Meeting Schedule, Agendas and Minutes
October 14, 2004 Minutes
In attendance were Task Force Chairman William W. Wilkins, Vice Chairman Jim Hyre, Ted Adams, Susan Bodary, John Brandt, Eric Burkland, Representative Chuck Calvert, Fred Church, Paolo DeMaria, Matt Filipic, Christine Hansen, Russ Harris, Representative Bill Hartnett, Representative Jim Hoops, Senator Jeff Jacobson, Tom Johnson, David Locke, Jim Mahoney, Dick Maxwell, Dan Navin, Senator C.J. Prentiss, Barbara Shaner, David Varda, Scott Williams, Denny Woods, Tom Zaino and Susan Tave Zelman.
Presentations:
- Assumptions used for Simulations, Increases to Foundational Building Blocks, Impact to Parity Aid, Year 1 Impact, Year 4 Impact (PDF*, 20 KB)
- Language Alternatives for Constitutional Amendments for Property Tax Growth Caps (PDF*, 8 KB)
- Drop-Out Prevention Proposal (PDF*, 12 KB)
Mr. Hyre called the meeting to order shortly after 10:00 a.m.He noted that the information presented today by Task Force staff is based on numerous assumptions and is a first attempt at modeling the tentative recommendations of the Task Force.
Mr. Marshall added that the simulations provided at this meeting show the impact on state aid. At the Task Force's October 28th meeting staff will examine the impact of the draft recommendations on local revenue. This analysis requires the development of a different set of assumptions.
Inflation Factors and Elimination of the Cost-of-Doing-Business Factor
Mr. Navin asked whether the Employment Cost Index was a Midwest inflation indicator. Mr. Church replied that it is a national number.
Mr. Navin asked whether it is necessary to make assumptions about what the changes will be to the 22 growing mills and the 22-mill charge-off (that is tied to the level of growing mills) will be over time. How quickly will the 22 mills decline and over what period of time? Mr. Church responded that the simulations assumed a four percent limit on the growing mills.
Mr. Brandt asked whether the simulations assumed a separate hold-harmless provision for the elimination of the cost-of-doing-business-factor (CODBF) and another bottom-line hold-harmless for the final state aid calculation.
Mr. Marshall replied that the simulations do include a separate hold-harmless for the CODBF. He noted that the proposed elimination of the CODBF has a big impact on the urban districts, which would impact them very negatively if we just had a guarantee at the end. Mr. Church added that including this CODBF hold-harmless allows the big urban school districts some bottom-line growth.
Funding the Costs of Categorical Programs
Ms. Shaner opined that using a 3.3 mill charge-off for categorical programs (special education, career-technical education and pupil transportation) takes away some flexibility for school districts. Most available millage is already being used by the Task Force's plan. It makes more sense to her to have a lower charge-off or prorated charge-off to determine the local contribution. We want to eliminate as much hold-harmless and gap aid as we can to get more money into the foundation formula.
Mr. Church replied that assuming a 3.3-mill charge-off for categorical programs is simply a starting point. The hold-harmless for the CODBF is an up-front guarantee that is needed in the early years but phases out fairly quickly.
Mr. Adams asked how long the CODBF hold-harmless would last. Mr. Marshall answered that it is pretty much gone by the fourth year of implementation of the proposal. He added that the Task Force is attempting to mitigate any negative impacts of changing the school-funding formula.
Mr. DeMaria asked whether the 3.3 mills was a charge-off or a limit on school districts' local exposure. Mr. Church replied that it is a charge-off. Mr. DeMaria asked whether school districts could be paying a higher share than the current formula would allow. Mr. Church affirmed that some school districts could pay a higher share and some could pay a lower share. Mr. DeMaria would like to minimize any gap-aid portion of the formula. Mr. Church offered that using a charge-off means that the state does not pay 100% of the cost of categorical programs, but it does pay 100% of the cost that is above 3.3 mills.
Mr. Brandt asked whether there were any alternatives to the 3.3-mill charge-off under consideration. Mr. Church stated that one other option is for a new gap-aid program. He added that Representative Calvert had suggested a new levy at the local level that would be dedicated to paying the categorical program costs. There was further discussion relative to whether this millage would be subject to a vote and whether it would grow or be subject to the H.B. 920 tax reduction factors.
Mr. Marshall observed that the assumptions are listed so that members can understand how staff prepared its simulations. They are all subject to changes, but they were assumptions that had to be made before staff could estimate impacts of the proposal.
