient revenue
attributable to the regular program to meet anticipated
regular program expenditures. However, assuming that the
state and local index used to project expenditures is accurate,
it appears that growth in expenditures may outpace growth
in revenue at some point after fiscal year 2011. The following
section describes increases in actual regular program
expenditures from 2005 to 2007.

INCREASES IN REGULAR PROGRAM EXPENDITURES

Regular program expenditures increased from fiscal years
2003 to 2007, with the largest increase occurring between
fiscal years 2005 and 2007. Figure 7 shows the trend in
expenditures per regular program ADA from fiscal years

FIGURE 7
REGULAR PROGRAM EXPENDITURES PER ADA TREND,
FISCAL YEARS 2003 TO 2007

Expenditures

$4,750

$4,625

$4,500

$4,375

$4,250

$4,125

$4,000 T

2003 2005 2007
*Projected.
Source: Legislative Budget Board.

2003 to 2007, the base year for the current analysis. As
indicated by this figure, expenditures per student have grown
by 1 percent and 8 percent for the two biennial periods
ending in fiscal years 2005 and 2007.

Figure 8 disaggregates the increase in expenditures from
fiscal years 2005 to 2007 by category of expense. Increases in
compensation-related costs accounted for 72 percent of the
increase in regular program expenditures per student from
2005 to 2007, followed by increases in expenditures for
contracted services, supplies and materials, other operating
expenses, and capital outlay excluding land and buildings.

FIGURE 8
PERCENTAGE OF INCREASE PER STUDENT BY CATEGORY
OF EXPENSE, FISCAL YEARS 2005 TO 2007

Professional
and Contracted
Services
12.2%

Supplies and
Materials
Payroll Costs 12.5%

62.8%

Capital Outlay
12.3%

A

Other Operating
Costs
0.2%

Debt Service
0.0%

*Projected.

Source: Legislative Budget Board.

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009 9
ANALYSIS OF THE BASIC ALLOTMENT AND REGULAR PROGRAM

Figure 9 shows additional detail concerning the
contributions of various categories of expenditure to the
observed per student increase from fiscal years 2005 to
2007. In evaluating the level of increase in expenditures for
compensation, it is important to note that HB1 provided
an annual salary increase of $2,000 for classroom teachers
and full-time counselors, nurses, and librarians effective in
fiscal year 2007.

FIGURE 9

CATEGORIES OF EXPENSE CONTRIBUTING TO REGULAR PROGRAM AMOUNT PER AVERAGE DAILY ATTENDANCE OR
AMERICANS WITH DISABILITIES ACT INCREASE, FISCAL YEARS 2005 TO FISCAL YEAR 2007

FISCAL YEAR CHANGE
EXPENDITURE CATEGORIES 2005 2007 DOLLAR PERCENTAGE IMPACT
COMPENSATION
Professional Payroll $2,824 $3,023 $199 7% 56%
Other Payroll $445 $476 $31 7% 9%
Group Insurance & Other Employee Benefits $353 $377 $24 7% 7%
SUBTOTAL, COMPENSATION $3,622 $3,876 $254 7% 72%
CONTRACTED SERVICES
Utilities $173 $207 $34 20% 10%
Other Contracted Services $200 $213 $13 7% 3%
SUBTOTAL, CONTRACTED SERVICES $373 $420 $47 13% 13%
OTHER CATEGORIES
Supplies for Maintenance & Other General Supplies $166 $197 $31 19% 9%
Other Operating & Selected Capital Expenditures $104 $124 $20 19% 6%
SUBTOTAL, OTHER CATEGORIES $270 $321 $51 19% 15%
TOTAL $4,265 $4,617 $352 8% 100%

Source: Legislative Budget Board.

10 LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES
OVERVIEW OF THE BILINGUAL EDUCATION ALLOTMENT

Texas state law requires public school districts with a certain
critical mass of students with limited English proficiency to
offer special language programs to help students achieve
academic standards in all areas and become proficient in
English. These programs could be a bilingual education
program or English as a Second Language program depending
on the grade level in which the program is offered. Texas
Administrative Code requires campuses with one or more
students with limited English proficiency to offer special
language services to these students. The calculation of school
districts’ entitlements under the Foundation School Program
provides for a 10 percent bilingual education funding weight
for students enrolled in these special language programs in
acknowledgement of a marginally higher cost associated with
providing these services as compared to a regular instructional
program.

This report provides an overview of bilingual education in
Texas, its funding weight within the Foundation School
Program, and how Texas compares to its peer states.

