1

School Finance in Iowa

Larry Sigel

School Finance Director

Iowa Association of School Boards

2

School Finance - Background

Dillon’s rule:– School districts only have those powers

expressly authorized by the Code of Iowa. Home rule:

– Cities and counties can do anything not expressly prohibited.

3

School Finance - Background The school foundation formula relies on

two sources of revenue

– State General Fund appropriations

– Locally raised property taxes

– Before discussing the school foundation formula, it is important to have a basic understanding of property taxes.

4

School Finance - Background

Property Tax Background– Assessed v. taxable valuations

– “Rollbacks”• Tie between residential and agricultural property

• Assessment growth limitation

– Equalization - odd numbered years

– Taxing Districts, Taxing Authorities

– Tax Rate x Taxable Value = Taxes Levied

– Lag between assessments and district budgets.

5

School Finance - Background Property Tax Credits

– Residential - Homestead and Military Service Credits reduce the taxable value by $4,850 and $1,850, respectively.

– Elderly and Disabled tax credit based on percentage of income.

– Agricultural - Family Farm and Ag Land Tax Credits - difference between regular program tax levy and $5.40 uniform levy.

6

School Finance - Background Agricultural Property

– Different than other classes of property– Taxed based on productivity value– Value in relationship to all other agricultural

property in county– Roughly 40% of market value

7

School Finance - Background Examples-

– Property tax on three different properties - a home, a business and a farm. All utilize the same levy rate.

– Residential property - $1.67 levy on $100,000 home. (.513874 x 100,000) - 4,850 x $1.67 / 1,000 = $77.72

– Commercial property $1.67 levy on $100,000 business. (1.00000 x 100,000) x 1.67 / $1,000 = $163.27

– Agricultural property $1.67 levy on $100,000 farm. (.4 x 100,000) x 1.67 / $1,000 = $66.80

8

School Aid - Basics Purpose of foundation formula:

– Code of Iowa, 257.31:

• “…equalize educational opportunity, to provide good education for all children of Iowa, to provide property tax relief, decrease the percentage of school costs paid from property taxes, and to provide reasonable control of school costs.”

9

School Aid - Basics Foundation formula - ceiling v. floor

– The foundation formula results in a maximum expenditure per pupil and therefore a maximum amount a district can raise and spend (note: not every district has the same ceiling).

– Other states’ school aid formulas have created a minimum spending per pupil.

– This has led to a number of lawsuits nationwide.– Iowa’s Constitution does not guarantee educational

equity.

10

School Aid - Basics

Basic Principles:– The school aid formula is a child-based

formula.– The formula provides funding on a per

child basis.– The total amount of foundation formula

revenue is the number of children times a cost per child.

11

Operation of Foundation Formula Three components

– Uniform Levy - Property tax levy of $5.40 per

thousand of taxable valuation.– State Foundation Percentage - Amount the

state pays in excess of $5.40 - varies by district (87.5% of cost per pupil).

– Additional Levy - Property tax levy which funds the difference between the Combined District Cost and the sum of the Uniform Levy and the State Foundation Percentage.

12

Operation of Foundation FormulaProperty Poor District Property Rich District

Additional Levy Additional Levy

State Aid State Aid

$5.40 Uniform Levy

$5.40 Uniform Levy

87.5% of Total

Cost Per

Pupil$4,067

Total Cost Per

Pupil

$4,648

Total Cost Per

Pupil

$4,648

87.5% of Total

Cost Per

Pupil$4,067

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What is the Purpose of the Foundation Percentage? Determines how much the state is going

to equalize local property tax rates. If no state foundation percentage, tax

rates for highest district would look like:Levy Rate Comparison

$5.4000 $5.4000$5.5948

$39.3582

$0.0000

$10.0000

$20.0000

$30.0000

$40.0000

$50.0000

District 1 District 2Lev

y R

ate

Per

$1,

000

of

Taxa

ble

V

alu

atio

n

Uniform Levy Additional Levy

$10.9948 $44.7582

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Purpose of Foundation Percentage If foundation percentage set at 100

percent, the tax rate would look like:Levy Rate Comparison

$5.4000 $5.4000

$5.5948

$-

$0.0000

$2.0000

$4.0000

$6.0000

$8.0000

$10.0000

$12.0000

District 1 District 2Lev

y R

ate

Per

$1,

000

of

Taxa

ble

V

alu

atio

n

Uniform Levy Additional Levy

$10.9948 $5.4000

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Purpose of Foundation Percentage Regardless of the state foundation

percentage, total funding to the district is exactly the same (just who pays is changed).State School Funding Formula - Total District

