A for adequate, F for funding.

Providing equity and adequacy in school funding formulas has legislatures struggling.

There's nothing more difficult for a legislature than rewriting the way it pays for education. "We thought reapportionment was bad - this is worse," says Wyoming Speaker Pro Tern Peg Shreve, whose state is in Round 2 of a court-ordered school finance fight this session.

In Wyoming and other states around the country, the battle lines are drawn and the combatants have gathered - parents, school boards, teachers, senior citizens, farmers, developers, taxpayers - pitting rural lawmakers against urban lawmakers, Republicans against Democrats and governors against legislators.

There's a lot of money at stake in any battle over school funding. Nationwide, schools cost some $200 billion a year to operate. States provide about half of that, local districts 44 percent and the federal government about 6 percent. It's the local share - most often coming from property taxes - that causes the most disparities between school districts. Districts with wealthy homeowners simply raise more money than districts with poorer taxpayers. Only the legislature can fix that.

Legislatures in 14 states are currently rewriting their school funding systems all responding to court rulings that their present systems are unconstitutional. The business of changing how states fund schools is a major undertaking for legislatures and can dominate a session's agenda. And changing the way a state supports education forces legislators to confront some tough political issues they would probably rather avoid, such as tax increases, state tradition of local control of education and redistributing money from wealthy to poorer districts.

Assistant House Majority Leader Carolyn Oakley served on the House Education Committee when Oregon was in the midst of major property tax reform in 1990. She believes the voter initiative process was the only way Oregon could address property tax reform. The divisiveness of term limits and partisanship make the legislature ill-suited for devising good solutions to issues such as property tax reform and school funding, she says. "Term limits have created a lack of allegiance between legislators - everyone is out for themselves." School finance issues seem to exacerbate this divisiveness because of the pressure local school districts put on their individual legislators.

"There are 132 different people in the legislature and 132 different agendas for local school systems. It makes finding a solution very difficult," says Ohio Senate President Richard Finan, whose state is in the middle of court-ordered reform. Much of the difficulty comes from a Pandora's box effect. "School funding debates put everything on the table," he says. "Is more money really the solution? Can other reforms solve the problem? Should vouchers be considered? Is the problem really money, or is the problem the schools?"

Legislatures need not wait for courts to strike down school funding formulas before they redesign them. Although few legislatures voluntarily enter the fray, many respond to the threat of court action and attempt to ward off an actual judgment. It's not that lawmakers don't believe a problem exists, but responding to these issues is agonizingly difficult. The process of rewriting formulas is fought by organized and emotional interest groups and fraught with winners and losers. And even when a court determines a funding system is unconstitutional, it rarely offers guidance on how states should get from point A to B - only the directive that they do so.

This year, five states are in the spotlight with school finance issues. Ohio, Wyoming and New Hampshire are struggling to respond to court orders. Vermont has just dramatically reformed its state tax structure in response to a court decision. Illinois continues to wage a long and hard-fought battle not only to reshape how education is funded, but to enact some significant education reforms as well.

WHAT'S AN "ADEQUATE" EDUCATION?

School finance litigation in the past decade has largely been driven by equity - the gap between what rich and poor schools have to spend on students. The equity issue is tied to the pervasive use of property taxes to fund education. And it is assumed that more money means better schools and a better education. In recent years, however, "adequacy" of money has joined equity issues. Adequacy gets at whether the amount of school funding for each student is sufficient to produce a good education.

Enter Wyoming and Ohio who have taken innovative, but different, approaches to defining adequacy and attaching a price tag.

In 1995, the Wyoming Supreme Court ordered the state to eliminate spending disparities among its 49 school districts. Spending differences were significant largely due to the high cost of delivering education in rural schools. The court required the Legislature to identify the elements of a proper education, define an "adequate" education and determine what that would cost. The Legislature would then be required to provide money for schools at this level and equalize funding throughout the state.

In approaching the task, the Legislature started with a "market basket" of all the goods and services necessary for an adequate education. Once it agreed on the market basket, costs could be attached to each item and an overall cost determined.

An interim committee conducted hearings throughout the summer and determined that the basket of educational goods and services should be a common core of knowledge and skills defined by the state board of education. Included are student performance standards, mandatory statewide graduation requirements, a statewide assessment, free and accessible kindergarten programs, a maximum districtwide class size of no more than 20 students to a teacher and extension of the school year to 180 days.

