After Frisco ISD voters passed a tax proposition in November, changes may be made to the state’s funding formula for school districts in the upcoming Texas legislative session. The changes, proposed by Gov. Greg Abbott, could slow the revenue growth for FISD and other school districts.
The passage of FISD’s tax ratification election in November increased the district’s maintenance and operations tax rate to the state maximum of $1.17 per $100 valuation. The district also decreased the interest and sinking tax rate, doing what is called a tax swap. The M&O increase is expected to bring in an additional $35 million per year for the district as well as cause FISD to resume paying into recapture a year earlier than projected.
For the 2018-19 school year FISD is projected to pay nearly $15 million to the state in recapture funds, a finance mechanism in which property-wealthy school districts share some of their revenue with property-poor school districts. By the 2022-23 school year early estimates show FISD paying more than 10 times that amount if school finance law does not change.
“The environment we’re in right now, our property tax base is not slowing down in growth, but our student enrollment is slowing down in growth a little bit,” FISD Chief Financial Officer Kimberly Smith said. “That gap between our value growth and our student growth is widening, and it compounds very quickly when you’re looking at property wealth and recapture.”
Recapture payments have steadily increased statewide since the system’s implementation in the mid-1990s. In turn the percentage of the state’s share of public school funding has also steadily declined, according to data from the governor’s office.
To address this Abbott outlined a proposal, dated at the end of October, for the state’s school finance system. In the proposal, Abbott recommends a 2.5 percent revenue cap for part of a school district’s M&O tax rate. Under his plan M&O tax revenue could not increase more than 2.5 percent from the previous year. The M&O tax rate would be adjusted if needed. The cap, which would also apply to cities and counties, is intended to lower property tax rates and slow the growth of recapture payments.
The governor’s plan suggests using state revenues to ensure districts do not lose money as a result of lowering tax rates. The plan does not identify where those revenues would come from.
“If you’re going to reduce the property tax burden on a homeowner, then you have to have some meaningful school tax reform because that’s what the system is based on right now: property tax revenue from the homeowner,” Smith said. “We have to look at where the other revenue is going to come from …. There are only so many mechanisms that the state has to generate revenue.”
FISD has not paid into recapture for the past three school years. But with the passage of the tax election coupled with rising property values, the district’s recapture payments are expected to grow over the next five years if state law does not change, Smith said.
Statewide the total recapture payments have grown nearly 2,000 percent over the past 25 years. The number of districts paying into recapture has also increased, up to more than 200 projected this year from 34 districts in the 1993-94 school year.
“The system was created in a way that the largest school districts in the state would not fall under recapture, but that is not the case anymore,” said Stephen Waddell, a visiting professor for the University of North Texas College of Education. “What’s really putting the recapture situation into a crisis mode … is the fact that the largest school districts in Texas—Austin, Dallas—are now under recapture.”
Under the state’s school funding formula each district is guaranteed a certain amount of funding per student, largely through property tax revenue, according to the Texas Education Agency. If a district’s property tax revenue is not enough to reach its guaranteed level of funding, the state will make up the difference. If a district garners more in property taxes than its guaranteed level of funding, the excess is recaptured by the state.
Abbott’s plan suggests capping property tax revenue to help districts stay close to the guaranteed level of funding so they pay less in recapture.
Abbott’s plan would not be the first time the state has asked districts to compress tax rates. Districts were required to compress their M&O tax rates by a third in 2006, according to the TEA. To make up for the loss of funding the state paid recapture districts through a fund called Additional State Aid for Tax Reduction. FISD received ASATR funds until the 2015-16 school year. ASATR was repealed effective Sept. 1, 2017. Abbott’s plan calls for state revenue to be used to make up for lost funds as a result of compressing tax rates. Smith said this sounds like ASATR.
“What the state did in 2006 is promise to make up the difference for school districts so that they could still educate children with the same amount of money per student—less at the local level and more at the state level,” said John Classe, FISD board of trustees president. “That only worked for a few years until the state broke that promise and started to phase out that hold harmless agreement or that additional state support.”
The governor’s office did not respond by press time to a request for information about what state revenues could be used and how much it could cost.
Smith said it is unclear how a revenue cap could affect FISD without seeing the specifics of the plan or where additional state revenue would come from. But because voters recently allowed the district to increase its M&O tax rate to $1.17, the district is better equipped to handle a revenue cap than it would if the tax rate remained at $1.04, she said.
“We’re going to generate a certain amount of money at $1.17 this year,” Smith said. “And then should [Abbott’s] proposal or any form of it be put into place, I would assume that that cap would be relative to what we generated this year as opposed to relative to what we generated at $1.04.”
Legislation that hinders school districts’ ability to raise funds could hurt North Texas’ efforts to attract businesses, said Chris Wallace, president and CEO of the North Texas Commission, a nonprofit organization that markets the North Texas region.
“It is always in the top five of checklists that site selectors will be looking at to move a new company to the area, for companies looking at expanding, companies looking at retaining their operations: a viable, well-trained, accessible workforce,” he said. “The common denominator in that is we’ve got to make sure our school systems are funded well ….”
Eyes on Austin
The 86th Texas Legislature convenes Jan. 8. Waddell said some legislators will likely file a bill following Abbott’s plan.
“Everybody’s coming to the capitol thinking that … school finance is first priority,” he said. “The question is, how is that going to get done?”
State Sen. Jane Nelson, R-Flower Mound, was one of four state senators to vote against recapture when it was first proposed, she said. Nelson said all eyes will be on the Texas Commission on Public School Finance, a commission formed by the 85th Texas Legislature to make recommendations to improve the public school finance system. The commission is scheduled to present recommendations to the governor and legislature by Dec. 31.
“I would like to see a constitutional system that is equitable, properly compensates our teachers and provides the resources for every child to receive a quality education,” Nelson said. “We need to create a way to fund our schools that removes all of the ‘band-aid fixes’ and applies resources directly to the student in the classroom.”
Waddell said some mechanism has to be in place to equalize funding among school districts; if recapture is repealed, something has to replace it, he said.
“Recapture is a problem, but that is not the real problem,” he said “The real problem is that the state has not kept pace in funding schools, and their share has dropped. The governor’s plan purports that they can increase the state share, but in doing so they’re going to reduce the amount of revenue going to schools.”