Not Funding the Evidence-Based Model in Ohio Paper presented at Annual Meeting of the American Education Finance Association Richmond, VA March 19, 2010 Carla Edlefson, Ph.D. Professor, Leadership Studies Ashland University Ashland, OH [email protected] 1 ABSTRACT The purpose of this descriptive case study was to describe the implementation of Ohio's version of the Evidence-Based Model (OEBM) state school finance system in 2009. Data sources included state budget documents and analyses as well as interviews with local school officials. The new system was responsive to three policy objectives ordered by the Ohio Supreme Court in the DeRolph lawsuit: (a) a distribution formula based on student needs; (b) elimination of phantom revenue; and (c) decreased reliance on the property tax. An examination of the distributional effects assuming full funding showed that the OEBM is designed to provide adequate funding from the state, when combined with a local property tax rate of just two percent. However, the OEBM was enacted with state appropriations far below full funding, and the new formula had no effect on distribution of state funds in 2009-10. Analysis of the distribution of all state funds for schools found that property tax reimbursement to public school districts and funding for choice schools were big competitors for the education dollar. (Nine tables, one graph). 2 NOT FUNDING OHIO’S EVIDENCE-BASED MODEL On July 17, 2009, Ohio’s Governor Ted Strickland signed into law Amended Substitute House Bill 1, the state’s biennial appropriation legislation for fiscal years 2010 and 2111. HB 1 contained a comprehensive K-12 education reform program, including a school finance distribution program similar to the Evidence-Based Model developed by Odden and Picus (Odden, Goetz, & Picus, 2008). 1 The Ohio Evidence-Based Model (OEBM) in HB1 was part of a comprehensive school reform program that has earned the Education Commission of the States Frank Newman Award for State Innovation (Education Commission of the States, 2010). In addition to school funding reforms, the Ohio program set up new standards in the academic areas, more rigorous licensing requirements for education professionals, revisions to the teacher tenure law, and more stringent financial school district reporting and accounting. The school finance provisions of HB1 met at least three policy objectives that stemmed from the court orders in the DeRolph (1997; 2000) school finance case. The first objective was to develop a school funding system that was based on the educational needs of students. The second objective was to eliminate the problems caused by the interaction of Ohio’s school finance laws with the property tax laws, problems that have been labeled phantom revenue. The third policy objective was to reduce the reliance on the property tax. Policy Objective 1: Funding Based on Educational Needs Unlike Ohio’s previous funding system, which was a foundation program, the unit of funding in OEBM is the organizational unit. An organizational unit at the elementary grades level is 418 students; at the middle school level, an organizational unit is 557 students; and at the high school, 733 students. The first component of the OEBM is Instructional Services Support, i.e., teachers. The student-teacher ratio in grades 4 through 12 is 1:25. The ratio in grades K-3 is 3 1:19, and will be phased down to 1:15 by FY14. All districts are required to offer full-day kindergarten; only half-day was required in the past. Funding is provided for lead teachers, who will provide training and mentoring for other teachers. The model’s base teacher cost in FY10 is $56, 902, and includes mandatory contributions to the state retirement system, but not other benefits. The other OEBM components are Additional Services Support (counselors, summer remediation, nurses); Administrative Services Support (superintendent, principals, etc.); Operations and Maintenance Support; Gifted Education and Enrichment Support; Technology Resources Support; and Additional Support, including professional development for teachers and instructional materials for students (Ohio Department of Education, n.d.a, pp. 5-9). The sum of the costs of all these components for each district is designated the adequacy amount. Policy Objective 2: Correcting the Phantom Revenue Problems Since the 1970s, Ohio’s property taxes have been adjusted for inflation through the tax reduction factor every time a jurisdiction’s property values are reappraised or updated. As a result, the effective tax rate is lowered. However, the old school funding formula used the updated property values in calculating the local district’s share of the foundation amount. This combination of policies caused districts to collect no increases in property tax revenues, but also caused them to lose some state subsidy as property values increased. The name for this phenomenon was phantom revenue, and the Ohio Supreme Court in DeRolph v. State (1997, 2000) ordered the state to remedy it. However, because the tax reduction factor