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A CONVERSATION ABOUT THE FUTURE OF TEXAS PUBLIC SCHOOLS.

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1 A CONVERSATION ABOUT THE FUTURE OF TEXAS PUBLIC SCHOOLS

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5 In 2005, the Texas Supreme Court ruled that the previous system of school finance amounted to an unconstitutional statewide property tax. In the 3 rd Called Session of the 79 th Legislature (2006), Legislators responded by passing House Bill 1 (“HB 1”), the tax relief and school finance legislation. HB 1 changed the process for determining state aid to school districts by reducing local school property tax rates by one-third and dedicating more state money to the schools to replace the local money, including a restructured business margins tax and increased cigarette taxes. To ensure school districts did not lose revenue solely as a result of the tax relief measure, Legislators provided a hold harmless feature for school funding called “Target Revenue.” From the outset, there were concerns that the new taxes would not fully fund the compression of local school taxes. Texas Comptroller Carol Strayhorn warned the Legislature that the shortfall over 5 years would exceed $23 billion, and would likely lead to future tax increases, budget cuts to critical services, and another round of litigation. Following $5.4 billion in cuts to education in 2011 by the 82 nd Legislature, 6 separate lawsuits were filed against the State, representing more than two-thirds of the state's public school population (over 3 million students) and over one-half of the State’s school districts. The current round of school finance litigation is the eighth filed against Texas since 1968, and is the largest in the State’s history. 5 of the lawsuits were consolidated and went to trial on October 22, The initial ruling is expected in early Assuming it is appealed, a final decision is possible by Fall of

6 “A general diffusion of knowledge being essential to the preservation of the liberties and rights of the people, it shall be the duty of the Legislature of the State to establish and make suitable provision for the support and maintenance of an efficient system of public free schools.” The Texas Constitution, Article 7, Section 1 “[T]he Legislature’s decision to rely so heavily on local property taxes to fund public education does not in itself violate any provision of the Texas Constitution, but in the context of a proliferation of local districts enormously different in size and wealth, it is difficult to make the result efficient — meaning “effective or productive of results and connot[ing] the use of resources so as to produce results with little waste”— as required by article VII, section 1 of the Constitution…. Compensation must be made for disparities in the amount of property value per student so that property owners in property-poor districts are not burdened with much heavier tax rates than property owners in property-rich districts to generate substantially the same revenue per student for public education.” West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) 6

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8 Legal challenges over public school education and finance in Texas have been going on for decades, and tend to focus on three issues: Local Control - Does the state control the property tax, making it a de facto statewide property tax, which is prohibited by the Constitution? Adequacy/Suitability – Do districts have adequate resources to reach the “general diffusion of knowledge?” required by the Constitution? Equity and Efficiency – Is the system efficient, and do districts have substantially equal access to revenue? Today’s issues have been shaped by the Texas Supreme Court’s most recent decision in the case of West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) and the Texas State Legislatures’ responses since that time. 8

9 In its 2005 decision, the Texas Supreme Court declared that the 2005 system of Texas school finance was an unconstitutional statewide property tax. To avoid being a state property tax, the Supreme Court ruled that the Legislature‘s system must afford local school districts meaningful discretion over local tax rates. If school districts are forced to tax at or near maximum rates, control over local ad valorem tax rates and spending effectively shifts to the State, depriving districts of meaningful discretion to tax below the rate cap set by the State or to spend on local programs. Although it limited its ruling to the finding of an unconstitutional Statewide property tax, the Court added that “[t]here is substantial evidence… that the public education system has reached the point where continued improvement will not be possible absent significant change, whether that change take the form of increased funding, improved efficiencies, or better methods of education…. As we have said since Edgewood I, structural changes, and not merely increased funding, are needed in the public education system to meet the constitutional challenges that have been raised.” 9

