TEXAS PUBLIC SCHOOL FINANCE
A LOOK AT WHERE WE HAVE BEEN - AND WHERE WE ARE HEADED
Bracewell & Patterson, L.L.P.
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
TEXAS PUBLIC SCHOOL FINANCE
A LOOK AT WHERE WE HAVE BEEN - AND WHERE WE ARE HEADED
Bracewell & Patterson, L.L.P.
The history of Texas public school finance over the past 30 years has been a cycle of litigation, court decisions and legislative response. Significant activities occurred in the 1970's, the 1980's and in the first part of the 1990's. Most of the legislative responses to judicial decisions became opportunities to address various issues of educational policy in addition to attempting to correct problems in funding of public education. The Texas Legislature has not significantly revised the school finance system since the Texas Supreme Court upheld its constitutionality in 1995 in Edgewood IV. However, with the Court's decision on May 29, 2003 in West Orange-Cove CISD v. Alanis, it appears likely that this cycle is about to begin again, with the accompanying responsibilities and opportunities.
II. Key Provisions of the Texas Constitution and Texas Education Code
A. Article VII, Section 1 - Support and Maintenance of System of Public Free Schools
A general diffusion of knowledge being essential to the preservation of the liberties and rights of the people, it shall be the duty of the Legislature of the State to establish and make suitable provision for the support and maintenance of an efficient system of public free schools.
B. Article VII, Section 3 - Taxes for Benefit of Schools; School Districts
(a) One-fourth of the revenue derived from the State occupation taxes shall be set apart annually for the benefit of the public free schools.
(b) It shall be the duty of the State Board of Education to set aside a sufficient amount of available funds to provide free text books for the use of children attending the public free schools of this State.
(c) Should the taxation herein named be insufficient the deficit may be met by appropriation from the general funds of the State.
(d) The Legislature may provide for the formation of school districts by general laws, and all such school districts may embrace parts of two or more counties.
(e) The Legislature shall be authorized to pass laws for the assessment and collection of taxes in all school districts and for the management and control of the public school or schools of such districts, whether such districts are composed of territory wholly within a county or in parts of two or more counties, and the Legislature may authorize an additional ad valorem tax to be levied and collected within all school districts for the further maintenance of public free schools, and for the erection and equipment of school buildings therein; provided that a majority of the qualified voters of the district voting at an election be held for that purpose, shall approve the tax. (Amended Aug. 14, 1883, Nov. 3, 1908, August 3, 1909, Nov. 5, 1918, Nov. 2, 1920, Nov. 2, 1926, and Nov. 2, 1999.)
C. Article VIII, Section 1-e - Abolition of Ad Valorem Property Taxes
No State ad valorem taxes shall be levied upon any property within this State. (Added Nov. 5, 1968; amended Nov. 2, 1982, and Nov. 6, 2001.)
D. Texas Education Code, Section 42.001. State Policy
(a) It is the policy of this state that the provision of public education is a state responsibility and that a thorough and efficient system be provided and substantially financed through state revenue sources so that each student enrolled in the public school system shall have access to programs and services that are appropriate to the student’s educational needs and that are substantially equal to those available to any similar student, notwithstanding varying local economic factors.
(b) The public school finance system of this state shall adhere to a standard of neutrality 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.
Added by Acts 1995, 74th Leg., ch. 260, §§ 1, eff. May 30, 1995.
E. Texas Education Code, Section 4.001. Public Education Mission and Objectives
(a) The mission of the public education system of this state is to ensure that all Texas children have access to a quality education that enables them to achieve their potential and fully participate now and in the future in the social, economic, and educational opportunities of our state and nation. That mission is grounded on the conviction that a general diffusion of knowledge is essential for the welfare of this state and for the preservation of the liberties and rights of citizens. It is further grounded on the conviction that a successful public education system is directly related to a strong, dedicated, and supportive family and that parental involvement in the school is essential for the maximum educational achievement of a child.
(b) The objectives of public education are:
OBJECTIVE 1: Parents will be full partners with educators in the education of their children.
OBJECTIVE 2: Students will be encouraged and challenged to meet their full educational potential.
OBJECTIVE 3: Through enhanced dropout prevention efforts, all students will remain in school until they obtain a high school diploma.
OBJECTIVE 4: A well-balanced and appropriate curriculum will be provided to all students.
OBJECTIVE 5: Qualified and highly effective personnel will be recruited, developed, and retained.
OBJECTIVE 6: The state’s students will demonstrate exemplary performance in comparison to national and international standards.
