Texas School Finance: Doing the Math on the State’s Biggest Expenditure
Published January 2019
Education is essential to the growth of any modern economy. As knowledge-based industries assume ever-greater importance to the state and the nation, educated workers are vital.
For decades, the state has sought to provide an equitable public school system funded by shared state and local revenues. In 2016, the Texas Supreme Court ruled the system “meets minimum constitutional requirements” but needs “transformational, top-to-bottom reforms.”1
This report analyzes the history and intricacies of Texas’ school finance system, to provide the perspective needed to understand the fundamental legal, financial and policy challenges facing the system.
Demands on the state’s education budget have never been higher. Texas’ public schools serve more than 5 million students, and enrollment is growing at a rapid pace. The number of economically disadvantaged students, who are costlier to educate, is rising rapidly, outpacing the growth of the overall student population. Demographers project this trend to continue, raising significant concerns about the system.
School finance is undoubtedly one of the most difficult issues Texas state policymakers have to address, and attracts more opinions and criticism than any other. This report does not address many issues falling under the general heading of education reform, focusing solely on funding.
These are some key points about the current school finance system:
Property tax bills are rising sharply, placing a growing burden on Texas businesses and homeowners.
Most public school funding in Texas comes from a combination of state and local revenue. School districts levy property taxes to fund the local share.
Texas property tax rates, which are set by local entities including school districts, have changed relatively little in recent years. Property tax revenue, however, has increased due to skyrocketing property values.
As a consequence of strong economic growth and current funding formulas, both the local share of funding and recapture payments continue to rise.
While the state and school districts both are responsible for a share of school funding, the Foundation School Program (FSP) formulas count the district’s local property tax revenues first, with the state providing the remaining portion of each district’s “entitlement” — its total amount of funding as dictated by the formulas.
A reasonable balance between state and local funding is crucial to the system’s viability and helps to minimize its reliance on local property tax revenues. Yet the formulas ensure that any increase in local tax revenue reduces state funding. The state’s share of FSP revenues was 46.2 percent as recently as 2008; since then it has declined steadily, to 36.0 percent in 2018.2
In essence, it’s a math problem:
X + Y = Z
As with any equation, the two sides need to balance. If X is local revenue, Y is state revenue and Z is the total amount needed to fund our schools, as fixed by the formulas, any increase in X requires a decrease in Y.
Texas’ school finance formulas do not respond to inflationary effects.
The goods and services used to provide public education are subject to inflation, just as any other element in our economy. While both state and local per-student funding rose greatly between fiscal 2000 and 2018, for instance, after adjustment for inflation state funding actually fell. The FSP formulas that determine the funding school districts receive have no mechanism that adjusts automatically for inflation.
“Recapture,” the state’s primary vehicle for ensuring equity, accounts for a growing portion of overall school district funding.
To compensate for varying amounts of property wealth among Texas school districts, the system uses “recapture” to transfer some local revenue from property-wealthy districts to those with low property wealth. Essentially, recapture is used to bring more equity to the system.
Due mainly to the FSP formulas, recapture amounts rise over time with taxable property values.
If left unchecked, the school finance formulas will cause more districts to lose funding to recapture; the Houston and Dallas independent school districts (ISDs) have joined Austin ISD as recapture districts in recent years. The addition of large urban districts to recapture status will significantly increase the number of students attending school in districts that lose local funds to the state.
Any significant change in current Texas school funding patterns will require changes to the FSP formulas.
The Legislature’s ability to provide an efficient system of public education — and to constrain the system’s increasing reliance on local property tax revenues — depends largely on its willingness to make changes to the school finance formulas.
Growing enrollment, especially among low-income and other disadvantaged students, will continue to exert upward pressure on funding needs.
About 59 percent of Texas’ public school students are classified as economically disadvantaged, and their share of total enrollment continues to rise — as will the demand for special programming and compensatory educational funding.
Any consideration of school funding sources should take into account their inherent volatility and their long-term ability to grow with funding needs.
The demand for education funding is rising steadily, but tax collections can and do fluctuate with the economy on which they are based. While property taxes are remarkably reliable as a funding source, the sales tax that supplies well over half of all state tax revenue is vulnerable to the effects of economic downturns. Severance taxes are even more volatile, often varying by 50 percent or more annually. Any consideration of public education finance should recognize the higher inherent volatility of state revenue.
Any standard for the relative state and local shares of public school funding should consider the characteristics of all funding sources.
The historical average of 40 percent state funding and 60 percent local funding seems reasonably attainable and may provide a useful starting point for these discussions.