SIGNIFICANT FINDINGS

« Annual growth in the population of students enrolled
in Texas public schools with limited English proficiency
has occurred at a rate nearly three times that of the
overall student population. Students with limited
English proficiency now comprise approximately
15 percent of the total student population in public
schools.

+ The state provides a 10 percent funding weight to
support special language programs through the
bilingual education allotment in the Foundation
School Program. The weight has not been modified
since 1986.

* Ofthe top five states ranked by the percent of students
with limited English proficiency as a function of
total student population, all but California provide
funding through a weighting mechanism similar to
Texas's bilingual education allotment. Among those
states, Texas provides the lowest weight per student.

* In 2007, the Seventy-ninth Legislature considered
several proposals to modify the bilingual education
allotment structure. These proposals would have

weighted funding for students with limited English
proficiency in later grades at a higher rate than those
in earlier grades.

* The Texas Education Agency is under a federal
court order to develop a plan to modify its system
for monitoring bilingual and English as a second
language programs and to modify English as a second

language instruction. This ruling is currently under

appeal.

DISCUSSION

In recognition of the necessity of English proficiency for full
participation in the state public education system, state law
requires that school districts with 20 or more students
identified as having limited English proficiency (LEP
students) in the same grade level must offer a special language
program—either a bilingual education or an English as a
second language program. Bilingual education programs are
defined as dual-language programs that provide instruction
in basic academic skills in the student's native language
alongside English language instruction. State law requires
that bilingual education programs be offered in Kindergarten
through the elementary grades and allows that bilingual
education programs may be offered through grade 8.

English as a second language (ESL) programs provide
instruction in English by teachers specially trained to
compensate for language differences. ESL programs may be
offered in post-elementary grades through grade 8 and are
the required mode of delivering special language instruction
in the high school grades. Title 19, Part 2, Section 89.1205(d)
of the Texas Administrative Code requires that districts offer
English as a second language services to all LEP students for
whom a bilingual program is not required regardless of the
total number of LEP students in the district.

Students are first identified as having limited English
proficiency based on a home language survey. If the survey
reveals that a language other than English is spoken at home,
then the student would be tested for English proficiency. A
local language proficiency assessment committee (LPAC)
comprising a bilingual educator, a transitional language
educator, a parent of a student with limited English
proficiency, and a campus administrator reviews test results

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES I
OVERVIEW OF THE BILINGUAL EDUCATION ALLOTMENT

to determine whether a student qualifies as having limited
English proficiency. If the LPAC recommendation is that the
student should be enrolled in a special language program,
parental permission must be obtained prior to enrollment.
Other duties of the LPAC include development and
monitoring of student plans for accelerated English mastery,
annual assessment of student progress and recommendations
for future placement, and monitoring of students who have
exited special language programs.

SPECIAL LANGUAGE PROGRAMS:

ENROLLMENT AND FUNDING

The population of LEP students represents approximately 15
percent of the total student population in Texas public
schools as of the 2007-08 school year. From fiscal years
2001 to 2008, enrollment of LEP students in special language
programs in all grades increased nearly 40 percent, from
approximately 460,000 students in the 2000-01 school year
to 640,000 students in 2007-08. The average annual increase
in the population during the same period was approximately
5 percent. This increase compares to more modest growth in
the total student population of nearly 14 percent from school
years 2000-01 to 2007-08 and an average annual growth
rate during that period of 1.8 percent.

The majority of students enrolled in special language
programs are in grades K~3 with enrollment by grade level
following a generally diminishing trend from K-12.
Figure 10 shows the distribution of bilingual and ESL
enrollment by grade for the 2007-08 school year.

The calculation of school districts’ entitlements under the
Foundation School Program (FSP) provides a 10 percent
bilingual education funding weight for students enrolled in
special language programs in acknowledgement of a
marginally higher cost associated with providing these
services as compared to a regular instructional program.
School Outcomes and School Costs: the Cost Function Approach,
a study conducted on behalf of the Joint Select Committee
on Public School Finance of the Seventy-eighth Legislature,
2004, by Gronberg, et al, found the cost of attaining the
passing standard on the Texas Assessment of Academic Skills
(predecessor to the Texas Assessment of Knowledge and Skills
(TAKS) currently serving as the standardized test in the state
accountability system) for a LEP student would cost around
20 percent more than for a regular student.