Ms. Shaner expressed a concern that there needed to be more of a trade-off between the state and school districts, perhaps in the area of categorical programs, to compensate for the higher 40-mill charge-off on tangible property. Mr. Navin asked whether Ms. Shaner was suggesting that there should be no local share for categorical program costs. Ms. Shaner responded that she was not, but offered that the local share should be different from the 3.3 mills that had been proposed.
Mr. DeMaria opined that there is a delicate balance between local effort and the state's resources. He supports including in the proposed constitutional amendment allowing school districts to have the opportunity for mills above 20 grow to support the costs of categorical programs or perhaps other purposes. Mr. Navin expressed his opinion that there was a consensus among Revenue and Taxation Committee members that there should be an opportunity for local growth levy options over and above the proposed 22 growing mills. Mr. Brandt agreed with Mr. Navin.
Mr. Adams likes the fact that the proposal is an integrated framework. He believes that the proposal would clear up some of the current confusion relative to inside and outside mills and state and local shares.
Ms. Shaner suggested that, if there is a 3.3-mill charge-off for the costs of categorical programs, those mills could be allowed to grow with inflation so that there would not be a phantom revenue problem. Mr. Navin asked how much money something like Ms. Shaner's proposal could generate. Ms. Shaner noted that there are already about 160 school districts that do not levy at least 22 mills on real property. If the state raises the millage more, the number of school districts that would experience increased property taxes would rise even more.
Simulated Impact of Proposal by the Fourth Year of Implementation
Mr. DeMaria remarked that this is a dynamic analysis. If all the factors equaled out, we would retain the same state and local shares. It is when real property values increase faster than the cap that the balance shifts.
Mr. Navin offered that the Operations and Efficiency Committee recommended that there be changes in the purchase of health care insurance for school employees. Was that recommendation considered when making these estimates? The answer was this recommendation was not considered in the simulations, but implementation of that recommendation could drive down such costs.
Mr. Filipic asked which of the assumptions provided were most responsible for the differences in the outcomes. He noted that using inflation factors that are different from the current factor of 2.2% is a significant change. Replacing the Disadvantaged Pupil Impact Aid program with poverty-based assistance and eliminating the cost-of-doing-business factor also seem very important. Are there other principal financial drivers?
Mr. Marshall offered that the changes listed by Mr. Filipic are clearly very important, but that increasing the charge-off on tangible personal property to 40 mills is probably bigger than any of those items, especially in the early years of implementation. That is why it is important to have a hold-harmless.
Mr. Filipic stated that the Task Force's draft proposal will not obviate the need for some local levies, but it will provide much more stability than the current system. Mr. Marshall noted that various studies have shown that current inflation-adjusted property tax revenues are approximately the same as they were 30 years ago. The principal impact of the H.B. 920 property tax reduction factors is that school districts are required to return to the voters periodically to retain property tax funding levels.
Mr. Harris asked whether staff had estimated the impact of the proposal for the next two budgets. Mr. Marshall replied that, by the fourth year of implementation, the draft proposal would cost the state approximately $165 million more than current law. Mr. Harris asked whether staff could estimate total additional state aid that would be provided each year under the draft proposal, including increases that would be generated under current law. Mr. Marshall said that could be done.
Senator Prentiss remarked that in an earlier discussion, someone said that within five years 75% of our school districts would be in financial difficulty. Does the draft proposal address the problem of school districts getting into fiscal problems? Will it prevent that from happening? Mr. Marshall replied that the draft proposal will take several years to implement. Many of the proposed changes will take years to implement so they will not provide much assistance in the near future. What the Task Force is attempting to do is put in place a structure that will help school districts resolve their long-term funding problems. One key component of this structure is providing school districts the ability to benefit from the revenue generated by 22 growing mills.
Senator Prentiss asked if lack of growth is what school districts say is their biggest problem. Mr. Marshall responded that lack of growth is certainly one of the problems. School districts are essentially living on a fixed income now and local revenue growth will address that problem. However, lack of growth is not the only financial problem that school districts face. Senator Prentiss remarked that she wants the Task Force's proposal to solve the problem of structural deficits. Does the draft proposal accomplish this goal? Mr. Marshall opined that the draft proposal will significantly improve Ohio's current school funding structure, but we cannot say that it will fix every school district's financial difficulties.