10 In a special session in the summer of 2006, the 79 th Legislature passed House Bill 1 (“HB 1”) HB 1 lowered Maintenance and Operations (“M&O”) tax rates for most districts from $1.50 to $1.00 per $100 of assessed value (the "compressed rate"). This reduction in revenue was to be offset by increased funding from other sources, including a restructured business margins tax. HB 1 required that State aid would be provided to districts in an amount needed for each district to maintain total per-pupil revenue equal to what it had received in the school year, or what it would have received in the school year under the old system, whichever was greater (known as "Target Revenue"). HB 1 provided that districts could supplement the basic level of funding by increasing M&O tax rates above the compressed rate, up to a cap of $1.17 per $100 of property valuation. Any increase above $1.04 per $100 of property valuation has to be approved by the district's voters in a special “Tax Ratification Election” ("TRE"). The first 6 pennies above the compressed rate are “golden”, and not subject to recapture. For Chapter 41 districts (considered “wealthy” districts under the State’s Robin Hood plan), the next 11 “copper” pennies – i.e., any funds generated by an increase of more than six cents above the compressed rate - are subject to partial recapture by the State under statutory formulas. 10

11 From the outset, there were concerns that the new taxes created under HB 1 would not fully fund the compression of local school taxes, and that State funds would be needed from other sources for this purpose. This “structural deficit” is estimated at over $4.0 billion per year. The State was able to avoid the issue in the 2009 legislative session, due to a one-time infusion of approximately $12 billion in federal stimulus funds. This included $3.8 billion earmarked specifically for education. The State Comptroller’s 2006 projection of a $23 billion shortfall by 2011 proved optimistic, as the 82 nd Legislature dealt with a $27 billion shortfall. Despite a number of factors in favor of increasing state funding for public education— including rapid student population growth, a demographic that is increasingly economically disadvantaged, heightened standards, rising education costs and the growing needs of students generally—in 2011 the 82 nd legislative session closed with $5.4 billion in cuts to public education funding. 11

12 A growing and changing student population faces the highest academic standards and expectations in Texas history. The State of Texas Assessments of Academic Readiness (“STAAR”) testing program has replaced the Texas Assessment of Knowledge and Skills (“TAKS”) as the measure of how well Texas students are meeting state standards. For the first time, the Texas testing system will focus on increasing postsecondary readiness of graduating high school students and helping to ensure that Texas students are competitive with other students both nationally and internationally. STAAR includes annual exams for students in grades 3 through 8, and a series of end-of-course exams that high school students must pass in order to graduate. STAAR is a more rigorous testing system than TAKS. The total number of questions has been increased and, unlike under TAKS, students take the test in a time-limited environment. STAAR questions are more difficult, assessing skills at a greater depth and level of cognitive complexity. STARR tests are designed to measure a greater range of student achievement and establish strong links to postsecondary readiness. 12

13 Texas is subject to the No Child Left Behind Act of 2001 (“NCLB”), under which States are required to bring 100% of students up to the "proficient" level on state tests by the school year. Individual schools have to meet state "adequate yearly progress" (“AYP”) targets toward this goal (based on a formula spelled out in the law). Concerns about NCLB have been growing since its passage, particularly concerning its rules surrounding AYP and the requirement of 100% proficiency by Initially, Texas fared better than most States in the measurement of AYP. For the school year, the Center on Education Policy reported that 38% of the nation’s schools failed to meet AYP, with fewer than 5% of Texas schools failing to meet AYP. But in August, 2012, the Texas Education Agency (“TEA”) announced that only 44% of Texas campuses met AYP targets the prior year due to a substantial increase in requirements. - A school or district met AYP requirements only if at least 87% of their students passed the state reading/English language arts test; 83% passed the mathematics test; and, depending on grade level, had either a 75% graduation rate or a 90% attendance rate. Minimum requirements are continuing to increase each year. 13

