Joint Task Force on Local Effort Assistance

September 25, 2002

Bill Freund, Consultant To The Task Force

2

Purposes of the Joint Task Force pursuant to Engrossed House Bill 3011

1. Changes in state and federal funding since the levy equalization program began in 1989 make it necessary to examine the levy equalization formula and to determine whether the purpose is fulfilled.

2. Complete a thorough analysis of the program, its impacts, and revenues included in the levy base.

3. Determine whether the statutory purpose of the program is being met under the current allocation formula.

4. Present the findings and recommendations of the task force to the legislature by December 1, 2002.

3

Levy Equalization Eligibility and Costs 1990-2005

4

• 210 districts are receiving levy equalization in CY 2002.

• 68 percent of the students are in districts receiving levy equalization funding.

• Of the 86 districts that do not receive levy equalization, 18 are eligible but do not qualify because they did not pass a levy.

Over 70% of school districts are receiving levy equalization funding in calendar year 2002.

Number of School Districts Receiving Levy Equalization Funding 1990-2002

100

120

140

160

180

200

220

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Calendar Year

Nu

mb

er o

f D

istr

icts

5

Since the start of full implementation of the levy equalization program in 1989, the number of school districts with levies has grown substantially.

Excess General Fund Levy Election History 1989-2002

FINAL LEVY APPROVALS FINAL LEVY FAILURES NO LEVY REQUESTCollection $$$ # of FTE** $$$ # of FTE** # of FTE**

Year Amount* Dist. Students Amount* Dist. Students Districts Students

1989 423,634,530 233 676,032 12,021,786 15 22,669 48 35,3611990 448,242,327 248 712,121 877,587 6 4,588 42 31,9301991 519,523,386 251 735,327 3,478,000 8 8,850 37 24,4621992 554,863,191 257 764,228 10,409,364 6 18,985 33 12,4971993 663,306,099 258 799,063 7,368,320 10 16,950 28 7,3871994 719,954,685 259 833,245 3,633,044 10 11,948 27 4,9051995 753,041,982 245 777,903 58,324,310 20 78,089 31 12,7281996 839,318,107 260 853,039 12,089,175 11 21,104 25 12,0331997 874,789,668 264 883,065 3,765,443 8 11,504 24 9,1501998 838,604,584 262 882,124 15,047,453 8 25,737 26 15,5701999 940,765,937 261 876,969 38,481,902 9 40,562 26 18,8592000 1,030,873,759 269 925,408 1,268,399 4 2,782 23 18,1552001 1,088,088,126 275 924,412 13,438,599 4 17,258 17 6,7752002 1,143,919,081 274 943,501 3,533,559 5 4,038 17 3,426

Source: “School District Property Tax Levies, 2002 collections”, published by the Office of the Superintendent of Public Instruction.

6

Since 1995, the percent of levy authority used by school districts has increased. In 2002, 10.4% or $127.3 million of levy capacity was unused.

Levy Authority Compared With Levy Revenue

1995-2002

Collection Year Levy Authority

Estimated Levy Revenue

% Of Levy Authority Exercised

1995 $938,628,398 $734,588,749 78.3%1996 $991,590,916 $813,336,855 82.0%1997 $1,028,257,502 $864,803,432 84.1%1998 $993,061,542 $838,604,584 84.4%1999 $1,096,159,165 $923,404,986 84.2%2000 $1,161,686,352 $1,012,568,861 87.2%2001 $1,183,426,661 $1,048,909,439 88.6%2002 $1,227,147,940 $1,099,843,843 89.6%

7

Of districts with levies, 216 districts were under their maximum levy authority. Of this group 179 districts (83%) had above average property tax rates for a 12% levy.

Characteristics Of Districts Not Utilizing Their Maximum Levy Authority2002 Calendar Year

Total Number Of

Districts

Percent Of State Enroll.

Levy Equal. Eligible

Percent Of State Enroll.

No Levy 22 0.8% 18 0.5%

Combined actual Levy & LEA below levy authority

216 50.0% 179 39.6%

Combined actual Levy & LEA, at least 40% below levy authority

82 7.0% 68 6.3%

Combined actual Levy & LEA, at least 40% below levy authority. Also, 12% levy rate/$1000 at least 50% above state average.

