February 2008

Feature Article

By David W. Davare PhD

Rising costs...falling funding

Pennsylvania's history of school funding is a story of ups and downs. Along the way, legislation and mandates have complicated the plot and presented challenges to school entities across the state.

The history of state funding of public schools dates back as far as 1790 when George Washington was still president of the United States. Since then, the percentage of state funding climbed slowly from about 20% to a historical high of 51% in the 1972-73 school year. The gains made over the centuries since the founding of the United States have been almost completely lost within just a little more than three decades.

Looking back as far as 1970, one can see a dramatic drop in the percentage of funding that comes from the state compared with local funding (see chart on page 22). The recent costing-out study commissioned by the State Board of Education found that the commonwealth is underfunding public education to the tune of $4.4 billion (see page 10). On the heels of this report came a study by the School Cost Reduction Task Force that was established as part of Act 1 of 2006. While the task force recommends many ways schools can save money, there is still a significant gap remaining to close the $4.4-billion hole.

As costs have risen and state funding has declined steadily over the years, school districts have had few options to cover the shortfall other than to rely on the one main area where they have authority to raise money – local property taxes.

The state has attempted to address local tax relief in various ways since 1970, including Act 50 of 1998, Act 72 of 2004 and Act 1 of 2006. The questionable success of these pieces of legislation, the results of the costing-out study and the hard facts on the decline in state funding demonstrate that one solution to local property tax relief may be as simple as restoring the state’s financial commitment to funding public education so that local school boards would not need to rely so heavily on this tax.

The following article and accompanying chart highlight some of the major events in public education funding.

The long climb and short fall

When state funding of schools began in Pennsylvania in 1790, it covered about 20% of the cost. Over the years, the state contributed varying amounts toward the operation of local schools. The state process for making payments has taken many different approaches over the years.

In 1835, state funds were distributed based on the number of taxable residents in the county. Using taxable residents to fund schools lasted for more than 60 years. In 1863, there was a failed attempt to distribute funds based on Average Daily Membership.

Funding based on number of children between ages 6-16 and the number of taxable residents and properties in the county began in 1897. State subsidy still remained relatively low, only reaching 30% of total cost by 1940. The increase to 30% was due primarily to property tax delinquencies during the Great Depression. In 1947, the legislature passed Act 481, which authorized school districts to levy a number of nonreal property taxes.

The state’s share of school costs increased to about 40% during the 1950s. Federal funds for school districts began during the 1950s and are the result of the launch of Sputnik by the Soviet Union.

A number of funding formula modifications were made during the 1950s, including the use of weighted pupil calculations and the implementation of the market value/personal income aid ratio and other elements that still are used today. Even these changes left state subsidy in the range of 40% of educational cost.

As a way to increase the state’s share, the state adopted a sales and use tax of 5% in 1963. The title of the legislation was “Tax Act of 1963 for Education.” To further assist in funding schools, the legislature passed Act 511 of 1965, the “Local Tax Enabling Act.” Act 511 was a virtual re-enactment of Act 481 of 1947. The following year (1966), the legislature passed Act 580. This piece of legislation added to the funding formula the definition of state share of total cost. The first sentence of this act was, “For the school years 1966-67, the state’s share of total reimbursable cost shall be 50%.” This definition was repealed in 1983.

The state share of funding actual instructional expenditures peaked at 51% in the 1972-73 school year and declined to 32.2% by the 2005-06 year. It took nearly 150 years for the state subsidy of public education to increase from 20% in 1790 to around 30% by 1940. It took only 33 years for it to drop from the peak of 51% back to pre-World War II levels.

While total state dollars increased, the cost of educating students increased at a faster rate. At the same time, several pieces of legislation were introduced that repealed various nonreal property taxes authorized by Act 511.

In 1987, the state legislature passed the Solid Waste Recycling Act. This act repealed the levy of taxes on landfills. In 1988, the first of four attempts at property tax reform repealed the authority to levy mercantile and business privilege taxes. The second attempt at tax reform, Act 50 of 1998, repealed another four tax levies from the Act 511 authority. Act 24 of 2001 authorized districts that levied the millage-based occupation assessment tax to replace the revenue with an increase in the earned income tax, and further, it repealed any future use of this tax by school districts.

Along with the repeal of the occupation assessment tax in 2001, the legislature revised the Public Utility Realty Tax Act as part of the deregulation of electric and gas utilities. The impact was about a 50% reduction of revenue collected by the state. Most of the reduced revenue to the state was taken away from municipal governments and school districts. In 2004, the legislature passed the third attempt at property tax reform, Act 72. This attempt maintained the status quo for nonreal property but limited the implementation of new taxes.

In 2006, the legislature passed the fourth attempt at property tax reform, Act 1. This law mandated all districts to participate. One of the features limits the future use of nonreal property taxes to those approved by referendum. Real property tax revenue increases are now limited to an “index” as provided for in Act 1.

Unfunded mandates add
to local school district burdens

Complicating the funding issue is the impact of federal and state mandates requiring additional spending by school districts. Beginning with the passage of Act 195 of 1970, school districts were required to collectively bargain salaries, wages and other terms and conditions of employment. School year 1970-71 saw the creation of intermediate units, with districts providing a large contribution from their budgets for the operations of these entities.

Mandates on providing transportation to nonpublic school students began in 1972-73. The initial Individual with Disabilities Education Act passed in 1975; additional reauthorizations with increasing mandates occurred in 1983, 1986, 1990, 1997 and 2004. Pennsylvania incorporated gifted education requirements with special education costs in 1990.

Testing as a means of evaluating schools began in 1991 (with the PA System of School Assessment). Beginning in 1997, the PSSA became the basis for student assessment. In 1992, substantial changes were made to the collective bargaining process by Act 88. Charter school payments by school districts began in 1996-97. Act 16 of 2000 provided for mandate waivers. The waivers did provide some limited relief to mandates but do not apply to substantial cost waivers such as prevailing wage. Substantial changes were made to the retirement system in 2001. An attempt to control cost was provided as part of the mandate waivers authorized by Act 35 of 2001.

Unfunded mandates and the state’s reduction in funding for public education force school districts to raise local property taxes or discontinue programs for students. The costing-out study proves that more money is needed for students to gain the education they need to meet state academic standards.

The accompanying graph shows the state and local shares of actual instructional expenditure along with the federal and state legislative mandates. The table includes only major mandates imposed on districts along with tax reform efforts.