A comprehensive look at NH’s school-funding commission report

Governor, Legislature to be presented with possible overhaul of property tax system

School FundingAfter meeting regularly and mostly remotely since January, the Commission to Study School Funding is putting the finishing touches on its final report for presentation to the Legislature and governor by Dec. 1.

The commission – the third to tackle the issue since the 1990s, when the New Hampshire Supreme Court struck down the system – has undertaken the most expansive and intensive review of school funding to date.

The 18 members — lawmakers, educators and private citizens — have worked under the chairmanship of Rep. David Luneau, D-Hopkinton, and with the administrative support of a team from the Carsey School of Public Policy at the University of New Hampshire. The commission applied $160,000 of its $500,000 budget to contract with the Washington, D.C.-based American Institutes for Research (AIR) for research and consulting services. An extensive public outreach effort has gathered information and sounded opinion from a broad cross-section of individuals, organizations and interests in all quarters of the state. Few, if any, stones have been left unturned.

The report

The commission has not prepared a specific, comprehensive plan ripe for legislative action to reform the financing of public education. Instead, the commission has recommended fundamental principles and policy considerations for lawmakers to follow. In particular, the commission has proposed a fresh definition of a constitutionally adequate education and presented several options for funding it.

Among the principles affirmed by the commission, two are paramount. First, every student must have an equal opportunity to attain the statewide average level of educational achievement. And second, the system of funding pubic schools should seek to minimize the relationship between the fiscal capacity of communities on one hand and the levels of investment and performance of their schools on the other.

At the same time, any school-funding plan must comply with the rulings of the New Hampshire Supreme Court, which have set the parameters of the issue for the past four decades.

The inequities

AIR undertook an exhaustive statistical analysis of the current school-funding system that found it is marked by inequitable opportunities for students and inequitable burdens for taxpayers.

AIR concluded that municipalities “with higher poverty rates and lower property wealth are doubly penalized under New Hampshire’s current system.”

On average, spending per student is less in these cities and towns than in their more affluent counterparts while taxpayers in these municipalities generally bear higher, often much higher, local school property taxes than residents of wealthier communities.

These inequities weigh heavily on the performance and achievement of students. AIR found that, on average, students in districts with high numbers of economically disadvantaged students (and to a lesser extent students receiving special education services and learning English language) perform less well than those in districts with fewer such students.

“Students in districts serving these high-need students are not being provided an equal opportunity to learn as students in districts serving fewer students with additional needs,” AIR reported.

On average, the performance of New Hampshire students ranks among the highest in the country. And only seven states spend less per student than New Hampshire. But no state contributes less to the cost of its public schools.

AIR concluded that the school-funding system in New Hampshire, with its preponderant reliance on local property taxation, is easily the most regressive among the New England states in that it provides the fewest financial resources to the school districts with the greatest needs.

Mining data from the state Department of Education and Department of Revenue Administration, AIR developed a model — the Education Cost Model (ECM) — that simulates how funds can be distributed and revenue can be generated to provide both equitable opportunity for students and equitable treatment for taxpayers.

While the commission accepted the design of AIR’s model, particularly its approach to defining an adequate education and use of a statewide property tax to fund public schools, it refrained from either endorsing or adjusting the dollar values calculated by AIR.

Defining an adequate education

In the past, the Legislature has calculated the cost of an adequate education as the sum of the cost of the inputs — salaries, materials, equipment, buildings, etc. — required to provide students with skills, competencies and knowledge in the range of academic disciplines, which together represent the standards for school approval.

Departing from precedent, the commission, at the recommendation of AIR, chose to define the cost of an adequate education as the financial resources required to provide each student with the opportunity to reach a level of educational achievement matching the average attained by students statewide.

Consequently, the cost would vary from district to district with the differences in the texture of their student populations. At the same time, the minimum standards, which provide the framework for the curriculum and instruction provided by public schools, will remain in place and intact.

Pricing adequacy

AIR calculated the cost of providing an adequate education in each of the 234 municipalities at $2.9 billion, approximately the total amount of current state and local expenditures for K-12 public education. In other words, the issue is not the amount but the distribution of school funding.

AIR’s formula starts from a base cost per student of $5,868. The base cost is weighted to reflect the additional costs of bringing students eligible for free and reduced-price lunch, requiring special education services and learning English language — the primary factors in student performance — to the state average level of achievement. Other lesser weights capture costs that vary with the size of schools and enrollment by grade level within them.

For example, Berlin, where students living in poverty and with special needs represent 59% and 23% of enrollment respectively, would receive $22,686 per student. Gilford, with 20% of its students living in poverty and 15% with special needs, would receive $17,753 per student.

The distribution formula would be adjusted periodically — at least every 10 years and perhaps more frequently — to incorporate changes in student populations.