52 5.8%

* 14% actual levy divided by 24% levy authority = 58% of maximum levy authority.

8

Levy equalization program costs increased 69% from 1999 to 2002. The forecasted increase from 2002 to 2005 is an estimated 31%.

Levy Equalization Program Fiscal Year Costs 1995-2005

$71.0$76.9

$82.8 $82.0 $83.2

$102.6

$124.1

$140.9

$154.9

$170.3

$184.2

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

$160.0

$180.0

$200.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

State Fiscal Year

$s

in

Mil

lio

ns

Estimated

9

While changes in the levy base are still the major factor in the growth of the levy equalization program, changes in assessed value per student are becoming more of a factor.

Factors Accounting For Levy Equalization Cost Increases 1995-2003

1995 1998Components of Change To 2003 To 2003

Assessed Valuation 9% 29%

Levy Base 44% 30%

Voter Approved Levies 23% 15%Legislative Policy 23% 26%

Total 100% 100%

10

In 2002, 59% of LEA funds went to districts with enrollment over 5,000 students. Districts of less than 1,000 students received the largest amount per student.

Distribution Of Enrollment And Levy Equalization Assistance (LEA) By Selected District Resident Enrollment Size Categories

Resident Enrollment

Districts Receiving

LEA

Students By Size

Category

% Of State

Enroll.LEA $ By Size

Category

% Of LEA

FundsLEA

$/FTE

Less Than 200 31 3,376 0.4% $2,040,967 1.4% $605200 to 499 37 11,201 1.2% $3,739,488 2.5% $334500 to 999 32 22,124 2.3% $8,381,134 5.6% $3791,000 to 4,999 73 172,908 18.2% $46,641,045 31.3% $2705,000 to 9,999 19 123,628 13.0% $26,510,949 17.8% $21410,000 to 19,999 12 158,313 16.6% $37,320,234 25.1% $236Over 20,000 6 148,902 15.7% $24,177,143 16.2% $162

Total 210 640,452 67.4% 148,810,960$ 100.0% $232

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Levy Equalization Purpose and Mechanics

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“ The purpose of these funds is to mitigate the effect that above average property tax rates might have on the ability of a school district to raise local revenues to supplement the state’s basic program of education. These funds serve to equalize the property tax rates that individual taxpayers would pay for such levies and to provide tax relief to tax payers in high tax rate school districts. These funds are not part of the district’s basic education allocation.”

RCW 28A.500.010

Note: The language up to the last sentence was added to the levy equalization statute in 1999.

Purpose of the levy equalization program – as added to the law in 1999.

13

The levy equalization formula equalizes the property tax rate necessary to raise 12 percent of a district’s state and federal revenues.

Average District District "A"

12 percent of adjusted levy base = $2.2 million

12 percent of adjusted levy base = $2.2 million

Assessed Value: $1.7 Billion Assessed Value: $850 million

Tax rate needed to raise $2.2 million: $1.33 per $1,000

Tax rate needed to raise $2.2 million: $2.66 per $1,000

Tax rate needed for a 12% levy:$2.66 per $1,000

Tax rate needed for a 12% levy:$1.33 per $1,000

$1.1 million in Levy EqualizationEqualization

$2.2 million

Amount that can becollected with a levy

rate of $1.33 per $1000:$1.1 million

State Average Tax Rate For A 12% Levy

14

Assessed Value Aspects in Levy Equalization

15

Examples Of Groups Of Districts With Similar Levy Bases Per StudentWith Differing Levy Equalization Eligibility

CountySchool District

Adjusted* Levy Base

Per Student

Assessed Value Per Student

12% Levy Amount

Per Student

12% Levy Rate per

$1,000 AV

Per Student

LEA

State Average $5,712 $515,031 $685 $1.33 $160

Snohomish Lakewood $5,044 $419,893 $605 $1.44 $47Cowlitz Kalama $5,045 $697,365 $605 $0.87 $0

Franklin Pasco $6,367 $216,282 $764 $3.53 $476Grays Harbor North Beach $6,372 $1,231,647 $765 $0.62 $0

Walla Walla Prescott $9,359 $868,839 $1,123 $1.29 $0Kittitas Kittitas $9,360 $383,892 $1,123 $2.93 $612

* Levy Base adjusted for transfers and per pupil inflator.

