RD3 - Review of Elementary and Secondary School Funding


Executive Summary:
Elementary and secondary public education in Virginia is funded by a combination of local, State, and federal funds. With a public school system serving over 1.1 million pupils, the cost for elementary and secondary education in the State is considerable. In FY 2000, the last year for which expenditure data were available within the time frame of this review, approximately $7.735 billion was spent for operational costs of the system, or an average of about $6,878 per pupil. In addition, facility costs statewide in FY 2000 were about $743 million, representing an additional expenditure or debt service commitment in that year of about $661 per pupil.

The State provides more aid to localities for education than for any other governmental purpose. State payments for public education are largely driven by the State Standards of Quality, or the SOQ. The SOQ framework for State and local support of the public schools is specified in the Constitution of Virginia. The SOQ provide minimum requirements that all school divisions must meet. The SOQ therefore represent the State’s “foundation” program for all school divisions. Standards are to be set by the Board of Education, subject to revision only by the General Assembly.

Under the Constitution, the General Assembly is given the responsibility to determine the manner in which funds are to be provided to the school divisions for the cost of maintaining an education program meeting the SOQ. The General Assembly establishes the SOQ cost in the Appropriation Act. The General Assembly is also required to determine State and local responsibilities or shares of the cost for the SOQ. Since FY 1993, the State has implemented a policy of paying 55 percent of the shared SOQ cost, as those costs have been established in Appropriation Acts. The composite index, the State’s measure of local ability to pay for education which is used to distribute State SOQ funding (for all major SOQ accounts other than the State-appropriated sales tax), is calculated so that the State’s aggregate share of SOQ costs after deduction of the State sales tax is about 55 percent.

Local governments may fund education operating costs at levels above the minimum requirements of the SOQ, and the State may also do so as a matter of policy choice. Funding provided by the localities and by the State for operating cost purposes which exceed the Standards of Quality have been called “non-SOQ” operating costs.

The table shown on page II shows operating expenditures by source of funds for FY 2000, the most recent year for which an analysis could be completed within the timeframe of this review. Almost two-thirds of SOQ costs (about 63 percent) were paid by the State-appropriated sales tax and by other State funds. However, about two-thirds of non-SOQ operating expenditures were paid by local funds. Federal funds pay for a relatively small portion of costs (six percent of operating costs).

For operating cost purposes, State appropriated sales tax funds plus other State funds were roughly equal to locality expenditures in FY 2000 ($3.593 versus $3.666 billion). However, local governments also pay the majority of capital costs. The State historically has not recognized capital costs as SOQ costs, but in recent years has provided some non-SOQ funding for these purposes.

The revenues received by school divisions reflect funding for operational and capital facility purposes. A review of the revenues received by school divisions shows that local governments typically pay about half of the total education costs (see figure on the next page). The State typically pays about 40 percent of education costs (State-appropriated sales tax plus other State funds). As a result, for many years, local governments have voiced their concern that the State has not been an equal partner in funding public education.

Local government expressions of concern about the adequacy of State support for public education contributed to General Assembly interest in a JLARC review of the issues. During the 2000 General Assembly Session, several resolutions were introduced that requested that JLARC study the funding of the SOQ, and the ways in which local programs and services exceed the SOQ. In May 2000, the full Commission directed that a study of elementary and secondary education be conducted and reported in 2001. A topic selection subcommittee of JLARC also requested that the review consider teacher shortage funding issues. In addition, certain issues pertaining to the State’s at-risk pre-school program initiative were included in the review. Issues regarding this program, which is funded under the direct aid portion of the Department of Education’s budget, were brought to the attention of the study at regional input sessions, and by letter requests from the Virginia Advisory Commission on Intergovernmental Relations (ACIR) and a member of the General Assembly.

The focus of this review is on State SOQ funding and local school division expenditures beyond the SOQ. The magnitude of locality expenditures beyond the SOQ is, of course, a function of both how SOQ costs are determined, and locality decisions about what additional resources should and can be purchased with local funds. As part of a process for estimating State costs to fund the SOQ as well as the costs of funding options to go beyond the SOQ, JLARC staff examined issues regarding the way in which SOQ costs are estimated and funded, and the ways in which local governments choose to spend more than is required pursuant to the SOQ.

Seven primary findings resulted from this review.

• Localities which support educational programs going beyond the SOQ have some valid reasons to be concerned about the level of responsibility that they bear for education costs.

• As it has recently indicated it will do, the Board of Education needs to reexamine the SOQ, particularly for instructional staffing positions, to ensure that the standards are realistic in relation to the Commonwealth’s current educational needs and practices.

• The General Assembly is empowered by the Constitution to establish SOQ costs. It has been generally presumed, however, in Attorney General’s opinions and in other documents from early in the development of the SOQ, that the costs should not be estimated in an arbitrary manner, but should be realistic in relation to the current costs for education. Methodologies to achieve this objective were developed in the 1970s by a task force on financing the SOQ, and by JLARC staff in the mid-1980s. While the JLARC staff methodology was adopted by General Assembly budget actions during the 1980s, a number of changes were made in the calculations during the 1990s. Some of these changes raise questions as to whether the State’s foundation cost estimates have become less current and less realistic in relation to educational practice.