was in the state constitution, a remedy was elusive. Local boards of education in general do not have the authority to impose property tax rate increases without voter approval. Therefore, most Ohio school districts submit rate increases to 4 the voters (we call them levy ballot issues, or levies) at regular intervals, because the tax reduction factor does not permit property tax revenues to increase at the same rate as property values. The exception is those districts who levy a rate of exactly 20 mills (2 percent) of assessed valuation. The tax reduction factor does not apply in cases where it would result in an effective rate of less than 20 mills. Also, special tax levies in which voters approved a dollar amount for a specific period of time, rather than a millage amount, do not count toward the 20 mill floor. In recent years, some districts have found ways to convert some of their millage to dollar amounts so that they could reach the 20 mill floor and begin to realize increased property tax revenues on those 20 mills when property values were updated (Ohio Office of Budget and Management, 2009a, p. D30). HB1 contains a provision for a new kind of property tax levy issue, called a conversion levy. It permits a local school board to submit to the voters a proposal to convert some of their existing millage to a dollar amount so that it would not be subject to the TRF. The conversion would enable more districts to have some millage not subject to the TRF, permitting additional growth in revenues. As a result, districts would be less likely to have to ask voters for additional millage. In the period November 2002 through November 2008, 60.5% of the districts who remained at the 20 mill floor were on the ballot for more millage, while 90% of the districts who were not at the floor had levy requests (Ohio Office of Budget and Management, 2009a, p. D34). Policy Objective 3: Less Reliance on Property Tax A second kind of phantom revenue in the old system was caused when in 1993 the local district’s contribution to the foundation program was increased from 20 mills to 23 mills of assessed valuation. The effect was equalizing, because property-wealthy districts contributed proportionately more than property-poor districts, and that freed up more state money for the 5 formula, benefitting lower wealth districts more. However, some districts levied less than 23 mills, and the difference between what the district was charged for its local contribution to the foundation amount and what the district collected in taxes constituted a second kind of phantom revenue. There was a state appropriation, called Gap Aid, to replace the phantom revenue in those districts. In the new OEBM the local contribution to the adequacy amount will phase down to 22 mills in FY10, 21 mills in FY11, and 20 mills in FY12. Gap Aid has been eliminated. The Adequacy of the OEBM The theory behind the evidence-based model is, of course, that there are certain strategies that schools may employ that research or best practice has shown to be effective in improving— even doubling--student achievement (e.g., Odden et al, 2008; Odden & Archibald, 2009). Costs are calculated for each of the strategies, and the sum of those costs is the adequacy amount. However, it is unclear that Ohio’s achievement problems can be traced to inadequate funding. Appendix Table A shows that in Ohio, student outcomes are correlated with characteristics of the population in the school district, such as race and poverty, not with school expenditures, property wealth, or tax effort. Table 1 shows the results of regressions with two different student outcome measures, the Performance Index Score and the Number of Report Card Standards Met, as dependent variables. The Performance Index is a way of combining a district’s test results at all the various grade levels into one score (Ohio Department of Education, 2009b). The strongest predictors of student outcomes are the percent of students in poverty and median income. District expenditures per pupil are not statistically significant predictors of achievement, and local tax effort has a negative impact. Table 1 6 Predictors of Student Outcome Measures Dependent Variables Performance Index Score Number of Report Card 2008-2009 Standards Met 2008-09 Independent Variables Standardized Coefficient Standardized Coefficient Percent White 2008 .266 ** .256** Percent Student Poverty 2008 -.350** -.404** Total Expenditure Per Pupil .022 -.038 2008 Median Income, Tax Year 06 .426 ** .320** Local Tax Effort FY08 -.085** -.068* R2 .685 .634 * significant at .05 level ** significant at .001 level Sources: Ohio Department of Education, 2009d; n.d.b If fully-funded, the OEBM system would have increased school aid by more than two billion dollars in FY10 over FY09 (Ohio Office of Budget and Management, 2009b; OEBM, 2009). It would have given greater state funding increases to the most highly performing districts (Table 2). The Ohio Evidence-based Model is responsive to the Ohio Supreme Court’s order to adopt a funding system that