Texas' Complicated School Finance System: A Primer

The Texas public school finance system, responsible for underwriting the education of the nation’s second-largest student population, is notoriously byzantine. Parsing the jargon alone — golden and copper pennies? hold harmless? recapture? — can prove a hopelessly frustrating task.

But finding a way through the labyrinth of school finance is more important now than ever as lawmakers deliberate an education budget that could, if the House has its way, leave public schools $7.8 billion short in funding. And as state Sen. Florence Shapiro, R-Plano, reminded members of the Senate Finance Committee when they passed their own education budget last week — with still staggering numbers that are $4 billion more than those from the lower chamber — any funding for education depends the passage of a new school finance bill.

In the House, state Reps. Scott Hochberg, D-Houston, and Rob Eissler, R-The Woodlands, have introduced separate legislation outlining reforms. Shapiro, who chairs the Senate Education Committee, and state Sen. Kel Seliger, R-Amarillo, have each said they are working on proposals.

Here’s our layman’s guide to figuring out the current system, compiled with the help of experts at the Texas Taxpayers and Research Association, the Equity Center and the Texas Education Agency.

The state’s 1,030 traditional school districts operate with a combination of federal, local and state revenue. In the 2008-09 school year, the federal government paid $4.7 billion, the thinnest slice of the pie at 10 percent. At $20 billion, the state paid 42.9 percent of the total funding for schools, and local districts paid 47.1 percent, $22.2 billion (the state’s portion includes money “recaptured” from local property taxes; more on that later).

Most federal money comes through Title I, the law intended to help districts educate economically disadvantaged students. That money is distributed based on the number of students who qualify for free and reduced meal plans — and almost all districts in the state receive some amount of Title I funds. They can also receive specialized federal grants, including those for students with disabilities, English-language learners, preschool programs, migrant students and vocational education.

Texas allocates most state funding for schools through a mechanism called the Foundation School Program, which was created in 1949 to distribute money from the state's Available School Fund. Now the program distributes operating funds to school districts via two streams that each contain a local and state component. A portion of state facilities funds also comes from the Foundation School Program. The Available School Fund contains the proceeds from fuel taxes and earnings from something called the Permanent School Fund, which was established in 1876 and is made up of revenue from land sales and leases on offshore oil lands and other mineral holdings. It also finances instructional materials and technology for schools outside of the Foundation School Program.

According to the Texas Taxpayers and Research Association, in the 2010-11 biennium, about $7.5 billion in state education funds came from the Available School Fund, lottery proceeds, recaptured property taxes, and taxes on oil and natural gas, franchises, tobacco, and used car sales. Additional money from the state’s general revenue accounts made up the rest of the state’s roughly $40 billion share. Over the last two years, the state has also used federal stimulus money to supplant state funding to the Foundation School Program. 

Through the Foundation School Program, the state determines how much money each district gets for operations through two formulas: “Tier 1,” which constitutes the bulk of a district’s funding, and “Tier 2,” so-called enrichment funding.

The Tier 1 formula determines a district’s “entitlement” — the total cost a district bears in meeting basic education requirements for its students. The entitlement is calculated using the number of students who make up a district’s average daily attendance, adjusted by factors like the district’s size, the number of students instructed in areas like English-language training, gifted and talented classes, and special education programs, and its regional “cost of education” index. (That index, assigned to districts in 1991, is based on size, teacher salaries in neighboring districts, and percentage of low-income students there in 1989-90. It has not been updated since then.)

A district’s portion of its Tier 1 entitlement is calculated by subtracting whatever amount of money a $1 tax rate raises from the taxable property within its borders. The breakdown between state and local funding can vary widely from district to district. For example, if a district’s entitlement is $100 million, and the $1 tax rate raises $43 million, the state will chip in $57 million. For a district with lower property values, that local number could be $10 million, and the state’s portion could be $90 million.

If a district happens to exceed its entitlement with the local money levied by its dollar tax rate, the state can “recapture” those extra funds. Recapture, also referred to as “Chapter 41” or “Robin Hood,” requires property wealthy districts to share their local tax revenue with the state to ensure that all public schools in Texas receive equitable funding.

The Tier 2 formula depends on the famed “golden” and “copper” pennies. It uses calculations based on a district’s “compressed tax rate,” which the Legislature created in 2006 when it reduced maintenance and operation property taxes by a third. Most districts, which were taxing at $1.50 in 2005, have a compressed tax rate of $1 (that’s per $100 of property value).

The state calculates its share of Tier 2 funding based on each “penny” a district chooses to tax above its compressed tax rate (which, for simplicity’s sake, we’ll assume is $1, but can differ from district to district and ranges from $0.64 to $1.09). The law caps each district’s maintenance and operations property tax rate at $1.17 and requires districts to hold elections to tax more than 4 cents higher than the compressed rate. The first six pennies a district levies above a dollar are not subject to recapture — thus they are called “golden.”

For equity purposes, the state guarantees every school district the same amount of revenue that the Austin Independent School District raises with a penny of tax rate — which in 2008-09 was about $60 per penny per student. If a district is unable to raise that amount locally, then the state fills in the rest. For those first six pennies above the compressed tax, any amount a district raises above $60 is protected from recapture.

Any money a district raises with pennies seven through 17 — so-called “copper pennies” — is subject to recapture. If a district raises more than $31.95 of revenue per copper penny, that overage goes back to the state. If it fails to raise that amount, the state will supplement its funding until it gets to that $31.95 level.

After both the state and districts have paid their part through the formulas, what’s called “target revenue” comes in. In 2006, when the Legislature reduced the property tax rate, the state guaranteed that districts would get no less than the amount they received per student at that time. They would be "held harmless" against losing any money because of changes by the Legislature. If after both the Tier 1 and Tier 2 formulas are run, a district ends up with less than its “target revenue” number, the state makes up the difference — something it does for about 900 districts, according to the Texas Taxpayers and Research Association.

Last session, the Legislature voted to give districts another $120 per weighted student to create a new target revenue number in response to concern from districts that the 2006 formulas did not give them enough money to operate at current costs. The state aid that funds up to the target revenue number is what lawmakers call “target revenue hold harmless” funding — because, in essence, the state is holding a district “harmless” to a certain revenue level because it is not letting them drop below it.

What additional layers lawmakers will add with changes to the system this session is anyone’s guess, says Sheryl Pace, senior analyst at the Texas Taxpayers and Research Association. They could punt, fixing the current system by passing a bill that’s simply a vehicle for distributing blanket cuts across school districts. They could change elements in the funding formulas to redirect more money to poorer districts. Or they could scrap the system entirely and move to a block grant per student.

“The options are pretty much endless of what they could try to do,” Pace says.