Does Ohio need a revolution in school funding?

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Ohio Representative Andrew Brenner has introduced legislation described on the General Assembly’s website as an effort to “revise school funding.” If there were an award for understatement of the year, that might win the prize. The bill (House Bill 102) wouldn’t just “revise” school funding policies; it would revolutionize them—so much so that enacting it requires not only passage through the General Assembly but also approval via statewide referendum.

Given the sweeping changes he is proposing, Representative Brenner has prudently stated that his bill is intended as “a way to open up the discussion about how we traditionally fund schools in Ohio.” This discussion is sorely needed, but let’s also see what is in his bill. What ideas are promising and which deserve greater scrutiny?

The central ideas

The heart of HB 102 is to shift responsibility for school funding to the state level, a significant departure from the hybrid state-local funding system of today. To this end, Brenner would eliminate all district-level taxes and make up the difference with a 2 percent statewide property tax and a hike in the state sales tax. With funding centralized, HB 102 then sets across-the-board per-pupil amounts for all school districts and schools of choice. By scrapping local education funding, HB 102 is able to eliminate the complex formula adjustments that presently try to account for districts’ varying wealth.

The other important idea is that dollars would flow, on a per-student basis, to the institution that is actually educating the child. Two provisions in HB 102 make that clear: First, the state directly finances all districts and schools of choice based on their enrollment. This is an important change as more students choose to attend non-district schools. Under HB 102, no longer would Ohio use circuitous methods whereby choice students are first deemed district pupils and then money is deducted from that district. Instead, schools of attendance would begin to emerge as the targets of the funding system.[1] Second, the bill would scrap funding caps and guarantees. Because caps suppress state revenue when districts enroll more students and guarantees shield them from losses tied to enrollment declines, eliminating both would move Ohio further toward true per-pupil funding based on where students attend school.

An illustration of HB 102 in action

The table below illustrates, at a high level, how HB 102’s funding approach compares to current policy. It doesn’t show exactly how funding amounts would change, just the key differences in the policy frameworks. It displays data from Urbana City Schools, a small-town district west of Columbus, and Sycamore Community Schools, a property-rich suburb near Cincinnati. These districts were selected in part because they’re not currently subject to caps or guarantees, and hence receive state funds determined just by the formula; neither district has many students in choice programs either (less than 1 percent). These features help to simplify the illustration.

Table 1: Comparison of per-pupil funding under current policy and HB 102

Notes: This does not include state or local transportation and facilities funds, and it excludes federal and non-tax revenue. Urbana levies a 3.608 percent effective property tax; Sycamore 4.255 percent. For simplicity, this table bases calculations on the assumption that all resident students (in FY 18) attend district schools. Sources: Ohio Department of Education, Foundation Funding Reports (January #1, FY 18) and Ohio Department of Taxation, Tax Data Series (TY 16).

A few observations:

  • Base Amount: Under current policy, districts must assess at least a 2 percent property tax in order to receive state foundation funding. Due to wealth differences, districts generate varying amounts on this tax rate: Urbana, for example, raises an estimated $2,387 per student versus $6,124 in Sycamore. To equalize the base amounts, the state contributes more to Urbana than to Sycamore: $3,269 per student through its core Opportunity Grant versus just $291 for Sycamore. Another $595 per student is allocated to Urbana via Targeted Assistance and Capacity Aid, funds that are also based on local wealth. In a roundabout way, current policy creates a more or less equal funding base for all districts. However, as this table shows, HB 102 is more straightforward: It simply sets an equal funding base of $8,720 per student for all districts; this clear and explicit base amount is an admirable feature of the proposal.
  • Supplemental Funding: Current policy drives additional funding to districts in a couple of ways. First, the state provides extra dollars atop the base amount when districts enroll students with special needs (e.g., disabilities or economically disadvantaged). These categorical funds are adjusted for wealth so that higher-poverty districts receive more aid. Under HB 102, all districts receive full categorical amounts, resulting in higher state funding across both districts. Second, many districts generate revenue through locally approved property taxes above the 2 percent floor; in fact, the average tax rate in Ohio in 2016 was 3.8 percent. But HB 102 prohibits such local supplementation. In Sycamore, this leads to a large reduction, while Urbana is less affected due to its lower tax rate and property values. Property-rich districts with high tax rates, such as Sycamore, will likely face significant funding declines if HB 102 were enacted; this reality, plus several other issues discussed below, could make the Brenner plan a tough sell.

