August 4, 2017
After two years with no complete budget except for public school funding, Illinois now faces the prospect of beginning the 2017-18 school year with a budget for everything except schools.
On August 1 Governor Rauner issued an amendatory veto of the school funding bill, SB1, passed by the General Assembly on May 31. Because the appropriations bill enacted in July over the Governor’s veto required that primary and secondary education funding be allocated with an evidence-based formula, the General Assembly now must approve or override the Governor’s changes or pass a new funding formula in order to fund schools.
The existing school funding formula has long been criticized, on a bipartisan basis, as providing too little State funding, with too little attention to equity, resulting in highly disparate per-pupil spending levels.
SB1 is the only recent attempt to steer the State in the direction of more equitable funding that has been passed by both chambers of the Illinois General Assembly. The bill has several components that work to achieve the equitable funding goal while leaving no district in the State worse off, which has stymied previous attempts to reform school funding. This blog post will review both the major provisions of SB1 and the changes made by the Governor in his veto.
Hold-harmless
SB1 provides for a calculation of each school district’s Base Funding Minimum, which districts will receive regardless of equity considerations. The Base Funding Minimum is the funding received by each district from the State for the 2016-17 school year. For the Chicago Public Schools, the Base Funding Minimum also includes the block grant that the district has traditionally received. This results in CPS getting $203 million more than what the evidence-based formula provides.
Because of the hold-harmless provision, the evidence-based formula only allocates funds appropriated above and beyond the FY2017 level. After the hold-harmless provisions, there is $350 million to allocate to increasing funding equity out of the $6.7 billion allocated to the new formula in the appropriations bill passed over the Governor’s veto in July. (Because of categorical spending, the total P-12 appropriation is $8.2 billion.) The bill also provides a minimum funding level for future years. A commission convened by Governor Rauner to recommend revisions to the school funding formula estimated that it would take State spending of an additional $3.5 to $6 billion for all districts to meet their adequacy targets.
Adequacy Target
In comparison with the current formula, which assumes the same foundation level of funding for each student in the State, SB1 sets out a target funding level for each school district based on the district’s needs in a number of areas:
- The number of full-time equivalent teachers at average salaries needed to achieve target student-teacher ratios based on grade level and the number of low-income students;
- Additional amounts based on the number of low income, special education and English language learning students;
- Amounts for other personnel, such as specialist teachers, teacher’s aides, tutors, substitutes, guidance counselors, nurses, librarians and administrators; and
- Amounts for operating costs, including professional development, assessments, instructional materials, computer technology, facility maintenance and employee benefits. Under the bill as passed by the General Assembly, this section includes the normal cost of pensions and retiree healthcare benefits for Chicago Public Schools, approximately $221 million.
The above factors are adjusted to account for varying costs of living throughout the State and annually recalculated to adjust to rising average teacher salaries.
Local Capacity
In addition to an adequacy target, the bill calculates each school district’s capacity to fund itself, based on the equalized assessed value of property in the district. Adjustments are made for districts whose property taxes are capped by the Property Tax Extension Limitation Law (PTELL) and for districts that have Tax Increment Financing (TIF) districts, based on the argument that these measures effectively reduce local capacity to self-fund education.
Finally, just before final passage of the bill on May 31, the House added language that removes the approximately $500 million that CPS must contribute annually toward the unfunded liability for teachers’ pensions from its local capacity. The rationale for the changes is that money contributed toward pensions cannot go to the classroom and thus should not be counted toward local capacity. This means that under the new funding formula, the State will begin to contribute a portion of this cost. At the time, Democrats estimated the additional State aid at approximately $20 million, but more recent estimates put it at $40 million. Currently the State pays for normal costs and toward the unfunded liability for downstate and suburban districts, but only a small portion of pension costs for CPS.
Tier Allocation
Next, the bill divides the sum of each district’s Local Capacity and State funding by its Adequacy Target and ranks all districts in the State according to the resulting ratio. The districts are split into four tiers; the districts with the least capacity to meet their Adequacy Target are placed into Tier 1 for the highest priority of funding.
The total FY2018 impact on CPS from the various provisions of SB1 is estimated at $293 million over the FY2017 funding level.
The Amendatory Veto
Upon passage of SB1, the State Senate put a procedural hold on the bill to prevent it from immediate presentation to the Governor for his consideration. Governor Rauner quickly threatened to veto the bill. The Governor objected to what he believed was excessive funding for CPS, especially the allowance for its unfunded pension liability added to the bill by the House just before final passage.
