The FY 2010 Budget Gap and Chapter 70 Support

Heading into the FY 2010 budget process, it was clear that Massachusetts faced a sizable budget gap. By the time the Senate budget was voted on, the size of the budget gap had grown to approximately $5 billion, or approximately 15 percent of total FY 2009 state spending. With education aid in Massachusetts representing one of the largest expenditures in the state budget, such a large budget gap was sure to impact the Commonwealth’s ability to fund public schools.

In the FY 2009 budget, the state appropriation for Chapter 70 education aid was $3.948 billion. The 2008-2009 school year marked the third year of a five-year phase-in of changes to the state’s education funding system adopted in FY 2007. It was estimated that a state spending level of approximately $4.3 billion (an increase of approximately $300 million over FY 2009) would be necessary to keep up with inflation and enrollment changes and fully implement the fourth year of the FY 2007 changes.¹

Reducing State Chapter 70 Spending in FY 2010

In order to reduce the budget impact of Chapter 70 spending in FY 2010, the state Legislature employed four strategies:

1. Limiting the growth of education cost increases by changing how annual education budgets at the district level account for inflation. As discussed below, the state used a new method to calculate cost increases over the past year, resulting in a much lower inflation adjustment than would have been the case if existing state statute had been followed.
2. Changing the existing funding formula to eliminate several types of aid and adopting new policies to reduce aid increases for specific types of communities.
3. Cutting state funding for each school district by 2 percent. For many districts this cut was mitigated by use of federal stimulus funds, however 207 school districts will receive less aid in FY 2010 than they did in FY 2009.
4. Using federal stimulus dollars, rather than state revenue, to pay for all increases required to ensure that all districts could spend at the Foundation Budget levels required by law. The federal American Recovery and Reinvestment Act (ARRA) included close to $50 billion to help states avoid steep budget cuts, especially in education. Through ARRA’s State Fiscal Stabilization Fund (SFSF), Massachusetts will receive $994 million between FY 2009 and FY 2011. In the FY 2010 budget, the state used $167 million of this amount to ensure that each school district received sufficient aid from state and federal sources to reach their Foundation Budget.

These three strategies reduced the FY 2010 state obligation for Chapter 70 by approximately $430 million. Of these savings:

• $167 million is due to using federal stimulus funds.² Using federal funds saves the state $167 million because these funds are used to ensure that each district reaches their Foundation Budget. Without federal funds, the state would have been forced to either use state funds to meet foundation gaps or not meet its commitment to the Foundation Budget.
• $79 million is due to reducing aid to each school district by 2 percent.
• $184 million is due to changes made to how the Chapter 70 formula was implemented.

How did Chapter 70 in FY 2010 budget differ from previous years?

Over the last three years, the Chapter 70 formula has worked in a manner consistent with changes made in the FY 2007 budget. These changes focused primarily on how local contributions to school districts are determined, while making few changes to how the Foundation Budget in each school district is calculated. In the FY 2010 budget, the Legislature not only altered or suspended some of the provisions created in FY 2007, but also used a new method to account for inflation.

Change in Inflation Adjustment

Each year, the state adjusts the Foundation Budget in each school district to account for cost increases over the previous year. The original Chapter 70 statute sets forth how this annual inflation adjustment is calculated. Under the law, the inflation adjustment equals the increase in state and local government costs during the first quarter of the two previous fiscal years, with a cap of 4.5 percent. However, in years when the inflation rate exceeded 4.5 percent, the Legislature waived the cap and increased Foundation Budget rates by the full amount. During the FY 2010 budget process, the Senate budget used a different time period to calculate inflation, which was then included in the final budget document. Specifically, the FY 2010 budget changed the inflation period from the start of FY 2007 to the first quarter of FY 2008 to the second quarter of FY 2007 to the second quarter of FY 2008.

This change eliminated the largest quarter of cost growth (the growth during the first quarter of FY 2007) from the calculation, simply skipping over it. By using this different time period, the inflation adjustment was 3.04 percent, as opposed to 6.75 percent (which is the inflation adjustment according to the statutory calculation) or 4.5 percent (the statutory cap on inflation). Using a lower inflation adjustment kept the funding level called for in each district lower, reducing costs to the state. Changing the inflation adjustment in this way ignores a quarter of cost growth that has occurred at the district level. Unless this cost growth is then accounted for in future budgets, Foundation Budgets will not fully account for inflation increases over time.