$420,580 $420,580

$2,629,670

$-

$435,750

$3,065,420

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

District 1 District 2

Tota

l Fu

nd

ing

Uniform Levy State Foundation Additional Levy

$3,486,000 $3,486,000

State School Funding Formula - Total District

$420,580 $420,580

$2,629,670$3,065,420

$435,750$-

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

District 1 District 2

Tota

l Fu

nd

ing

Uniform Levy State Foundation Additional Levy

$3,486,000 $3,486,000

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Operation of Foundation Formula Two factors affecting district Regular

Program budgets:– 1. Enrollment - increases or decreases in

enrollment affect district budgets.– 2. Combined district cost changes

(Allowable Growth).

– Changes in growth in valuations - uniform levy rate ($5.40) or foundation percentage have no effect on Regular Program.

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School Aid - Basics Basic Calculations - District Costs

– Regular Program District Cost - budget enrollment times district cost per pupil. 608.4 students x $4,648 = $2,827,843

– Combined District Cost - sum of Regular Program plus special education, ELL, media services.

– What happens if less is spent? Carries forward as unspent budget authority - can be used in future (one-time).

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School Aid - Basics Basic Calculations - Allowable Growth

– Last year’s minimum District Cost Per Pupil (e.g., $4,557)

– Allowable Growth Rate = 2.0%– This year’s district cost per pupil growth = .02 x

$4,557 = $91.14 - rounds to $91– $4,557 + $91 = $4,648– If District Cost Per Pupil is higher than minimum,

only get the fixed dollar - not 2.0%. For example, $4,612 + $91 = $4,703

– Not $4,612 + $92 = $4,704

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School Aid - Basics Basic Calculations (cont.)

– Differing District Costs Per Pupil • Slightly over 50% of districts have a cost per pupil above

the minimum although the deviation is less than 4.5%.• Differences will be reduced over time.

– When is 2% allowed growth not 2%?• Common perception is all districts receive 2% increase in

budgets.• In FY 2003, 1% allowed growth resulted in $20 million in

new money (0.9%) of which $27.8 million was due to the budget guarantee.

• In FY 2004, 2% allowed growth resulted in $32.4 million new money (1.4%) of which $27.5 million was due to the budget guarantee.

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School Aid - Basics

Basic Calculations - Budget Guarantee– Principle: Districts receive what they received in

the prior year for the Regular Program Budget regardless of enrollment changes.

– Calculation: 2002-03 2003-04Enrollment 450 410Cost Per Pupil 4,557$ 4,648$ Regular Program Budget 2,050,650$ 1,905,680$

Difference (144,970)$ Buget Guarantee 144,970$ Net Change in Budget -$

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School Aid - Basics Set two separate calculations

– Calculation 1: Scale down option• Declining percentage of FY 04 Regular

Program District Cost (with adjustment) as follows:

FY 2004 100% FY 2008 60% FY 2012 20%

FY 2005 90% FY 2009 50% FY 2013 10%

FY 2006 80% FY 2010 40% FY 2014 0%

FY 2007 70% FY 2011 30%

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Scale down (continued)Calculation of Budget Guarantee Using Scale-Down Option

Enroll.

Cost Per Pupil (2% growth)

FY04 Budget

Guarantee

Regular Program Dist.

Cost

Change in Regular

Program Dist. Cost

Scale Down Pct.

