An
Agenda for Equitable and
Cost-Effective School Finance Reform
Findings
Resulting from the Comptroller's Community Forums on
Alternatives for Financing Education
October, 1996
H.
Carl McCall
State Comptroller
To the People
of the State of New York:
A little over a year ago, I initiated a study of school finance
issues. This is a topic that is on people's minds wherever I go
and I wanted to encourage an informed public discussion. I held
a series of community forums across the State, issued several papers
on the topic and articulated the principles that I think are most
important as we move toward reform. As promised, I am now reporting
back on the results of this study.
At my forums experts and ordinary citizens alike offered a wealth
of interesting ideas and perspectives. But as those who attended
any of these meetings already know, it is an understatement to say
that no consensus emerged. Simply put, New Yorkers are very divided
on this issue. We seem to have fallen into competing camps: there
are tax revolters vs. education advocates, management vs. labor
concerns, and then there are divisions of geography and wealth.
The very difficult task ahead is to find productive common ground
among these diverse interests.
The opinions voiced at the forums were deeply held and thoughtfully
expressed, and there is truth in every perspective. On that premise,
I believe we must develop a balanced approach to reform, and the
principles I have articulated attempt to strike such a balance.
In shortest form, those principles are that we should address equity,
enhance cost-effectiveness and accountability, and reform our property
tax system.
I stress the need for balance because many of the "solutions"
recently offered have been decidedly unbalanced. For example, although
cost-effectiveness must be a paramount concern, simply cutting spending
or imposing draconian limits on schools is not the answer. Neither,
however, is mindlessly throwing money at them. And any solution
must address equity, because the current system is unfair to those
children and taxpayers who happen to have fewer resources within
their school districts. We should not let the concern for cost control
blind us to the essential need for an adequate education system
or the moral imperative to treat our children fairly and decently
regardless of where they live.
The solution to our school finance dilemma is not an entirely new
method of financing schools. Rather, I believe the answer lies in
improving the basic system we already have: local funding through
property taxes supplemented by equalized state aid. Virtually every
state uses some variant of this approach and when working properly,
it is not a bad system. If we could strike a better balance between
state aid and property taxes and reform them both, it truly could
be ideal, providing both equity and local control. The current school
aid formula is complex, jumbled and in need of a complete overhaul,
but the original idea of supplementing local resources with equalized
state aid is very sound.
A thorough analysis convinces me that the property tax is here to
stay -- we simply cannot eliminate it. The State does not have the
resources to accomplish it, and no viable local alternative exists.
Although income taxes are in many respects a better way to raise
revenues, I do not believe there is any consensus to substantially
increase the income tax or forgo the current cuts in order to reduce
local taxes.
Given that we cannot eliminate the property tax, we must reform
its administration and provide targeted relief to those most adversely
affected by its regressive nature. We must also reverse the recent
trend of increasing reliance on the property tax as a funding source.
With these improvements, it is a method of funding we can live with.
There was much discussion at my forums about whether the current
state-level tax cuts, by constricting local aid, are having the
effect of raising local property taxes. This is a critical question
and it is something that should have been better evaluated before
we enacted huge multiyear tax cuts. Clearly taxes are a vital factor
in our competitiveness with other states and the world at large,
but it is our local taxes which are most seriously out of line.
State-level cuts which lead to local tax increases may worsen rather
than improve our competitive situation. They also result in a more
regressive and narrowly based system which cannot effectively align
resources with needs.
We must develop a long-term approach to the issue of equity. My
recommendation is to reform the aid formula and provide increased
state aid over time to the districts most in need. Such a long-term
"leveling up" is the best and also perhaps the only achievable
method for addressing equity. There are many other methods that
could be technically effective, including a dramatic redistribution
of aid, regional tax bases or even full state funding, but these
options quite frankly are unrealistic. All of these approaches have
been advocated in the past, sometimes by very prominent task forces
or commissions, but they have never been enacted, nor are they likely
to be.
I do not advocate increasing state aid blindly. We must at the same
time focus intently on inefficiencies and work to make the entire
education system more accountable and focused on standards and results.
We are already moving in this direction and I support Commissioner
Mills' efforts to refocus the Education Department's mission along
these lines. This year's budget also contained a number of positive
initiatives in this area and I will monitor their implementation
closely. Lastly, school districts must continue to look to shared
services, consolidations and mergers to improve effectiveness.