Assessed value per student differences can cause districts with similar levy bases per student to receive very different levy equalization per student.

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The primary characteristic of districts eligible for levy equalization is below average assessed value per student.

Levy Base and Assessed Value Per Student As Eligibility Factors For 2002 Levy Equalization

Levy Base Per StudentAbove Avg. Below Avg. Total

Districts Districts DistrictsEligible For Levy Equalization 162 66 228 Resident FTE Enrollment 269,066 375,954 645,020 Percent of State Enrollment 28.3% 39.5% 67.8%

Not Eligible For Levy Equalization 26 42 68 Resident FTE Enrollment 55,714 250,110 305,824 Percent of State Enrollment 5.9% 26.3% 32.2%

Assessed Value Per StudentBelow Avg. Above Avg. Total

Districts Districts DistrictsEligible For Levy Equalization 199 29 228 Resident FTE Enrollment 633,598 11,422 645,020 Percent of State Enrollment 66.6% 1.2% 67.8%

Not Eligible For Levy Equalization 6 62 68 Resident FTE Enrollment 34,602 271,222 305,824 Percent of State Enrollment 3.6% 28.5% 32.2%

17

Assessed value differences among districts affect the cost of levy equalization to a greater degree than levy base differences.

Effect On 2002 Levy Equalization Costs Of Neutralizing Assessed Value or Levy Base Differences Per FTE

Assumption

Districts Receiving

LEA

LEA Payable

($ In Mill)District Eligibility

Impacts

Current LEA Formula 210 $148.8

Levy Base/FTE Differences Only - negate effect of assessed value differences per FTE*.

167 $19.8 23 new eligible districts, 66 original districts drop out.

Assessed Value/FTE Differences Only- negate effect of levy base differences per FTE*

192 $145.6 6 new eligible districts, 24 original districts drop out.

* Set at state average amount per FTE for all districts.

18

From 1998-2003, AV growth was above average in 4 counties and below average in the other 35 counties.

Growth Of Assessed Value (AV) In Selected Counties 1998-2003

AV Growth % Of State % Of StateCounty 1998-2003 AV 2003 AV 1998

State Average 46.9%

Clark 48.4% 4.83% 4.78%King 69.8% 43.97% 38.03%San J uan 63.3% 0.84% 0.75%Snohomish 47.9% 9.86% 9.80%

Kitsap 34.4% 3.25% 3.55%Pierce 39.7% 9.03% 9.50%Spokane 22.8% 4.42% 5.28%Yakima 21.9% 2.06% 2.49%

Ferry 5.9% 0.07% 0.10%Pend Oreille 9.7% 0.18% 0.24%Whitman 15.2% 0.38% 0.48%Note: Levy equalization is calculated with a one year lag in AV. For example,

2002 levy equalization is based on 2000 AV.

19

Had King County assessed values grown at the average of the other 38 counties, fewer districts would be eligible for LEA and the cost would be lower.

Effect On LEA 2003 Cost Had King County AV Grown At The State Average Rate Of The Other 38 Counties From 1998-2003

Current 2003 AV

With King County At State Avg. AV Growth 1998-03 Difference

LEA Payable($ in Mill) $161.9 $133.5 ($28.4)

LEA Eligible Districts 234 217 -17

Districts Receiving LEA 216 200 -16

20

Since 1998, the levy rate per $1,000 of Assessed Value for a 12 percent levy has been dropping.

State Average Levy Rate For A 12 Percent Levy (1995-2005)

$1.566 $1.556

$1.506$1.543

$1.472 $1.471

$1.389

$1.331$1.302

$1.234

$1.169

$1.000

$1.100

$1.200

$1.300

$1.400

$1.500

$1.600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Calendar Years

Le

vy

Ra

te P

er

$1

,00

0 A

ss

es

se

d V

alu

e

Estimated

21

Levy Base Aspects in Levy Equalization

22

Differences in state and federal revenues per student can cause districts with similar assessed value per student to receive very different levy equalization per student.