The funding weight has not been modified since 1986 and is
applied to each district’s Basic Allotment along with
adjustments for district characteristics and funding weights
for other special student populations. The bilingual education
allotment affects each district’s Tier 1 FSP entitlement as well
as the calculation of students in weighted average daily
attendance (WADA), which is a driver of entitlement under
the Guaranteed Yield Program (Tier 2) described in Chapter
42, Subchapter F. In addition, district WADA is a driver in
the calculation of school district enrichment revenue
associated with certain pennies of tax effort levied above the
compressed tax rate defined by legislation enacted by the
Seventy-ninth Legislature, effective from fiscal year 2007
forward.

FIGURE 10

DISTRIBUTION OF TEXAS BILINGUAL AND ESL ENROLLMENT BY GRADE, SCHOOL YEAR 2007-08

Percentage of Total Population

20%

15%

10% +

5% >

0% =
K 1 2 3 4 5
Source: Texas Education Agency.

12 FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009
OVERVIEW OF THE BILINGUAL EDUCATION ALLOTMENT

Figure 11 shows that the total value of FSP entitlement
attributable to the bilingual education allotment has increased
by 63 percent from about $253 million in fiscal year 2001 to
about $413 million in fiscal year 2008, excluding enrichment
revenues in fiscal years 2007 and 2008. Including enrichment
revenues brings the fiscal year 2008 total to about $430
million, for an increase of about 70 percent compared to
fiscal year 2001.

During the period from fiscal years 2001 to 2008, although
the 10 percent student weight did not change, changes made
to other elements of the FSP formulas result in atypically
large year over year increases in these years. Examples of such
formula changes include the addition of a $110 per WADA
allocation, effective for fiscal year 2004, the addition of the
high school allotment and a teacher salary increase effective
for fiscal year 2007. Excluding the outlier years yields an
annual average increase in FSP entitlement attributable to
bilingual enrollment of about 5 percent per year, which is
consistent with annual growth in the population of LEP
students.

BILINGUAL/ESL EDUCATION FUNDING IN OTHER STATES
According to data published by Baker and Markham in the
Bilingual Research Journal in 2002, there are four basic
funding structures for Bilingual/ESL education services
among the 50 states. Those structures include the following:
* student weighting programs, as is the case in Texas,
which provide an additional percentage of funding

above the funding level for regular education services
for a student receiving special language services;

* flat grants, which provide a set dollar amount in
additional funding for a student receiving special
language services;

* resource-based funding, which provides a_ set
allocation of specific resources for students receiving
special language services (e.g., a state might provide
funding for a bilingual/ESL teacher for every 20

qualifying students); and

* percentage reimbursement, which would provide
a set reimbursement rate for budgeted or actual
expenditures for special language services.

Of those models, the student-weighting program is the most
common approach. Of the five states with the most LEP
students as a function of the total student population,
Arizona, California, Florida, New York, and Texas, four of
the five provide funding for special language programs
through a weighted funding mechanism. Arizona, Florida,
and Texas’ funding weights function similarly and range from
10 percent (Texas) to 11.9 percent (Florida). New York's
system essentially allows for a 50 percent funding weight for
LEP students within the calculation of its “Pupil Need
Index,” which is one component of the overall funding
formula. California provides a set dollar amount of $118.18
per LEP student in grades 4—8 with some additional funding

FIGURE 11

BILINGUAL ALLOTMENT AND ELIGIBLE STUDENTS IN AVERAGE DAILY ATTENDANCE, FISCAL YEARS 2001 TO 2011

Millions Bilingual ADA
$600 800,000
a s+ 700,000

an a eal + 600,000

ue eS i | + 500,000

$300 — ree |} 400,000

— + 300,000

+ 200,000

100 4 | + 100,000
$0 0

2001 2002 2003 2004 2005

[= 1 Bilingual Allotment, excluding enrichment

Source: Texas Education Agency.

2006

HE Enrichment

2007 2008 2009 2010 2011

== Bilingual ADA

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

13
OVERVIEW OF THE BILINGUAL EDUCATION ALLOTMENT

that is available on the basis of students successfully
transitioned out of special language programs, subject to
appropriation.