Scale Down Amount

Regular Program

Cost w/Guarantee

FY04 373.3 4,648$ 103,572$ 1,838,577$ 100% 1,838,577$ FY05 356.6 4,741$ 1,690,721$ (147,856)$ 90% 133,070$ 1,823,791$ FY06 338.3 4,836$ 1,635,944$ (54,777)$ 80% 162,106$ 1,798,050$ FY07 338.0 4,932$ 1,667,183$ 31,239$ 70% 119,976$ 1,787,159$ FY08 380.0 5,031$ 1,911,835$ 244,652$ 60% -$ 1,911,835$ FY09 318.2 5,132$ 1,632,928$ (278,907)$ 50% -$ 1,930,953$ FY10 315.5 5,234$ 1,651,454$ 18,526$ 40% -$ 1,651,454$ FY11 308.2 5,339$ 1,645,508$ (5,946)$ 30% -$ 1,667,969$ FY12 307.0 5,446$ 1,671,883$ 26,375$ 20% -$ 1,671,883$ FY13 305.0 5,555$ 1,694,211$ 22,328$ 10% -$ 1,694,211$ FY14 301.1 5,666$ 1,705,998$ 11,787$ 0% -$ 1,711,153$

($1,838,577 - $1,635,944) * 80% =

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101% Option Calculation 2: 101% Option

– District would be eligible to receive 101% of prior year’s regular program district cost.

– Does NOT include any “accumulated guarantee” (any amount in excess of headcount times cost per pupil for FY 2004)

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101% (continued)Calculation of Budget Guarantee Using 101% Option

Enroll.Cost Per Pupil (2% growth)

FY04 Budget

Guarantee

Regular Program Dist.

Cost

Change in Regular

Program Dist. Cost 101% Amount

Regular Program

Cost w/Guarantee

FY04 373.3 4,648$ 1,735,005$ 1,735,005$ FY05 356.6 4,741$ 1,690,721$ (44,284)$ 61,634$ 1,752,355$ FY06 338.3 4,836$ 1,635,944$ (54,777)$ 71,684$ 1,707,628$ FY07 338.0 4,932$ 1,667,183$ 31,239$ -$ 1,667,183$ FY08 380.0 5,031$ 1,911,835$ 244,652$ -$ 1,911,835$ FY09 318.2 5,132$ 1,632,928$ (278,907)$ 298,025$ 1,930,953$ FY10 315.5 5,234$ 1,651,454$ 18,526$ -$ 1,651,454$ FY11 308.2 5,339$ 1,645,508$ (5,946)$ 22,461$ 1,667,969$ FY12 307.0 5,446$ 1,671,883$ 26,375$ -$ 1,671,883$ FY13 305.0 5,555$ 1,694,211$ 22,328$ -$ 1,694,211$ FY14 301.1 5,666$ 1,705,998$ 11,787$ 5,155$ 1,711,153$

$1,690,721 * 101% =

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School Aid - Basics Basic Calculations - On Time Funding

– Principle - Districts with increasing enrollment have a way of capturing growth. Due to year delay in enrollment count in funding formula - districts with increasing enrollment have shortfalls.

– Calculation: 2003-04 Budget 2003-04 ActualEnrollment 450 500Cost Per Pupil 4,648$ 4,648$ Regular Program Budget 2,091,600$ 2,324,000$

Shortfall (232,400)$ On-time Funding Amt 232,400$ Net Change in Budget -$

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School Aid - Basics On-Time Funding (Cont.)

– Senate File 203 makes permanent the on-time funding.

– Districts requesting the authority must adopt a resolution and notify the SBRC by November 1 each year.

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School Finance - Weightings Why Weight?

– Some populations have higher costs than others. Two choices: pay more per student or count students at value greater than 1.

– Special education has three weightings: .72, 1.21, 2.74 depending on severity.

– These are in addition to the 1.0 weight.

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School Finance - Spending Authority Spending authority is the sum of:

– Combined District Cost (property tax and state aid)

– Miscellaneous income – anything not above– Unspent balance from previous years

Why important?– Districts cannot exceed spending authority– Not a measure of cash– Why allow districts to carry forward unused

spending authority?

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Building Blocks of Spending Authority

0

20

40

60

80

100

Total Spending Authority

Unspent Balance

Federal Grants - Misc

Teacher Compensation- MiscESL-CombinedDistrict Cost (CDC)Special Education-CDCRegular Program-CDC

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Comparing Spending Authority and Cash Concepts

Term Explanation Analogy TypeSpending Authority Total amount a school district can legally spend

during a year.Income + credit cards Recurring

Unspent Balance Remaining amount of spending authority at end of year (Spending Authority minus Actual Expenditures).

Credit cards One time

Term Explanation Analogy TypeCash On Hand Total cash on hand. Savings account One timeState Aid Amount received by a district from state General

Fund.Paycheck Recurring

Property Taxes Amount received by a district from local property taxes.

