“Equity and Adequacy in the Foundation Program”
A Presentation to the Legislative Symposium Sponsored by AASB, AEA, CLAS, and SSA
By Jim Williams
Executive Director, Public Affairs Research Council of Alabama
January 19, 2008
Title Slide
Good morning! I appreciate the opportunity to be here with you.
I realize that the subject most on everyone’s mind today is the one discussed by the speakers who have preceded me – how much money will be available, or perhaps won’t be available, in the Education Trust Fund as we go forward from here. Unfortunately, of course, we’ve been here before. I think it was Yogi Berra who said, “It’s de ja vu all over again.”
We all know that the Alabama economy is cyclical, that the Education Trust Fund mirrors its up’s and down’s, and that the automobile-led economy we’re building – which is bringing great prosperity to our state – will probably ensure this kind of cyclicality in the future. That’s not my topic today, but it’s a worthy one for discussion when a downturn becomes an upturn, as it inevitably will, and there are options available.
Thank goodness that a Constitutional Rainy Day Fund was created and some of the funds that could have been appropriated were set aside during the good years we have just seen. At some point it will be valuable to consider how those ideas can be improved upon in the future.
But in times like those we face today it is important to remember the value of the arrangements that have been made to ensure that every child in Alabama has the opportunity to receive a good education, and to ensure that our public school systems are funded adequately to carry out that educational program. If you will indulge me one other cliché, “It’s important not to throw out the baby with the bath water!”
The cornerstone of those arrangements in Alabama, as it is in most other states around the country, is a foundation program that provides the basic funding structure for the public schools. The name “foundation program” is descriptive, because these programs are created to place a firm foundation under the operation of the public schools in communities around the state – in places that are both rural and urban, and either rich or poor in terms of local resources.
In Alabama the roots of the Foundation Program go back to the early years of the twentieth century, and in some respects even further, according to Ira Harvey’s very useful history of the subject. The Foundation Program actually began with the Minimum Program Act of 1935, and its basic features have remained reasonably stable through the developments that have occurred over the 72 years since.
Slide 2
There are two basic goals of a foundation program, whether it’s our program here in Alabama or the ones in Texas and Michigan, where I once worked, or in other states. They can be termed “adequacy” and “equity.”
Adequacy is about providing the resources necessary for an adequate educational program. How is that defined? Basically, there are two ways to define adequacy. One is simply to spell it out as a certain amount of dollars per student. Mississippi does that, for example. This has the advantage of simplicity, but the problem with a money approach is that the dollars don’t buy the same program in every kind of school system, and it’s hard to understand what they buy anywhere. It becomes very easy to let the dollar allocation slip behind the real cost of providing the services that the program assumes will be made available.
The other way is to specify the components that are included in an adequate educational program and to cost them out, adding to a total for each school system. Georgia follows this kind of approach, for example. This has the advantage of allowing the dollars to be tailored more precisely to the costs involved in each system, but it tends to be accompanied by more earmarking of state funds.
The Alabama Foundation Program has elements of both these approaches. There are four components, as you know. The first two are related – the salaries as well as the fringe benefits of the kinds of personnel defined as being necessary for an adequate educational program. The third component includes several instructional support items, such as classroom supplies, textbooks, technology, and so on. These three items are specified in terms of the number of schools, students, or “earned” professional personnel units in a particular school system. So they follow the more specific, definitional approach to reaching adequacy.
The fourth component in the Alabama Foundation Program follows the more general, dollar-value approach. We call it “Other Current Expense,” and it’s an amount that is supposed to cover everything else necessary to the operation of an adequate educational program. What that entails is not specified, but it surely involves keeping the lights on, maintaining clean classrooms, providing security if needed, accounting for all of the money coming into and going out of the system, having telephone service, and so on.
There are advocates for the specific components in the Foundation Program, and as we will discuss in a moment, items have been added over time that are associated with the Foundation Program if not formally a part of it. But it is a lot more difficult to advocate for “everything else,” when it is not even clear what that means, much less how much it costs. Indeed, it is easy to assume, especially when times are tough, that this is the place to take money from – because it doesn’t affect any activity that is specifically identified.
The Code of Alabama provides for adequacy studies, and I haven’t got such a study to offer this morning, but I do have some information about adequacy that I want to share.