OTHER BILINGUAL/ESL EDUCATION FUNDING
STRUCTURES CONSIDERED IN TEXAS

During deliberations regarding overall reform to the public
school finance system, the Seventy-ninth Legislature
considered several proposals that would have provided a
tiered bilingual allotment divided according to grade level,
based on school district testimony that serving students
entering special language programs in higher grades is more
costly. There were three versions of this tiered allotment
considered by the Legislature; though, ultimately no change
was made to the bilingual education allotment:

* House Bill 2 (engrossed version), Seventy-ninth
Legislature, Regular Session, 2005, would have
provided an allotment of $500 per LEP student
in average daily attendance (LEP ADA) in special
language programs below grade 9 and $1,000 per
LEP ADA in special language programs above
grade 9.

* The Senate Committee Substitute to House Bill 2,
Seventy-ninth Legislature, Regular Session, 2005,
would have provided for a four-tier weight of 12
percent for pre-Kindergarten through grade 2, 18
percent for grades 3-5, 24 percent for grades 6-8,
and 30 percent for grades 9-12 for LEP ADA who
have been enrolled in a special language program for
less than three years.

* Senate Bill 8, Seventy-ninth Legislature, First Called
Session, 2005, called for an allotment of the greater
of $500 or 10 percent of a district's FSP accreditation
allotment (similar to the adjusted basic allotment
under current law) for LEP ADA enrolled in special
language programs below grade 9 and the greater of
$1,000 or 21 percent of the accreditation allotment
for LEP ADA at or above grade 9.

RECENT BILINGUAL EDUCATION-RELATED LITIGATION

In July 2008, the U.S. District Court, Eastern District of
Texas, issued a revised opinion in the matter of U.S. and
League of United Latin America Citizens and GI Forum
(LULAC-GI) vs. the State of Texas. The revised opinion was
issued in response to two motions filed by LULAC-GI
requesting that the court reconsider its earlier ruling with
regard to the original complaint, which was that the state’s

bilingual and ESL education program is in violation of the
federal Equal Education Opportunity Act.

In its revised opinion, the court drew the following
conclusions:
* The bilingual education program, which is the state
policy for primary grades, appears to be adequate in
terms of student achievement.

* The ESL program, which is the state policy for
secondary grades, is inadequate as demonstrated
by disparities in student achievement with regard
to TAKS performance and in dropout rates when
comparing LEP students to all students.

+ TEA’ Performance Based Monitoring Analysis
System (PBMAS—a data-driven monitoring tool
that replaced the site visit-based system in 2006) is
inadequate for the purpose of ensuring equal
educational opportunity for LEP students for several
reasons; and it is ineffective in determining whether
districts are properly implementing state policy with
regard to LEP students’ education.

The court ordered TEA to revamp both its monitoring
functions related to bilingual/ESL education and the
secondary ESL education program, but was careful to note
that a data-driven system such as a revised PBMAS, as
opposed to a site visit-based system, and a revised ESL
program, as opposed to an entirely different instructional
model, could be designed to meet the requirements of the
law. The court gave TEA until January 31, 2009 to formulate
a plan that must be implemented starting in the 2009-10
school year. The decision is currently under appeal by the
state.

14 FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009
OVERVIEW OF THE TRANSPORTATION ALLOTMENT

School districts are entitled to a transportation allotment
calculated on the basis of districts’ linear density, which is a
function of the number of students served who reside two or
more miles from their assigned campus and the number of
route miles traveled by district transportation services. The
state provides for an allocation per route mile that varies
among seven categories of linear density, with the least dense
districts receiving the highest allocation.

This report provides a brief overview of the state's
transportation allotment, its relationship to school districts
transportation-related expenditures over the last seven years,
and alternative methods of delivering funding considered by
the Texas Legislature.

SIGNIFICANT FINDINGS

+ The schedule of rates per route mile for regular
services and the rate for special education services are
established in the General Appropriations Act and
have not changed since 1984.

* In fiscal year 2001, the transportation allotment
corresponded with 39 percent of school districts’
reported transportation expenditures, compared to
28 percent of statewide transportation expenditures
covered in fiscal year 2007. Average annual increase
in expenditures from fiscal years 2001 to 2007 is 6
percent, compared to the average annual increase in
the allotment of 0.2 percent during this period.

* Payroll expenses make up about two-thirds of district
transportation expenditures on average statewide,
followed by capital outlay for vehicle purchase and
fuel costs. Professional and contracted services make
up about 12 percent of total average statewide district
transportation expenditures, and about two-thirds
of school districts contract for some portion of their
transportation services.

* The last significant proposal to update the
transportation allotment was considered by the
Seventy-ninth Legislature. The proposal would have
amended the transportation allotment to a flat rate of

$1.50 per approved route mile for all districts.