Suspension of Forms of Aid

In the FY 2007 changes, four types of state aid were used: Foundation aid, Down-payment aid, Growth Aid, and minimum aid. In the previous three state budgets, each type of aid was calculated for each school district, with the district receiving whichever type of aid was largest. Under this system, every school district was guaranteed an increase in state aid from the previous year.

In the FY 2010 budget, however, the only type of aid calculated is Foundation Aid. Foundation Aid is the difference between a district’s Foundation Budget and the sum of its required local contribution and the minimum amount of state aid they could receive. Foundation Aid guarantees that each school district is able to reach its Foundation Budget.³

In FY 2010, total Chapter 70 education aid increased by $89 million over the FY 2009 appropriation. While the majority of Foundation Aid is made necessary simply due to increases to local Foundation Budgets from inflation, Foundation Aid also goes to some communities whose local required contribution was decreased in FY 2010 in order to get that district closer to their Target Share, the percentage of a district’s Foundation Budget that the local district should ultimately contribute based on its underlying ability to pay. In addition, there is a maximum target share of 82.5 percent (of foundation budget), regardless of underlying ability to pay. This means that wealthy communities that could afford to contribute more than 82.5 percent toward the foundation budget, are allowed to reduce the support and given additional state funds to replace the reduced required local contribution. It is important to note that the FY 2010 budget uses solely federal stimulus funds for Foundation Aid.

Continued Reductions to Local Contributions for some Communities

One of the chief changes in FY 2007 was a move to get each municipality to contribute at a target level dictated by the funding formula. Communities that the formula considers contributing at too high a level (high-effort communities) were placed on a schedule to reduce their local required contribution over five years, until their required contribution equaled their Target Share. In FY 2010, these communities were slated to reduce their required contribution by 50 percent of the gap between their preliminary local contribution and their target contribution. However, the FY 2010 budget sets the effort reduction percentage at 15 percent which reduced the amount of Foundation Aid necessary to bring all school districts to their Foundation Budget level. This means that these communities will be limited in the amount of their Foundation Budget they can shift from local to state spending.

New Increases to Local Contribution for Other Communities

The FY 2007 changes also included provisions for increasing the required local contributions for communities contributing below their target level. But communities where the historic required spending level was below the new target local share were not required to increase their local spending all at once. Rather they were required to increase education spending by the growth in municipal revenues each year, or slightly faster, as determined by formula.⁴ Some of these communities, however, chose to spend above that required level. The FY 2010 budget penalized districts that are below the target but spent above their requirement by requiring them to continue most of that extra local spending and then reducing their state aid by up to that amount.

Specifically, in the FY 2010 budget, communities whose initial local contribution was below their target have up to 95 percent of their actual spending level from FY 2008 converted into required spending. This means that a low-effort district that, in the past, spent above their required contribution, would now be required to spend up to 95 percent of what they actually spent in a previous year (the increase is capped at the district’s target). In most communities, the actual local spending on education exceeds the required minimum spending level, sometimes by quite a large amount. This new provision was included to capture much of this actual spending as required spending, thereby bringing a number of these low effort communities substantially closer to their Target Share in one year. Fiscal Year 2008 was used as the base year because it is the most recent year for which the Department of Elementary and Secondary Education have complete spending data at the district level.

State Aid Reduction

The FY 2010 budget includes a state aid cut of 2 percent for each school district from its FY 2009 Chapter 70 aid level. While federal funds are used to make up for these cuts for districts in need of aid to reach their Foundation Budget, this cut still results in a total aid reduction for 207 school districts.

1. For more information on the Chapter 70 changes made in FY 2007, see the MassBudget Briefs, “Public School Funding in Massachusetts: Where We Are, What Has Changed and Options Ahead” and “School Finance Reform and the FY 2010 Budget” Both briefs are available here.

2. For the purposes of this brief the $167 million in ARRA funds are considered part of Chapter 70 spending. Technically, while these funds were distributed based on the Chapter 70 system, they are not part of the FY 2010 Chapter 70 appropriation.

3. For a description of what the Foundation Budget is, please read “Public School Funding in Massachusetts: Where We Are, What Has Changed, and Options Ahead."

4. For more information on how required local contributions have been increased, please read the MassBudget document, “School Finance Reform and the FY 2010 Fiscal Year Budget."