July 11, 2001

TO THE ADMINISTRATOR ADDRESSED:

Re:School Finance Legislation

The purpose of this letter is to provide written information concerning the implementation of school finance provisions for school districts and open-enrollment charter schools as they finalize budget plans for the 2001-02 school year. This letter addresses major finance related topics in some detail, provides a general description of less significant changes, and provides information on the relationship between health insurance funding and the school finance system. The intent is for this letter to supplement materials that are contained in the briefing book published earlier by the agency. Current agency understandings and interpretations are provided for statutory changes as needed. Sections of the Education Code impacted by recent legislation are noted, and relevant interpretations are provided.

MAJOR FINANCE TOPICS

Foundation School Program Formulas

The following significant formula changes were made:

  • Increase the guarantee level for Tier 2 to $25.81 in 2001-02 and to $27.14 in 2002-03
  • Increase the equalized wealth level to $300,000 in 2001-02 and to $305,000 in 2002-03 (and proportionate increases for districts eligible for the hold-harmless in Chapter 41)
  • Increase the number of cents that may be equalized in the existing debt allotment (EDA) to $0.29

There was no change in the basic allotment or any of the program funding weights in Subchapter C, Chapter 42. There were a few changes in Chapter 42 that could have an impact on funding for some school districts or open-enrollment charter schools. Note that formula funding increases are directly related to new public school employee group health insurance requirements, as will be discussed later.

ADA Declines

School districts that experience declines in total average daily attendance (refined ADA) that exceed 2% may be allowed to use 98% of the previous year’s ADA for state funding purposes. The use of an adjusted ADA count is subject to appropriation limits. For the next state fiscal biennium, a total of $22 million was appropriated, and it is expected that $11 million will be available each year for this adjustment. School districts that expect to have a decline in student attendance greater than 2% from 2000-01 to 2001-02 school years will be asked to complete a worksheet in September using enrollment data as of September 7, 2001 to justify a preliminary adjustment. At that point, it will be possible to estimate whether the $11 million appropriation will be sufficient to adjust ADA up to the level of 98% of prior year. It should be noted that open-enrollment charter schools are specifically not covered by this adjustment. (See HB 2879 and SB 450; both amend Texas Education Code §42.005)

Compensatory Education Allotment

Certain school districts and open-enrollment charter schools that do not participate in the national school lunch program can have students counted for purposes of compensatory education funding. The commissioner is authorized to adopt rules governing the counting of students for this purpose. There are approximately seven school districts and several dozen open-enrollment charter schools that currently do not participate in the national program. It is expected that the counting of students for this purpose will be defined in rule to be as comparable to the current statutory method as possible, including a six-month averaging of eligibility counts and the use of prior-year counts for funding purposes. More details will be provided upon adoption of the rule. (See HB 2879 and SB 702; both amend TEC §42.152)

Gap Funding

School districts that are ineligible for Tier 2 funding due to their property wealth level, but not subject to Chapter 41, will be eligible for additional state assistance during the next two years that is equivalent to the revenue gains that will be available to those districts eligible for Tier 2 funding. This additional state aid, known as “gap funding”, is related to the public school employee health insurance programs and requirements enacted by the legislature, and its role in health insurance funding will be discussed later in this letter. There are approximately 36 school districts in the state that appear to qualify for gap funding. The amount of funding for the biennium is limited to $37 million, and the $2.44 increase in the guaranteed yield ($24.70 v. $27.14) that would be the equivalent revenue gain is reduced in the 2002-03 school year by increases in the tax bases of eligible school districts. (See HB 3343, which adds a new TEC §42.2513)

Taxpayer Protest Protection

School districts that are significantly impacted by taxpayer protests of valuation may be eligible for a temporary adjustment to property values or tax collections to offset the impact of the taxpayer’s withholding of tax payments. The commissioner is authorized to adopt rules and make adjustments for the withholding of tax payments by major taxpayers that are protesting valuations under Chapter 42 Tax Code. The adjustment affects the state aid for Texas Education Code Chapters 42 and 46, and the amount of recapture under Chapter 41. Commissioner’s rules will be proposed this summer that define who a major taxpayer is in terms of the value protested and taxes withheld, as well as the computation process for temporary relief. Note that the terms of this adjustment require that any additional state aid that is not earned as a result of the final determination of the protest must be repaid no later than two years after the adjustment is initially made. The adjustment is to be paid from surplus funds appropriated for the Foundation School Program, and funding for other items (IFA funding for new awards in 2002-03, EDA tax rates above $0.12 in 2002-03, property value declines, and optional homestead recognition) are prioritized higher for receipt of any surplus funds available. For the 2001-02 school year, it is unlikely that sufficient surplus funding will exist to be able to make the adjustments for taxpayer protest. School districts that anticipate a major shortfall in tax collections in 2001-02 as a result of large taxpayer protests of valuation should contact the State Funding Division for further instruction after reviewing the forthcoming rules. (See HB 2879, which adds a new TEC §42.2531)

