School Funding Commission Property Tax Working Group January 3, 2017
Adequacy Level and Local Effort Q. How well funded is the district with an ideal equalized local tax effort (LCT)? Q. How well funded is the district with the current tax effort (Real Revenues)? Q. How can we discount current tax effort based on ideal local effort and % of adequacy and promote potential property tax relief? 2
Overview of the Model 1. Ade 1. Adequacy Tar arget: How much does providing high quality 100% of of education cost? Adequacy Ad Tar arget 2. Ad Adequacy Le Level: How well- funded is the district? Local Loc l Cap Capacit ity: How much can the district contribute? Base Fun Base Fundin ing g Min Minim imum: How much does the state currently contribute? Gap to Adequacy 3
Adequacy Level This model distributes dollars based on how adequately funded a district is. The current level of funding for a district is its Ade dequacy Level: • The Adequacy Level is calculated by determining a district’s current level of state funding plus its current level of local funding and dividing this by the district’s Adequacy Target. Local Funding + Current State Funding Adequacy Level = Adequacy Target • For example, if a district has an Adequacy Target of $12,000 and receives $4,000 in local funding and $5,000 in state funding, its Adequacy Level would be 75%. 4
How much can a district contribute? • Loc ocal l Cap apacit ity Tar arget (L (LCT CT) is a calculation of local effort — the amount a district would ideally contribute towards its Adequacy Target • Calculating the Local Capacity Target: Effort In Index: Step ep 1: 1: Calculate an Effort Index for each district 3 Year Average of EAV o High effort index = greater expected contribution Adequacy Target o Low effort index = low expected contribution Step ep 2: 2: Convert Effort Index to Local Capacity Target (LCT) by comparing all districts in the state o LCT represents the percent of local support a district should ideally contribute o No district will be expected to pay more than 90% of their adequacy target Step ep 3: 3: Adjust LCT to allow for equalization of tax rates and new funds Districts with higher property wealth are expected to contribute a greater % toward adequacy, while districts with greater adequacy needs contribute less. 5
How much can a district contribute? • Some districts collect Real Receipts* from local taxes that are above their LCT, some collect Real Receipts below their LCT • For districts taxing below their LCT, the formula uses their calculated LCT. This means that districts are responsible for a portion of how inadequately funded they are. However, as districts raise more revenue to reach their target, they will not lose their spot in line for new state dollars. • For districts taxing above their LCT, EBM adjusts their real receipts downwards towards their LCT. Creates incentive for these districts to lower taxes because doing so will increase their eligibility for state dollars. Adjustment is based on how far a district is from reaching their Adequacy Target, so districts that tax at high rates but are still far from adequacy get the biggest adjustment of real revenue towards their LCT. *Calculation of real receipts can be found in Appendix 6
The Local Capacity Target Adjustment in Action 10 100% 0% of of Ad Adequacy Tar arget Local Capacity Target District Taxing Below LCT District Taxing Above LCT Real Receipts Adjusted Local Capacity 7
Using the Preliminary Adequacy Level as a Discount Factor • Preliminary Adequacy Level is the district’s Adequacy Level in an ideal state Calculation is LCT + CPPRT + Base Funding Minimum • This is the district’s percent of adequacy that would be funded if the district were contributing its Local Capacity Target • This Preliminary Adequacy Level is used as a Discount Factor to make 2 adjustments in the model In the calculation of a district’s Local Capacity, the Discount Factor is used to adjust real revenue downwards toward the ideal LCT In the calculation of the Base Funding Minimum, the Discount Factor is used to decrease the amount of the previous year’s poverty supplemental grant in the calculation of how adequately funded a district currently is, allowing for a smoother transition from a formula that incorporates poverty concentration to one that does not Using the Preliminary Adequacy Level as a Discount Factor means that adjustments to formula components are based on need. 8
Calculating Local Capacity (Over LCT Example) Step 1: St 1: Calculate the Effort Index (EAV/Adequacy Target) EAV AVE VERAGE Ade dequacy TYP YPE (G (Greater of of 3 3 YR YR Averag age Effort In Index Tar arget or Prio or rior Yea ear) Unit $17,350,979 $5,285,866 3.283 Step 2: St 2: Convert Effort Index to Local Capacity Target (LCT) by comparing all districts in the state (normal distribution) Norm ormali lized Effort Di Distric ict Ind Index = = LCT CT Ca Calc lculated LCT CT Per ercent Amount 10.74% $567,458 9
Calculating Local Capacity (contd.) St Step 3: 3: Adjust LCT to allow for greater equalization of state funds and potential tax relief. Over-LCT Amount Discount Factor aka Preliminary Adequacy Current Local Receipts (Current Local Level [(LCT + CPPRT + Base Funding (EAV*OTR-Trans) Receipts – LCT) Minimum)/Adequacy Target] $804,709 $237,251 62% Adjusted LCT Final Adjusted [LCT + (Over-LCT Amount x Discount Factor)] LCT $567,458 + ($237,251 x 62%) = $715,078 $715,078 10
Calculating Local Capacity (Under LCT Example) St Step 1: 1: Calculate the Effort Index (EAV/Adequacy Target) EAV AVE VERAGE Adjusted Ind Adj Index Ade dequacy TYP YPE (3 YR (3 YR Average or or Prio rior Effort In Index (x 9/ (x 9/13 El Elem, Tar arget Year ear if f 10% 10% les ess) 4/ 4/13 HS HS) HS $443,290,161 $12,816,736 34.587 10.642 St Step 2: 2: Convert Effort Index to Local Capacity Target (LCT) by comparing all districts in the state (normal distribution) Norm ormali lized Effort Di Distric ict Index = Ind = LCT CT Ca Calc lculated LCT CT Per ercent Amount 45.77% $567,458 11
Calculating Local Capacity (contd.) St Step 3: 3: Adjust LCT to allow for greater equalization of state funds and potential tax relief. Over-LCT Amount Discount Factor aka Preliminary Adequacy Current Local Receipts (Current Local Level [(LCT + CPPRT + Base Funding (EAV*OTR-Trans) Receipts – LCT) Minimum)/Adequacy Target] $527,990 -$39,468 NA because current receipts less than LCT Adjusted LCT Final LCT = [LCT + (Over-LCT Amount x Discount Factor)] Calculated Effort NA because current receipts less than LCT $567,458 12
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