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May 16, 2017

Among the most important duties of Ohio lawmakers is to craft a reasonably transparent school funding formula that efficiently allocates state dollars to local districts. But almost everyone will agree that Ohio’s formula is pretty complicated. While a certain degree of complexity is required, the formula need not be inexplicable either. The legislature should consider ways to improve the transparency of the formula while also maintaining the goal of driving more state aid to the neediest districts.

One of Ohio’s formula elements worth closer scrutiny is the implementation of resident income. Income should absolutely play a key role in determining districts’ “needs” for funding purposes: Districts with lower-income residents may have more difficulty raising local funds via property tax referenda. Low-income districts will educate more pupils from disadvantaged backgrounds and require higher levels of state support. Yet the way Ohio incorporates income into the formula is complex and policy makers should explore more straightforward approaches. Let’s take a closer look at the issues.

**Complication 1: Two measures of income**

It might surprise you to learn that Ohio uses not one but two income measures in its formula: both federal and Ohio adjusted gross income (AGI). Federal AGI is different from Ohio AGI because of several additional deductions allowed in state law, including deductions for social security benefits and small business income. Statewide, the average federal AGI in 2014 was $76,621 per tax return while Ohio AGI was $70,882. Though having dual measures may slightly improve the precision of the formula, they also create more complexity. Eligibility for other government programs (like free and reduced price lunch) rely on a single definition of household “income”; one alternative for streamlining the formula is to gauge districts’ resident income on either the federal or Ohio definition rather than both.

**Complication 2: Three income indexes**

Ohio operationalizes these income measures using indexes that gauge districts’ resident income relative to the state average or median. The following bullets describe each of them. Those printed in bold are indexes defined in state law. To facilitate discussion, I have defined an additional index—the Per Pupil Income Index—though it is not defined in statute. (That calculation is described in law but not given a formal term.) The Median and Per-Pupil Indexes differ in three ways: The use of 1) federal vs. Ohio income data; 2) median vs. per-pupil calculation; and 3) one vs. three years of data.

**Median Income Index**(uses Ohio AGI): Gauges each district’s median income relative to the state median; uses the most recent year of available income data.- Per Pupil Income Index (uses federal AGI): Gauges each district’s income per pupil relative to the state average; uses an average of the three most recent years of available income data.
**Income Index**: An average across both of these indexes.

Despite the differences, the Median and Per Pupil Indexes are closely related. The chart below displays the correlation between the income index scores for Ohio school districts, each represented by a point. Not surprisingly, most districts have similar results; for example, high-income districts on one measure tend to be high income on the other. A handful of districts appear to be somewhat wealthier (or poorer) on one or the other index—those that appear to be considerably above or below the trend line. Overall, however, the chart suggests that the formula would work in a similar fashion regardless of which index is used.

**Note: **Two outlier districts with Per Pupil Index scores above 4.0 are omitted for display purposes.

**Complication 3: Inconsistent use of income data**

After all this work, you might think the income data are automatically used to determine districts’ state aid. Alas, you’d be wrong. Instead, the state undertakes a two-step process to determine whether income will actually be used when calculating districts’ State Share Index (SSI)—the “final” index that determines funding.

The state first compares districts’ Income Index to their property value index.[1] Then, districts’ Median Income Index is compared against a set number in statute (1.5). Two things can happen.

*Scenario 1: If Income Index < Property Valuation Index*AND*Median Income Index < 1.5*, then average the Income Index and Valuation Index scores at a 40-60 weighting, respectively, to compute a district’s Wealth Index (the direct basis of the SSI).*Scenario 2: If the condition above doesn’t hold,*then the Property Valuation Index = Wealth Index. In this case, income is not used in the calculation of SSI.

The table below displays the number of districts whose SSIs were determined under each scenario in FY16. As you can see, roughly half of districts’ funding amounts were based in part on resident income, while others’ amounts were premised entirely on property values.

If this sounds strange and confusing, you’re right. So why do it? According to the Legislative Service Commission, the idea behind Scenario 1 is “to make an applicable district look less wealthy to the formula and increase its state share.” Translation: By factoring in income, the formula appears to drive some additional state aid to lower-income districts—those below 150 percent of statewide median income. But why limit the use the income data to certain districts; why not apply them to all?

* * *

Under the Kasich Administration and recent General Assemblies, Ohio has begun to use resident income as part of districts’ funding formula. They’ve made an important step forward. Yet the use of income data inside the formula is complicated, hard to follow, and applied inconsistently. On the one hand, this complex process might improve the precision of the formula—gets us closer to the “true” wealth of districts (and conversely, their funding needs). On the other hand, a cynic might suggest that we’re observing manipulations of the formula to generate results that legislators want to see and may not want the public to understand. Perhaps the truth is somewhere in the middle.

Nevertheless, the excruciating implementation of income into the formula opens questions around whether it can be simplified, without undermining the formula’s intent. Are there substantive differences if legislators settled on either Ohio or federal income measures, or picked the median or per-pupil income index? What if the state simply split 50-50 districts’ income and property values and then applied that formula computation to all districts? These are simpler alternatives that should be considered and their fiscal impacts modelled. As lawmakers seek to improve the functionality and transparency of the formula, they should consider ways to streamline the incorporation of income while continuing to ensure a fair and efficient allocation of state funds to districts.

[1] This is called the Valuation Index, which is a district’s property values averaged over the past three years (with an adjustment for tax-exempt property in certain circumstances) divided by the student enrollment.

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