Issues to consider

The beauty of the funding system proposed in HB 102 is its simplicity, transparency, and predictability, as a well as a fundamental sort of statewide equity. Practically any elected leader could explain this type of system to their constituents. With fewer variables in the formula, schools should be able to better predict their revenues. Moreover, HB 102 better centers funding on where students actually attend school, regardless of whether that is a district, public charter, STEM, or chartered nonpublic school. The legislation also places all districts and schools on equal footing in terms of funding amounts, while also providing additional resources for students with greater needs. It would also put an end to the bewildering array of local levies—such as operating, incremental, emergency, and bond—that citizens are currently asked to vote on, and the campaigns in which districts and their supporters seem to spend an inordinate amount of time trying to win.

Still, for all of its elegance and simplicity, the plan would face an uphill battle to garner support—or to sustain it should the legislation pass.

Local autonomy: The present system preserves citizens’ right to voluntarily tax themselves at higher rates. This form of local autonomy ensures that citizens wanting to spend more money on education have a legal means to do so; and in the view of many, districts pay closer attention to constituents as they must win voter approval for taxes. If HB 102 is enacted, will Ohioans just petition the legislature for local taxing authority all over again? Will districts feel less pressure to meet local needs? Both are plausible. It’s also possible that residents—especially those living in high-tax districts—will simply resort to private contributions in the absence of local school taxes, something that occurred in Vermont when it shifted to a centralized funding system. Public school purists may cringe at this, though others who view education as a public-private good may not have the same concerns. Lastly, with the state government picking up the full funding tab, legislators may use power of the purse to impose their priorities and preferences, for better or worse, on all Ohio schools, perhaps leading to concerns about regulatory overreach.

Property inflation: A longstanding policy in Ohio is known as “tax reduction factors” whereby increases in property values are usually exempt from school taxes. In its proposal for a statewide property tax, HB 102 retains these reduction factors. As a result, the state won’t collect additional revenue when home values rise, though it will generate new revenue on construction. As the Legislative Service Commission writes, “A 5.0% increase in real property value will generally lead to a smaller increase (1.0%, for example) in real property tax revenue for the state.” With the property tax base more or less stuck at current real-estate values, revenues on this statewide tax could stagnate over the long run, and education funding may not keep pace with economic growth. If there is a move to a statewide property tax, legislators would need to find ways to ensure sufficient revenue growth for Ohio schools well into the future.

Property versus consumption taxes: HB 102 would increase the state sales tax from 5.75 to 7.35 percent to generate the revenue needed to fund this model. While many property owners would enjoy a substantial tax break—especially those in the highest-tax districts—they would also face higher sales taxes. Modelling tax effects is notoriously difficult, but policymakers would need to consider the potential economic consequences of shifting from property to consumption taxes.

Chartered nonpublic schools: Perhaps the most provocative aspect of HB 102 is the incorporation of chartered nonpublic (i.e., private) schools into the state’s funding system. They would receive the same per-pupil base and categorical amounts as their public-school counterparts. With full state funding for all private-school pupils, HB 102 would scrap the state’s voucher programs as well as today’s modest appropriations for auxiliary services and administrative costs for private schools. It also calls for state testing of all nonpublic school students. Although many developed nations fund their private schools (but don’t operate them), the wide-ranging proposal here would be remarkable for the United States where public support for private schools has generally been limited to targeted voucher programs. HB 102 sets forth a different, more pluralistic vision for Ohio’s school system: Taxpayer funds would support schools with varying missions, governance structures, and religious convictions. Strong objections, some on ideological grounds, would undoubtedly be registered, while critics would also likely argue that this amounts to a windfall for upper-middle-class families already paying tuition. And there’s no guarantee that all chartered nonpublic schools would participate, given the new exam requirements; some might move to “non-chartered” status, refusing state funds in return for autonomy. Nevertheless, this framework would better allow all families (who all pay taxes) the freedom to choose schools that meet their educational needs and correspond to their most deeply held beliefs.

* * *

Hats off to Representative Brenner for putting this proposal on the table. Many of the ideas behind HB 102 have merit, especially its emphasis on a simple, transparent funding system. Clear, equal base per-student funding for all districts and schools of choice would be another major advance. However, the proposal would face headwinds, especially from those residing in more prosperous districts where funding might decline. And perhaps there’s not enough discontent with the current funding system to storm the Bastille and upend the status quo in the way imagined in this bill. These realities likely favor incremental approaches—and Buckeye policymakers should certainly consider several workable provisions from HB 102 that would move the funding system in the right direction. They include dumping caps and guarantees, simplifying the funding formula, and financing choice programs directly from the state. Nonetheless, for the school-funding revolutionaries out there, vive la révolution! 


[1] Once state funds reach school districts, districts may not allocate funds on a per-pupil basis to students’ schools of attendance.

 

 
 
Aaron Churchill
Aaron Churchill is the Ohio Research Director of the Thomas B. Fordham Institute.