Now, the second goal of a foundation program is equity, or fairness. The adequacy goal focuses on the content of the foundation program, and this establishes a total amount that ought to be available for every school system. The equity goal focuses on the distribution of the state dollars that provide the lion’s share of the money to finance that adequate program.
The purpose behind the equity goal is to provide every child, no matter where
he or she lives, with the same opportunity to take advantage of an adequate educational program that every other child in the state has. And the standard method for doing that is to establish a fair share for each local school system to contribute toward the adequate program that has been defined, based on ability to pay, and then to provide state funding to make up the difference between the adequate total and the local fair-share contribution.
In Alabama the fair-share requirement has been set at 10 mills of property taxes. We’ll look at some data on two questions related to equity. First, Is the state putting up a significant share of the money required to finance the Foundation Program? And second, Has the Foundation Program improved the fairness of school funding across the state?
Slide 3
I mentioned earlier that items have been added, either into the Foundation Program itself, or associated with it. Here are the allocations that I’m going to consider in the data I present to you. As you can see, the universe is a lot more complicated today than it was even a few years ago!
Over on the left, at the top, is the classical Foundation Program with its four components, salaries and benefits of the positions included, plus classroom instructional support and other current expense or “OCE.”
Closely associated with the Foundation Program is the Capital Purchase Allowance that is based on the state property tax that goes into the Public School Fund, and requires a small local fair-share contribution of its own.
And several other associated allocations are included on the Foundation Program worksheets that the State Department of Education publishes each year – Current units that account for growth, the 1% Salary item, At-Risk allocations, the High Hopes program for the graduation exam, Pre-School, School Nurses, and Technology Coordinators.
Finally, over on the right are a number of grant programs that have been developed that allocate money to local school systems. They aren’t on the Foundation Program worksheet, but I’ve estimated the amounts involved using the published information I could find on them.
I have left out the student transportation program because the amounts there vary by the number of students transported and the distances involved, rather than by tax equity. So those funds really do not apply to this discussion.
As part of my analysis of the adequacy of the Foundation Program, I’m going to look at the growth of all three of these types of items since 1997, which was back near the time when the current edition of the Foundation Program began. So I’m looking at the Foundation Program broadly defined, because these associated allocations are an integral part of how we fund public schools in Alabama.
Slide 4
So let’s turn to the first question and look at what the data have to say. Has the State put up a fair share of the total state/local support for public schools? Or to put it another way: Do local taxpayers have to pay too big a burden in the methodology created by law to fund an adequate and equitable program of education for the student population of Alabama?
What I’m going to do in this case and in the case of the other two questions I’ve posed is to present, I hope objectively and fairly, the evidence that I see that has a bearing on the issue. Sometimes there isn’t as much direct information as one would like, and it’s possible that there is other information of which I am unaware.
Slide 5
One way to approach the question about the state versus the local share of school finances is to look at what other states do. The southeastern states generally are the ones in which state funding is dominant, so I have limited this chart to the ten southeastern states. In a number of other states the state share is much smaller and the local share much larger. The data come from the Census Bureau and are based on the 2005 fiscal year. They show the state portion of the state-local total of public school finances, omitting federal funds and lunch room fees.
As the chart shows, even among our southeastern neighbors with generally high state levels of funding, Alabama stands out as a place where the state share of school finances is high. Arkansas is first, at over 90%, and we rank second, at 70%. Mississippi, Kentucky, and North Carolina round out the top five, not far behind. There is a break between the top and bottom five, but all are above 50% in the state’s funding share.
The other way to look at this chart would be to focus on the local share, which makes up the remainder in this comparison. It is important to note that the local share here includes not only the foundation program’s fair-share requirement, but also the enrichment that local taxpayers choose to provide over and above that which is required of them. Just as Alabama’s state share is second-highest among these ten states, its local share is second-lowest.
Slide 6
Here is a look just at Alabama, and just at the Foundation Program and the related allocations that I showed you on an earlier slide. The two bars in the chart represent 1997 and 2008, showing the changes in state and local funding for this broadly defined set of foundational allocations to local school systems.