A consulting firm was hired to figure the cost. The state department is now working to supply the necessary information and data. Estimates for required new money to finance the plan range between $49 million and $82 million. Debate is under way on whether to raise property taxes or initiate an income taxes as the best source for that new revenue. (A half percent to raise property taxes or initiate an income tax sales tax increase was narrowly defeated last year.)

The Legislature is fine-tuning the plan this session. Meanwhile, another lawsuit has been filed challenging the proposed finance plan. Even though plans to address the inequities are continuing, the school districts say they are tired of waiting. Four districts involved in the original lawsuit, along with several small and intermediate school districts and the Wyoming Education Association have filed the case, arguing that the state failed to implement a new plan by the court's July 1, 1997, deadline. The Wyoming district court recently detailed 30 technical points in the legislative plan that need to be clarified or changed by a new deadline of April 1998. The court said the Legislature did not address certain factors - such as salary adjustments for school personnel. Representative Shreve says the Legislature never intended to address many of the issues now questioned by the court and she expects the litigation to dominate this year's session.

According to Shreve, the Wyoming court has significantly overstepped its bounds. It took three years to hand down a ruling, but gave the Legislature only 18 months to totally reshape its education funding system. By insisting that the Legislature look at issues it didn't want to address, the court, according to Shreve, is "legislating." She points to the nearly $500,000 in litigation costs the state has already spent and the additional $500,000 that the case may still cost, as well as the vast amount being spent by the district plaintiffs. This is money that could have gone to educate kids.

"The really frustrating thing," she says, "is that everybody lost sight of what this is all about - it's really about children. Instead, it's become all about money."

Ohio's school finance system also has been in court for a long time. Four years ago, a common pleas court ruled the system unconstitutional based on the state's failure to close the gap between spending by rich and poor districts and the violation of a child's "fundamental right" to an education. The court implied that the state needed to end its reliance on local property taxes as the primary funding source for public schools. That decision was overruled by an appellate court in August 1995 because of numerous "assignments of errors" within the lower court decision. Then in March 1997, the Ohio Supreme Court affirmed the system's unconstitutionality. The state had to address two issues: defining an "adequate" education and determining the cost, and then finding the money to pay for education at this new level.

Since the Supreme Court decision, Ohio has been scrambling to address the mandate. Governor George Voinovich appointed a task force that included four legislators and the chief state school officer. In about two months, the task force put a proposal together describing where the money would come from and how it would be distributed. School finance consultant John Augenblick worked with the state to define and price an adequate education. The task force estimated an additional $1.5 billion would be needed to support the new formula, establishing a $4,269 per pupil base.

By early February, lawmakers had passed a $5.24 billion school appropriation bill for FY 1999, but no way to help pay for the increases it contains. After a failed attempt to get a half-cent sales tax increase before voters in the May primary, Speaker Jo Ann Davidson invoked a 147-year-old provision of the Ohio Constitution and pushed through a one-cent hike on Feb. 11. The $1 billion this will raise is earmarked half for schools and half for property tax relief. Davidson relied on the never-before-tested provision that allows education-related measures to pass with a simple majority instead of the three-fifths majority normally required to put an issue on the ballot. At press time, the Senate was expected to pass the measure, and voters will have the final say in May. If the public defeats the proposal, most legislators and Governor Voinovich say the newly passed state school-aid package will be underfunded starting in 2001.

WHOLE SCALE TAX REFORM,

Vermont moved quickly to enact a new school finance formula following a February 1997 ruling by the state Supreme Court. The legislature approved major reform in the final days of its session. Act 60 of 1997 set a statewide property tax and added state equalization of local revenues.

Vermont had debated tax reform for a number of years, but school finance litigation was the impetus for change. Equalization of spending by the state has a "Robin Hood" effect - shifting tax revenues from wealthier districts to poorer communities. In 200 Vermont towns, property taxes will drop; however, in 40 wealthy towns, property taxes will rise, but school budgets will likely shrink.

The General Assembly created a uniform statewide school tax of $1.10 per $100 in property value. The state property tax is "income sensitive" - taxpayers with incomes below $75,000 will not pay more than 2 percent of their incomes for the tax, although they may pay more in local school property taxes.

What that means is that a taxpayer in an exclusive neighborhood who earns $100,000 and lives in a $200,000 house would pay $2,200 for the statewide school tax. A taxpayer with a $40,000 income, living in a $100,000 house would pay $800 instead of $1,100. This statewide tax forms a pot that is divided among the states' 251 school districts in the form of per-pupil block grants. The individual school districts could still levy their own voted-on property taxes and that would vary from town to town.