Paycheck Recurring

Miscellaneous Income

Any income which is not propety tax or state aid (must be actually received).

Birthday money from Grandma

One time/ recurring

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Unspent Balance and Cash on Hand Matrix

Cash on HandNegative Zero Positive

Negative Bad Less Bad Water, water everywhere…Unspent Zero Less Bad Tolerable More TolerableBalance Positive Better than reverse Even Better Best

-$150,000

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

Cash UnspentBalance

-$150,000

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

Cash UnspentBalance

32-$150,000

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

Cash UnspentBalance

-$150,000

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

Cash UnspentBalance

-$150,000

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

Cash UnspentBalance

-$150,000

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

Cash UnspentBalance

Cash and Unspent Balance – Pictorial Representation

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School Aid - Facilities Levies Outside Combined District Cost

– Facility Related Levies• Board-Approved Physical Plant and Equipment

Levy (PPEL). Maximum $0.33 / thousand.• Voter-Approved PPEL. Maximum $1.34 /

thousand. Maximum 10 years. Caution - allowable uses slightly different (simple majority). Can use income surtax as well.

• Public Education and Recreation Levy (PERL). Maximum $0.135 / thousand. Public use playgrounds/recreation facilities.

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School Aid - Facilities Facility related levies (cont.)

• Library Levy (AKA Amana Library Levy). Maximum of $0.20 / thousand. Used for joint library facilities if no local public library available.

• Local option sales tax. Maximum of $0.01 additional local option sales tax for school infrastructure.

– Can use for repair and renovation of buildings and facilities.

– Distributed based on number of students your district has attending school in the county in which passed.

– Maximum 10 years or less if ballot specifies.

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School Aid - Facilities Local Option Sales Tax Changes in SF 445 and HF

683– Expanded Purpose: Changes the definition of infrastructure

to include PPEL (e.g., buses, technology, repair) and Public Education and Recreation Levy (PERL) purposes.

– Revenue Purpose Statements: Requires revenue purpose statements (how are you going to spend the funds). The statements are specific to each district in the county. New timelines for revenue purpose statements:

• Deliver to County Commissioner of Elections 60 days prior to vote.• Publish in newspaper 10 to 20 days prior to election.• Post at polling places.

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Local Option Tax and Supplement Funds

– If miss any of these deadlines, first have to use funds for property tax relief (debt service, PPEL and PERL). If those are fully bought down, then use for any lawful purpose.

If want to change revenue purpose statements must have a district-wide election. Requires a 50% majority to change purpose.

Make sure statements are in harmony with ballot language and they should not state broader purposes than those contained in ballot language.

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Facility related levies (cont.) Supplement Funding

– Starting in FY 2005, supplement funding appropriated to bring districts up to $575 (or to a level the fund can support).

– The math:• If funds are available to bring everyone to $575

• If funds are available to bring everyone to $385

District A District B

Own-Source Local Option Revenues per Pupil $225 $400 Supplement Level $575 $575 State Supplement $350 $175

District A District B

Own-Source Local Option Revenues per Pupil $225 $400 Supplement Level $385 $385 State Supplement $160 $0

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Use of Local Option Tax Proceeds and Supplemental Payments

Revenue Per PupilBelow $575 per Student Above $575 per Student

Prior to April 1, 2003

Use of Funds

May be eligible for supplement payment in FY 2005 (if sufficient funds exist). Use of local option funds limited by original ballot language; use of any supplement monies required to be used for debt service property tax relief unless run a change of use election (50% majority). May use supplement funds for PPEL and PERL expenditures if change of use election affirmed (or if funds remain after satisfying debt obligation without change of use election).

No change; receive funding would have received without SF 445 and HF 683. Ineligible for supplement funds. May use local option funds received for PPEL and PERL purposes if original ballot language allows. May run a district change of use election to expand purpose to include PPEL and PERL (at 50% majority).

Opt In/Out Provision

Districts have option to opt out of pool - one-time decision and not reversible. Must pass board resolution by October 1, 2003.

Districts have option to opt into pool - one-time decision and not reversibile. Must pass board resolution by October 1, 2003.