In 1997, the state provided 93% of the Foundation Program and related allocations, and local school systems provided 7%. In that year the required level of local support was 7.5 mills of property tax or the equivalent. The full 10-mill required level of local support was phased-in before 2008, of course. And in 2008, the state provided 90% of the Foundation Program and related allocations, and local school systems provided 10%.
This comparison doesn’t tell us yet about how different kinds of school systems fare, or about the growth of funding over the period – both of which we’ll get to later. And this chart leaves out the voluntary tax investments made by taxpayers around the state, which are substantial in many areas. It just focuses on the fact that the state has maintained its predominance in the funding of the program it defines as adequate and chooses to put in all schools statewide. The variation from 1997 to 2008 is basically consistent with the phase-in of the 10-mill local fair-share requirement that was built into the 1995 Foundation Program law from the start.
I’m not saying the state should put up more, or less. I just think that when we compare the state’s contributions with those of our neighbors, and with itself over time, the data indicate that it has and continues to put up a significant share of the funding.
Slide 7
Now let’s look at whether the Foundation Program has improved equity in the distribution of school funds. Here we want to know whether all school systems are able, with the same tax effort on the part of their local taxpayers, to afford an adequate educational program as it is defined in state law.
Slide 8
In this chart, I have played a little “what-if” game. What if we went back to the rules in place before the 1995 Foundation Program law? What would be the impact on the 10 school systems with the highest property values, and the 10 school systems with the lowest property values? And what you see in the chart is that the top 10 systems – those best able to help themselves – would have a substantial advantage over the bottom 10 systems, who are least able to help themselves. This is shown in the two bars on the left; the blue bar shows the average allocation for the top 10 systems, and the red bar the average allocation for the bottom 10 systems.
On the right, you see that under the current Foundation Program method, both groups receive approximately equal allocations on a per-student basis.
So on equity grounds, the current Foundation Program is clearly preferable to the pre-1995 version in that it better spreads educational opportunity across all school systems.
Slide 9
In this chart, I’ve tried to illustrate how this occurs. The basic equity mechanism at work is the 10-mill chargeback or fair-share requirement as I like to call it. I’ve picked five school systems with varying local property taxing capacity, defined in terms of the value of 1 tax mill per student, shown in the chart. They range from Homewood, with the highest value of any system ($143 per student per mill), down to Perry County, which is among the lowest at only $30 per student per mill.
Obviously from these numbers, if Homewood and Perry County levy the same tax burden on their local population, Homewood will be able to finance a much better school program than Perry County. Or, to come from a different angle, if both of these systems decide to put on the same school program, Homewood is able to do so at a far lower tax rate than Perry County. The Foundation Program sets out to equalize financial capacity for the Foundation Program by varying the state share, shown in blue, according to the amount of money the local system is able to raise when applying the fair-share local tax effort of 10 mills plus the small amount required by the Capital Purchase Allowance. The local share is shown in red.
And what you see is that all systems receive around $6,000 per student, but the share that comes from the state varies directly with the ability of the local system to raise its own tax revenue, based on property value.
One more thing to notice: even in the system that is at the top of the distribution, the state provides almost three-fourths of the total amount required for the Foundation Program and closely-related allocations. And it goes up from there. This does not detract from the enrichment to the Foundation Program provided by local taxpayers with discretionary taxes that they raise and decide how to use. Homewood, for example, spends around $10,000 per student in total rather than the $6,000 shown here. The point is that, for all systems, the state is the predominant financier of the program defined by law as adequate.
Slide 10
Here you see a complete picture of the state and local contributions to the Foundation Program and related allocations for all school systems. The total is around $6,000 per student across the board, with variations based on things like the number of at-risk students. (The outlier is Linden, which has a countywide vocational school that distorts the number of students.) The school systems are shown according to property value per student, which is low on the left and high on the right. Here’s Homewood at the far right, for example. And the state share of the funding for these allocations is shown in red; it declines as we go from the “poor” to the “rich” systems, while the local share in green rises. In all cases the state share dominates.
It seems to me that these three charts indicate that the Foundation Program and the allocations closely related to it get pretty good marks on equity, without unduly burdening local taxpayers.