DISCUSSION
The Foundation School Program (FSP) flows funding to

support school district student transportation services via a
transportation allotment, described in Texas Education Code
Section 42.155. A district’s state aid entitlement under the
transportation allotment comprises four possible allocations
for regular education students, special education students,
career and technology education students, and for private
transportation services. The allocation for regular education
students is a function of the number of students served by
the district, excluding students receiving special education
services who require special transportation services to attend
school, who reside two or more miles from their school
divided by the approved daily route miles traveled by the
transportation system.

The result of that calculation, referred to as linear density,
serves as the basis for the funding allocation per mile of
approved route, as determined in the General Appropriations
Act. Districts are categorized into one of seven linear density
groups, with the least dense districts receiving the highest
allocation per route mile ($1.43) and the densest districts
receiving the lowest allocation per route mile ($0.68).

In addition to entitlement amounts generated by the linear
density formula, school districts may apply for an additional
10 percent of their regular transportation allotment to
transport students living within two miles of campus who
would have to walk through areas designated as hazardous in
order to get to school. Hazardous areas are defined as areas in
which no walkway is available and the travel route includes a
freeway, expressway, over or underpass, a major traffic artery,
or an industrial or commercial area.

School districts’ state aid entitlement for providing special
transportation services for students receiving special education
services is based on the previous year’s cost per mile with the
maximum rate per mile for reimbursement determined by
appropriation. In the General Appropriations Act (2008-09

biennium), the maximum rate is set at $1.08 per mile.

A school district’s entitlement for transporting career and
technology students to programs conducted at a site other
than the students’ regular campus is a function of the actual
miles traveled and the rate per mile for extracurricular travel
established by district boards of trustees. School districts are

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES [5
OVERVIEW OF THE TRANSPORTATION ALLOTMENT

entitled to a rate per mile established by appropriation for
the provision of private transportation services for students
living in isolated areas or to transport students receiving
special education services. In the General Appropriations Act
(2008-09 biennium), the rate is set at $0.25 per mile, not to
exceed $816 per student per year.

COMPARISON OF TRANSPORTATION ALLOTMENT

AND STATEWIDE SCHOOL DISTRICT

TRANSPORTATION EXPENDITURES

The linear density factors used to calculate transportation
allotment entitlements have not changed since 1984. From
fiscal years 2001 to 2007, total statewide transportation
allotment funding increased from $298 million to $301
million. In comparison, district transportation expenditures
increased from $764 million in fiscal year 2001 to $1,064
million in fiscal year 2007. In fiscal year 2001, the
transportation allotment corresponded with 39 percent of
school districts’ reported transportation expenditures,
compared to 28 percent of statewide transportation
expenditures covered at the fiscal year 2007 funding level.
Average annual increase in expenditures from fiscal years
2001 to 2007 is 6 percent, compared to the average annual
increase in the allotment of 0.2 percent during this period.

Statewide, district expenditures for transportation services
have increased by almost 40 percent from fiscal years 2001
and 2007. Expenditure data can be classified according to six
broad categories: Payroll Costs, Supplies and Materials,
Other Operating Costs, Professional/Contracted Services,
Debt Service, and Capital Outlay. Figure 12 shows the
average percentage of total transportation expenditures by
category during the seven-year period from school years
2000-01 to 2006-07. Payroll costs account for the majority
of expenditures, followed by capital outlay, which would
include vehicle purchase, and supplies and materials, which
would include fuel costs. Professional and contracted services,
other operating costs, and debt service make up the balance
of total expenditures. About two-thirds of all school districts
contract for at least a portion of their transportation services,
for either operation or maintenance or both.

OTHER TRANSPORTATION ALLOTMENT

STRUCTURES CONSIDERED IN TEXAS

The Seventy-ninth Texas Legislature considered proposals to
amend the transportation allotment as part of its broader
consideration of reforms to school finance and policy. Two
similar proposals appeared in several versions of legislation
considered during that period. One would have done away

FIGURE 12
DISTRICT TRANSPORTATION EXPENDITURES BY CATEGORY,
SCHOOL YEARS 2000-01 THROUGH 2006-07

Professional
and Contracted
Services
12.2%

Supplies and
Materials
Payroll Costs 12.5%

62.8%

Capital Outlay
12.3%

Other Operating
Costs
0.2%

Debt Service
0.0%

Source: Legislative Budget Board.

with the linear density grouping and set the transportation
allotment at a flat rate of $1.50 per approved route mile for
all districts, a rate $0.07 higher that the highest rate available
under current law. That version would eliminate the 10
percent premium for hazardous conditions, together with all
funding directed specifically to special transportation services
for students with disabilities and career and technology
students and to private transportation services.