Senator Prentiss asked how the Task Force could justify spending $50 million less in the first year of the proposal's implementation than would be spent under current law. Mr. Church replied that staff had to make numerous assumptions before the first simulations could be run. The assumptions were a reasonable starting point. The task now is to determine what changes need to be made to the draft proposal.
Senator Jacobson offered that school districts get in trouble for many reasons. He opined that collective bargaining law is the 800-pound gorilla that no one wants to talk about. Senator Jacobson added that, to a certain degree, fixing all school districts' problems is beyond the ability of the Task Force. He suggested that the Task Force consider recommending a measure that would short-circuit unfundable contracts when a school district finds itself in financial trouble. When a company goes into bankruptcy, they renegotiate contracts. Senator Jacobson stated that the public sector should do that more.
Mr. Harris asked whether staff could estimate the impact on local revenue increases of the proposal to authorize 22 growing mills. Mr. Sobul answered that staff is planning on estimating the effect of 22 growing local mills over time. Assumptions need to be made about levy behavior, but that is what staff intends to do next.
Mr. Hyre interjected that the simulations run by staff are not meant to be a recommendation. What is before the Task Force is just what happened with the assumptions that they were working with. Mr. Hyre added that one of the things that we have to keep in mind is that this is a complex system and that simple trades are not possible. As we get to the final recommendations of this Task Force, we have to prioritize what we can deal with and what we cannot. There is a limit to the number of issues we can address.
Mr. Maxwell agreed that the various components of the proposal impact the whole and he wants to address the proposal in its entirety.
Senator Prentiss expressed concern with a proposal to fix the schools that is dependent on a vote of the citizenry. If the Task Force's proposal does not pass we do not have a back-up plan. Could we develop alternatives that reach the same goals without going to the ballot? She opined that the Task Force needs a back-up plan.
Senator Jacobson agreed with Senator Prentiss regarding the need for a back-up plan. He believes that the proposal for a constitutional amendment is unlikely to win legislative approval to be placed on the ballot. Senator Jacobson wants it spelled out what can be accomplished with the constitutional amendment and what can be done without it. He suggested that an alternative to 22 growing mills statewide would be to allow local voters to authorize this for individual school districts.
Mr. Hyre suggested that this is a viable option, but offered that the Task Force should not consider this option until the discussion of the statewide proposal is completed.
Ms. Shaner stated that the discussion has centered on what local growth would mean. However, the foundation formula absorbs all of the growth that occurs. The real benefit is that school districts would no longer have phantom revenue.
Mr. DeMaria noted that there has been some discussion about the 40-mill tangible charge-off and if that number should be reduced. Is there a number for that charge-off that is revenue neutral? The answer was that a revenue-neutral tangible charge-off would be about 30 mills.
Parity Aid
Mr. Marshall discussed the treatment of parity aid in the staff's draft simulations. Staff attempted to hold parity aid constant, which is difficult because when you change the foundation formula you also alter the variables that make up the calculation for parity aid. There are many ways to calculate parity aid: staff just tried to keep it constant.
Mr. Maxwell asked whether the income factor is still a part of the calculation. It is. The simulation also continues the phase-in of parity aid.
Senator Jacobson interjected that the Task Force needs to decide if it is serious about making an investment in preschool. He offered that the Task Force will not be able to just add funding for preschool to the formula. Senator Jacobson argued that parity aid is not as justifiable with the changes that the Task Force is making to the formula. He suggested that money targeted to continue the phase-in of parity aid could be used for preschool instead. The state could retain its current investment in parity aid and use the growth that would have occurred and focus that money on an expanded preschool program.
Mr. Hyre asked Senator Jacobson whether shifting money towards a long-term investment in preschool is one of his priorities. Senator Jacobson responded that preschool would not be a priority with the current foundation formula, but with the Task Force's proposed changes in the formula it makes sense.
Mr. Maxwell expressed that he might have misunderstood the reason Senator Jacobson instituted parity aid. Parity aid is provided for lower-wealth districts based on the extra millage that is available to higher wealth districts. Mr. Maxwell added that he is a major supporter of preschool funding, but he would not want to take parity aid from low-property-wealth school districts to give to school districts with high poverty. These are not necessarily the same school districts.
Senator Jacobson stated that the changes to foundation funding by the Task Force would result in lower parity aid payments. He believes that if the Task Force does not reallocate this excess parity aid to preschool this would be "low-hanging fruit" for the General Assembly.