Slide 11
My final question is whether the Foundation Program, and the allocations related to it, have improved the adequacy of school finances. As I mentioned earlier, one would have to do a detailed study to answer this question completely, and it would remain partially a judgment call even then. The evidence I have on this issue isn’t as direct or clear-cut as what was available on the other two.
Slide 12
We can say that there has been substantial growth in the Foundation Program and related allocations, from about $3,300 per student in 1997 to a little over $6,000 per student in 2008. This is an 83% increase, which is 57% real growth after inflation is taken into account.
Slide 13
The statewide student count increased by only 1% over the same time period, which means that virtually all of the growth went into program improvements rather than into accommodating more students. This is a statewide overview, but if we looked at growing systems we would find that their total increase would be higher, and that the main issues would involve the timing of adjustments related to growth.
Slide 14
Despite the fact that the student count was up by about 1%, the number of earned units in the Foundation Program increased by 10% from 1997 to 2008. And of course this doesn’t include those associated allocations such as nurses, technology coordinators, and reading coaches that weren’t there in 1997 but are in 2008.
So there has been substantial growth in the allocations related to the Foundation Program, which suggests increasing adequacy, without of course telling us whether or not we have arrived at complete adequacy. We seem to be better off than we were, for sure.
Slide 15
Now, this table shows where those increases occurred. Down the left side you see three kinds of allocations. First, there is the Foundation Program, and we show the salaries and benefits, OCE, and Instructional Support items separately. Second, there is the Capital Purchase Allowance. And third, there are the fairly large number of other allocations, some of which I had to estimate and tried to do so conservatively. Then there is the total of all these allocations at the bottom.
Across the top, there are three columns, the first being the percent increase in total dollars, then the percent increase per student, and finally the percent increase per earned unit. The increases are all from 1997 to 2008. Since the number of students only grew by 1%, there is very little difference between the first two columns. The number of units grew by 10%, and that is why the increases are a little smaller if looked at on a per-unit basis. I’m going to talk about the increases using the middle column that shows increases per student.
The Foundation Program in total increased by 74% per student from 1997 to 2008. Salaries and benefits, which is the largest component, and OCE both showed about the same level of increase, while the instructional support items didn’t grow as fast. Overall, the Foundation Program increased by a substantially smaller percentage than either the Capital Purchase Allowance or the other state allocations.
One reason for the seemingly high percentage increase for the Capital Purchase Allowance over this period is that at the beginning of the 1995 Foundation Program, the Public School Fund was used to support the Hold Harmless allowance for several years. This reduced the amount that was allocated to capital purchases, and so the 1997 base can be considered abnormally low to that extent.
It’s the other state allocations that have really grown over this period. They total a little over $250 million, which is a relatively small amount of money compared with the $4-billion Foundation Program. It is appropriate to start initiatives as grant programs where willing partners are involved in developing best practices during a statewide roll-out. Yet there are issues associated with adding separate programs rather than building on the basic Foundation Program. Personnel added in these ways do not generate the OCE and instructional support that are intended to complement the growth of the school workforce and make it possible to carry out programs adequately within a school system. So the numbers in this table suggest a caution in that regard.
Slide 16
A few years ago we brought together an informal working group to think about ways of defining adequacy in the Foundation Program. The group met off and on for a number of months, and we never came to any final conclusions. Susan Lockwood was a superintendent at the time and a member of the group. In 2006, in her new role, she asked me to give her association the benefit of my current thinking on adequacy and the Foundation, and I agreed to do so without any contractual relationship or obligation on anyone’s part.
The State Department of Education is kind enough to provide us with the financial statements of local school systems each year, which enables us to look at the Foundation Program through the detailed perspective that one can get from the accounting system. I want to share briefly some of our findings related to adequacy.
First, we looked at expenditures from the Foundation Program source in fiscal 2005. From our research perspective it is very advantageous that the accounting system allows us to trace back expenditures to their sources in this way. I don’t want to go through all the details of this complicated table, but let’s just look at the three boxes near the bottom. When we looked at where Foundation Program money was actually spent in terms of the five functional categories in the accounting system – instruction, instructional support, facility operation and maintenance, auxiliary or support workers, and general administration – we found that 92% of the Foundation Program dollars went for instruction and instructional support, as opposed to the facilities and administrative activities of the school system, which received only 8% of spending from this source. 97% of the Foundation Program dollars went for salaries and benefits, 89% of that being in the instruction and instructional support categories; only 3% went for materials and services.