OBJECTIVE 7: School campuses will maintain a safe and disciplined environment conducive to student learning.
OBJECTIVE 8: Educators will keep abreast of the development of creative and innovative techniques in instruction and administration using those techniques as appropriate to improve student learning.
OBJECTIVE 9: Technology will be implemented and used to increase the effectiveness of student learning, instructional management, staff development, and administration.
Added by Acts 1995, 74th Leg., ch. 260, §§ 1, eff. May 30, 1995.
F. Texas Education Code, Section 4.002. Public Education Academic Goals
To serve as a foundation for a well-balanced and appropriate education:
GOAL 1: The students in the public education system will demonstrate exemplary performance in the reading and writing of the English language.
GOAL 2: The students in the public education system will demonstrate exemplary performance in the understanding of mathematics.
GOAL 3: The students in the public education system will demonstrate exemplary performance in the understanding of science.
GOAL 4: The students in the public education system will demonstrate exemplary performance in the understanding of social studies.
Added by Acts 1995, 74th Leg., ch. 260, §§ 1, eff. May 30, 1995.
III. A Brief Primer on School Finance
A. A minimum foundation program structure was adopted in 1949 as part of the Gilmer-Aikin proposals, to be financed by equalized local tax effort and supplemented by state aid to compensate for differences in local districts' wealth per student.
B. Why does the system seem so complicated?
1. The number of school districts and students - 1,041 districts in 2001-2002 (excluding charter schools) and over 4,000,000 students;
2. The size of districts - under 100 to over 200,000 students;
3. The range of local property wealth - under $10,000 per weighted student to over $2,700,000 per weighted student;
4. Student and district factors to adjust funding levels;
C. How is the system funded?
1. For the 2002-2003 biennium (2001-2002 and 2002-2003 school years), total K-12 expenditures are $56.9 billion:
a. state taxes - 38% $21.6B
b. local property taxes - 53% 30.2B
subtotal $51.8B (state 42%, local 58%)
c. federal funds - 9% 5.1B
2. Sources of revenue:
a. state revenue:
1) sales tax
2) corporate franchise tax
3) motor fuels tax
4) natural gas and oil taxes
5) "sin" taxes
6) insurance tax
7) utility tax
8) lottery proceeds
9) Available School Fund
10) "recapture" funds
b. local revenue:
1) property tax
2) earned interest
3) co-curricular activities fees
D. The Foundation School Program
1. A three-tired system:
a. Each tier is divided into a state and local component, determined by a district's wealth per student;
b. As a district's wealth per student increases, its state aid within each tier decreases and the local property tax portion of each tier increases;
c. Increases in local taxable values do not automatically result in more money for public education; rather, such increases reduce state aid.
2. State funds are distributed in inverse proportion to local taxable property wealth per weighted student.
3. The system is operating as it is designed to operate; it is producing a relatively high level of equity at high tax rates. Stated another way, the system has captured the potential to raise revenue represented by the local property tax, pushed (or pulled, depending on one's perspective) rates to their legal limits, and brought that increased revenue within an equalized system.
4. Tier 1 is the basic or "foundation" level, local tax rate of $0.86, $2,537 per student increased by district and student adjustments.
5. Tier 2 is the "enrichment" level, local tax rates between $0.86 and $1.50, $27.14 per $0.01 per weighted student in state and local funds guaranteed.
6. Tier 3 is the "facilities" level, IFA for new instructional debt, EDA for existing debt, both IFA and EDA at $35 per $0.01 per student in average daily attendance.
7. A word about "Robin Hood".
a. "Robin Hood" affects all school districts, in that all districts lose state aid as their wealth per student increases;
b. "Recapture" is simply the most visible aspect of the "Robin Hood" system;
(1) It is intended to limit available revenue in districts with high wealth per student, to meet requirements of Texas Supreme Court decisions;
(2) The equalized wealth level is $305,000 per weighted student;
(3) Options provided in Chapter 41, Texas Education Code:
ii) detachment and annexation;
iii) purchase of attendance credit;
iv) education of non-resident students;
v) tax base consolidation.
(4) "Recapture" has become a significant revenue source for the State - $1.3 billion in the 2002-2003 biennium; it is expected to reach $2.4 billion in the 2004-2005 biennium.
8. For the 2004-2005 biennium (2003-2004 and 2004-2005 school years), $110 per weighted student is distributed each year to all districts outside of the FSP formulas.