The 1997 law (Act 60) also set a state minimum of $5,000 that would be spent to educate each school child. Many communities already spend more than that per pupil and at a lower tax rate. A more wealthy community with a lot of commercial property, for example, could be spending $9,000 per pupil with a school tax of just 71 cents per $100 of property value. Under Act 60, if such a town wanted to continue raising enough local taxes to spend more than the statewide per-pupil minimum, it must share the additional revenue it raises with other towns via a statewide equalized yield fund.

A number of legislators are still uncomfortable with Act 60 and would like to reopen debate about the statewide property tax and the tax sharing that is the centerpiece of the law. One alternative is a gross receipts tax, essentially a sales tax on every transaction in the economy, to be used for the per-pupil block grants.

THE GREAT COMPROMISE

The Illinois General Assembly ended its last session on a sour note. GOP Governor Jim Edgar had campaigned vigorously for a sweeping $1.6 billion plan to shift the burden of paying for schools from local property taxes to a statewide income tax and the House approved the measure. But as the bill stood poised to pass the Senate, Republican leaders took issue with the plan, calling it "the highest tax increase in state history." The measure stalled in committee, and the Senate refused to schedule a vote. It appeared to most in Springfield that the time for radical school finance reform had come and gone.

What a difference six months and a special session can make. In early December, the General Assembly enacted a new state aid formula that includes, for the first time, a continuing appropriation to "guarantee" the level of funding. Rooted in a foundation formula that will increase the base level of funding each year between 1997-98 and 2000-01, the new plan also contains numerous academic reforms, a bond program for school construction and increases in cigarette, message, and failure to pay, taxes.

The Illinois case is an unusual example of reform not ordered by a court. Three times since 1973, the courts have upheld the state's funding system. But Governor Jim Edgar, in his last term, has pledged to make some changes.

Those who have watched Illinois school funding over the years, know that the new plan doesn't represent a fundamental shift as the governor's original plan would have. However, the final compromise was supported by a rare coalition of the governor, Chicago public schools chief Paul Vallas, Chicago Mayor Richard Daley and an array of children's groups that had supported Edgar's original proposal.

"I think we lost a great opportunity to fundamentally change the system of financing public education. It will be very difficult to find someone to take that challenge again," laments Speaker Michael Madigan.

NEW CASE HAS INTERESTING IMPLICATIONS

The New Hampshire Supreme Court issued its ruling in Claremont vs. Governor, the states' most recent school finance case, Dec. 17, 1997. The court said that the state's system of paying for public education with local property taxes was unconstitutional because it created widely unequal tax burdens.

The case is significant for two reasons. First, because the Granite State historically has contributed the least of any of the states to K-12 education (averaging about 8 percent of all revenue for schools) - it relies on local property taxes for 90 percent of school funding. Second, because New Hampshire is one of only two states that has no sales or income tax, trying to design a new school finance system without additional taxing sources will be difficult and potentially explosive in a state that cherishes its current tax system - or lack thereof. Recognizing the complexity of creating a new plan, the court said the current funding system could stay in place for a year.

The Senate has created a select committee to examine state options and the House is looking at how other states have dealt with the issue. Governor Jeanne state sales or income tax, and is pushing a 23cent cigarette tax increase. Some observers worry that the approaching election will make it difficult to adopt a solution, although technically the state need not respond formally to the court order until next December.

However, Speaker Donna Sytek says the legislature must tackle the issue before the elections. "As a practical matter we have to do it this session. A new plan has to be in place in time to get the tax apparatus in place. Communities get their budgets together in August so we really have to get this done before we adjourn."

NEVER EASY, NEVER QUICK

The experiences of these five states speak to the complexity of school funding issues and the difficulties of settling them in a political environment. While a few states have addressed per-pupil disparities before court rulings were handed down, most have been pushed by "judicial intrusion." Once a case has been filed, it takes about four years to get a final ruling by a state appellate or supreme court. State courts only respond to cases that are brought to their attention by citizens and school districts that claim they have exhausted all other means of redress.

If legislatures want to ensure that their imprint - rather than the imprint of the courts - is left on state school funding plans, they should consider moving more quickly to address issues of equity and adequacy. Finance consultant Augenblick says legislatures can be much better prepared.

"What we hope legislatures do is what some states like Kentucky, Louisiana and Nebraska are already doing: have in place a committee or procedure to evaluate the system on an ongoing basis - so you always know where you stand," he says. Such committees have no authority to make policy changes, but can constantly collect information, evaluate progress and inform legislatures about potential problems. The information also can serve as an important basis for evaluating responses to potential or actual legal action.