14 According to TEA, AYP requirements are now comparable to Recognized or Exemplary level performance in the 2011 State accountability system. As requirements have increased, performance has dropped: TEA reports that the majority of Title I districts and campuses in Texas that missed AYP are in “Stage 1,” having missed AYP for the same reason for two years in a row. - These districts or campuses must develop an improvement plan. - campuses must offer students the option to transfer to a better school within the district, if any, that is meeting AYP requirements. Missing AYP in the 3 rd year forces the school to offer free tutoring and other supplemental education services to struggling students. If a school misses its AYP target for a 4 th consecutive year, the school is labeled as requiring "corrective action.” - This might involve wholesale replacement of staff, introduction of a new curriculum, or extending the amount of time students spend in class. A 5 th year of failure results in planning to restructure the entire school. 59 schools in the State of Texas have already reached this level. - The plan is implemented if the school fails to hit its AYP targets for the 6 th year in a row. - Options include closing the school, turning the school into a charter school, hiring a private company to run the school, or asking the state office of education to run the school directly. 14

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16 “No State ad valorem taxes shall be levied upon any property within this State.” The Texas Constitution, Article 8, Section 1(e) “The State’s control of… local revenue is a significant factor in considering whether local taxes have become a state property tax …. If school districts are forced to tax at or near maximum rates to meet constitutional and statutory requirements, then control over local ad valorem tax rates and spending effectively shifts to the State, depriving school districts of any meaningful discretion to tax below the rate cap set by the State or to spend on programs other than those required by the State and the Constitution.” West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) 16

17 More than a quarter of Texas school districts have tax rates that exceed the $1.04 cap set by House Bill 1. Over 200 school districts in Texas are taxing at the $1.17 tax cap. Many other districts are effectively constrained from raising their tax rates above $1.04 or $1.06 because either: (a) they have attempted but failed to pass a TRE (like Keller ISD and Carroll ISD); or (b) they have determined that a TRE is not politically viable and is unlikely to succeed in their district. This is exacerbated in Chapter 41 districts, which are placed in the position of asking voters to support a tax increase when a significant portion of any new tax revenue exceeding 6 cents over the compressed rate ($1.06 for most districts) would be sent outside the district. Current lawsuits make the claim that the $1.17 tax cap (and for some, $1.04 or $1.06) has become both a floor and a ceiling, leaving such districts with no meaningful discretion and making the system of education finance an unconstitutional statewide property tax. - “A single district states a claim … if it alleges that it is constrained by the State to tax at a particular rate.” West Orange Cove v. Alanis (Tex. 2003) 17

18 “It would be arbitrary… for the Legislature to define the goals for accomplishing the constitutionally required general diffusion of knowledge, and then to provide insufficient means of accomplishing those goals.” West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) 18

19 Data indicates that about 45% of districts cannot regain funds lost by the cuts made by the 82 nd Legislature, even if their taxpayers are willing to pay the maximum M&O rate of $1.17. Even at the maximum they cannot recoup losses from the cuts, increase revenue to meet increasing accountability standards and community expectations, or offset inflation. The Legislature's 2011 budget cuts have forced school districts across the State to eliminate teaching positions, to fail to replace retiring teachers and staff, to reduce career and counseling services, to restrict curriculum and enrichment opportunities, and to curtail or eliminate after- school and prekindergarten programs. These reductions have led to a significant increase in the number of school district requests for waivers from state-mandated class size limits. - Because the level of state funding drops even further for many school districts in the school year, additional staff cuts and class size waivers are expected. Many of the lawsuits claim that HB 1 and the Legislature‘s 2011 cuts to education spending have left many school districts with insufficient means to meet growing costs generally, as well as the added costs associated with increasingly demanding education standards under Texas’ STARR testing program and NCLB’s requirement of Adequate Yearly Progress. 19

20 “[Texas Constitution Article 7] section 1 dictates what the public education system cannot be: it cannot be so inadequate that it does not provide for a general diffusion of knowledge, or so inefficient that districts which must achieve this general diffusion of knowledge do not have substantially equal access to available revenues to perform their mission, or so unsuitable that it cannot because of its structure achieve its purpose.” West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) 20