IV. A Brief History of Public School Finance Litigation in Texas
A. The 1930's
1. Love v. City of Dallas, 40 S.W. 2d 20 (Tex. 1931)
A school district may not be required by the State to use local tax revenues to educate students who reside outside of its boundaries.
2. Mumme v. Marrs, 40 S.W. 2d 31 (Tex. 1931)
In addition to the Available School Fund, which is distributed on an equal per capita basis, the Texas Legislature may appropriate general revenue funds and distribute such funds to local school districts on the basis of factors such as size and wealth. The particular statute challenged was meant to equalize educational opportunities for students in small and financially weak school districts.
B. The 1970's - Federal Litigation
1. United States Constitution, 14th Amendment, Equal Protection Clause
2. San Antonio Independent School District v. Rodriguez, 411 U.S. 1, 93 S.Ct. 1278 (1973)
a. By a 5-4 vote, United States Supreme Court found that wealth of individuals is not a suspect classification, nor is education a fundamental right, and that the Texas school finance system did not violate the 14th Amendment;
b. The Texas system clearly needed revision; in 1967-68, Edgewood ISD received $356 per student ($222 from state, $26 in local property taxes, $108 in federal funds); Alamo Heights ISD received $594 per student ($225 from state, $333 in local property taxes, $6 in federal funds).
c. 64th Legislature, Regular Session, H.B. 12126 (1975).
This legislative response significantly raised the salary schedule, and set the local share of the Foundation School Program at 35 cents per $100 valuation.
d. 65th Legislature, 1st Called Session, S.B. 1 (1977).
This statute raised the salary schedule again, significantly reduced the local share of the FSP, created an equalization fund allotment of $135 million per year, and increased the student instructional year to 175 days.
C. The 1980's and 1990's - State Litigation
1. Edgewood Independent School District v. Kirby, 777 S.W.2d 391 (Tex. 1989) (Edgewood I)
a. 68th Legislature, 2nd Called Session, H.B. 72 (1984).
In response to renewed litigation concerning the equity of the system, the Legislature passed House Bill 72 in special session. The bill completely revised the finance system, created the guaranteed yield approach that continues to the present and significantly increased state funding for public education. However, House Bill 72 probably was more well known for its comprehensive revisions of education programs. The bill created an appointed State Board of Education, created the teacher career ladder, prohibited social promotion, established no pass-no play, set limits on elementary class sizes, prohibited attendance of students before September 1, established the state criterion testing program and instituted alternative certification of teachers.
b. The Texas Supreme Court unanimously ruled that system violated Article VII, Section 1 of the Texas Constitution and the Legislature had failed to establish an "efficient" system. The Court found that the FSP did not even cover the cost of state-mandated minimum requirements. The Court also noted that the system did not provide any state assistance for facilities or debt.
c. In 1985-86, the 100 poorest districts had average tax rates of 74.5 cents and revenues of $2,978 per student; the 100 wealthiest districts had average tax rates of 47 cents and revenues of $7,233 per student.
d. The Court determined that Article VII, Section 1 required that districts have substantially equal access to similar revenue per student at substantially equal tax rates.
e. The opinion did not make clear whether or not unequalized local enrichment was permitted. Efficiency does not mean that local communities are prohibited from supplementing a constitutionally efficient system; however, any such supplementation "must derive solely from local tax effort."
2. Edgewood Independent School District v. Kirby, 804 S.W.2d 491 (Tex. 1991) (Edgewood II)
a. 71st Legislature, 6th Called Session, S.B. 1 (1990)
In response to Edgewood I, the Legislature increased the equity of the system and ensured that 95% of the state's students would be within the equalized system. The Legislature excluded the wealthiest districts in the state from the equalized system.
b. The Texas Supreme Court again unanimously determined that the Texas system failed to meet the requirements of the state constitution. The Court specifically found that the wealthiest districts could not be excluded from the equalized system. To be constitutionally efficient, a system so dependent on local property tax revenue "must draw revenue from all property at a substantially similar rate." The Court also suggested that the Legislature could consider tax base consolidation as one means of capturing the potential tax revenue of wealthy districts.
c. In a controversial opinion in response to a motion for rehearing a majority of the Court specifically found that unequalized local enrichment was permissible; four justices either disagreed with this conclusion or believed that the issue should not have been addressed.
d. 72nd Legislature, Regular Session, S.B. 351 and H.B. 2885 (1991)
In response to Edgewood II, the Legislature began to consider more radical approaches to improve the equity of the system. Increasingly, the focus shifted from improving the financial condition of poorer districts to reducing the revenue and tax bases available to wealthier districts. The state created 188 county education districts, which redistributed funds from wealthier to poorer districts within each county, or in a few multi-county districts.
