Ohio faces a significant budget crunch. This is forcing state lawmakers to scrutinize expenditures—even more closely than usual—to create a balanced budget by the end of June. A good place to start would be examining the projected $378 million in “guarantee funding” over the next biennium (fiscal years 2018 and 19). Guarantees award some districts with millions more than they would otherwise receive under the state’s own funding formula. Guarantees are a poor use of limited resources and undermine the formula. Here’s why.
Funding guarantees aren’t a trivial expense
Under the Administration’s budget proposal, the state would spend $181 million on the guarantee in FY 18 and $197 million in FY 19. This represents about 2.1 percent of overall state spending on K-12 education over the biennium. While that may not sound like a large slice of the funding pie, it is roughly equivalent to the state funding specifically allocated to gifted, career and technical education, and English language learning combined.
For non-budget-obsessed readers, let us recall what the guarantee is. Guarantee funds are allocated to districts that are either losing students or experiencing gains in local wealth relative to the rest of the state (sometimes both). The idea is that districts need budgetary stability and should be shielded from funding reductions under the state formula.
In the former case, the state funds districts for “phantom students,” or kids who aren’t even being educated by the district. Economists Jon Fullerton and Marguerite Roza have argued that propping up declining districts through a guarantee could actually be counterproductive: “Funding phantom students delivers the message that school districts should continue delivering education the way they have for the last century.” They explain that guarantees allow districts to avoid making decisions that could improve the performance of their schools, such as re-prioritizing educational programs, seeking ways to innovate or form partnerships, or shifting to more flexible cost structures.
In other cases, the state provides additional dollars to districts with improving economic conditions. Several districts are projected to be on the guarantee in FY 18-19 due in part to reductions in their state share index (SSI). A lower SSI means that as local wealth increases, the state picks up less of the funding tab all else equal. For example, among the districts on the guarantee, the largest negative change in SSI is Noble Local (-28 percent). A closer look at its recent financial statements indicates that the district is generating more property tax revenue due to oil and gas development. A similar phenomenon is likely happening in other districts that are also reaping the benefits of the fracking boom. Lawmakers should ask themselves whether it’s an efficient use of limited state education dollars to drive additional aid to districts that have more local wealth they can (literally) tap into.
The guarantee is becoming a permanent fixture for many districts
One common argument for the guarantee—also known as “temporary transitional aid”—is that districts need time to adjust to changing circumstances. Yet guarantee funding is sometimes anything but temporary. The table shows the breakdown of districts expected to be on the guarantee in FY 18-19 and whether they’ve been on the guarantee in prior years. Interestingly, eighty-five districts out of 328 districts projected to be on the guarantee have been on it for each of the four prior years. Together, the districts are slated to receive more than $218 million or almost 58 percent of the guarantee funding over the next two years. In per-pupil terms, they also receive more than the other “guarantee” districts: on average almost $1,500 per-pupil in guarantee funding. Though some districts are “new” to the guarantee, the bulk of the guarantee aid would be directed to districts that have drawn the extra funding for year after year.
Ohio districts by the number of years on the guarantee (FY 2014-17)
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* Includes districts projected to be on the guarantee in either FY 18 or 19 (almost all are on the guarantee both years). Source: Author’s calculations based on OBM, School Foundation Funding Estimates and ODE, District Payment Reports (for FY 14-17 guarantee amounts).
The guarantee pulls money away from other uses
Rather than providing $378 million to help fund phantom students or districts with diminishing need, lawmakers should consider whether there are better uses for those dollars. One option might be to help reduce the impact of Ohio’s school funding cap, which under the Administration’s proposal would deny $825.5 million in funding to hundreds of districts in FY 18-19. Such districts have increasing enrollments and/or weakening tax bases, leading to the growth in state funding (which is then limited by the cap). Some districts on the cap serve significant numbers of low-income children—like Canton, Columbus, and Dayton—and the repurposed funds could be used to ensure that they receive the full formula amounts rather than shortchanging their already-needy pupils.
The guarantee doesn’t effectively create financial certainty for districts
One idea behind the guarantee is that districts require stability and certainty as they create their budgets. But the biennial debates around the guarantee and its lack of fairness likely make it less than a “certainty” for districts. Plus, there are better ways to manage fluctuations than the guarantee.
First, as suggested in A Formula That Works, the state could base its funding formula on prior year enrollments instead of current year. In essence, this would allow districts to better predict their state funding for budgetary purposes, as they would know in advance how many kids they would be funded for. This would work almost like a guarantee, but it would apply to all districts and not just select ones. It would indeed “hold harmless” districts that lose students from one year to the next, though it would underfund districts with enrollment gains.
Second, in extraordinary situations, the state could step in to provide temporary support. For example, state lawmakers are considering emergency relief for Adams County districts where property taxes are set to plunge due to two power plant closures. The state already has a solvency assistance fund and policymakers could ensure that enough rainy-day dollars are available for rare cases in which districts truly need temporary emergency aid.
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Perhaps one way of thinking about the guarantee is like unemployment compensation. It’s a reasonable public expenditure to help individuals who need temporary assistance, but few would argue it should be indefinite. Likewise, the state should provide some extra help to districts in emergency situations not of their own making. Yet it need not offer open-ended access to hundreds of millions of dollars in additional funding—all outside of the formula—through the guarantee. Ohio lawmakers face tough budget decisions in the coming months and they should consider unwinding the guarantee. Dollars spent on children not actually being educated by a district is not money well spent.