21 The basic allotment of Tier 1 funding that was meant to equalize the cost of a basic education was set so low that today more than 75% of all school districts are funded at their Target Revenue hold-harmless amount. Target Revenue numbers are tied to numbers from 2005 and 2006, and districts’ revenues today are still held down to those levels on a per student basis. - As a district’s enrollment increases, their funding does as well. - However while more students bring a district more “Target Revenue” money, increased property values do not. Any gains a district would have realized due to higher property values are now absorbed by the State. Some district’s Target Revenues benefitted from their circumstances at that time, such as rising property values during the 2004 and 2005 tax years, or the fact that they were maximizing their tax effort for any number of reasons. - The Target Revenue system may have benefitted districts that were operating inefficiently at the time. These districts are able to effectively raise revenues by maximizing their tax effort. Districts that were operating efficiently were in effect penalized, forced to cut programs and/or services when faced with budget deficits. Wide ranging disparities in funding from district to district have given rise to claims that the current system is inefficient, and therefore unconstitutional. 21

22 State formulas recognize that the cost to educate one child as opposed to another will vary based on the specific needs and characteristics of that student and the setting in which they are being educated. The cost drivers currently recognized include: - “Child Centered Variables” such as (1) Economically Disadvantaged, (2) English Language Learners (“ELL”), and (3) Special Education (Autistic, ADD, ADHD, Physical & Mental Disabilities, etc.); and - “School District Variables” such as (4) Geographic Location (“CEI”); and (5) size, e.g., small, sparse, mid-sized (those without advantage of economies of scale), etc. Most funding weights and allotments were established over 20 years ago (the ELL cost assumptions go back to 1984) and have not been updated since. The “Cost of Education Index” or CEI funding formulas recognize that there is a variance in the cost of goods and services based upon geographic location. CEI calculations were established over 20 years ago and do not accurately reflect the true cost differentials today. The outdated CEI skews revenue comparisons between districts. - Austin ISD has a CEI index of 1.10 while Brownsville has an index of 1.19, a difference of 8.0%. Using the ACCRA Cost of Living Index Report, Austin has a Cost of Living Index of 94.1 and Brownsville has an index of 89.4, a difference of 5.0%. The State’s CEI funding formula favors Brownsville ISD, and negatively affects Austin ISD’s purchasing power. 22

23 There are significant cost drivers outside a school district’s control that are not addressed by school finance formulas. While such factors contribute to the varying cost to educate students, current funding formulas may not adequately take them into account. - It may cost more to educate students along the Texas coast because such districts have to manage the high costs of wind storm insurance. - While the vast majority of districts are exempt, some districts are required to pay millions of dollars to Social Security on behalf of their employees due to a federal law. - Other districts struggle with the challenge of keeping up with a rapidly increasing student population in fast-growth areas. Federal funds are not taken into account by state formulas when the level of funding is determined. Some districts receive significantly more federal funding than other districts, with some seeing as much as 40% of their revenue from federal sources. Federal funds come with a different set of spending requirements than state and local dollars, but many overlaps exist. As school funding formulas do not reflect the true, current, and complete costs associated with educating students around the State, the claim is made that the system cannot be efficient. 23

24 “[T]he constitutional standard of efficiency requires substantially equivalent access to revenue only up to a point, after which a local community can elect higher taxes to “supplement” and “enrich” its own schools. That point, of course, although we did not expressly say so in Edgewood I, is the achievement of an adequate school system as required by the Constitution. Once the Legislature has discharged its duty to provide an adequate school system for the State, a local district is free to provide enhanced public education opportunities if its residents vote to tax themselves at higher levels. The requirement of efficiency does not preclude local supplementation of schools.” West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) 24