• Adjustments should be considered to make the State’s foundation cost estimates for FY 2003 and FY 2004 more accurate and current for the years in which the funds are provided. Compared to the State’s planned allocation levels in FY 2002, it is estimated that a 55 percent State share of foundation costs with the proposed adjustments made would add $480 million to State SOQ costs in FY 2003. Also compared to FY 2002, the proposed adjustments to the estimate of the foundation costs would add an estimated $580 million to State SOQ costs in FY 2004.

• The Virginia Department of Education (DOE) needs to ensure that all localities are providing sufficient local resources to meet SOQ requirements. Currently, DOE reviews the amounts budgeted by localities, but does not retrospectively examine whether sufficient local funds have been expended. The General Assembly may wish to more explicitly give DOE the authority to examine whether required local expenditure levels have been met and to take appropriate action.

• There are a wide variety of actions the State could pursue to enhance its support of elementary and secondary education beyond the full costs of the SOQ. Potential options in the report address areas such as instructional staffing levels, pre-school programs, teacher salaries, and debt service costs.

• The Constitution of Virginia provides the General Assembly with the responsibility for determining State and local shares for SOQ costs. The current framework which is utilized for making the determination of State and local share responsibilities for education appears to be compatible with constitutional provisions.

The primary issue with regard to State funding appears to continue to be the sufficiency of the State standards for education and the costs which the State will recognize and support. This issue can be addressed through various combinations of options to fund the State’s standards, enhance the standards, and enhance the State’s recognition of costs beyond current SOQ levels.

Localities will be impacted by State changes in its recognition of costs in varying ways, depending on the extent to which they make expenditures exceeding the SOQ. Localities which do not exceed, or only somewhat exceed, current State standards and SOQ required costs will likely benefit from the additional State funds in terms of their ability to pay improved teacher salaries and purchase more resources generally. However, they will also experience an increase in the level of local resources that they will be expected to provide for public education.

Localities operating well above the SOQ already, however, may have some local funds freed by the additional State funding. These localities might either use their freed-up funds to enhance their educational programs, or reduce their own burden for paying education costs. If localities offset the additional State funding with local funding reductions, then the pupils and staff that are part of the public education system will not receive a net benefit from the enhanced level of State support. Rather, in these localities, other local services may benefit, if funding is shifted to local non-educational programs, or local taxpayers may benefit, if local tax rates are decreased.

Localities Have Some Valid Reasons for Concern About the Burden They Bear for Education Costs

Six factors have converged to make the funding burden upon localities in recent years more severe than in the mid-1980s, the time of the last JLARC review of education funding. First, the number of pupils has been growing. From FY 1974 to FY 1985, the number of pupils statewide in public schools had declined, but from FY 1985 to the present, the number of pupils in statewide average daily membership grew every year, and about 140,000 pupils were added to Virginia public schools between FY 1985 and FY 2000.

Second, school facility costs have risen, even on a per-pupil and inflation-adjusted cost basis. School facility costs have largely been supported by local funds, although in recent years the State has provided an enhanced level of assistance. Still, there is reason to believe that costs in this area will continue to be high. While statewide growth in pupils is expected to slow over the next several years, some localities continue to grow at high rates. Further, approximately 18 percent of the school buildings in the State were built from 1950 to 1959, and another 26 percent were built between 1960 and 1969. These facts anticipate a need to replace or renovate a large number of buildings.

Third, average statewide growth in the local real property tax base, the largest single source of local revenues in most localities, has been slow (an average annual rate of increase in value per pupil of just 1.7 percent, between tax year 1989 and tax year 1998). As a consequence, in 1989 local governments on average needed to apply an effective tax rate of $0.747 per $100 of estimated true value to pay for the local revenues that were expended for elementary and secondary education. By 1998, local governments on average needed to apply an effective tax rate of $0.928 per $100 of estimated true value to pay for their education expenditures.

Fourth, the State has taken actions that change the nature of locality reliance upon the personal property tax (also known as the “car tax”). Personal property has been, after real property, the largest source of tax revenues for local governments. The State has been working toward the goal of eliminating local taxpayer payments of this tax. As car tax relief for local taxpayers who own vehicles proceeds to 100 percent implementation, State revenues are used to reimburse the localities for their lost revenues. State reimbursements are based on the locality tax rates that were in place on August 1, 1997, so that no locality has an incentive to raise its personal property tax in order to obtain greater State payments. While local governments still technically have the authority to raise car tax rates and collect revenues above the tax policies they had in place in 1997, as a practical matter it appears that this will be a rare and unpopular course of action. Local governments are concerned, as indicated by the Report of the Commission on Virginia’s State and Local Tax Structure for the 21st Century, that “a majority of the citizenry has probably been conditioned to believe that their car tax has been permanently ended by the enactment of the 1998 legislation,” and that therefore “a political cap has been applied to this source.”

Fifth, the State is seeking, through a State curriculum and testing program known as the Standards of Learning (SOL), to challenge the State’s pupils and schools to improve student knowledge and performance. Local government and school division officials reported during regional input sessions for this study that additional resources are warranted to help accomplish these expectations. Lastly, after years of rapidly increasing State funds for education during the 1980s (even on a constant dollars per-pupil basis), State funding dropped from FY 1991 to FY 1992, and not until FY 1998 did State funding per-pupil in constant dollars again roughly equal FY 1990 levels. While the State provided increased funds in FY 1999 due to the application of Lottery Funds to education purposes and the start of a school construction grants program, localities are concerned that with increasing financial difficulties, the State may once again lose ground in funding, leaving local governments to bear the majority of the costs.