Category: Confused About

High property taxes drive school funding inequity. But for every 2 districts that over-tax, there is at least 1 under-taxing district out there.

The Evidence-Based Funding Formula identifies a target property tax rate for every district. The model calculates how much each district needs to be funded adequately. It then specifies a local capacity percentage (LCP) based on how much property wealth each district has. A district with lots of property wealth will have an LCP of up to 90%. That means if a district’s per pupil adequacy target is $12,000 and its LCP is 75%, the formula expects the district to raise $9,000 per pupil locally. From there, we can back into an “implied” tax rate for each district.

Most districts tax themselves higher than their implied tax rate. (Those are all the orange dots above the blue line in the chart below.) But 310 districts (the orange dots below the blue line) actually tax themselves lower than that rate. A rate freeze would impact these districts across the board. Freezing undertaxed districts would guarantee that those schools will never reach adequate funding. (And inflationary increases compound quickly, so lots of the 543 districts that are “over-taxing” now would fall under the blue line after a few years of increased adequacy costs and frozen levies.)

Addressing property taxes in the formula was a sticking point during the school funding negotiations. Should the formula recognize districts’ whole property tax levy? If they are over-taxing themselves, that could push the districts into a higher tier and further solidify their reliance on property taxes. If they are under-taxing themselves, that could knock them down a tier and put them in line for more state funding than other deserving districts that have put forth more local effort.

On the other hand, should the formula ignore actual rates and just use the implied rates? That would completely disconnect the question of how districts tax locally with how much state funding they get for their schools. There would be no incentive to under-tax, but no disincentive to over-tax.

The Evidence-Based Formula decided to use the best of both worlds: for districts that were under-taxing (the orange dots below the blue line), the model assumes they are taxing at their implied rate (the blue line itself). For districts that are over-taxing themselves (orange dots above the blue line), the model recognizes a portion of their overage in order to encourage them to reduce their rates. How much depends on how much property wealth a district has. The overage is multiplied by the district’s LCP, thus wealthier districts will be penalized more for overtaxing and therefore, incentivized further to lower their levies.

Let’s look at a few examples:

• An under-funded district trying to compensate locally. North Chicago SD 187, a property-poor district that is expected to raise just 10% of its funds locally. That gives the district a $5.5 million target levy. However, North Chicago is so underfunded, it taxes itself almost twice that much, $5.1 million more. Because the district’s LCP is 10%, just 10% of that over-levy will “count” against the district in the formula.
• An above-adequacy over-taxer. The property-wealthy Bannockburn SD 106 is expected to raise $1.8 million, which is 90% of its adequacy target. But the district brings in $5.5 million, $4.7 million more than the model expects. The formula will recognize 90% of Bannockburn’s $4.7 million overage.
• An almost-adequate under-taxer. Rockdale SD 84 in Will County is expected to raise 60% of its adequacy target from property taxes. But it only brings in 24% of that total. Its implied tax rate is 3.2%, but its actual rate is just about 1.2%. The formula assumes that Rockdale raises its full Local Capacity Target. It would hardly be fair to the rest of the districts to reward Rockdale’s under-taxing with more state money. But it would be equally unfair to Rockdale to freeze its levy where it is, so far from its expected rate with a formula that assumes it has access to those resources.

In the statewide aggregate, there are over $3 billion in property taxes levied by school districts above what the formula expects them to bring in. About $2 billion of those are for school districts funded below adequacy. There are about $1 billion in property tax over-levies in over-adequacy districts. Finally, there are $670 million in uncaptured property tax receipts, almost all in districts that are funded below adequacy.

Finding the right balance between providing property tax relief and moving toward adequate school funding is a challenge. If it was easy, someone would have done it. But it’s worth it to wade into this complex territory because this is such a critical issue. Let’s just make sure we acknowledge that it is complicated and will require more than a one-size-fits-all solution.

The Governor signed the budget today (yay!) and we’re all praising the legislature for adding another $350 million towards the evidence-based funding formula enacted last year.

Let’s break down that $350 million a bit more.

$300 million of that figure will be equitably distributed first to the school districts that are the most under-funded (i.e., furthest away from adequacy) and just like last year, no district will lose money.

The remaining $50 million will be “swapped” for property tax relief, with those funds rebated to homeowners in the form of grants.

If Springfield had allocated more than $350 million, the remaining amounts would be handled in the same manner as the $300 million.

