Report Foreword: A Formula that Works

School funding debates are as predictable as the seasons, and right on cue, the release of Governor John Kasich’s biennial budget has precipitated hand-wringing from various corners of Ohio. Why? Like many other states, Ohio’s budget is tightening and his plan would reduce the amount of state aid for dozens of districts that have been consistently losing student enrollment.

No public entity anywhere has ever been happy about receiving less money than the year before; every elected leader worth their salt is going to fight for more resources for their own constituents. The challenge ahead for thoughtful policy makers is to distinguish the typical bellyaching from legitimate and serious problems in Ohio’s school funding policies.

To help, we are pleased to present this analysis of Ohio’s school finance policies. It gets under the hood of the Buckeye State’s education funding formula and tax policies and seeks to understand how well they promote two essential values: Fairness and efficiency. Why these two? Consider:

• Ohio must lift student achievement to meet the demands of colleges and employers—an especially urgent imperative for children from low-income backgrounds. According to last year’s state test results, proficiency rates for economically disadvantaged students fell a staggering 30 percentage points below their peers. Funding structures should ensure that public funds are being fairly distributed to the districts and schools whose pupils have the greatest educational needs.[1]
• Like many states, Ohio is experiencing increasing demand for school choice, including inter-district open enrollment, charter schools, private school vouchers, independent STEM schools, and college dual enrollment. Funding structures should be designed in ways that recognize the fact that more students are availing themselves of educational opportunities that do not follow the traditional organizational patterns by which K-12 education has long been funded.
• According to the National Association of State Budget Officers’ December 2016 report, The Fiscal Survey of States, states are reporting tightening budget conditions in 2017. In recent comments, state budget director Tim Keen has indicated that Ohio will face budgetary constraints in the coming biennium. Challenging fiscal conditions only reinforce the need for an efficient allocation structures that make certain that every dollar is being used to educate students.

To offer an independent, critical review of Ohio’s funding policies in light of these concerns, we turned to Andy Smarick, formerly at Bellwether Education Partners and now at the American Enterprise Institute.

In 2014, we teamed up with Andy in a successful review of Ohio charter-school policies; we were exceptionally pleased when he accepted the challenge of analyzing our home state’s school-funding system. He enlisted Bellwether’s Jennifer O’Neal Schiess, who spent a decade working with the Texas legislature on school finance and education policy to lead the research efforts along with her colleagues Max Marchitello and Juliet Squire.

As readers will see, Ohio’s present approach has several strengths, including its ability to drive more state aid to more disadvantaged districts—via the State Share Index—and the added dollars for students with greater educational needs (e.g., pupils with disabilities or English language learners). Yet Bellwether also explains several elements of the present system that subvert its fairness and efficiency.

Three issues are particularly worrisome:

• Caps and guarantees. More than half of Ohio districts were affected by funding caps or guarantees as recently as fiscal year 2016. A funding cap withholds state dollars that a district should receive under the formula, while a guarantee provides districts with state funds they should not receive under the formula. Caps and guarantees fail to meet standards of fairness and efficiency by undercutting the state’s own formula and the core principle that Ohio provides funding to districts based on the students whom they are responsible for educating. For example, the guarantee holds harmless certain districts with declining enrollment, effectively delivering state aid to educate “phantom students” who are no longer enrolled in that district. To ensure that all districts are funded according to the formula, legislators should eliminate the cap and guarantee.
• Pass-through funding. Students exercising choice—e.g., charters, inter-district open enrollment, or independent STEM schools—are included in their home district’s funding formula. State funds are then deducted from their district and transferred to their school of choice. But more Ohio students are choosing non-home-district options every year, making this “pass-through” structure increasingly problematic. It creates the illusion that pupils exercising choice are “taking” money from their home district, when in fact state dollars go to the school that educates the child—as indeed they should. In addition, the inclusion of choice students in a district’s formula makes it look needier than it actually is (i.e., the district appears to have more kids to educate relative to its local tax base). This in turn muddles the calculations that ultimately determine the state’s funding obligation to that district. To create a cleaner and more efficient funding formula, legislators should eliminate the pass-through and instead fund schools of choice directly from the state.
• Phantom property tax revenue. Since the mid-1970s, state law has prohibited districts from capturing additional tax revenue when property values rise due to inflation. While this law—referred to as “tax reduction factors”—protects homeowners from abrupt tax hikes, it also denies districts a certain amount of local revenue. Think of it this way: You have a home that was worth $100,000 but is now assessed at $150,000 because housing prices are booming. With few exceptions, your district does not generate revenue on that extra $50,000 absent a tax rate election. That’s a plus for the property owner, of course, and some would argue that voters should weigh in on increases in local revenue for schools. But the state’s formula automatically and incorrectly assumes the district earns tax revenue on that additional value—sometimes called “phantom revenue.” This in turn causes a miscalculation of the state’s funding obligation under the formula. To ensure fair funding calculations, legislators should discount the value of property that is impacted by tax reduction factors in the state funding formula. This recommendation would not affect a property owner’s tax burden, but would likely increase the state’s obligation to districts that, as a result of state law, are denied revenue tied to increasing property values.

These recommendations, along with a couple of others discussed in the paper, would greatly improve Ohio’s school finance system and drive limited state dollars to where they’re most needed. We urge that this be done.

Much work remains to be accomplished if Ohio is to craft a transparent, modern school-funding structure. We realize that the profound complexities and political realities of school funding policy make this a daunting task. In our view, the best course forward is to take one manageable step at a time. If state leaders make these essential repairs, Ohio will take its next step in the long journey toward a school funding system that supports an excellent education for all.

You can download the full report - A Formula that Works: Five ways to strengthen school funding in Ohio - here.