After holding the bill for two months, and after a comprehensive budget passed over the Governor’s veto, the Senate presented SB1 to the Governor on July 31. Negotiations over the bill had been taking place but had reportedly broken down. The next day, the Governor issued an amendatory veto that not only reduced funding levels for CPS, but also significantly changed portions of the school funding formula.
With regard to CPS, the amendatory veto removes $203 million of CPS’ block grant from the hold-harmless provision and adds the annual Chicago Teachers’ Pension Fund unfunded liability amount back into Local Capacity. Moreover, the veto removes the $221 million in pension normal cost and retiree healthcare contributions from CPS’ Adequacy Target. This funding, however, is added to the pension code as a continuing appropriation. Democrats have accused the Governor of eroding the State’s small FY18 surplus with this change, because the $221 million is already included in the FY2018 appropriation for P-12 education. The Governor claims that the veto is budget neutral, but to be so would require the General Assembly to reduce the education appropriation by the new amount in the pension code.
Both SB1 as passed and as vetoed would provide the normal cost of CPS’ pensions (the latter through the pension code), whereas SB1 would provide approximately $40 million in assistance toward the unfunded liability and the Governor’s plan would not. The Civic Federation has advocated that the State should be responsible for the unfunded liability of all school districts, including CPS, but that school districts should be responsible for normal costs. The veto stipulates that to the extent that downstate districts become responsible for normal costs, the funding formula will not compensate them.
The total effect of the veto on CPS remains unclear. The reduction in the hold-harmless amount will be partially offset by formula funding, but other changes may move CPS into the lower-priority Tier 2. The Governor originally said that the total effect of his veto would be $145 million less in funding for CPS than SB1 as passed would have provided, but the numbers are in the process of being updated. The Illinois State Board of Education is expected to produce new estimates in a few days.
To the extent that the Governor’s changes reduce formula funding to CPS, the formula will shift the funds to other districts. However, the amendatory veto also makes a number of changes that could potentially reduce formula funding for some districts outside of Chicago.
First, it removes the minimum funding requirements for future years and removes the annual recalculation of average teacher salary from the adequacy calculation. These changes may result in the State assuming a lower responsibility for education funding over time. Second, it puts a cap on the regional cost of living factor of districts’ adequacy targets. Some districts in high-cost suburban areas may get less funding as a result.
Third, the veto sunsets the hold-harmless provisions of the bill after the first three years, and replaces them with an alternate hold-harmless formula based on a three-year rolling average of student enrollment. Districts that lose student population between the 2016-2017 school year and the 2020-2021 school year could lose funding under the new formula. This provision could affect a large number of districts; 527 of them lost population between 2015 and 2016.
Finally, the amendatory veto removes the adjustments for PTELL and TIF districts from the determination of local capacity in the formula, with potentially large ramifications in affected districts. The hold-harmless provisions ensure that school districts that received PTELL adjustments in FY2017 will retain that funding for FY2018 and school districts with TIFs will be held harmless to GSA levels they received in FY2017. This provision has not been affected by the Governor’s amendatory veto. School districts using PTELL EAV and with TIFs could be affected with regard to what portion of the $350 million in additional funding for FY2018 and any additional funding going forward they will receive. This is because the calculation of how much local funding they can provide will use a larger measurement of the school district’s taxable EAV. The larger EAV number would make it seem like the school district can provide more local funding. Such a change could have a large impact if it moves a school district down into a lower priority tier of funding.
Therefore, school districts that are subject to PTELL and school districts that have TIF districts within their borders are more likely to lose out on additional funding the State may provide in FY2018 and future years. School districts not subject to PTELL and that do not have TIF within their borders are more likely to gain some of that additional funding.
The Path Forward
Faced with the amendatory veto, the General Assembly now has three options: it can affirm the Governor’s changes, override the veto or pass a new school funding bill. All three options require a three-fifths majority in both chambers, and the final option would also require the Governor’s signature. Additionally, some have questioned whether the Governor’s movement of appropriations from SB1 to the pension code through an amendatory veto is constitutional.
The General Assembly has a deadline of fifteen days to approve or override an amendatory veto. However, a more practical deadline is the first scheduled payment to school districts on August 10, which the State cannot process if an evidence-based funding formula is not finalized. Many school districts claim that while they will be able to open on time if payments are delayed, they will exhaust funds mid-year if the impasse is protracted. Fitch Ratings has warned that delayed resolution of the veto could imperil districts’ credit ratings, with CPS being especially vulnerable. While conventional political wisdom might predict that the high stakes would lead to a quick resolution, Illinois consistently defied expectations during its two-year budget standoff.