3. Carrollton-Farmers Branch Independent School District v. Edgewood Independent School District, 826 S.W. 2d 489 (Tex. 1992) (Edgewood III)
a. By a vote of 5-4, the Texas Supreme Court determined that the county education district system was unconstitutional, in spite of the fact that the Court had specifically suggested tax base consolidation in Edgewood II. The Court found that the system impermissibly set the tax rates for the county education districts, and that the tax levied by the districts was not authorized by the voters in each county.
b. In a concurring and dissenting opinion, Justice Cornyn stated that the Texas Legislature must consider the efficiency of the system not just in terms of funding, but also in terms of the system's educational purpose and results.
c. 73rd Legislature, Regular Session, S.B. 7 (1993)
In response to Edgewood III, the Legislature adopted a "cafeteria" approach to reducing the revenue of wealthier districts. Specifically, the bill allowed wealthier districts to choose their own wealth-reduction approach from five options. A district could purchase virtual students from another district or from the state, it could consolidate entirely or just tax bases with a poorer district (even a noncontiguous district), or it could detach a portion of its property and permit that property to be annexed to a poorer district (even a noncontiguous district).
4. Edgewood Independent School District v. Meno, 917 S.W. 2d 717 (Tex. 1995) (Edgewood IV)
a. In a 5-4 decision that clearly indicated its tiredness with this issue, the Texas Supreme Court determined that the system as modified by Senate Bill 7 met the requirements of the Texas Constitution. The Court held that the "recapture" of local property taxes was permissible since local voters had approved it.
b. Also, the Court stated that the Legislature's constitutional duty was only to equalize to the level necessary for a general diffusion of knowledge, which was equivalent to the accredited system.
c. The Court warned the Texas Legislature not to set too low a standard, and stated in footnote 14 that "the State's provision for a general diffusion of knowledge must reflect changing times, needs, and public expectations."
d. However, the Court warned that "[i]f a cap on tax rates were to become in effect a floor as well as a ceiling, the conclusion that the Legislature had set a statewide ad valorem tax would appear to be unavoidable because the districts would then have lost all meaningful discretion in setting the tax rate."
e. The Court also warned that unequalized enrichment could not become so substantial that it impaired the equity of the overall system. "As long as equity is maintained, it is not unconstitutional for districts to supplement their programs with local funds, even if such funds are unmatched by state dollars and even if such funds are not subject to statewide recapture. We caution, however, that the amount of "supplementation" in the system cannot become so great that it, in effect, destroys the efficiency of the entire system. The danger is that what the Legislature today considers to be "supplementation" may tomorrow become necessary to satisfy the constitutional mandate for a general diffusion of knowledge."
V. Current Litigation
A. West Orange-Cove Consolidated Independent School District v. Alanis, 107 S.W.3d 558 (Tex. 2003)
1. Four districts asserted that the public school finance system has evolved into an impermissible state ad valorem tax prohibited by Article VIII, Section 1-e, as foreseen by the Texas Supreme Court in Edgewood IV. The Travis County district court dismissed the plaintiffs’ suit on the pleadings and the Third Court of Appeals affirmed.
2. On May 29, 2003, the Supreme Court of Texas reversed the district court and court of appeals and remanded the case for trial on the merits consistent with its opinion.
3. Article VII, Section 1 imposes a mandatory duty on the Legislature and “both empowers and obligates” the Legislature to meet three distinct constitutional standards: first, the level of education provided to all students must be “adequate”; second, the means to provide the necessary level of education must be “suitable”, and; third, the overall system must be “efficient.”
4. If districts are forced to tax at their maximum rates to meet State requirements, a claim is stated under Article VIII, Section 1-e. A single district may raise such a claim. The existence of local option homestead exemptions does not preclude districts from raising such a claim. Districts do not actually have to tax at their maximum rates to state such a claim if they are able to establish that their maximum rates are necessary to meet state requirements.
5. The system must provide districts with “meaningful discretion.”
6. The system must allow districts to meet all State accountability/accreditation requirements and the constitutional “general diffusion of knowledge.”
7. The constitutional “general diffusion of knowledge” is a dynamic standard and “must reflect changing times, needs, and public expectations.”
B. Hopson v. Dallas Independent School District, Cause No. 01-2750-G; In the 134th Judicial District Court, Dallas County, Texas.