Similarly, the second proposal would have set the
transportation allotment at a flat rate of $1.50 for all districts.
However, the second version would have maintained the 10
percent premium available to districts for students living
within a two-mile radius of their school who would have to
walk under hazardous conditions and would have allowed
the Commissioner of Education to make additional grants
for special transportation services for student with disabilities
subject to appropriation. The proposal would have eliminated
the specified reimbursement rate for special services for
students with disabilities or private transportation services
and would have eliminated the separate calculation of
entitlement associated with special services for career and
technology students participating in offsite programs.

16 FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009
MAINTENANCE AND OPERATIONS TAX RATES

Fiscal year 2006 was the final year under the public school
finance system as it existed prior to the enactment of House
Bill 1, Seventy-ninth Legislature, Third Called Session. The
maximum maintenance and operations tax rate was $1.50,
although a handful of school districts in Harris County were
allowed to tax above that limit. In fiscal year 2007, the
implementation of House Bill 1 compressed maintenance
and operations tax rates to 88.67 percent of fiscal year 2006
rates, and allowed independent school districts to access a
$0.17-enrichment tier; $0.04 of this tier was accessible
without an election. In fiscal year 2008, a district’s non-
enrichment tax rate was compressed to 66.67 percent of its
fiscal year 2006 rate.

SIGNIFICANT FINDINGS
+ Due to property tax relief enacted by the Seventy-
ninth Legislature, Third Called Session, 2006,
statewide average maintenance and operations tax
rates have declined from a high of $1.46 in fiscal year
2006 to $1.04 in fiscal year 2008.

* By fiscal year 2008, only 23 districts, or just over
2 percent, had accessed less than the four golden
pennies.

+ In fiscal year 2008, 98 districts, or 9.5 percent of all
districts, were taxing at $1.17 or above.

* For fiscal year 2009, thus far 102 districts have
proposed a maintenance and operations tax rate
increase large enough to require a rollback election
in fall 2009. Of these 102 districts, 81 are proposing
increasing their rate to the maximum of $1.17.

DISCUSSION

Figure 13 shows the trend in M&O tax rates since fiscal year
2000. Prior to House Bill 1 (HB1), the statewide average
M&O tax rate had been creeping steadily higher toward the
$1.50 statutory limit. By fiscal year 2006, 548 districts were
at the statutory maximum of $1.50 (or higher, for select
districts in Harris County). With the 66.67 percent reduction
in M&O rates over fiscal year 2007 and fiscal year 2008, the
$0.04 gap between the statewide average rate of $1.46 and
the $1.50 maximum had been increased to a $0.13 gap
between the statewide average of $1.04 and the new statutory
maximum M&O tax rate of $1.17.

FIGURE 13
STATEWIDE AVERAGE M&O TAX RATES,
FISCAL YEARS 2000 TO 2008

M&0 Tax Rate

$1.55

$1.50 {4 =
$1.45 |— eee .
$1.40 ~

$1.35 +

AN |
ne

$1.20 =

$1.15 + — \ ~
\

$1.05

$1.00 7 7 ‘ r t ' , :
2000 2001 2002 2003 2004 2005 2006 2007 2008

—O— Statewide Average M&0 Tox Rote === Maximum M&0 Tax Rate
Sources: Legislative Budget Board; Comptroller of Public Accounts.

TAX RATE TRENDS BY DISTRICT CATEGORY

Figure 14 and Figure 15 show an analysis of trends in the
average nominal M&O tax rates adopted by school districts
in the last three years, with districts disaggregated by size
(student enrollment), enrollment growth rate, and property
wealth. The averages shown are simple averages, so districts
are treated as equivalent units; tax rates are not weighted
based on the size of districts’ tax bases.

FIGURE 14
AVERAGE NOMINAL M&O TAX RATES ADOPTED BY SCHOOL
DISTRICTS BY STUDENT ENROLLMENT, 2006 -07 TO 2008-09

ENROLLMENT 2006 2007 2008
Greater than 25,000 $1.49 $1.35 $1.04
10,000—24,999 $1.47 $1.34 $1.04
5,000-9,999 $1.48 $1.35 $1.04
3,000-4,999 $1.48 $1.35 $1.04
1,600—2,999 $1.47 $1.35 $1.04
1,000-1,599 $1.46 $1.34 $1.04
500-999 $1.44 $1.32 $1.04
Less than 500 $1.44 $1.32 $1.04
Statewide Average 1.46 1.33 1.04

Sources: Legislative Budget Board; Comptroller of Public Accounts.

