Texas School Finance: Doing the Math on the State’s Biggest Expenditure
Published January 2019
Texas uses local, state and federal funds to support educational operations and facility construction in public school districts throughout the state. Most of this revenue is state and local; the federal government provides a relatively small amount of funding to school districts for administration of the child nutrition program, Every Student Succeeds Act grants and other federal initiatives.
Local funding for Texas public schools is generated primarily by an M&O property tax levied on local taxable values. Each school district adopts a certain M&O tax rate per $100 of taxable property valuation.
One of the most important elements of the 2006 school finance reforms reduced local property tax rates throughout the state. It did this by establishing a compressed tax rate (CTR) for each district. A district’s CTR is its 2005 M&O tax rate multiplied by a state-set 66.7 percent, effectively reducing the 2005 rate by a third.
For example, a district with a 2005 M&O rate of $1.50 has a CTR of $1.00 ($1.50 multiplied by .667). To receive full state funding, districts must levy a tax rate at least equal to its CTR, but for most their maximum M&O tax rate became the CTR plus 17 cents — an effective cap of $1.17 per $100 of valuation. (Some school districts in Harris County have been allowed to adopt tax rates above the $1.17 cap; in addition, due to the effects of tax rate compression, some districts’ M&O rates are below $1.00.)38
Today, nearly all Texas school districts are subject to an M&O tax rate minimum of $1.00 per $100 of valuation and a cap of $1.17. The number of districts at the $1.17 cap rose by 178 percent between 2008 and 2017, from 144 to 401. The number at or below the minimum M&O tax rate of $1.00 fell by 70 percent, from 67 to 20, in the same period (Exhibit 8).
|Tax Year||Number of Districts at M&O Statutory Maximum||Number of Districts below $1.00|
Sources: Texas Education Agency and Texas Comptroller of Public Accounts
After the CTR was established in 2006, most school districts were allowed to add an overall total of 4 cents to their M&O rates without voter approval. Beyond that rate, school districts generally must obtain voter approval through a local tax ratification election (TRE) up to the M&O cap of $1.17. Since 2009, 434 school districts have held TREs. Of those, 355 or 81.8 percent were approved.39
In addition to the M&O property tax, school districts levy an interest and sinking property tax to collect revenue for payments on any debt incurred for facilities construction. I&S revenue is not subject to recapture.
The Texas Constitution authorizes counties, cities, school districts and special-purpose districts to levy property taxes. In tax year 2017, Texas school districts levied $32.1 billion in property taxes, 54.1 percent of all property taxes levied by political subdivisions in that year.40
From fiscal 1994 to 2005, the average statewide total property tax rate for school districts rose by 24 cents, from $1.44 to $1.68. Since property tax compression was implemented in 2007, the average statewide school district property tax rate has risen from $1.25 to $1.35, with M&O rates increasing by 4 cents and I&S rates by 6 cents (Exhibit 9).
|Fiscal Year||Total Tax Rate||M&O Rate||I&S Rate|
Note: Average M&O rates are weighted by taxable value. Rates are per $100 of property valuation.
Source: Texas Education Agency
Texas property values have been rising — by about 7 percent between 2017 and 2018 alone, for example.41 As a result, many school districts haven’t had to increase their M&O rates to raise additional revenue. During the 2017 tax year, the average M&O tax rate in Texas was $1.07 per $100 of taxable property valuation.42
In Texas, local appraisal districts appraise and value property located within their boundaries. (Appraisal district boundaries coincide with county boundaries, but appraisal districts are not part of county governments.) Each local taxing unit in the appraisal district, including school districts, sets tax rates and collects property taxes based on those appraised values after various deductions and limitations are applied.
State funding, however, is based on a study of the locally appraised property values conducted by the Texas Comptroller’s office. State law requires the Comptroller’s office to study the total taxable value of property in each Texas school district, as reported by appraisal districts, at least every two years.
This property value study (PVS) is intended to determine whether appraisal districts are appraising property at market value, to ensure the appropriate values are used to calculate state funding. The state’s commissioner of education uses the PVS as part of the state’s funding formula to determine how much state funding each school district is eligible to receive.
Most state funding for public education comes from the state’s General Revenue-Related (GRR) funds, including the General Revenue Fund, Available School Fund, State Technology and Instructional Materials Fund and the Foundation School General Revenue Dedicated Account.43
In addition, since 2007 the state’s Property Tax Relief Fund (PTRF) has supplemented education expenditures to help lower property tax rates. In recent decades, combined GRR and PTRF funds generally have trended upward, but year-over-year growth rates tend to fluctuate fairly dramatically with the rest of the economy.
Exhibit 10 shows the state’s share of the calculated FSP entitlement as a percentage of the state’s annual GRR and PTRF revenue for fiscal 1996 through 2017. During this period, the share of GRR and PTRF devoted to the FSP averaged about 37.3 percent. The large increase after 2006 is the result of the property tax rate compression approved in that year, which caused the state to increase its contributions. More recently, however, the state share has begun to decline again as property values and property tax revenue both rise and expenditures for health and human services take an increasing share of the state budget.
|Fiscal Year||FSP Share of State Appropriations|
Source: Texas Comptroller of Public Accounts