Mr. Maxwell asked whether the parity aid proposal is identical to the current parity aid program except that staff used 10.5 mills instead of 9.5 mills and used real property valuations instead of recognized valuations to generate the same funding levels. Staff answered that Mr. Maxwell is correct.
Mr. Hyre asked whether Task Force members had any concerns with the assumptions that staff used to simulate the draft recommendations. Mr. Maxwell noted that increasing the charge-off on tangible property from 23 to 40 mills saves the state a considerable amount of money. He acknowledged that there are some real justifications for raising the tangible charge-off, including the likely decline of tangible tax revenues in the future. Increasing the charge-off now will protect school districts in the future. Mr. Maxwell added that he would like to fund categorical programs based on how the state currently funds transportation for school districts: 60% or their state share, whichever is higher.
Senator Jacobson suggested that the Task Force should look at this as various pieces that can be dealt with separately. Special attention should be given to the components that need to be there if the constitutional amendment fails.
Mr. Maxwell opined that the recommendation to amend the constitution to solve phantom revenue is a strong one. He urged the Task Force to remember that if various options are discussed, members need to remember that phantom revenue is something that needs to be fixed. Senator Jacobson responded that phantom revenue is not an equal problem for all school districts. He added that most of the money used to fix that problem goes to school districts that do not necessarily need the money.
Ms. Shaner suggested that the Task Force needs to create an ideal model and then see if there are pieces that we might be able to separate out with regards to Senator Jacobson's idea. Senator Jacobson agreed that the Task Force can try to present an ideal plan to the General Assembly, but we must be ready to guide legislators to the parts of that plan that must go together. The legislature cannot be allowed to pick and choose, because they will pick and choose incompatible items. Mr. Maxwell agrees that the recommendations are interconnected. He would like to see what would happen if staff simulated a class size of 18 instead of 20.
Constitutional Amendment Options
After lunch, Mr. Sobul reviewed for the Task Force four options for amending the constitution to limit growth for the 22 mills. The four options for limiting growth were: the lesser of a hard cap (four percent) or some limit approved by the General Assembly; the lesser of a hard cap (four percent) or the increase in the Consumers Price Index for all Urban Consumers (CPI-U); allowing the General Assembly to establish by law a cap; and setting the cap at the lesser of the CPI-U index increase or some cap established by the General Assembly.
Representative Hoops iterated his request to consider applying tax reduction factors to residential and agricultural property separately to eliminate the current shifting of tax burden that occurs between these two types of property during reappraisal cycles. Mr. Maxwell agreed that this shifting of tax incidence is a problem. Representative Hoops would like to see three tax reduction factors: one each for residential, agricultural and commercial property. Representative Hoops added that a farmer's home and buildings would be residential, but the working agricultural land would be considered agricultural.
Mr. Navin asked whether the objection is to the fact that there is instability about who bears the cost or do we want to stabilize the cost of having farm land? Representative Hoops replied that reduction factors do not work the way that people think because of how revaluations are done. Within a school district, if one part increases much faster than another area the tax burden can shift, even if revenues overall do not increase. Having residential and agricultural property in the same class seems to play a major role in these shifts.
Mr. Hyre observed that it is very difficult to explain to people why their taxes might have gone up but the school district did not get any more money. Mr. Hyre requested that Representative Hoops, Mr. Woods, Mr. Maxwell, Representative Hartnett and Mr. Williams discuss this with Mike Sobul before the next Task Force meeting.
Graduation Rates for African-Americans
Senator Prentiss noted that there was a report done by Harvard's law school that showed that the graduation rate for African-Americans in Ohio is the lowest of all states. She would like to see a drop-out prevention program built into the formula to provide extra assistance to school districts that have less than a 75% graduation rate.
Mr. Marshall stated that 20 school districts have graduation rates that are below 75%. He added that these school districts have approximately 315,000 students, of which 139,000 are in grades 7 - 12. If the state created a program that provided $100 for each student in these districts in grades 7 - 12, multiplied by the district's Disadvantaged Pupil Impact Aid index, it would cost about $33 million annually.
Senator Prentiss remarked that the purpose of this money would be for drop-out prevention. The bottom line is that we have to increase the graduation rate for African-Americans. This program would not be about rewarding failure, but providing opportunities. We need to recognize that some schools have extra challenges.
Mr. Zaino asked what would happen when these 20 districts get above a 75% graduation rate. Do they then lose the money? Or, if the problem is not helped by this extra money, do we keep paying?