Examples Of Groups Of Districts With Similar Assessed Values Per StudentWith Differing Levy Equalization Eligibility

CountySchool District

Adjusted* Levy Base

Per Student

Assessed Value Per Student

12% Levy Amount

Per Student

12% Levy Rate per

$1,000 AV

Per Student

LEA

State Average $5,712 $515,031 $685 $1.33 $160

Walla Walla Columbia $5,660 $669,120 $679 $1.02 $0Clallam Crescent $9,011 $670,352 $1,081 $1.61 $189

King Highline $5,567 $546,113 $668 $1.22 $0Whitman Endicott $12,485 $546,430 $1,498 $2.74 $771

Snohomish Snohomish $5,269 $483,524 $632 $1.31 $0Pacific Willapa Valley $6,696 $482,774 $804 $1.66 $161

King Federal Way $5,217 $385,061 $626 $1.63 $114Yakima Union Gap $6,143 $385,227 $737 $1.91 $225

* Levy Base adjusted for transfers and per pupil inflator.

23

Levy base differences can be attributed primarily to a few state and federal programs. There is greater variation among districts in federal revenues than state revenues.

2002 Levy Base Dollars Per Student -- Range and Standard Deviation in Selected Programs

AverageStandard Deviation Lowest Highest

All Programs 5,712 2,938 4,920 21,840

State Programs 5,128 2,759 4,667 21,586 Apportionment 4,206 2,429 3,759 19,935 Special Education 470 109 0 831 Transportation 212 652 0 5,932 Learning Assistance 82 52 0 282 Bilingual 46 81 0 467

Federal Programs 584 958 0 11,603 Title I 142 515 0 8,072 Migrant/Bilingual 15 79 0 742 Special Education 114 65 0 585 Special Purpose 77 666 0 10,812

24

The influence of federal programs in explaining levy base per student differences among districts has been growing.

Program Characteristics Of LEA Districts With Above Average Levy Bases Per Student in 2002 & 1995

Districts Exceeding State Average Levy Base $/FTE Student By 5%

In 2002 In 1995

All State Programs 108 109 Apportionment 83 87 Special Education 3 28 Learning Assistance 0 1 Bilingual 5 2 Transportation 65 59

All Federal Programs 54 39 Title I 21 10 Special Education 1 0 Special Purpose Grants 23 2

All Programs 139 129

25

Federal funds as a percent of total funds in the levy base have increased since 1995. Since there is greater variation in distribution of federal funds among districts, this increases the cost of levy equalization.

Composition Of The Levy Base, Calendar Year 2002 Compared With 1995

2002 1995State Funds 4,875,642,475 3,745,016,170 % of Total 89.8% 93.1%

Federal 555,618,471 278,798,902 % of Total 10.2% 6.9%

26

Increases in federal funds impact levy equalization costs to a greater extent than evenly distributed state fund increases.

Effect Of Differing Modes Of Funding Increases On LEA

Method Of Increase

Cost Of Increase ($ in mill)

LEA Cost Increase ($ in mill)

LEA % Cost Increase

Change In Total LEA Eligible

Districts?

Change In LEA Rank

Among Districts?

$450/FTE increase (Average 8.8% increase in state dollars per FTE )

$427.9 $11.2 7.5% None, but one district becomes elig. & one drops out.

Yes

10% federal funds increase for districts with federal funds.

$53.2 $8.2 5.6% 9 more districts elig.

Large changes.

27

Legislative Levy and Levy Equalization Policy Changes 1987-2003

28

After enacting various increases in the levy authority of school districts, the 1987 legislature enacted a levy equalization program. Subsequent increases in levy authority led to further legislative increases in levy equalization.