Existing Debt Allotment Eligibility and Limits

House Bill 2879 made two significant changes to the existing debt allotment program related to funding limits and debt eligibility. First, it raised the maximum tax rate for which debt is equalized (EDTR in the formula) to 29 cents. This increase is effective for the 2001-02 school year, and is a permanent change. However, HB 2879 contains a specific provision limiting the rate to 12 cents for the 2002-03 school year unless the commissioner determines that sufficient surplus funds are available to provide for the higher tax rate. In determining that a surplus exists, the commissioner is directed to refrain from overpaying state aid to those districts that experience more rapid increases in property value than projected by the statewide growth rate of 6.01%. Because of direction in law to create a cash surplus if possible in the second year of the biennium (2002-03), it seems likely that there will be funds for the higher tax rate limit. A formal determination will not be made until at least January when the Comptroller certifies preliminary property values that will be used for funding the 2002-03 school year. If surplus funds are available, $50 million of the surplus must first be allocated to the Instructional Facilities Allotment program before the $0.12 limit can be increased.

The eligibility requirements for the EDA were also changed. Under prior law, only those debts for which districts levied and collected taxes in 1998-99 were considered eligible for funding under the program. In addition to rolling forward the 1998-99 levy and collection requirement to 2000-01, HB 2879 now allows bonds to be eligible for EDA assistance if the district made a payment on the bonds in 2000-01. The most significant effect of this change is to make any debt for which a district makes a payment in the 2000-01 school year eligible for EDA funding, even if the district makes an interest-only payment from a reserve account in August of 2001.

Notwithstanding the eligibility definition change, there is a substantial caution for districts expecting additional state aid from the EDA eligibility change. Under Texas Education Code §46.034(b), the tax rate for which a district may receive EDA funding (EDTR in the formula) is limited to the I&S tax rate the district had in the last year of the preceding state fiscal biennium (2000-01) for eligible bonds. If a district made a payment from a non-tax (I&S) source in 2000-01, the debt for which the payment was made would be eligible, but the limit on funding under TEC §46.034(b) would not recognize that payment. School districts with debt that was newly issued in the 2000-01 school year should expect the limit on EDA to be increased only if the debts were issued early enough in the fiscal year to affect the tax rate and tax collections for debt service in 2000-01. If that is not the case, the eligible debts would most likely impact the EDA state aid in the 2003-04 school year if the district levies taxes for those debts in 2002-03 (the next “second year of the previous biennium” year).

In some instances, districts that issued debt during 2000-01 may be able to receive EDA funding for the newly issued eligible debt even if the district did not actually levy and collect taxes for that newly issued debt in 2000-01. If a district had a declining debt obligation for those debts for which it taxed in 2000-01, it will have a limit set under TEC §46.034(b) that may exceed the funding requirements for those older debts, thereby allowing a newly eligible debt to receive partial or full funding under the EDA program. Districts that believe they may have a circumstance that meets these requirements are strongly advised to notify the State Funding Division of this situation early so that appropriate adjustments can be made to the EDA payment that will flow in September. Any request for adjustment should be accompanied by complete debt schedules for the relevant issues and a letter describing the basis of the debt’s eligibility and its impact on the EDA state aid requirements.

As a reminder, the payment of facilities assistance for both the EDA program and the Instructional Facilities Allotment stand as first priorities in distribution of state aid. Should the appropriations for either program be insufficient to meet the distribution requirements, TEC §46.009 and 46.035 direct that sufficient funds from the Chapter 42 state aid distributions be transferred to meet the spending requirement for EDA and IFA.

Lastly, it is important to carefully review the debt information used on the summary of finances existing debt worksheet that will be provided to all districts. Please verify that the payment information is correct and up to date, and notify the State Funding Division of any changes. This will make the payments more accurate and reduce the need for settle-up adjustments in the following year.

