Determination of the State/Local Share of Funding in FY14-15 and As Proposed by the Governor and House for FY16-17

From the mid-1980s through Fiscal Year (FY) 11 the local share of school funding in each Ohio school district was determined by the millage chargeoff. However, under the current FY14-15 funding formula the local share is no longer determined by a millage chargeoff against total district property valuation, but according to an index based on each district’s relative wealth as determined by property value per pupil and in some cases relative median income. The local share, now known as the “State Share Index” (of “SSI”) varies from a low of 5% in the state’s highest wealth districts to a high of 90% in the state’s lowest wealth districts.

While it is not obvious from its construction, the SSI effectively acts as a variable chargeoff, with the local share in most districts ranging from an amount equivalent to 18 to 23 mills of taxation.

Discussion of the Current State Share Index (SSI)
The SSI provides an alternative approach to determine each districts local and state share of funding by constructing an index based on each districts per pupil property wealth and some districts relative median income. However, the SSI formula is much more complicated than the chargeoff approach and the final step which takes each districts relative wealth per pupil and translates it into a state share percentage ranging from 5% to 90% is impossible to explain without the use of algebra and graphs. In this respect the SSI is a “black box” which lacks the transparency that a funding formula should ideally have.

In addition to the lack of transparency, the method by which income is included in the SSI computation is seriously flawed. An income adjustment was first used in Ohio’s school funding formula in the mid-1990s as a means by which low income districts were provided additional funding by effectively adjusting their property valuation downward. The logic of this adjustment was that districts with lower income residents will find it more difficult to raise revenues locally than would districts with higher income residents. A logical extension of this argument would have been that districts with higher incomes would see their property valuation adjusted upward but such an adjusted was not made at that time.

The problem with the income adjustment in the SSI is that of the 186 districts that currently benefit from the income adjustment, 176 of those districts are districts with higher than average median incomes. In this regard, the income adjustment works exactly opposite of how it worked back in the 1990s — instead of low income districts such as Youngstown, East Cleveland, Trimble Local and Southern Local benefiting from the SSI’s income adjustment, districts such as Orange, Beachwood, Upper Arlington and Indian Hills benefit. This is contrary to both fundamental economic principles and basic logic.

A final concern regarding the SSI is that because it is based on each districts relative statewide ranking on valuation per pupil, a district’s state share will be influenced not just by how its valuation changes over time compared to its previous valuations, but also by how it changes compared to all other districts in the state. This phenomenon makes the SSI both harder to forecast over time and potentially less stable as districts will be moved “up and down the ladder” of the valuation rankings instead of just compared to their own past valuation levels. In addition, there is some evidence to suggest that the value per pupil approach overstates the wealth of small districts and understates wealth of large districts by spreading the valuation across small and large numbers of pupils.

Governor’s FY16-17 Budget Proposal Modification of the SSI
The Executive proposal modifies the State Share Index to include income as a factor in a different manner than is the case in the FY14-15 funding formula. The State Share Index would also be renamed the “State Share Percentage” and the current “wealth index” component of the SSI would be referred to as the “capacity measure” in the State Share Percentage.

The current SSI includes income as a factor only when a district’s ratio of median income to state median income is lower than the district’s valuation index. The SSI of 186 districts currently includes an income adjustment. However, as mentioned above, 176 of these districts are districts whose valuation index is greater than one (i.e. wealthier than average) while only 11 of the districts have lower property wealth per pupil than average.

The Governor’s proposed FY16-17 formula would apply the income ratio in a different manner by adjusting the property wealth index downward for school districts whose median income is more than ½ standard deviation below the statewide average district median income and by adjusting the property wealth index upward for districts whose median income is more than ½ standard deviation above the statewide figure. 321 districts whose median income ratio is within ½ standard deviation of the state median income would not have an income factor applied. 176 lower property wealth districts would see the income factor applied to their benefit (i.e. make them appear even lower wealth), while 114 wealthier districts would see the income factor applied to their detriment (i.e. make them appear even wealthier). The adjustment for the lower wealth districts would occur immediately while the adjustment for the higher wealth districts would be phased in over five years.

The Governor’s proposed implementation of the income adjustment to the state share calculation is consistent with the rationale used when income was included in the formula in the mid-1990s. Even though the Governors proposal would work to the disadvantage of a number of higher income school districts this approach is far more rational than the approach used in the current formula. The disadvantage of the Governor’s proposal is that it takes something that is already quite complicated (the SSI computation) and makes it even more complicated.

House State/Local Share Calculation
The Governor’s budget proposal improved upon the current State Share Index by adjusting the property wealth index downward for districts with low median income and upward for districts with high median income. The House plan makes two changes to the method for calculating the state and local share of funding. First, the use of property valuation per pupil is replaced with a chargeoff approach based on total property valuation. Each district’s property valuation is then multiplied by 20 mills to determine an unadjusted local contribution. The return to the chargeoff approach is expected to provide more stability to the funding formula because each district’s state and local share depends only on its own valuation change over time rather than how valuation changes in comparison to all other districts in the state as is the case with the SSI approach.

Second, under the House proposal, each district’s local contribution is multiplied by an income ratio based on the district’s median income compared to the statewide median income. The income ratio is capped at 1.315 in the highest income districts. In addition, the income adjustment for districts above the statewide median income is phased in at 50% in FY16 and 60% in FY17. As is the case currently and under the Governor’s proposal, all districts receive at least 5% state aid.

The result of the House proposal is that the local contribution is essentially an income-adjusted chargeoff that varies from roughly 11 mills in the lowest income district to a maximum of 23.15 mills in FY16 and 23.78 mills in FY17 in the highest income districts. As was noted above, the current SSI also functions as a variable chargeoff with most districts ranging from 18 to 23 mills. The House state share calculation merely makes this phenomenon more transparent and easier to understand, while also increasing stability over time by no longer linking each district’s state and local share of funding to the changes in property valuation and income of all 610 districts.