The current school aid formula should not be relied upon to target
the funds as we move toward equity -- there are simply too many
problems with it. This formula has been cobbled together piecemeal
over the years, through our deeply flawed budget process. Each year
new manipulations occur, usually in the middle of the night, to
produce the politically desired "shares" of aid on the
computer run. One would not expect the product of such a process
to be rational or equitable, and it is not. The current system is
in dire need of substantial redesign -- so substantial in fact,
that we almost have to start over. We should not let this system
continue for another year.
While I do not have a complete new formula to propose, I do have
specific criticisms and recommendations. In line with the traditional
mission of the Comptroller's Office, most of these focus on ways
to make the aid system more flexible, less administratively cumbersome
and potentially more cost-effective. Naturally, there are other
issues to be addressed in areas where my Office does not have great
experience, such as whether the formula appropriately directs aid
to pupil needs.
We need to work toward consensus on reform, acknowledging all the
while that there are no easy answers. I hope to move the debate
forward and the approach I advocate is a responsible and balanced
framework for reform. To those who hoped for a more immediate or
dramatic solution, I would offer that my recommendations are based
on a judgment about what is realistically achievable.
I am aware of the inherent difficulty in reaching consensus on this
topic, but we should not let this dissuade us from pursuing a solution.
I stand ready to work with the Regents, the Executive, the Legislature,
the education community, and all others concerned with reform of
our finance system. But we need to do more than study reform and
advocate for it, we need to accomplish it. Toward this end, I would
support a special commission approach to arriving at a new aid formula,
modeled after the federal "base-closing" commission. Any
such effort should be directed not just to study the issue, but
to arrive at a reformed formula.
A real solution to equity, as I have outlined it, will require additional
resources over the long term and I acknowledge that finding those
resources will be extremely difficult. As I have shown in many reports,
our State is in extremely poor financial condition. Never the less,
I am laying out in this report what I think should be done. This
agenda for reform is flexible, and even within the current financial
constraints I believe we could be doing a much better job than we
are. However, if we cannot even begin to address equity because
the State is too financially strapped, then that condition itself
should be the issue. For if our State is in so poor a condition
that we cannot support basic functions like education in a rational
and fair manner, then clearly something is very wrong.
In fact, the inability to effectively address school finance reform
is deeply rooted in the failings of the current budget process.
Education is one of many areas where a long-term focus is essential
if we are ever to progress. The issues are complex and the funding
needs cannot be dealt with through our stop-gap, one-year-at-a-time
approach to budgeting. If the budget process performed as it should,
we would arrive at rational policy decisions predicated on the true
long-term interests of the State. We would not enact tax cuts without
any plan to pay for them and without any thought to the impact on
local needs and taxes. I will continue to stress budget reform until
it is achieved, because without it, we will not be able to resolve
the long-standing problems confronting our State and we will continue
to fall short of our full potential.
Sincerely,
H. Carl McCall
Comptroller
This report presents the Comptroller's
findings in the vital area of school finance reform. The Comptroller's
reform agenda is the product of a series of community forums held
across the State and more than a year of study. The school finance
principles the Comptroller articulated last February are reaffirmed,
but this report also arrives at some major findings and makes a
series of recommendations on how the current system should be altered.
The Comptroller's earlier discussion paper reviewed the many possible
approaches to reform, whereas this report arrives at a recommended
long-term approach, and thus rules out many of those options. Following
is a summary of the major findings and recommendations:
- The basic school finance
system already existing -- property taxes supplemented by equalized
state aid -- is here to stay. Policy makers should therefore refocus
on the difficult and long-standing issues of school aid formula
and property tax reform.
- The sheer magnitude of the
school property tax (approximately $15 billion currently) means
replacement would require a major increase in state taxes, damaging
New York's competitiveness with other states. For example, raising
$15 billion in revenues is equivalent to doubling the current
state income tax or raising the sales tax by 10 cents on the dollar.
- Since it cannot be replaced,
the property tax must be made less objectionable through a three-pronged
approach:
Reform its administration
by requiring periodic reassessment, modern appraisal methods,
and a uniform and current value standard.
Reverse the recent trend
of increasing reliance on property taxes as a funding source.
The regressivity of the
tax should be eased for those most adversely affected by expanding
the "circuit-breaker" credit in the state income
tax.