25 The “Taxpayer Fairness” complaint filed on behalf of members of the Equity Center includes an equity claim whose basis is enunciated in the Texas Supreme Court’s prior rulings that “citizens who were willing to shoulder similar tax burdens, should have similar access to revenues for education.” Many examples are given, including: In 2011, a taxpayer in the Central Texas district of Belton ISD was taxed at $1.17 for M & 0, which raised $5,947 per WADA. A similarly situated taxpayer in another Central Texas district, Glen Rose ISD, with an M & 0 rate of $0.825, raised $8,895 per WADA. In other words, the Belton ISD taxpayer paid 42% higher taxes while Glen Rose received 50% more in revenue per WADA. In 2011, a taxpayer in Kaufman ISD was taxed at $1.17 for M &O, which raised $6,192 per WADA. In the next county, a taxpayer in Lovejoy ISD was taxed at $1.06, which raised $7,969. The Kaufman ISD taxpayer paid 10% higher taxes while Lovejoy received nearly 30% more in revenue per WADA. 25

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28 “The need is apparent for reform in tax systems which may well have relied too long and too heavily on the local property tax. And certainly innovative thinking as to public education, its methods, and its funding is necessary to assure both a higher level of quality and greater uniformity of opportunity. These matters merit the continued attention of the scholars who already have contributed much by their challenges. But the ultimate solutions must come from the lawmakers and from the democratic pressures of those who elect them.” United States Supreme Court San Antonio Independent School District v. Rodriguez, 411 U.S. 1 (1973) “There is substantial evidence… that the public education system has reached the point where continued improvement will not be possible absent significant change, whether that change take the form of increased funding, improved efficiencies, or better methods of education…. As we have said since Edgewood I, structural changes, and not merely increased funding, are needed in the public education system to meet the constitutional challenges that have been raised.” West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) 28

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30 Though the parties in current and previous litigation have helped to develop the record with respect to issues in funding for education, a thorough scientific-based study of a very large number of districts may be needed. Such a study could address a realistic assessment of the levels of funding and the changes in educational learning, assessment and accountability needed to raise all Texas school districts to a status that meets the state’s high objectives for learning. From a school finance perspective, almost all the issues raised in prior cases could be removed from consideration by adopting a State sales or income tax and dedicating the proceeds to the public school finance system, as allowed by the Texas constitution. Absent that, “Robin Hood” will remain and the Legislature will have to try again to find a way to “make suitable provision for the support and maintenance of an efficient system of public free schools” as required by the State Constitution. Funding will again be a central issue. But there are other paths forward, including fresh approaches to how we educate our children and a departure from the centuries old “factory” model of education. This is not just a Texas issue, but an issue facing all U.S. public schools. 30

31 Senate Bill 1557, 82 nd Texas Legislature, 2011, added TEC §7.0561, which created a Texas High Performance Schools Consortium (the “Consortium”) to emphasize digital learning, high-priority learning standards, and an accountability system that relies on multiple assessments and allows for greater parent and community involvement. SB 1557 authorizes the commissioner of education (the “Commissioner”) to adopt rules. The Consortium is initially comprised of the following independent school districts: Anderson-Shiro Consolidated, Clear Creek, College Station, Coppell, Duncanville, Eanes, Glen Rose, Guthrie Common, Harlingen, Highland Park in Dallas County, Irving, Klein, Lake Travis, Lancaster, Lewisville, McAllen, McKinney, Northwest, Prosper, Richardson, Roscoe, Round Rock and White Oak. The Consortium is to convene periodically with the Commissioner to prepare a plan for the Governor and Legislature designed to improve learning standards and assessment and accountability systems that the Consortium will implement. TEA has concluded that SB 1557 will benefit the public and students by providing an opportunity for interested school districts and open-enrollment charter schools to contribute to the development of innovative, next-generation learning standards and assessment and accountability systems. 31