Major State Levy and Levy Equalization Policy Changes 1978-2003

Calendar Levy Lid Levy Base Levy Grandfather DistrictsYear Percent Changes Equal. % Number Phasedown

Pre-1979 No Limit -- -- -- --

1979 10% State Basic Ed -- 50 By 1981

1980-85 10% Added state progs. -- 150 by 1982 By 1983,then '90

1986-87 Higher of actual, -- -- Less than 150 By 199318.18% or ESD avg.

1988 20% Fed rev. & inflation adj. -- 91 Levy red. funds

1989-93 20% Lag adj. (1993) 10% 91 Max 30%--1994-95 20%+temp. 4% -- 12% Prorated 91 ----1996-97 20%+temp. 4% -- 10% 91 --

1998 22% -- 10% 91 --

1999 24% -- 10%, & 12% 91 --for lowest quartile

2000-02 24% -- 12% 91 --

2003 24% -- 12% Prorated 91 --

29

The cost of the legislature’s recent increase in levy equalization from 10% to 12% is $24.2 million in 2002.

• The increase from 10% to 12% levy equalization, first effective in calendar year 2000, has the following effect in 2002:

2002 LEA Cost

With 12% levy equalization = $148.8 million.

With 10% levy equalization = $124.6 million.

Difference = $ 24.2 million

• The $24.2 million is 16.3% of the 2002 calendar year LEA cost.

30

DRAFT Potential Findings

31

DRAFTSummary Of Potential Findings

1. In 2002, 70% of Washington’s school districts receive levy equalization, (210 out of 296). These districts have almost 68% of the state’s K-12 enrollment. Another 18 districts are eligible but do not have a voter approved levy.

2. The number of districts eligible for levy equalization is expected to increase from 228 to 234 districts in calendar year 2003. Of the 234 districts, 216 are expected to receive levy equalization.

3. From fiscal year 1999 to 2002, levy equalization costs increased 69%, (from $83.2 to $140.9 million). The forecasted increase from 2002 to 2005 is an estimated 31% ,from $140.9 million to $184.2 million).

4. The main reasons for the increasing costs of levy equalization are changes in the levy base, assessed value and legislative policy.

32

5. In 2002, 59% of the levy equalization funds were allocated to districts with enrollment over 5,000 students. Districts of less than 1,000 students received the largest amount per student.

6. From 1995 to 2002, the number of districts with levies rose from 245 to 274 and levies as a percent of total levy authority grew from 78.3% to 89.6%. The rise in voter approved levies accounts for 23% of the increased cost of levy equalization for this time period.

7. Of the 274 districts with voter approved levies in 2002, 216 districts or 79% had levies that were below their maximum levy authority. Of these 216 districts, 179 or 83% had above average property tax rates and receive levy equalization.

8. Of the 228 districts eligible for levy equalization, 199 districts (87%) have below average assessed value per student. The remaining 29 districts had above average assessed value per student but were eligible for levy equalization due to above average state and federal revenues per student.

DRAFTSummary Of Potential Findings Continued

33

9. In 2002, differences in district assessed values per student are the primary driving force in the cost of levy equalization.

10. Assessed values have been growing faster in King County than the state’s other 38 counties. This lowers the state average levy rate for a 12% levy which increases the number of districts eligible for levy equalization and the state’s cost of the program.

11. Since 1998, the property tax rate per $1000 of assessed value for a 12% levy has been dropping, (from $1.54 per $1000 AV in 1998 to $1.33/$1000 AV in 2002). The primary reason is that assessed value has increased faster than the levy base.

12. Since 1995, the influence of federal funds in the levy base has increased. This resulted in increased levy equalization costs because the distribution of federal funds among districts is uneven.

DRAFTSummary Of Potential Findings Continued

34

13. With respect to federal funds, Title I and Special Purpose programs cause the greatest variation in per student revenues in the levy base.

14. The amount of federal special purpose grants included in each district’s levy base is based on district estimates. Some districts are using high estimates which not only increases these district’s levy amount but also may increase their eligibility for levy equalization.

15. Some districts that are fiscal agents for federal grants can receive levy equalization funds by including all the federal grant in their levy base, not just their share. (A district is a fiscal agent if federal grant funds are funneled through the district for the use of other districts or public entities.)

DRAFTSummary Of Potential Findings Continued