Most experts do not anticipate that the 25-year record of litigation over state school finance systems will end soon. Wide disparities still remain in most states and will likely continue - even in states that have addressed court suits. Most recently, in January, several districts in Colorado filed suit against the state on the issue of the adequacy of school facilities in small rural districts. In an election year, this will be yet another interesting case to watch.

RELATED ARTICLE: BALLOT QUESTIONS DICTATE SCHOOL FUNDING

The courts are not the only outside force pushing legislators. Some changes have been initiated by voters. And, in some instances, this has wreaked havoc on the state education system.

Measure 5 passed by Oregon voters in 1990 came in the midst of a national mood of property tax revolt. The initiative was aimed at lowering property taxes - as opposed to specifically responding to school funding issues - but all knew there would be significant consequences for schools.

The measure shifted the share of support for K-12 education from local to state sources and caused a serious shortage of funds for Oregon's higher education system.

"It came at a time when corrections and Medicaid were consuming our budget, so the money had to come out of higher education," says Representative Carolyn Oakley, who chaired the House Education Committee in 1991 and remembers the pressure in the legislature in the aftermath of Measure 5. Oregon voters were not quite done with property tax reform. While Measure 5 limited property tax rates, voters also approved limits on property valuations in 1996. Measure 47 cut taxes on each property in the state and limited future growth to 3 percent per year. Once again, the Legislative Assembly was called upon to make up the lost school funding, which dropped about 20 percent.

Today, Oregon's economy is strong - $800 million went back to taxpayers last year. And higher education's share of the budget is steadily growing.

No state has a history of the use of ballot initiatives to resolve public policy issues like California's. The state's ballots are routinely the longest and most complicated in the country. Much of the California education funding system is the result of voter involvement.

Two particular initiatives have become well known because of the great difficulty they imposed on the Legislature and the chaos they created for the state economy and education. California voters passed Proposition 13 in 1978, limiting property taxes and the ability of local governments to raise revenue. The initiative produced an immediate $7 billion loss in state revenue and placed restrictions on the Legislature that ultimately kept it from dealing with the declining state economy.

To respond to Prop 13, lawmakers were forced to draw heavily on other budget items to make up the shortfall. Schools became more equal in per pupil spending, but generally poorer in terms of total spending per district. Local residents were barred from raising money for schools outside the tax limit. In the five years following Prop 13, California's national ranking in school spending dropped from 15th to 30th while class sizes increased.

The next year, voters passed the Gann Amendment (Proposition 4), which limited the amount of tax money governments can spend and requires a rebate of tax revenues to taxpayers in excess of that limit. In large part, the measure was a response to the problems created by Proposition 13. But the timing was bad - the national recession of the 1980s brought severe economic pressures to California and lawmakers' hands were tied by the additional restrictions. The California economy was pushed into turmoil.

In 1988, spending on schools was still relatively low, and voters responded with Proposition 98. The goal of the "School Funding for Instructional Improvement and Accountability initiative" was to improve the overall quality of California's public schools and community colleges by preventing future budget cuts. With its passage, California became the first state to guarantee in its constitution that 40 percent of the budget be used for education. Again, the Legislature was left to figure out how to interpret and implement this initiative. Prop 98 forced lawmakers to work with a fixed expenditure for education and a revenue shortfall. As a result, all services were cut.

Only recently has the California economy begun to recover, enabling the Legislature to finally put more money into K-12 education.

RELATED ARTICLE: A FORMULA FOR OHIO

Education finance consultant John Augenblick helped the Ohio task force devise an intriguing method for figuring the cost of an adequate education.

He began with the assumption that if Ohio could set education standards, there ought to be schools and districts that are meeting those standards. And if those schools and districts could meet standards, all schools ought to be able to meet them.

In approaching the question of funding he first identified a "base" amount - that is, the money left when you take away funding for such things as special education and transportation. This yielded 611 different numbers - one for every district. The consultant then threw out any unusual or abnormal districts - for example, those with particularly high property wealth or low family income. This left approximately 500 districts."