32 To further promote local initiative, the 1995 revision of the Texas Education Code established a new type of public school, known as a charter school. Charter schools are subject to fewer state laws than other public schools with the idea of ensuring fiscal and academic accountability without undue regulation. Like school districts, charter schools are monitored and accredited under the statewide testing and accountability system. While four different classes of charter school are authorized, most of the charter schools in Texas operate under “open-enrollment” charters which are granted by the State Board of Education (the “SBOE”). The SBOE may grant up to 215 open-enrollment charters. The cap of 215 was reached on November 21, The research from charter school results to date is mixed and, as with other alternatives, charter schools do not appear to provide a “one size fits all” solution. However there is much to be learned from the successes that have been achieved, both as to the role charter schools can play and the implementation of best practices into other public schools. 32

33 Like independent school districts, open-enrollment charter schools: Receive state funds based on the WADA of students (based on the average funding all traditional school districts receive, which was $5,375 per WADA in FY 2011); May not charge tuition; and May only charge fees that independent school districts are authorized to charge. Unlike independent school districts, open-enrollment charter schools: Do not receive funds from local tax revenue; Do not have access to state facilities allotments; and May receive funds from private funding sources. The Texas Charter School Association (“TCSA”) and others have filed a separate lawsuit against the State, alleging the current system is unconstitutional on 2 grounds: The State’s denial of facilities funding to charter schools; and The arbitrary statutory cap on the number of permitted charter schools. As with the other lawsuits, much will be learned from the courts’ rulings. 33

34 State lawmakers have been taking testimony on a number of voucher, school choice and other proposals: Vouchers (which would allow the use of public money to be used for students wishing to transfer to private schools), including: - State vouchers for any student wishing to pay tuition at private schools (also known as “Taxpayer Savings Grants”); - Limited vouchers for students with special needs, in low-income households, or from failing school districts; - Tax credits for businesses funding scholarships to private and religious schools (also called “Scholarship Tax Credits” or “Tax Credit Scholarships”); and - “School of Last Resort” vouchers (student must qualify under means test and have not been accepted to at least 3 public schools, including charter schools). School Choice and other proposals, including: - Open enrollment within all school districts, allowing students to transfer to neighboring districts where there is space; - Lifting the current cap on the number of independent charter schools; - Partnerships between school districts and charter organizations; and - Increased cultivation of magnet schools. 34

35 12 states and the District of Columbia provide state-funded school vouchers to qualifying students: 4 target low-income students, 2 target students in failing schools, 6 target students with special needs (Louisiana ran a single program targeting all three groups) and 2 target students who do not have access to public schools. No state has a completely “open” State run voucher program (a state-wide universal school voucher system providing a maximum tuition subsidy of $3,000 was passed in Utah in 2007, but 62% of voters repealed it in a statewide referendum before it took effect.) Proponents argue that the competition fostered by voucher programs would improve the quality of students' education and bring savings to the state. In addition to increasing the options for parents and creating a better marketplace for teachers, they argue that such reforms improve traditional public schools by challenging them to attract and retain students. Opponents see the voucher program as weakening the public school system, and question how effective the “free market” competition can be since public and private schools are not operating on a level playing field. Private schools can choose which students to accept (public schools must take all who come), and State academic and fiscal accountability measures do not apply to private schools accepting state funds (which voucher school proponents and private school interests would not change). Other concerns include whether families could afford tuition costs above state vouchers, and whether vouchers would actually increase State costs. 35

36 “The Constitution does not require a particular solution. We leave such matters to the discretion of the Legislature.” West Orange-Cove Consolidated I.S.D. v. Neeley, 176 S.W.3d 746 (Tex. 2005) 36

37 As the last 20+ years have shown, change does not come easy to the system of public education. The number of districts involved in the current round of lawsuits, and the compelling issues raised, demonstrate the need for meaningful change. The trial that began on October 22, 2012 will provide initial guidance. The case is expected to be ultimately appealed to the Texas Supreme Court. However as with past decisions, we can expect that the details of any changes required from the Court’s final decision will be left to the Texas State Legislature. The 83rd Texas Legislative Session convened on Tuesday, January 8. Education is again a central issue. Government, business and community leaders can help effect change by becoming educated on the issues facing the system of public education, and making their voices heard in Austin. Draft Dated 1/23/13 37


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