There is nothing surprising or wrong with these statistics; the priority should be in the instruction-related accounts, and some of the pattern reflects choices about where to apply Foundation money. But it does help us to see where the Foundation money actually goes in accounting terms.
Slide 17
This is a similar table that shows where local money that is not part of the Foundation Program is spent in the accounting system. Not surprisingly, it goes where the Foundation dollars don’t: a majority of the money going to materials and services, rather than compensation, and to the facilities and administrative areas not covered by the Foundation Program dollars. Again, nothing surprising or out of order, but it helps to see that the two sources are attacking the adequacy issue in two different ways, one focused on instruction-related areas and personnel compensation in particular, and the other focused on the facility and administrative areas, and the supplies and services that are needed to operate the schools.
Slide 18
So we asked the rhetorical question: Where do school systems invest their local dollars? And answered: In areas where they see the need to supplement the Foundation Program. So we looked at accounts where virtually all school systems invested local dollars, and how much they invested. Here are the biggest areas related to facilities and administration: We didn’t find any state money in the utility accounts; utilities were paid 100% from local dollars, and the total was $118 million in 2005. You see the other items down to the telephone bills, and the number of systems involved, with total spending from local sources at $314 million for facilities and administration.
Slide 19
There also was local spending in instruction-related areas. Here you see the instructional areas in which very large numbers of systems reported spending local dollars. They hired teachers above the Foundation Program level, spent on instructional supplies, and so on, to the tune of over $250 million in 2005.
Looking at the areas in which very large numbers of school systems invest significant amounts of local dollars is like taking a statewide survey that is telling us the collective judgments of a broad cross-section of people about adequacy issues. They are in effect voting with their local dollars, and it would pay us to consider in more detail what is being said.
Slide 20
This year we have spent some time looking at 2006 financial data from a little different perspective, with similar results. What we did was look at what I call “core” academic spending per student – that is, operating expenditures other than food service and transportation, from all sources. The range for all school systems in 2006 was from about $6,000 per student to about $10,000 per student. And we asked: How does a typical school system allocate the extra $2,000 when it goes from spending $6,000 per student to $8,000? And then how does it allocate the next $2,000 when it goes from spending $8,000 per student to $10,000?
This table shows what we found. At $6,000 per student, a typical school system spends 68% of its money on instruction, 17% on instructional support, 9% on facility operation and maintenance, and 5% on central administration. If you add $2,000 to spending, a typical system allocates the increase as shown in the red box. The bottom half of the table shows what happens when that $8,000 system goes up to $10,000 per student.
There are increases in each of the four functional areas shown, but the striking thing is how much of this increase goes to facility operation and maintenance; the $381 increase at the top is 19% of the $2,000 added, but it raises the amount spent on facilities by two-thirds, from $563 to $945 per student. And then when an $8,000-per-student school system goes up to the $10,000-per-student level, its facility O & M spending increases by another 50% to $1,423.
Here’s what this suggests to me: the Foundation Program, as we saw earlier, is focused on the instructional areas, and properly so. What that means is that, relatively speaking, even at the lower end of the spending distribution, the Foundation Program covers their instructional needs better than it does their need to operate and maintain facilities. And so when they have the opportunity to increase funding beyond the minimal level, they try to shore up the facility area – even though they invest in more instructional resources too. And this tendency persists even to the highest levels of spending among our school systems.
As we begin to make large investments in facilities through the bond issue, it is important to make sure that school systems are able to operate and maintain those facilities adequately. Our research hasn’t produced any definitive answers as to what is adequate, but it is suggestive of some directions in which we ought to look.
In my time I have tried to give you some perspective on whether the state is putting in its fair share of funding compared to local taxpayers, which I think it has; whether the Foundation Program has improved equity in the distribution of funds to the public schools, which I think it has as well; and whether the Foundation Program has improved the adequacy of school funding, which I think it has at least in terms of the growth of allocations. I would suggest a caution about the growth of allocations apart from the Foundation Program framework, and some attention to the issues related to the operation and maintenance of facilities.
I appreciate your time, and wish all of you the best in what will probably prove to be a trying year ahead.