Tomball and Magnolia ISDs are drafting balanced budgets for board of trustees approval in August with fiscal year 2018-19 approaching Sept. 1, despite increased expenses and limited revenues for the districts.

Tomball and Magnolia ISDs are tapping alternative methods, including changing the fiscal year and calling a Tax Ratification Election, respectively, to craft balanced budgets as state funding formulas per student remain unchanged.

“We’re faced with the same thing every district around us is and that is with deficits,” TISD Chief Financial Officer Jim Ross said. “You can’t operate in an environment where you see no increase in your revenue per pupil, and yet we have inflation rates running at close to 3 percent per year.”

The two school districts are among many across the state struggling to balance budgets this year. Over the past few years, the Texas public school finance formula has been plagued with legal battles and reform efforts that failed to pass in the Texas Legislature. House Bill 21 established the Texas Commission on Public School Finance in 2017 after state legislators once again could not come to an agreement on school finance reform in the 85th session.

State Sen. Paul Bettencourt, R-Houston, serves on the commission and said members are looking into many factors affecting public education statewide.

“We’re drinking from a fire hose on the commission,” he said. “The important thing is to eventually come together as a group and look at recommendations of best practices—what we know is working well.”

Trimming Tomball ISD’s budget

In May, the TISD board of trustees approved a change in the FY 2019-20 start date from Sept. 1 to July 1. As a result, TISD’s fiscal year 2018-19 is trimmed from 12 months to 10 months, running Sept. 1, 2018-June 30, 2019.

This action, a one-time change allowed by the Texas Education Code, permanently moves TISD’s fiscal year from Sept. 1 through Aug. 31 of the following year to July 1 through June 30 of the next year.

Without approving the change in fiscal year, the district would have faced a $3.5 million budget shortfall, Ross said in May.

“We had preplanned that we would hold the change in fiscal year to the year that we needed it, which we did this year,” he said.

The board of trustees will vote on the $130 million proposed budget—which includes the fiscal year change—on Aug. 14. It includes a 2 percent salary increase for district employees, funding for about 50 new employees, no change in the tax rate of $1.34 per $100 valuation and an increase to the starting teacher salary from $53,200 to $54,000, according to district information.

Ross said the proposed budget also anticipates less money paid to the state in FY 2018-19, as the limited open enrollment initiative TISD launched last fall allowed the district to keep more of its local revenue instead of sending that money to the state’s recapture program—a wealth equalization plan that requires wealthier school districts to send a portion of revenue back to the state to share with poorer districts.

The district’s recapture payment to the state dropped from $3.7 million in FY 2017-18 to $1.3 million in FY 2018-19.

While the FY 2018-19 budget is a 1.17 percent increase over FY 2017-18, TISD estimates 6.19 percent enrollment growth, 3 percent growth of its property tax base—a slighter increase than in previous years—and no change in its revenue per student, according to TISD.

The slower property tax growth is largely due to heavy flooding from the last two years, including Hurricane Harvey last August, Ross said.

“[Flooding] really knocked us down hard with our tax base growth—not that it stopped, but it just cut that percentage of growth in half,” he said.

Stagnant revenues and rising costs are to credit for TISD’s tightened budget, Ross said.

“What we faced when writing this budget was what every school district in the state is facing. The state has not changed the state funding formulas in years. They’ve got us just capped off at revenue per pupil,” he said.

MISD calls tax election

With the new costs of opening two intermediate schools and funding safety improvements, MISD is also looking to boost overall revenue for FY 2018-19, Assistant Superintendent of Operations Erich Morris said.

The MISD board of trustees will ask voters Aug. 14 to approve a Tax Ratification Election, which would provide the district with more funds for its daily operations without increasing the total tax rate. The tax rate will remain at $1.3795 per $100 valuation, but the maintenance and operations portion of the tax rate would increase 10 cents by subtracting 10 cents from the interest and sinking portion of the total tax rate, Morris said.