Senator Prentiss urged that school districts be extremely accountable for the expenditure of this money. She is in favor of making sure that the money goes to the children who most need it and to find out what school districts did with the money.
Representative Calvert expressed concern that funding for Senator Prentiss's drop-out prevention proposal could be used for student intervention, since Ohio has refused federal intervention money. Dr. Zelman responded that the state has been working on using federal money better and improving the way it is spent. Senator Prentiss offered that the restrictions on federal funding that is allotted through the Temporary Assistance to Needy Families program are crazy. These requirements are very burdensome for the schools.
Representative Calvert responded that there is also state intervention money that is not being used. Dr. Zelman replied that the Department of Education can show very clearly where the state's intervention dollars have been spent.
Senator Jacobson opined that it is good to help school districts that have low graduation rates, low proficiency scores and other achievement problems. However, for the most part these are the same districts. How can we justify giving school districts money to deal with their challenges as our poverty-based assistance proposal does and then give them another pot of money if they also have low graduation rates? Senator Jacobson is opposed to having different pots of money for each symptom. He added that the student intervention proposal, if successful, will raise the graduation rates.
Senator Prentiss answered that she is trying to go after the older students who have been failed by the system for the past eight or nine years. She wants to help the child who is in seventh grade but who is reading at a second-grade level.
Ms. Shaner asked that when staff put the intervention programs together, were there any components to those intervention programs at the school districts that staff visited that dealt specifically with graduation rates. Mr. Marshall responded that there were pieces to the intervention programs that would have an effect on graduation rates, but could not recall any that dealt explicitly with graduation rates.
Ms. Shaner noted that school districts would have discretion relative to spending the proposed intervention funding. She added that, if this aspect was not addressed in the amounts proposed for intervention, perhaps we should change the level of funding for intervention.
Mr. Filipic expressed sympathy for the underlying purpose of Senator Prentiss's proposal: it is consistent with what the Task Force has been discussing over the last year. He suggested that it could be possible that the allocation of resources is the problem, such that the money is not getting to the school districts that have the largest concentrations of problems. Mr. Filipic asked if there are other characteristics, besides outcomes, that we can identify so that we can target our funds in the right direction. He still does not believe that it makes sense to allocate money based on failure: it does make sense to allocate funds based on the magnitude of the problems that they have to address. We should try to allocate the money based upon the disease, not on the symptoms. Mr. Filipic concluded by stating that he would tie the funding to students in grades one through six, not seven through twelve, since it is in these earlier grades where the problems begin.
Mr. Maxwell observed that the formula being proposed is perverse. If five more students in Akron graduate next year, Akron would lose $3 million annually. We have to find another way of doing this. Is there some index that we could look at to fund this?
Senator Prentiss responded that it is apparent that Task Force members are willing to work on this, which is a good thing. Representative Hartnett expressed his agreement with Senator Prentiss. He stated that Ohio must deal with the children who have been overlooked. Schools have to become not teaching institutions, but learning institutions. We have created a system that perpetuates dropouts. We need to start at the top and change the culture.
Senator Prentiss asked whether Mr. Hyre could name a subcommittee to come up with a formula to deal with this. Dr. Zelman noted that the State Board of Education has a proposal relative to drop-out prevention. Mr. Hyre directed Senator Prentiss and Dr. Zelman to return to the Task Force with a drop-out prevention proposal for the Task Force to consider.
Mr. Church cautioned the Task Force that there are only a limited number of things that staff can do to the simulations in the two weeks before the next meeting.
Mr. Harris observed that the Task Force is on the home stretch, but there are many things that he had brought up previously that have not received adequate attention. He mentioned reducing class sizes and allowing local school district voters to approve school budgets, not millage rates. He passed out several pages of recommendations on a range of topics for the Task Force to think about for the future.
Mr. Woods responded to Senator Prentiss's drop-out proposal. He remarked that research that he has seen says that this is an extremely complex problem. As the Task Force crafted its proposal, we tried to include long-term solutions. That being said, we have a six- or eight-year implementation period. He suggested that maybe a drop-out program could be funded through the Department of Education that would reward school districts that deal with these items. Mr. Woods would target the money to successful programs.
Mr. Hyre requested all Task Force members to provide Mr. Marshall a list of their top five priorities, no later than a week from Monday. He opined that the Task Force needs to build some consensus on what the most important items are. Mr. Marshall was directed to provide a common list of possible priorities for Task Force members to use as they developed their own priorities.
Mr. Hyre adjourned the meeting at 2:00 p.m.
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