The plaintiffs alleged that the system violates Article VII, Section 1 because it is not "efficient," Article VIII, Section 1-e because it creates a "statewide property tax," and Article VIII, Section 1(a) because taxes are not levied and collected on an "equal and uniform" basis.
The trial court notified the parties on September 27, 2002 that the State's motion to transfer venue would be granted and the case would be transferred to district court in Travis County. The plaintiffs appealed to the Fifth Court of Appeals in Dallas County. On February 24, 2003, the Court dismissed the appeal for want of jurisdiction. On May 22, 2003, the Supreme Court of Texas denied the plaintiffs’ petition for review.
C. Fletcher v. Frisco Independent School District, Cause No. 219-01998-02; In the 219th Judicial District Court, Collin County, Texas
Same allegations as in Hopson.
D. Dorfman v. Gilmer Independent School District, CA 12-03-0011-CV (Court of Appeals, 12th District, Tyler).
Same allegations as in Hopson.
On April 14, 2003, the district court denied the defendant’s plea to the jurisdiction. On August 29, 2003, the Court of Appeals reversed and remanded to the district court with instructions to dismiss the suit for lack of jurisdiction. The Court of Appeals held that the commissioner of education is an indispensable party.
VI. Emerging Issues
1. Cost of new state requirements;
2. Increased accountability requirements;
3. Increased graduation requirements.
4. Implementation of No Child Left Behind.
1. 607 districts have M&O tax rates between $1.45 and $1.50 for the 2002-2003 school year;
2. 75% of all students are in such districts.
VIII. Essential Elements of the Texas School Finance System, Considering the Equity Standards of Edgewood IV
A. The Texas Legislature must first determine the educational goals for the system, remembering the Texas Supreme Court's admonition in Edgewood IV not to aim too low and to "reflect changing times, needs, and public expectations."
1. The Legislature already has set a comprehensive set of goals through the accountability/accreditation system.
2. These goals are being increased significantly over the next few years; however, no reliable calculation of the cost of these higher standards has been made.
3. Further, the State continues to require and regulate many "process" or "input" factors, some of which may or may not be related to or consistent with higher performance standards, and many of which add significant costs to the overall system.
B. The system should continue to rely on local property taxes for some support, but to a reduced degree; the State should provide at least a majority of funding for the overall system.
C. Use a one-tier guaranteed yield approach that treats all districts alike up to the level of effort required to generate revenue necessary to provide for a general diffusion of knowledge. The current system advantages and disadvantages different districts in ways that do not make much sense.
D. Continue to include adjustments for student and district factors, but critically examine and update factors that may no longer bear much relationship to current costs and needs. For example, the transportation formulas are based on 1984 costs, and the cost-of-education index (CEI) is based on ten-year-old data. Consider creation of a broad-based, flexible high school weight.
E. Establish a mechanism to keep student and district factors current. For example, the Texas Legislature could establish – and fund – a study of all such factors each biennium, and base funding each biennium on a rolling average of the two most recent studies, so that the factors stay reasonably current, but also change gradually over time as circumstances change.
F. Combine the current IFA and EDA programs into one true debt tier on which districts can depend and plan.
G. If local property taxes continue to be a basis for supporting public education, ensure that local districts have "meaningful discretion" regarding the use of such funds.
H. Provide some automatic mechanism to keep the system in balance over time, such as statutorily providing for increases in the guaranteed yield, or by linking the overall funding level to the wealth of a district at a relatively high level, such as that of a district at the 90% of wealth per student or above.
I. If the State is willing to fund 80% or more of the overall system, it may be possible to eliminate "recapture" entirely. However, if some significant portion of the system (hopefully, less than 50%) is funded through local property taxes, then some level of recapture may be necessary.
J. If some level of recapture remains a part of the system, recapture should be eliminated above the property tax rate associated with the “general diffusion of knowledge.”
It now appears likely that many school districts, both poor and wealthy, will return to court to challenge the equity and adequacy of the Texas system. On May 29, 2003, the Texas Supreme Court issued its anticipated decision in West Orange-Cove CISD v. Alanis. By 2003, several hundred school districts - possibly even a majority - will be at the maximum legal rate of $1.50 per $100 valuation. At the same time, it appears likely that the percentage of the overall system funded by the state will be at its lowest level in over fifty years. During the current interim between regular sessions, the Legislature is expected to meet in special session to revise both the public school finance system and the State tax system. However, the Legislature's options will be more limited than in previous years, since the option of shifting more of the cost of public education to the local property tax will not be available to the Legislature.