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009

FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES
MAINTENANCE AND OPERATIONS TAX RATES

FIGURE 15

AVERAGE M&O TAX RATES BY STUDENT ENROLLMENT, SCHOOL YEARS 2005-06 TO 2007-08

M&O Tax Rate

$1.55

$1.50

$1.45 4

$1.40 +

$1.35 +

$1.30 -
$1.25 +
$1.20 +
$1.15 +
$1.10 4
$1.05 +
$1.00 +

Nominal 2006
(Statewide Average $1.46)

B Greater that 25,000
Sources: Legislative Budget Board; Comptroller of Public Accounts.

Nominal 2007
(Statewide Average $1.33)

zoo |

Nominal 2008
(Statewide Average $1.04)

D Less than 500

In fiscal year 2006, there was a positive relationship between
district size and M&O tax rates: larger districts tended to
have higher tax rates. The 43 districts with enrollments of
25,000 students or more had an average M&O tax rate of
$1.49, compared an average rate of $1.44 for the 324 districts
with less than 500 students, a $0.05 gap. By fiscal year 2007,
that gap had narrowed to approximately $0.03, with small
districts accessing on average $0.04 of the enrichment tier
compared to slightly over $0.025 cents for larger districts. In
fiscal year 2008, the tax rates of small districts had caught up
to those of large districts, with both groups averaging $1.04.
This trend was driven primarily by 98 of the 324 districts,
which had adopted the maximum M&O tax rate of $1.17 by
fiscal year 2008.

A related analysis looked at district type (urban, suburban,
independent town, rural, etc.), and found the same pattern.
Major urban and suburban districts had adopted higher
M&O tax rates prior to the implementation of HB1;
however, in the two years since, districts in rural areas and
independent towns across the state on average have accessed
more of the enrichment tier.

There are two possible explanations for these trends. First,
smaller, rural districts generally have slower student growth
than larger districts, and student growth is the primary driver
of new revenue to a district. With growth, larger districts
may not need to access as much of their enrichment tier as

smaller districts. Second, since smaller districts were generally
taxing below the maximum M&O rate, their rate was
compressed to below $1.00 in fiscal year 2008. For many of
these districts, the calculation of their effective M&O rate for
rollback purposes raised their base rate to approximately
$1.00, effectively allowing the districts to increase taxes by
more than $0.04 without needing an election.

In fiscal year 2006, M&O tax rates in fast-growing districts
averaged $1.48, $0.03 higher than rates in districts suffering
enrollment declines. By fiscal year 2008, this trend had
reversed, with fast-growth districts taxing on average $0.02
lower than declining districts (Figure 16 and Figure 17).

FIGURE 16
AVERAGE M&O TAX RATES BY ENROLLMENT GROWTH BY
CATEGORY, FISCAL YEARS 2006 TO 2008

GROWTH CATEGORY 2006-07 2007-08 2008-09
Above Average $1.48 $1.35 $1.03
Average $1.46 $1.34 $1.04
Stable $1.45 $1.33 $1.04
Slight Decline $1.46 $1.34 $1.04
Moderate Decline $1.45 $1.33 $1.05
Statewide Average $1.46 $1.33 $1.04

Sources: Legislative Budget Board; Comptroller of Public Accounts.

As mentioned in the previous discussion, in a target revenue
mechanism where entitlement is driven on a per-student

18 FOUNDATION SCHOOL PROGRAM FISCAL AND POLICY STUDIES

LEGISLATIVE BUDGET BOARD STAFF — MARCH 2009
MAINTENANCE AND OPERATIONS TAX RATES

FIGURE 17

AVERAGE M&O TAX RATES BY ENROLLMENT GROWTH BY CATEGORY, SCHOOL YEARS 2005-06 TO 2007-08

Enrollment Growth Tax Rate

$1.55
$1.50

$1.45 +

$1.40

$1.35 4
$1.30 +
$1.25 -
$1.20 +
$1.15 4
$1.10 -
$1.05 +
$1.00 - T
2006-07

Bi Above Average
Sources: Legislative Budget Board; Comptroller of Public Accounts.