Attribution of Certain Taxes to Local Shares of IFA and EDA

New provisions were added to the law concerning the Instructional Facilities Allotment (IFA) and Existing Debt Allotment (EDA) programs that allow certain taxes that have not previously been used to qualify for state assistance in Chapter 42 or Chapter 46 to be attributed to the local share requirements of the IFA or EDA programs. If a district collected taxes in the current or prior school years (only back to 1999-2000) that exceeded the maximum Tier 2 tax collection amount for maintenance taxes or the local share requirements for either IFA or EDA for debt service taxes, those taxes may be attributed to a current-year EDA or IFA local share requirement. In general, the existence of these excess taxes will be indicated by an accumulated fund balance, particularly in the debt service fund. Under prior law, school districts that used accumulated fund balances to make a debt-related payment would not receive any matching state funding for that portion of the payment, since the IFA and EDA programs were set up to be tax rate equalization programs. The change in law will allow the use of such balances to meet local share requirements and thus generate state aid in the IFA and EDA programs.

The commissioner is given rulemaking authority over this computation and attribution. School districts should expect to be required to submit appropriate documentation of the existence of previously unequalized tax collections. More instructions will be forthcoming after initial publication of the proposed commissioner’s rules this summer. (See HB 2879, which added TEC §46.003(d) and 46.032(c))

Chapter 41 Revenue Hold Harmless for Certain Districts

School districts that are subject to wealth reductions under TEC Chapter 41 may choose to have their equalized wealth level computed under a revenue hold harmless provision that allows the district to retain as much revenue per WADA as the district had available in 1999-2000. Only districts that did not offer all twelve grades in the 1999-2000 school year are eligible for this alternative computation. Special worksheets have been developed to assist the affected districts in determining the financial consequences of this selection. School districts must maintain the tax effort level of 1999-2000 in order to qualify for the adjustment, and those choosing this adjustment will lose the adjustment to taxable property value for any tuition payments and will not be protected by the limit on tuition under TEC §25.039. Please see other correspondence on the requirements for Chapter 41 school districts (Chapter 41 notification letter and manual) for more direction on this subject.

OTHER FINANCE ISSUES AND INFORMATION

Salary Schedule

There are no changes to the state minimum salary schedule for the 2001-02 school year. House Bill 2879 did change the salary schedule factors used to compute the minimums, but the change is actually only a technical clean-up to produce the same salary schedule as existed for the 2000-01 school year. Under prior law, the commissioner was directed to compute the amount of state and local revenue available per weighted student to a district eligible for Tier 2 funding at the maximum tax rate. In 1999, a change to the computation of weighted students was authorized under TEC §42.152(s), and the commissioner was directed by TEC §42.152(t) to compute a new yield for the Tier 2 formula that would distribute the same amount of state funds with the different count of weighted students. The minimum salary schedule factors were computed using the definition of weighted students that existed prior to 1999, and the resulting salary schedule amounts for the past two years reflected the result of using the old definition of weighted students. House Bill 2879 removed the provisions that direct the commissioner to recompute the Tier 2 yield, so to prevent the salary schedule computation from resulting in lower minimums when the new definition of weighted students became the default count used in the schedule computations, the factors had to be increased slightly. (See HB 2879, which amends TEC §21.402, and also repeals §42.152(t))

House Bill 3343 increased the Tier 2 yield, which normally would impact the minimum salary schedule. House Bill 3343 also contains an amendment to TEC §21.402 that directs that none of the increase in funds available as a result of the Tier 2 increase be counted toward the minimum salary computation. This action was taken to assure that the Tier 2 increase would be available for funding public school employee group health insurance benefits.

Tuition for Ineligible Prekindergarten Services Authorized

Senate Bill 596 authorizes school districts to charge tuition to the parents of children who attend half-day or full-day prekindergarten programs but do not meet the eligibility requirements for funding under the Foundation School Program. School districts are also authorized to charge tuition for an additional half-day of prekindergarten instruction to eligible students. School districts must submit proposed tuition charges to the commissioner for approval. At the present time, no final determination of the acceptable level of tuition has been made. As a general guide, school districts should expect the limits on tuition to be equal to or less than the amount of state assistance that would be generated in the Foundation School Program. The agency has published amounts that should serve as a guide for the full-day tuition limit for each school district. Half-day tuition would be half the amount published. These amounts can be found on the agency web site under the prekindergarten expansion grant program information at Please note that an eligible student for whom tuition is charged for an additional half-day program is ineligible for prekindergarten expansion grant funding. Prekindergarten expansion grant funding is also not available for any ineligible student at the present time.

Special Open-Enrollment Charter School Considerations

For existing open-enrollment charter schools, the funding changes in HB 2879 to Tier 2 or the equalized wealth level will result in increases in funding per student compared to prior years. The same funding mechanism that refers back to the district of residence of charter school students will be in place over the next two years. Beginning in 2003-04 school year, House Bill 6 directs a 10-year transition to the use of state average funding elements for computation of state assistance.