Chapter 70 in Fiscal Year 2011

FY 2011 promises to be another tough budget year for the state. Even with a stronger-than-expected recovery in state tax revenues, the state will face another budget gap and there will be pressure to limit the state’s commitment to Chapter 70. Given this likely scenario, it is not too soon to consider what approaches the state could take to limit cost increases without sacrificing the ability of school districts to provide students with an adequate education.

The FY 2011 Chapter 70 situation is potentially even more difficult than FY 2010 because additional federal financial assistance may not be available to offset state funding reductions. Already in FY 2009 and FY 2010, the state committed to using $580 million in federal money to fully fund Chapter 70. It is possible that the state’s entire SFSF allocation will be spent prior to FY 2011. If so, without additional federal assistance, the cost of Chapter 70 to the state will increase substantially next year as the state is required to assume most, if not all, of the share of Chapter 70 funded with federal funds in FY 2010. Fiscal Year 2011 Chapter 70 costs to the state will also increase due to inflation and any Chapter 70 reforms that the state chooses to fund. Increased inflation costs will also have to be funded for the state to correct the omission of a quarter of cost growth in the FY 2010 budget.

Given these challenges, it is important to consider options for amending the current Chapter 70 distribution formula to ensure the largest impact for the state’s investment while meeting commitments for adequacy, equity and fairness and providing the state’s next generation with the skills and knowledge to participate fully in our economy, civic life and all other aspects of society.

While FY 2011 promises to be a difficult year for public education funding, it also offers an opportunity to examine more carefully the efficacy and cost effectiveness of the individual reforms introduced in FY 2007 as well as a serious discussion of the costs of a truly comprehensive Foundation Budget. Since the beginning of Education Reform the system for calculating each district’s Foundation Budget, such as the adequacy of the dollar amounts associated with the various aspects of education, have been left largely unchanged. A reexamination of the Foundation Budget would be an essential first step in ensuring that the Foundation Budget does accurately reflect the true costs of education.

Cost-Saving Options:

Reduce the floor on state aid instituted in FY 2007

The FY 2007 Chapter 70 changes created a minimum state aid floor of a 17.5 percent Foundation Budget. This means that, when the changes are fully phased in, each school district will receive a minimum of 17.5 percent of their Foundation Budget in state aid. This change was made partly in an effort to increase state aid to communities that believe their local ability to contribute is overstated by the wealth measurement component of the formula. While the aid floor has succeeded in increasing increased aid to these communities, it has also resulted in millions of dollars in new aid directed to the most affluent communities in the state. Although the rationale for the minimum aid floor may have merit, it must be weighed against other funding needs.

Suspend Effort Reduction

A chief provision of the FY 2007 changes was implementation of a system by which communities judged to be contributing too much were able to slowly reduce these contributions over time. Contribution reductions were continued (at a lower level) in FY 2010, meaning that some communities contributed less toward their schools than in the previous year and required additional outside aid to reach Foundation Budget. While allowing these communities to reduce their local contributions to education is a legitimate long-term equity goal, given the economic climate it is reasonable to ask communities to maintain their local effort.

State Aid Options:

In addition to possible cost-saving measures, the state also faces choices regarding components of the FY 2007 changes that will cost additional money. Most importantly, the state must address the issues caused by the change to the inflation factor in FY 2010.

Reinstitute Growth Aid

Growth Aid is equal to the Target Aid share of any Foundation Budget increase for each school district.¹ Growth Aid was designed to ensure that the state continue to assume an appropriate funding responsibility in high growth districts. Reinstituting Growth Aid would provide additional funds to districts that face real cost growth, but are not entitled to Foundation Aid.²

Restoring the FY 2010 State Aid Reductions

As discussed earlier in this brief, one of the chief dangers to school districts is the 2 percent cut in the FY 2010 budget will be the basis for determining additional state aid in future years. For districts who do not receive Foundation Aid, such a policy decision would result in the 2 percent reduction being imbedded in their state aid amounts in future years. Using FY 2009 state aid levels to calculate minimum state aid in FY 2011 would increase the state’s Chapter 70 spending by approximately $50 million.

Recalculate Inflation to Account for the Quarter Skipped in FY 2010

To avoid allowing spending in local school districts permanently to fall below the foundation budget level that the state has determined to be the minimum amount needed to provide an adequate education, the quarter year of inflation that was skipped in the FY 2010 Chapter 70 calculations will have to be accounted for in the FY 2011 calculations.

This chart adjusts the FY 2006 per pupil Foundation Budget amount by each subsequent year’s inflation factor. The most recent inflation data available is used to estimate the FY 2011 inflation factor.³ As the chart clearly shows, the FY 2010 decision to skip a quarter of cost growth affects not only FY 2010, but will continue to depress Foundation Budgets in future years if not corrected.

One method for including the cost growth between the first quarter of FY 2008 (which was skipped in the FY 2010 budget) would be to use the cost growth between FY 2007 and FY 2009 as the basis of the inflation factor in FY 2011. Using FY 2009 foundation budget levels and the two years of inflation data would capture all cost trends over that time and adjust for the missing quarter in the FY 2010 budget , ensuring an accurate representation of the cost pressures felt in school districts.

1. As mentioned earlier in the brief, the FY 2007 reforms included defining a target level of contribution for each school district. This target level is expressed as a percentage of Foundation Budget. The difference between that Target Share percentage and 100 percent is therefore the Target Aid level.

2. One of the downsides of Growth Aid is that it can also provide new aid to districts who already receive an aid level that exceeds their Target Share, making more difficult efforts to reduce existing inequities. For more information on Growth Aid, please read the MassBudget document, “School Finance Reform and the FY 2010 Fiscal Year Budget.”

3. An assumed 3 percent inflation rate is used for FY 2012 and FY 2013 to show the effects of the change in future years.