Texas school districts expect relief under new school finance law

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With Gov. Greg Abbott’s signature on Texas House Bill 3, analysts and school budget officials are sorting through the implications of the $11.6 billion school finance reform passed in the 2019 Legislature.

“Due to its sweeping and historic nature, House Bill 3 touches on many different aspects of education in Texas and impacts everything from recapture to Pre-K funding to Special Education and transportation,” the Texas Education Agency said after Abbott signed the bill June 11. “Because of the sheer number of topics to cover and provide guidance on, the agency will be releasing information week by week over the summer starting with a schedule of topics and a list of frequently asked questions.”

“Recapture” refers to the oft-criticized “Robin Hood” process of equalizing per pupil school funding between districts. Districts designated as “property rich” must share property tax revenues with those deemed “property poor.”

On Wednesday, the Texas Association of School Business Officials will hold workshops in Allen, north of Dallas, on preparing for the new law.

Tracy Ginsburg, executive director of TASBO, said this year’s conference will be well attended, which is typical after a legislative session. While most school districts’ financial officers have stayed attuned to the legislative process, HB 3 does represent a significant change, she said.

“It’s certainly reform in how we generate funding for our most needy students,” she said. “The legislature was trying to balance the need for tax relief with increased in school funding.”

The new law will increase basic per-pupil allotment by nearly 20%, to $6,160 from $5,140, and will provide additional money for low-income and English language learners as well as qualified full-day pre-kindergarten students. It will also bring mandated expenditure increases, but none that we view as significant.

HB 3 also creates an incentive pay program for teachers, adds career, college, and military readiness bonuses for school districts, funds full-day prekindergarten for students in poverty, and requires all elementary school principals and teachers in kindergarten through third grade be trained on science-based reading instruction by 2021.

The bill provides $6.5 billion to improve public education and pay teachers and a $5.1 billion state contribution to lower school district taxes.

Property tax rates will fall by an average of 8 cents in 2020, and the bill places a 2.5% cap on property taxes starting in 2021. That will result in an average tax rate reduction of 13 cents over the two-year budget period that begins Sept. 1, according to lawmakers.

Under HB 3 the tier-one tax rate covering maintenance and operations must be reduced to 93% of the current rate for the 2019-2020 school year.

"The people of Texas demanded that we take bold action to fix our state's broken school finance system, which is why I made school finance reform an emergency item this legislative session," Abbott said in a signing ceremony last week. "This law provides additional funding to recruit and retain the best teachers for the most challenging classrooms, employ effective strategies to better educate our students, and provide lasting property tax relief to homeowners."

In a report Friday, S&P Global Ratings called the legislation and another bill Senate Bill 12 on pension funding for teachers a positive step for school district and charter school credits.

"While we don't believe that the additional funding will directly result in upgrades, it is our opinion that the additional funding will provide relief for districts that had increasingly faced inflationary educational costs in a stagnant funding environment," said S&P Global Ratings credit analyst Joshua Travis.

SB 12 makes incremental increases contributions to the Texas Teacher Retirement System to shore up pension plan funding levels.

"While the contribution increases will result in some near- to medium-term cost increases for rated local independent school districts and charter schools, we believe the increased funding will provide long-term stability to the TRS plan," Travis said. "We also believe that annual funding will eventually reach or exceed actuarially determined rates, likely leading to improvement in the plan funded ratio."

Funding for local independent school districts comes from two main sources: local property taxes and state appropriations, allocated on a per pupil basis. Wealthy districts that generate strong local property tax collections receive minimal state aid, while those with low property wealth depend primarily on state funding. When a property-wealthy district's local funding exceeds the amount allocated under the funding formula, local tax revenue is submitted to the state for redistribution to property-poor districts in a process called recapture.

Historically, the share of funding has, on average, been split 45-55 between state and local effort, but strong tax base growth throughout the state, from both new construction and appreciation, has resulted in a shift, S&P observed.

As of fiscal year 2018, local property taxpayers were contributing 64% of educational funding, while the state's share had fallen to just 36%.

“Moreover, the basic per pupil allotment has largely remained stagnant since 2010, pressuring districts to maintain fiscal stability in the face of increasing educational costs,” Travis said. “The new legislation will address the balance between what local districts contribute versus what the state contributes.”

The additional state funding also brings mandated expenditure increases. For example, 30% of the increased funding must be used for pay hikes, primarily for teachers, librarians, and school counselors.

“While these mandated expenses somewhat limit the flexibility of districts, we don't view this as a significant inhibition,” Travis said.

Across the state, school boards last week received updates on what HB 3 means for the districts.

In the Dallas suburbs, Lewisville ISD, one of the state’s largest and fastest growing districts north of Dallas, learned that promises of financial relief may fall short of expectations.

Mike Ball, the district's chief financial officer, told the board at a budget workshop the net impact of HB 3 on LISD is a projected increase of $8.5 million.

Superintendent Kevin Rogers said that is far short of the $22 million to $28 million the district was told it would receive.

“That's disappointing,” he told Ball.

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Public school funding School bonds State budgets Texas