Augenblick then began to link spending to outcomes, but added information about how well districts did on specific state objectives. these included a passage rate of 75 percent on fourth grade and ninth grade proficiency tests, 85 percent on 10th grade proficiency tests and 60 percent on 12th grade tests. Other criteria included a drop-out rate of 3 percent or less and an attendance rate of at least 93 percent. The analysis indicated that 122 districts had met 17 of these 18 measures - or were doing a good job meeting state standards with current funding. Again, Augenblick eliminated those 5 percent to 10 percent at the top and bottom of the list.

This left 102 districts characterized as usual, not high or low spending, and meeting 17 of 18 output objectives. Augenblick took the average spending of these districts - $4,269 - as the base. Each district's spending was calculated using this base and multiplying a "cost of doing business" factor that was between 1 and 1.48. This factor takes into consideration basic costs to serve gifted and talented students, those enrolled in vocational programs, special education students and students from low income families.

The legislature approved in February an increase in per pupil spending to $3,851 for 1998-99 and to $4,414 in four years. Ohio now guarantees $3,663 per pupil.

RELATED ARTICLE: THE VERMONT PLAN:

* Equalizes all towns' ability to pay for schools.

* Bases school taxes on income rather than property for most Vermonters.

* Reduces nonhomestead school property taxes.

* Makes equal educational opportunity a fundamental right for all children and develops standards for student performance.

* Requires annual reports on state-wide and local school performance.

* Provides payments in lieu of taxes to towns with state-owned property.

* Reduces school taxes for most Vermonters by increasing the share paid by the state from gasoline, bank franchise, corporate income, room and meals, telecommunications sales, purchase and use taxes, and securities registration fees.

RELATED ARTICLE: SCHOOL FACILITIES: BUILDING A STATE ROLE

Lawmakers have started to look at the state's role in providing local school districts with funds for needed new construction and for maintenance and upkeep of existing school facilities.

Although local school districts are the primary funders of capital outlay and resulting debt service, many states place limits on local funding. Some limit property valuations to keep down taxes and some require super majorities for voter approval to issue bonds, making it hard for school districts to get the necessary approval.

A handful of states use a school construction fund that provides districts with low-interest loans. Coupled with state grants, usually made to only the most needy districts, this approach can be used by states that want to assist with capital outlay, but in a limited way. Other methods states use to finance capital outlay include:

* Funding facilities through the basic support program or school finance formula. Each pupil is guaranteed a set amount determined by formula.

* Issuing bonds to pay for school construction, then leasing facilities to districts at a minimal rate. (In California it's $1 a year for 40 years.)

* Granting a percentage of equalization based on district wealth.

* Providing flat grants. Indiana provides $40 per pupil, and districts can apply for low-interest loans through the Common School Fund.

* Granting full funding. In Hawaii, all capital projects must be approved by the Legislature and are funded entirely by state tax revenue.

* Entering lease purchase agreements with individual school districts.

* Selling a certain amount of general obligation bonds and earmarking a percentage of lottery proceeds to pay interest on the debt.

* Assessing municipal impact fees on developers to cover the effect of new subdivisions on the adjoining school district.

RECENT LEGISLATIVE ACTIVITY

In 1996, North Carolina voters approved by an overwhelming majority (73 percent) a $1.8 billion state bond proposal for public school capital improvements. The measure had previously been approved by the legislature as part of a recommendation by the School Construction Interim Committee.

Arizona remains the only state that has been sued successfully by a group of school districts solely on the inequities resulting from school district capital funding. So far, two plans passed by the Legislature and signed by the governor have been turned down by the courts. The Legislature has until the end of June to have another plan in place or the court will freeze state aid to schools.

Faced with a $3.3 billion price tag to meet the governor's Commission on Education's estimate of the state's school repair and construction needs, Florida lawmakers were called into a November special session on school overcrowding. After a week, leaders of the House and Senate brokered an agreement to spend $2.7 billion in borrowed funds to build schools over the next five years.

The plan includes using $180 million in lottery revenues over 30 years as collateral to borrow up to $2.5 billion in school construction bonds, a one-time-only funding infusion of $200 million and two grant programs totaling $600 million. To replace lottery money going to school construction, the state will boost overall school funding by $180 million each fiscal year for 30 years.

Georgia voters in 1996 approved by a razor thin 51-49 ratio a 1-cent local sales tax for education. Although the enabling legislation does not require that proceeds be earmarked for school construction, districts can use the money for that purpose.

Last year, the Texas Legislature approved a new $200 million facility assistance program. Revenue is to be used for the payment of principal and interest on bonds. Districts must apply to the education commissioner before issuing bonds that will be supported with state help.

Julie Davis Bell and Terry Whitney are education experts at NCSL.