Voting Date of Sales Tax

ElectionApril 1, 2003 to June 30, 2003

Use of Funds

May be eligible for supplement payment in FY 2005 (if sufficient funds exist). Use of local option funds limited by original ballot language (including PPEL and PERL expenditures if so allowed); may use supplement funds for any lawful infrastructure purpose (including PPEL and PERL).

Receive local option tax proceeds for time remaining of original levy, receive funding would have received without SF 445 and HF 683. Ineligible for supplement funds. Use limited to original ballot language. May use local option funds received for PPEL and PERL purposes if original ballot language allows.

After July 1, 2003

Use of Funds

May be eligible for supplement payment in FY 2005 (if sufficient funds exist). Revenue purpose statement must be provided to County Commissioner of elections 60 days prior to vote, must publish revenue statement 10 to 20 days prior to election; must place revenue purpose statement at polling places. If no revenue purpose statement, then proceeds must be used for debt service and PPEL rate reduction.

Only eligible to receive $575 per pupil. Remaining moneys distributed for supplement payments. Use limited to ballot lanuage. May use local option funds received for PPEL and PERL purposes if ballot language allows.

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School Aid - Facilities Facility related levies (cont.)

– Bonded Debt• Requires 60% majority - onetime election to go

up from $2.70 to $4.05• Maximum of $4.05 / thousand• Maximum 20 years• Work closely with bond counsel during the

process - can be tricky.• Best time to vote is October, November and

December.

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School Aid - Funding Programs Program Levies

– Instructional Support Levy (ISL)• Maximum of 10% of Regular Program Budget.• Can be either property taxes or income surtax,

or combination.• Can be board-approved (maximum five years -

subject to petition) or voter-approved (maximum 10 years).

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School Aid - Funding Programs– ISL may be used for any General Fund

purpose except:• Dropout prevention programs• Talented and Gifted programs• PPEL uses• Management levy uses• Special education deficits

– ISL generates nearly $130 million statewide

• 11% state / 36% income surtax / 52% property tax

42

School Aid - Other Levies Management Levy-

– Used to pay unemployment benefits, insurance (not employee benefits), judgements against the district, early retirement benefits.

Cash Reserve Levy– Reserve for the General Fund of the school

district.– Generated by property tax via school board action

annually.– Used to fund spending authority but does not

directly generate spending authority.

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School Aid - Other Issues Foundation Formula - Issues Affecting

Districts– Tax Increment Financing (TIF) Districts

• Utilized by cities, counties and community colleges.• Basic principle - take money from other taxing

authorities and recapture to spur economic development.

• Three permissible reasons for TIF:– Slum Area– Blighted Area– Economic Development Area

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School Aid - Other Issues– TIF (cont.)

• Primary impact on district budgets:– State makes up lost valuation due to reduced

collection of $5.40 (shift to state General Fund - over $28 million this year - would be over an additional percent of allowed growth)

– Additional levy is made up by other property taxpayers in district (shift to property taxpayers - makes their rate higher)

– No effect on debt levy because valuation remains with district.

– PPEL or ISL or any other rate limited levy outside formula results in lost revenue to district.

45

School Aid - Other Issues Increasing Foundation Level

Percentage– Currently at 87.5% – What is the impact of increasing this?

• Provides property tax relief, but generates no additional funding for schools.

• Makes the state General Fund expenditure for school aid larger - perception = more money for schools.

46

School Aid - Contacts Iowa Association of School Boards

(IASB)– Larry Sigel, School Finance Director 515-

288-1991 ext. 235 lsigel@ia-sb.org– Margaret Buckton, Government Relations

Director 515-288-1991 ext. 228 mbuckton@ia-sb.org

Department of Management– Lisa Oakley, 515-281-8485

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School Aid - Contacts Department of Education

– Su McCurdy 515-281-4738– Janice Evans 515-281-4740– Marlene Dorenkamp 515-281-4741– Mary Bingaman 515-281-4600– General - Stacey Glass 515-281-4729

Legislative Fiscal Bureau– Dwayne Ferguson 281-6561

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School Aid - Web Resources IASB: www.ia-sb.org Dept. of Education:

www.state.ia.us/educate/index.html Legislature - bills, amendments, etc.

www.legis.state.ia.us Legislative Fiscal Bureau:

www.legis.state.ia.us/lfb/ Dept. of Revenue and Finance:

www.state.ia.us/government/drf/index.html