is based on students’ educational needs, but the dollars do not appear to be targeted toward the districts most in need of improving achievement. Table 2 Numbers of Ohio School Districts By Report Card Designations and Average Percent Increase In School Funding, Governor Strickland’s Proposal (Full Funding) ______________________________________________________________________ 7 Report Card Designation Number of districts Average percent increase in state funding, FY10 full funding Academic Emergency 1 13.4% Academic Watch 9 21.0% Continuous Improvement 79 42.7% Effective 251 46.9% Excellent 154 46.6% Excellent with Distinction 116 58.7% All Districts 610 40.9% Sources: Ohio Office of Budget and Management, 2009b; Ohio Department of Education, n.d.b Note: The one Academic Emergency district is Youngstown. The Academic Watch districts are Cleveland Municipal, Dayton, East Cleveland, Jefferson Township, Lorain, Mansfield, Warren City, Warrensville Heights, and Whitehall. The Governor’s proposal contained an index that gave more weight to the calculations for low income, low wealth districts. That index was enhanced and became the Educational Challenge Factor (ECF) in the final legislation. Table 3 contains a sample of 14 Ohio districts, arranged in order of their ECF. The ECF was calculated for each district based on college attainment of the district residents, the personal income and property wealth per pupil, and the percent of students in poverty. The range of the ECF is .76 to 1.65. A high ECF indicates the district has a high educational challenge. Table 3 Ohio Evidence-Based Model, Estimated Full Funding for FY2010, Sample of Districts ______________________________________________________________________ State $ State $ Per pupil FY09 ECF Type District Per Per pupil percent State $ pupil FY10 increase as % of 8 FY09 09 to 10 Total Revenue 1.6349 5 Youngstown City 7533 9729 29.2% 61% 1.6007 1 Southern Perry 8207 10,247 24.9% 74% 1.5908 1 Rock Hill 8063 9572 18.7% 70% (Lawrence) 1.5616 4 Marion City 6522 8898 36.4% 65% 1.3855 4 Mt. Healthy 5432 7760 42.9% 53% 1.2661 5 Columbus City 3053 5241 71.7% 33% 1.1773 2 Indian Lake (Logan) 2789 3981 42.7% 39% 1.1687 6 London (Madison) 5076 5330 5.0% 36% 1.1389 2 West Muskingum 3271 4475 36.8% 46% 1.1349 3 Valley View 4150 4894 17.9% 49% (Montgomery) 1.0051 6 Medina City 2219 3396 53.0% 37% 1.1008 3 Liberty Benton 3981 4879 22.6% 51% (Hancock) 0.9851 7 Hilliard 2440 3369 38.1% 35% 0.8969 7 Worthington 1502 2307 53.6% 29% Sources: OEBM, 2009; Ohio Department of Education, 2010 District type: 1 Rural/agricultural, high poverty, low median income; 2 Rural/agricultural, small enrollment, low poverty, low to moderate median income; 3 Rural/Small town, moderate to high median income; 4 Urban, low median income, high poverty; 5 Major Urban, very high poverty; 6 Urban/Suburban, high median income; 7 Urban/Suburban, very high median income, very low poverty The entire Instructional Component, as well as the family and civic liaison, summer remediation, and enrichment fund components of OEBM, are multiplied by the ECF. Although 9 the wealthier districts would receive large percentage increases under the fully funded OEBM, the per pupil dollar amounts they received would be relatively small, as shown in Table 3. At full funding the new Ohio system would provide state support for the full adequacy amount, except for the local contribution of 20 mills of property tax. The state is already funding a high percentage of the cost per pupil in the low wealth, low income districts, so their percent increase under the fully-funded OEBM would be small compared to the percentage increase received by wealthy districts, who currently receive a low percentage of their revenues from state aid.2 Ohio’s Fiscal Situation in FY09 In addition to the economic crisis that put most states’ budgets into red ink, Ohio in 2009 was living with tax policy changes that also caused large reductions in revenues. Tax reform legislation enacted in 2005 phased down two out-dated taxes on business. The tangible personal property taxes on business equipment and inventory were phased out over four years, and the corporate franchise tax was phased out over five years. They were replaced by the commercial activities tax (CAT) on business, with a very broad base and a low rate. In addition, the personal income tax rates were to be phased down, so that at the end of five years, the tax rates would be reduced by 21% (Ohio Department of Taxation, 2009). In 2009, the trends in the General Revenue Fund showed a huge drop, as shown in Table 4. The combination of the recession of 2008-2009 and the enacted tax cuts resulted in the “most serious erosion in revenues [Ohio] has experienced in the last 40 or 50 years” (Levin, 2009). The budget gap was $5.2 billion, which was partially closed in HB1 with $2.4 billion in spending cuts throughout state government and the authorization of video lottery terminals (VLTs), estimated to produce $933 million (Levin, 2009). When the VLTs were challenged in court, a 10