- Equity should be addressed
through a reformed state aid formula, increasing aid over time
to the areas most in need.
Among all the options for
reforming the finance system, a long-term leveling up is probably
the best approach and also the only one that is realistically
achievable. Other options such as "Robin Hood" redistribution
proposals, new revenue sources, or regional tax bases are not
practical or likely to occur.
Equity cannot be achieved
immediately, but should be accomplished over a period of years.
This approach will require a long-term focus which the current
state budget process does not have. Budget reform is therefore
probably a prerequisite to real school finance reform.
The current aid formula
needs to be completely redesigned and should not be relied upon
to target aid for a long-term solution to equity.
In addition to criticism of
the current aid system and a discussion of the equity issue, this
report contains a number of specific recommendations for altering
the aid formula. These recommendations focus on ways to make the
aid system more flexible, less administratively cumbersome and potentially
more cost-effective -- areas where the Comptroller's perspective
may be most helpful.
- The formula should be simplified
and organized along the lines of a "block grant" system,
thereby giving school districts greater flexibility with their
aid and greater incentives to economize.
- The current complex system
of categorical aids and expenditure requirements fails to ensure
adequate services at the same time it complicates administration
and drives inefficiencies.
- Too much emphasis is placed
on reimbursing expenses in the current system, resulting in cost
escalation at both the state and local levels. Formulas that reimburse
expense provide the wrong incentives. They reward higher spending
and provide a disincentive to efficiencies, because if you spend
more you get more aid and if you spend less, you get less. These
aid formulas are also subject to continual aid claim revisions,
causing budget problems for the State.
- The formula should include
an explicit adjustment for regional cost differences.
- School districts that meet
educational standards should be free to use their state aid as
they choose, including for tax relief. In districts where standards
are not met, however, mechanisms should be considered to ensure
that any additional aid provided is used to improve programs.
The report includes a description of the enacted budget's changes
in school aid, as well as a comparison between the enacted budget
and the Comptroller's Principles for School Finance Reform released
in February.
- Many of the largest aid
increases provided to school districts this year appear to be
anomalous; they are driven by glitches in the aid formula.
- The State currently has
an immense, unfunded liability for "prior year claims"
for school aid of $654 million. This backlog in claims has been
building in recent years, but it has never been at such a high
level. When combined with a $406 million liability for the preschool
and summer handicapped programs, the total unfunded aid claims
amount to more than $1 billion.
- A number of positive initiatives
directed toward cost-effectiveness and accountability were included
in the budget, and the proposals limiting local control which
the Comptroller's Principles for School Finance Reform argued
against were rejected. No real progress was made, however, in
resolving the central issues of equity and property tax reform.
The positive initiatives directed toward cost-effectiveness
and accountability indicate that the State is moving in the
right direction in these areas.
Many of the new requirements,
however, are very broad, including those for plain language
budgets and school district report cards. Much remains to be
worked out in regulations.
The report also includes sections
examining the relationship between school finance and the State's
budget process, a historical review of education reform efforts
in New York, and a summary of activities in other states.
- Most previous reform efforts
have failed to produce a comprehensive overhaul of our school
finance system, often because of insufficient consideration of
fiscal and legislative realities.
- A special commission may
be an effective way to arrive at a reformed aid formula. To be
successful, any such effort should include representation from
the major interests and must be specifically mandated to create
a reformed aid formula, in ready-to-enact form. On the model of
the federal "base-closing" commission, the Legislature
could then either accept or reject the recommendation in its entirety.
This approach would eliminate the temptation to manipulate the
formula, which over the long term has produced the current complex
and unfair system.
- Reforms in other states
have most often been triggered by litigation or by external events
such as referenda. A review of the major reforms recently implemented
elsewhere shows that none of the ideas behind those reforms are
new to the debate in this State.
- New York's failure to achieve
reform is rooted in the short-comings of the current budget process,
which effectively lacks a long-term focus and tends to result
in the avoidance of difficult issues. The current jumble of formulas
is the result of manipulation through many years of this process.
Comptroller's School Finance
Principles
The Comptroller's Principles
for School Finance Reform were originally released in February 1996.
The four areas covered by the principles are cost-effectiveness,
accountability, property tax reform and relief, and equity.
The findings and recommendations made in this report are guided
by and reaffirm the Principles as previously described. Following
is a restatement of the Comptroller's principles, as further defined
by the major recommendations in this report.