Although some have argued that the court forbid the Legislature from “targeting” state aid, the justices, while affirming the fundamental constitutional right to a state-funded adequate education, have held, “It is not the right to horizontal resource replication from school to school and district to district.”

Raising the money

The report includes three options for funding public education – two fully developed plans presented by AIR incorporated in the body of the report and a third, attached as an exhibit, outlining the approach taken by Massachusetts. The commission has refrained from explicitly endorsing the design or attaching dollar values to any one of these plans.

AIR’s scenarios are embedded in its Education Cost Model, Both would raise $2.9 billion. They include continuing to appropriate some $600 million in state dollars from the Education Trust Fund – a potpourri of revenues raised from existing state taxes – and $32 million in catastrophic aid. Otherwise, they both rely solely on property taxes to raise the balance of $2.3 billion required to fulfill the state obligation to fund the cost of an adequate education.

The first scenario would pair a “mandatory minimum local contribution,” which, at a uniform rate of $5 per $1,000 in assess value, would raise $937.5 million, with a statewide property tax at a rate $7.24, raising $1.4 billion.

The second would raise the entire $2.3 billion solely with a statewide property tax with a rate of $12.05. AIR calculated that under both scenarios, school property taxes would be reduced in 167 of the 234 of cities and towns, or 70%.

The statewide property tax would be collected from all taxpayers by the municipalities and remitted to the state, then redistributed among school districts according to the terms of the weighted formula.

A role for local property taxes?

Incorporating a mandatory minimum local contribution in the funding mechanism would test two principal rulings by the New Hampshire Supreme Court in the foundational Claremont decisions of 1993 and 1997 and reaffirmed several times since.

The justices held that the state must bear the full cost of funding the opportunity for an adequate education — from first dollar to last — and that the taxes levied to fund this obligation must be “uniform in rate and equal in valuation throughout the State.”

The court has addressed the first dollar-last dollar issue several times since 1993 – never more bluntly than in 2006, when it held that “whatever the state identifies as comprising constitutional adequacy it must pay for. None of that financial obligation can be shifted to local school districts, regardless of their relative wealth or needs.”

As designed by AIR, the mandatory minimum local contribution would be levied at flat rate of $5, as required by the “equal in valuation and uniform in rate” rule. However, 24 municipalities with relatively high property values, the $5 rate would raise more than enough to meet their costs of providing an adequate education. As presented, under the plan taxpayers in those towns would pay a lower rate sufficient to fund an adequate education, which would be contrary to the court ruling.

Alternatively, if taxed at the full $5 rate, the excess revenue collected in these municipalities, estimated at about $32 million, could be remitted to the state and added to the funds to be redistributed among districts without violating the court’s rule. But, in that case the tax would be “local” only in form, not substance.

The Massachusetts model directly challenges both court rulings. In Massachusetts, a local contribution accounts for 59% and state aid 41% of education spending.

There, the state calculates the education cost and fiscal capacity of each municipality. Municipal fiscal capacity is measured by both aggregate property value and total personal income. The minimum local contribution represents a percentage share of local educational costs prescribed by the state based on fiscal capacity and raised by local property tax rates. The local contribution is capped at 82.5% of the school budget.

This approach was championed throughout the commission’s proceedings by Concord attorney Bill Ardinger, the governor’s appointee to the commission, who authored the attachment to the report explaining the Massachusetts system.

Reckoning with ‘donor towns’

Easily the most controversial aspect of the report will be the recommendation to fund the distribution of state aid with a statewide property tax, which will reopen the issue of so-called “donor towns.”

With or without a mandatory minimum local contribution, the statewide property tax rate modeled by AIR of just more than $12 per $1,000 would represent an increase for some 70 municipalities with relatively high assessed valuations. There, the rate would not only generate sufficient revenue to fund an adequate education but also excess revenue beyond that. The excess revenue would be remitted to the state for distribution among those municipalities with assessed valuations insufficient to fund the cost of an adequate education at the prescribed property tax rate.

One calculation estimates that under the first funding scenario modeled by AIR, which includes the mandatory minimum local contribution at the $5 rate, 70 municipalities would generate some $365 million in excess revenue. Without the local contribution, 72 municipalities would generate an excess of $342 million.

To ease the impact of continued reliance on property taxation and higher taxes in many municipalities, the commission recommends improving one program and introducing another to provide relief to individual property taxpayers.

The existing program for both low- and moderate-income taxpayers should be expanded to include renters as well as homeowners while the eligibility requirements should be adjusted and benefits increased.

Homeowners of valuable property but with limited incomes, should be offered the option of deferring a share of their property tax liability, then paying the arrearage when the property is sold.

After initially proposing that a new school-funding program should be phased in over three budget cycles, the commission agreed to ask the Legislature to address the issue as soon as possible.

The commission’s report, together with a full record of its proceedings — including video transcriptions and minutes of all meetings as well as all supporting documentation and materials — can be found on-line at carsey.unh.edu/school-funding.

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