This is the first time in history that these property tax relief grants have been funded. It’s uncharted territory, but here’s how it works:

• School districts with the highest property tax rates can apply for a grant.
• By August 1 of each year, the Illinois State Board of Education (ISBE) will estimate what tax rate school districts must have in order to be eligible. It all depends on how much money is put into the fund, since more funding means the state can afford more grants.
• School districts can apply until October 1 for grants worth up to 1% of the “equalized assessed value” of property in the district.
• By December 1, ISBE will publish a list of districts that qualify, based on the total number of applicants and the threshold tax rate for relief.
• Qualifying districts will receive their grant payments by January 15.
• School districts, in turn, rebate the amount of the grant to their property taxpayers.

One of the facts that became abundantly clear during the examination and re-write of the formula is that school funding isn’t just inequitable for students. It’s also inequitable for property taxpayers. Those who live in the poorest areas pay the highest property tax rates. For example, at the lower wealth end of the spectrum, one elementary district in the south suburbs has a tax rate of 9.8%, but it is still only 59% funded. At the other side, one of the wealthier elementary districts – which is funded at 288% – has a rate of just 1.5%.

So in August, you might take a peek at the ISBE website to see what tax rates might qualify. If your school district has a higher rate, ping your school board about going for a grant. It’s a new program and it’ll take some work to get it going, but what a great opportunity to reduce the reliance on property taxes without costing our schools those needed resources!

Yesterday was the historic bill signing for SB1947, which fixes the worst school funding system in the nation and puts all Illinois schools on the path to adequate and equitable funding. Its predecessor, SB1, had been called the most thoroughly vetted bill in recent Illinois history, given the sheer number of public task forces, working groups, commissions, committees, analyses, hearings, and models surrounding it over four and a half years. That’s left a lot of people wondering…what’s the difference between SB1 and SB1947?

In short, SB1947 keeps SB1 mostly intact and adds some additional items. The major exception to SB1’s intact-ness: it moves the Chicago teacher pension cost provisions from the School Code to the Pension Code (a change that I consider mostly cosmetic, but one that was important because it fixed one of the most heavily criticized pieces of SB1). SB 1947 relaxes state mandates for school districts around P.E. and drivers education, streamlines the existing mandate waiver process, creates a small tax credit scholarship pilot program, allows Chicago to raise its own levy, creates a TIF task force, and builds in a process for taxpayers in school districts that are funded over adequacy to put a referendum on the ballot to decrease property taxes.

We’ll walk through these things point by point, but if you’re just sticking with this shorthand summary, suffice it to say that SB1947 is a huge win for our kids, our state, and our future. The path to get to this point was long and complicated, but it is truly a grassroots victory for every mom, dad, student, teacher, administrator, and taxpayer who spoke up and demanded change from their state government. We wouldn’t have gotten here without it.

The New Funding Formula

The evidence-based model in SB1947 works just like SB1’s. Read more about it here. Here it is in a nutshell. Every district gets:

1. A “Base Funding Minimum,” which is equal to the amount of state aid it got last year. No one loses a penny state funds from the previous year.
2. Its own “Adequacy Target” calculation, which looks at their unique population of students and calculates the cost of providing evidence-based practices proven to boost outcomes for those kids. Every district will have its own, unique “Adequacy Target.”
3. A “Local Capacity Target,” which analyzes a district’s local ability to pay. When we add the Local Capacity Target to the Base Funding Minimum, we can measure how close each district is to its individual Adequacy Target.
4. Funding from the new formula. New dollars are most heavily invested in the most underfunded districts. This year’s budget provides $350 million in increased funds for the formula.

Mandate Relief

Current law includes a process for districts to request waivers from almost any mandate in the School Code. SB1947 streamlines that process and makes it easier for districts to get relief from state mandates. Rather than requests going to the state legislature, SB1947 would require three of the four legislative leaders to specifically flag a waiver for further consideration in order for it to come before the General Assembly. Otherwise, the State Board would have the authority to approve the waiver.

A provision of state law that limited the number of waivers a district could submit related to the daily P.E. mandate was eliminated in SB1947. The law also changes Illinois’s daily P.E. mandate to a requirement that students have P.E. at least three times per week. Schools can also exempt middle school and high school student athletes from P.E. classes.

Finally, SB1947 removes restrictions around contracting with commercial driving schools to provide drivers education instruction.

Tax Credit Scholarships

SB1947 created a pilot program that would incentivize individual and corporate donations to private school scholarships by providing a 75% tax credit on those donations. The total state cost is capped at $75 million per year and the program will sunset after five years. Students who qualify for free or reduced-price lunch are eligible for a full tuition scholarship to a non-public school and receive priority. Students with household incomes between 185% – 250% of the poverty line qualify for 75% of tuition and those between 250% and 300% of the poverty line qualify for a 50% scholarship. The maximum scholarship is equal to the average statewide operating expense per pupil, with additional weights for special needs students and those learning English.