- Cost-effectiveness
must be a focal point of educational reform. State regulation,
practices and finance mechanisms should assist, rather than hinder,
the economy and effectiveness of local schools. These efforts,
however, need not and must not conflict with quality or standards.
State-level reinforcement and assistance for cost-effective operations
is vital, including mandate relief and aid formula reform. School
districts should look to shared services, consolidation of functions
and even district mergers to reduce costs.
- Accountability
enhancements should be made within the current system of local
control. These should include better reporting and disclosure,
an improved local budget process, and an enhanced focus on performance
measures and standards. Locally controlled programs and budgets
are preferable to state control, and state regulation should focus
on results rather than on the means used to obtain them. More
flexibility should be provided for schools that meet standards
and regulatory controls should be concentrated on areas where
standards are not met.
- Property tax reform
and relief
must both be addressed. The often inequitable administration of
this tax through nearly 1,000 local governments must be reformed
and the system modernized. Periodic reassessment, modern appraisal
methods, and a uniform and current value standard must be required.
Regional appraisal systems should be encouraged. Property tax
relief is also crucial and the best approach is through cost-effectiveness
together with sufficient aid apportionments. Targeted relief for
those most adversely affected by the regressive nature of the
property tax should be provided through an enhanced circuit breaker
credit in the state income tax.
- Equity
and adequacy of resources for all school districts must be ensured.
The current heavy reliance on local property taxes disadvantages
children and taxpayers living in high-need and lower-wealth areas.
The long-term solution is to increase state aid over time to those
school districts most in need. School aid has historically shared
the burden of financing local education and the recent constriction
of aid is hard on all districts, but hardest on the lower wealth
districts which are most dependent on state aid for their programs.
This report presents the Comptroller's
findings and recommendations resulting from more than a year of
study and a series of community forums held across the State on
the topic of education finance.
Community forums on educational
finance were held in six locations across the State between October
1995 and May 1996. In addition to his reports on executive and enacted
budgets, the Comptroller has issued three reports explicitly on
the topic of school finance: School Finance Reform -- A Discussion
Paper (October 1995), Review of Current Proposals for Property Tax
Relief (February, 1996), and Principles for School Finance Reform
(February 1996).
In selecting from among the
many alternative approaches to equity and reform, the Comptroller
was guided by his previously expressed principles as well as by
a consideration of what options are realistically achievable, both
economically and politically.
The overarching conclusion
reached is that the basic school finance system already in existence
-- property taxes supplemented by state aid -- is here to stay.
This means that the policy debate should be refocused on the long-standing
and difficult issues of school aid formula and property tax reform.
Much of the debate and many of the proposals advanced in the past
year concentrated instead on moving to a completely new system or
on eliminating or freezing property taxes.(See "Review of Current
Proposals for Property Tax Relief", February, 1996, for a complete
discussion of these issues). Those directions are not likely to
lead to fruitful change.
Equity in the finance system
is a long-standing concern, and although the mix of state and local
resources has never been sufficient to overcome local wealth differences,
the situation is now worsening because of a declining proportion
of state aid. The Comptroller has concluded that the equity issue
can best be addressed through reform of the state aid formula and
by providing additional aid over time to the areas most in need.
This position is based on a judgement that among all the options
for reforming the finance system -- including "Robin Hood"
redistribution proposals, new revenue sources, regional tax bases,
or even full state funding -- this is the best approach and also
probably the only one that is realistically achievable. (These alternatives
are described in "School Finance Reform: A Discussion Paper,"
October, 1995)
The inefficient and virtually
incomprehensible aid formula system that has developed over time
must be completely redesigned, and a fairer and more rational system
developed. This report recommends a simplified system and a different
approach designed to encourage efficient and cost-effective operations.
By revisiting the aid system and working to hold down costs, more
resources can be devoted to equalization over the long term.
New findings and recommendations
are presented in this report in three areas: property tax, equity
and the school aid formula. Cost-effectiveness and accountability
continue to be vital elements of the Comptroller's school finance
reform agenda, and the aid formula recommendations in this report,
for example, are designed to enhance these two principles. However,
inasmuch as most of the cost-effectiveness and accountability improvements
advocated in the original Principles are now being implemented,
no additional recommendations are made in this report. The Comptroller
will continue to monitor efforts in these areas.
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