=a | |

2008-09

2007-08

O Moderate Decline

basis, districts that do not receive additional revenue from
WADA growth have little option but to access their
enrichment tier to secure new funds. Although districts with
declining enrollment represent 15 percent of all districts,
nearly 25 percent of the districts now taxing at the maximum
rate of $1.17 are declining districts.

PROPERTY WEALTH PER WADA

As Figure 18 and Figure 19 show, in fiscal year 2006 the
wealthiest districts were, on average, taxing $0.02 below the
poorest districts; by fiscal year 2008 that discrepancy has
grown to $0.05. Put another way, by fiscal year 2008 the

FIGURE 18
AVERAGE M&O PER PROPERTY WEALTH,
FISCAL YEARS 2006 TO 2008

WEALTH QUINTILE
PER WADA 2006 2007 2008

Less than $96,031 $1.46 $1.34 $1.06
$96,031 - $138,998 $1.45 $1.33 $1.05
$138,999 - $201,308 $1.47 $1.34 $1.05
$201,309 - $317,837 $1.46 $1.34 $1.04
Greater than $317,837 $1.44 $1.31 $1.01
Statewide Average $1.46 $1.33 $1.04

Sources: Legislative Budget Board; Comptroller of Public Accounts.

wealthiest districts were taxing approximately $0.05 above
their compressed rate, on average, while the poorest districts
were taxing approximately $0.085 cents above theirs.

One factor likely contributing to this result is the discrepancy
between the average revenue targets of these two district
groups. The revenue targets of districts in the wealthiest
quintile are approximately $1,600 more on average
(unweighted) than those of districts in the poorest quintile.
Districts with such a higher base budget per student may not
need to access enrichment tier revenues at the same rates as
poorer districts.

ENRICHMENT TIER

The enrichment tier is defined as district tax effort above its
compressed tax rate, up to the state maximum of $1.17. For
many districts compressed to $1.00, this means $0.17 of
enrichment. Other districts that were not taxing at $1.50 in
the 2005-06 school year, were compressed to below $1.00 by
HB1, may have enrichment pennies in excess of $0.17.

For the 2010-11 biennium, a district’s first $0.06 levied
above its compressed rate constitute “golden pennies,” and
are equalized at the yield per WADA per penny generated by
Austin ISD. There is no recapture on golden pennies, so
districts generating more local revenue than Austin ISD on

TEXAS SCHOOL PERFORMANCE REVIEW

LEGISLATIVE BUDGET BOARD 19
MAINTENANCE AND OPERATIONS TAX RATES

FIGURE 19
AVERAGE M&O TAX RATES BY PROPERTY WEALTH, SCHOOL YEARS 2005-06 TO 2007-08

M&O Tax Rate

$1.55
$1.50 ——
‘hs
$1.40 +
$1.35 5 - _ —
$1.30 +
$1.25 +
$1.20 +
$1.15 +
S110 -——
$1.05 +

2006-07 2007-08 2008-09

B Less than $96,031 per WADA CO Greater than $317,837 per WADA

Sources: Legislative Budget Board; Comptroller of Public Accounts.

these pennies will retain everything they generate. Every FIGURE 20

penny after the six golden pennies is equalized at $31.95 per DATA RELATED TO ENRICHMENT TAX RATES,
WADA per penny, with recapture on amounts generated FISCAL YEARS 2007 TO 2009

above that level. These are referred to as “copper pennies.” 2007 = 2008 = 2009
— . Simple Average Enrichment
A district does not require voter approval to levy the first ae $0.041 $0.070 8.1
$0.04 above the state maximum compressed rate of $1.00. ;
; . Weighted Average Enrichment
Any access to pennies beyond those four does require a tax Tax Rate $0.031 $0.046 5.6

rate election. If a district receives approval for a particular tax Districts that Held a Tax
rate beyond the first $0.04 above compression, it must levy Rate Election 15 119 116
that tax rate; for example, a district may not seek voter

approval to levy the full $0.17 of enrichment tax effort and

Elections that Passed 14 93 70

: —— : Percentage of Elections that
then keep taxing authority in reserve by levying something Passed 93% 78% 60%

less than that rate. Districts at the Maximum Rate 10 98 146

Figure 20 shows the statewide average enrichment tax rates Source: Legislative Budget Board.

for fiscal years 2007 to 2009, as well as tax rate election data.

: ee ; adopted tax rate, it is projected that approximately $2.2
Statewide averages are given in simple form (treating each

. billion in local and state revenue will be generated, or 50
district equally) or weighted (counting a distri