The I&S rate funds only repayment of debts, while the M&O rate can fund operations as well as debt repayment.
Although the district is not proposing a change in the total tax rate, the state requires school boards to seek voter approval if the M&O rate exceeds $1.04 per $100 valuation, Morris said. If approved, the tax swap would remain for future years and is estimated to bring $4 million more in revenue to MISD in FY 2018-19 by generating more state funds for MISD, he said.

“The scenario itself provides for significantly more dollars to use for the operation side without any increase in the tax rate,” Morris said.

Although approval of the TRE would lower the district’s I&S rate, Morris said the election’s outcome would not affect the district’s ability to repay its debt incurred from bond referendums approved by voters in 2004 and 2015. About $3 million received on the M&O side—in addition to the $4 million in new revenue for district needs—would go to repaying debt.

Based on MISD’s existing debt structure, Morris said he does not foresee the overall tax rate increasing in future years if the TRE is approved. Any tax rate increase would be triggered by voter approval of a bond referendum, as the district cannot increase its I&S rate above the rate necessary to continue repaying debts or increase its M&O rate further without voter approval, he said.

Due to the election’s timing, MISD is developing two budgets. Budget A plans for the TRE to fail, and Budget B plans for the TRE to pass, Morris said. The district will hold a public hearing on the final proposed budget Aug. 20.

Neither budget would have a funding deficit, but Budget A—which totals about $106 million—affords the district less flexibility to meet its staffing and program needs, Morris said. However, both budgets prioritize $1 million for safety improvements, such as adding eight constables and reviewing building setups, Morris said.

With additional funds from the passage of the TRE, Budget B—which totals about $110 million—would allow the district to further improve safety, increase campus budgets, enhance student programs, evaluate student-to-teacher ratios and employ more staff, and offer 4 percent salary increases, Morris said.

“We do believe the passage of a TRE will allow us to better take care of our district’s needs,” he said. “We’re dedicated to be the best school district in the state of Texas, and we believe that what that looks like is being able to take care of our folks, take care of our teachers, and take care of our students.”

Looking ahead

As school districts struggle to find revenue, the Texas Commission on Public School Finance is working to prepare a report by Dec. 31 for Gov. Greg Abbott and the Legislature, including its recommendations to improve the school finance system. The commission is made up of 13 members appointed by the governor, lieutenant governor, speaker of the House and State Board of Education.

“What we see coming out of the 2019 Legislature will depend greatly on what the commission recommends,” said Chandra Villanueva, economic opportunity program director for the Austin-based Center for Public Policy Priorities, a public policy organization. The commission meets again Aug. 9.

“If we’re going to do this right, we’re going to have to adopt best practices we see out there and make everyone use them when it’s effective,” Bettencourt said. “But we also have to realize the financial limitations on this. Everybody’s saying it’s going to be a tough session, and it will be.”

According to commission hearings, those who have testified before the commission have asked for more resources for special education, bilingual and pre-K programming, and higher teacher pay to increase retention rates, for instance. Recommendations range from shifting funding weights to increasing flexibility in how districts can spend funds and adopting property tax best practices from other states.

“The [funding] formulas are clearly out of date, and they have to be updated,” Bettencourt said.

Villanueva said the state has held its basic allotment—the money awarded per pupil—steady for four years at $5,140, offering districts no new money to keep up with growing expenses.

According to the state funding formula, local property tax revenue makes up the first share of the basic allotment, Villanueva said. As local revenue increases, the state’s share decreases

In TISD, local funding grew from about 69 percent of overall revenue in FY 2011-12 to 85 percent in FY 2018-19, while the state’s share has dropped from 31 percent to 14 percent in that time, according to budget information.
In MISD, local funding grew from about 49 percent of overall revenue in FY 2011-12 to 65 percent in FY 2017-18, while state funding fell from about 50.5 percent to 35 percent, Morris said.

“Most people believe that when their property taxes go up—either for a rate increase or because their valuation goes up—they think that if they’re paying more money their schools are seeing more money,” Villanueva said. “When your local revenue goes up, when your community prospers, it’s really just the state gives you less money. ... The state isn’t letting our schools grow with our communities.”

Additional reporting by Danica Smithwick