Each year, students accepting the scholarship would take the state assessment. The State Board of Education (ISBE) must hire an independent researcher to complete a report, which would then be integrated in a report to the legislature.

Chicago’s Tax Levy

Chicago, like most districts, is subject to property tax caps that limit the total dollar amount that can be raised from property taxes. That limit is generally based on last year’s levy amount, increased for inflation. CPS’s property tax rate is one of the lowest among unit school districts in the state. A perennial complaint from some SB1 opponents has been that if the state steps up to help CPS, CPS needs to also step up locally. SB1947 authorizes an additional 0.567% levy to pay its debt for Chicago teacher pensions.

Tax Increment Finance Reform Task Force

Tax Increment Finance (TIF) districts, created by municipal governments, are theoretically an economic development tool to help municipalities develop blighted areas. In reality, TIFs remain controversial. Schools, libraries, and other taxing bodies do not collect increased property tax revenue from new developments in TIFs, and that property value is excluded from the state’s calculation of local wealth in the state aid formula. A task force will examine the costs and benefits of TIFs, especially as it relates to the school funding law, and report by April 2018

Property Tax Relief

The bill provides property tax relief directed at two different problems: (1) the property tax system is regressive and hits lower-income homeowners with higher tax rates, and (2) other areas of the state with high local wealth pay a higher dollar amount in property taxes, sometimes for schools that are funded well above their adequacy target.

To address the first issue, a Property Tax Relief Pool Grant program is created. The legislature would have to appropriate funds for the program to take effect, and districts with the highest tax rates would qualify for grants of up to 1% of their districts’ Equalized Assessed Valuation. The grant would be rebated to property taxpayers. Though this was included in SSB1, SB1947 made the additional change of allowing $50 million in property tax relief grants to count toward each year’s minimum funding increase, which further integrates property tax relief into the new system.

To address the second, voters in district that are funded at or above 110% of adequacy would have the ability to petition to get a referendum on the ballot to reduce the property tax levy by up to 10%. 

Yesterday, the State Board of Education released its model of how school districts fare in the first year of the school funding structure in the Governor’s veto of Senate Bill 1. (Recall that Senate Bill 1 is the funding reform bill that fixes our broken school funding system for the first time in two decades, which passed both chambers of the legislature only to be vetoed by the Governor.)

We call on legislators to override the veto. These numbers tell a few interesting stories that show a long term plan to decrease state education funding and push costs of educating kids further onto property tax payers. This overreliance on property taxes is one of the main reasons Illinois has earned the distinction of having the most unfair funding system in the country. Why would we double down on that failed structure?

Here are some initial thoughts:

1. The definition of adequate funding decreases by over $1 billion. That means even if the evidence-based model were fully funded, schools would still have $1 billion less than they need.
2. The expected local investment increases by over $700 million. That means local property taxpayers would be expected to pick up more of the cost of education than under the version of SB1 the legislature passed.
3. Here’s the bigger deal: going forward, the veto ignores inflation and actual cost of living differences. Adequacy is a moving target. If we reach 2017 adequacy levels in 20 years, we can’t pretend that’s the current cost of educating our students.
4. Districts will soon begin picking up pension costs for their newly-hired teachers. When SB1 passed the legislature, it included those increased costs in the calculation of adequacy. But that was stripped out in the veto so that districts would still have to pay pension costs, but the model would pretend they had that funding available to invest in the classrooms.
5. In 2020, the model will shift to a per-pupil hold harmless. That means districts that have lost student enrollment, even if they are still not adequately funded, will lose money from their hold harmless.

With school starting in just a few weeks, Governor Rauner shut the door on progress by issuing an amendatory veto (AV) of Senate Bill 1 (SB1), the education funding reform bill that provides more money to local schools without any school district losing a penny of state or local funding.

The most concerning components of the AV are as follows:

• The AV removes the Minimum Funding Level, an important factor for encouraging the legislature to continue making investments in school funding so that all districts are adequately funded. SB1 sets a goal of a 1% increase of the total state adequacy level each year. If the goal isn’t met, SB1 shields the most underfunded districts. The AV erases this incentive to provide reasonable school funding increases in the future.
• In removing adjustments for property tax caps and TIF districts, the AV is ignoring the realities that districts face. Property tax laws limit the amount of funding school districts can take in each year. TIFs also divert property tax funds from school districts. Even though districts do not have access to these funds, the AV changes state law to pretend that they do. There is widespread agreement that the way Illinois approaches PTELL and TIF needs modernization, but this approach fails to address that core issue; instead it takes the problem out on school districts and children, who would now be twice denied that funding.
• The AV punishes districts statewide by capping regional costs, which will impact each of the 313 school districts in Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry, and Will Counties. It also ignores inflation.
• One component of this year’s budget package shifted pension costs for new teachers from the state to school districts. Districts must pay those costs in order to be adequately funded, but the Governor’s AV eliminates them from the adequacy calculation.
• Regarding Chicago, the AV turns its back on the fact that Chicago is the only school district in Illinois that pays its own pension costs. While the statement issued from the Governor’s office talks about the state finally beginning to treat Chicago like all other districts, it approaches this in a manner many experts believe is unconstitutional. The AV also removes the cost of Chicago’s block grant from the district’s base funding minimum, an unnecessary shot at the largest school district in the state and the 85% of its students who live in poverty because the block grant will go away in the future under SB1.
• To avoid a system of winning and losing schools, SB1 has a “hold harmless” that gives each district at least the same amount of state funds as last year. The AV evaporates the hold harmless in only three short years, at which time, as populations continue to move from rural to urban areas, our rural schools will feel the impact of lost resources. Last year, 222 districts lost enrollment.

We urge the legislature to override the veto.

It all goes hand in hand: you can’t spend money you don’t have through a formula that doesn’t exist. That’s why in order to fix our worst-in-the-nation funding formula, ensure schools open this fall, and put our education system on a path of renewed stability, we need to enact three bills:

1. Senate Bill 1, to fix our broken school funding system.

2. Senate Bill 6, to appropriate the money to pay for schools (among other things).

3. Senate Bill 9, to support the revenue needed to pay for the budget.

About SB1: The Funding Formula

SB1 is the school funding formula overhaul that passed the House and Senate on May 31. You can read the details here, but the upshot is that school leaders and advocates from across the state support the Evidence-Based Funding Model created in the bill as a once-in-a-generation chance to fix Illinois’s outdated and inequitable school funding system. The Governor has said he will veto the bill, even though all schools win and the framework aligns with recommendations of his own commission.

SB1 is the only funding formula that has passed the state legislature in 20 years. Multitudes of others have been filed but failed, including a recent one that would require at least six committee and floor super-majority votes to get as far as SB1. As a practical matter and as a lead publication has said, that last-minute attempt “appears DOA.”

About SB6: The Budget

SB6, which was enacted into law with the General Assembly’s override of the Governor’s veto, authorizes state spending for the fiscal year that just started. It includes increases in the education budget, but overall, the budget spends about $2.5 billion less than current spending levels. The education budget is consistent with the school funding structure in SB1. Almost all of the state’s appropriation to schools would flow through the new, integrated Evidence-Based Funding Model. That’s $6.7 billion. Without an Evidence-Based Funding Model in place to fund the budget, schools would be out that $6.7 billion.

The reality is that last year, the legislature essentially froze the General State Aid formula in place and sent new school funds through a temporary “equity grant.” Our main funding formula has been put on hold for over a year now. Last year’s budget took a small step toward improving school funding equity, but also created the situation we’re in this year where there is no active, functioning school funding formula. Both the Republican-drafted budget in SB2214 and the Democrat-drafted budget in SB6 appropriated school funding through a new evidence-based model. It is critical that SB1 be enacted so that schools get the funding they need to open their doors this fall.

SB9: The Revenue Bill

SB9 restores most of the income tax increase that lapsed two and a half years ago. This bill is the hardest part of the package, but one that 72 courageous and compassionate representatives voted to pass this week (71 representatives voted to override the Governor’s veto and enact it into law). No one likes tax increases, but the prevalent kick-the-can-down-the-road attitude in Illinois has led to years of spending without having money in the bank to pay for it. Many who voted for SB9 are fiscal conservatives who understand that the interest on the debt that’s growing every day will necessitate bigger tax hikes the longer we wait.

With $15 billion in unpaid bills and almost three years without a full budget, this is the critical piece of the package that will finally provide the stability that our schools need for long-term planning. Categorical payments are months delayed. General State Aid payments had been made on time, but a recent court ruling put in serious jeopardy the state’s ability to even continue making those payments in a timely fashion. And only 144 of over 850 school districts have 90-days cash on hand.

Without the revenue bill, there is no doubt in my mind that some schools would be unable to keep their doors open this year. The schools most impacted by this delayed payment cycle are the neediest districts.

The Conclusion

The budget only works if we have the evidence-based model in place. The evidence-based model only works if we have a budget to fund it. Schools can’t count on state payments for the evidence-based model or anything else unless we have revenue in place to pay for it. These three bills are all interconnected.

If your state senator or representative voted for SB9, say thanks! They stepped up and put kids ahead of politics. But while you’re at it, remind them that the job isn’t done until SB1 also becomes law. You can visit our action center to help get SB1 over the finish line here.