Maintaining Affordability, Reducing Recapture, and

Protecting State Education Funding through

Comprehensive School Finance Reforms

Governor’s Office of Budget and Policy

Presentation to the Revenues Working Group of the Texas Commission on Public School Finance
November 13, 2018
Goals For School Property Tax Reform
Increase state funding to public education to improve student outcomes and to
accomplish the following property tax goals:

• Prevent the imminent collapse in the
state’s share of public education funding
• Increased state funding, paired with
compression of local tax rates, re-balances
the state share
• Reduce recapture’s projected growth,
keeping tax dollars local
• Treat all students equally based on their
individual student needs, rather than the
district’s property values
• Slow the growth of skyrocketing tax bills
• Compress tax rates as property
values rise
• Promote housing affordability by
capping annual property tax revenue
increases
• Bolster economic development by
lessening the burden on capital
intensive industries

Texas Commission on Public School Finance 11/13/18

We need to pay our best teachers more, reward
teachers and districts for student growth, prioritize
spending in the classroom and reduce the burden of
skyrocketing property taxes.

I'll add up front that I believe the state will have to

provide more funding.

-Governor Abbott
August 29, 2018
What happens if we do nothing
to address school property taxes?

Texas Commission on Public School Finance 11/13/18

Without Tax Reform, the State Share of
Education Will Continue To Decline

“In its preliminary budget request ahead of next year's legislative session, the Texas
Education Agency projected a drop in the state's general revenue for public education by
more than $3.5 billion over the next couple of years, in part because the revenue from local
property taxes is expected to skyrocket.”

Texas Commission on Public School Finance 11/13/18

 Why Will the State Share Fall?
• The state only pays the amount that
a school district does not collect
through local property taxes.
• As property values rise – and
property tax revenues rise – more
local revenues mean a reduced need
for state funding.
• Fixed M&O tax rates ensure the
state share will always decline as
property values rise.
Texas Commission on Public School Finance 11/13/18
Sec. 42.252. LOCAL SHARE OF PROGRAM COST (TIER ONE).
(a) Each school district's share of the Foundation
School Program is determined by the following formula:
LFA = TR X DPV
where: "LFA" is the school district's local share;
"TR" is a tax rate which for each hundred dollars of
valuation is an effective tax rate of the amount equal
to the product of the state compression percentage, as
determined under Section 42.2516, multiplied by the
lesser of:
(1) $1.50; or
(2) the maintenance and operations tax rate adopted by
the district for the 2005 tax year; and
"DPV" is the taxable value of property in the school
district for the preceding tax year determined under
Subchapter M, Chapter 403, Government Code.
***
(d) A school district must raise its total local share
of the Foundation School Program to be eligible to
receive foundation school fund payments.
Why will the state share fall?

This is exactly what the current system is designed to

do.
The state only pays the amount that a school district
does not collect through local property taxes

State Share

Local Share

Texas Commission on Public School Finance 11/13/18

As property values rise – and property tax revenues rise –
more local revenues mean a reduced need for state funding

State Share

Local Share

Texas Commission on Public School Finance 11/13/18

Fixed M&O tax rates ensure the state share will always
decline as property values rise

Local Share

Texas Commission on Public School Finance 11/13/18

 Without Tax Reform, the State Share Will Fall to 32% by 2023

• Current law projections Current Law State Share Projections (2018-2023)

have the state share of 70.0%

public education M&O 60.0%

funding falling to 32% in
2023 50.0%

• Recapture will double its 40.0%

share of public education 30.0%

funding 20.0%

• Local property taxes 10.0%

(including recapture) will
finance 68% of education in 0.0%
State Share Recapture Share Local Share

2023 2018 2019 2020 2021 2022 2023

Texas Commission on Public School Finance 11/13/18

 Without Tax Reform, Recapture Will Also Skyrocket
• As property values have Recapture Actuals (1994-2018) and Projections (2019-2023)

increased, more districts have $5,000,000,000

$5,028,495,423

entered recapture and those

districts in recapture have seen $4,000,000,000

their payments continue to $3,000,000,000

increase.
$2,092,219,983

• Without reform, the total $2,000,000,000

amount of recapture and the size $1,075,602,976

of district recapture payments $1,000,000,000

will continue to grow rapidly.

$-

Recapture Actuals (1994-2018) and Projections (2019-2023)

Texas Commission on Public School Finance 11/13/18
 If These Trends Continue at Their Current Pace…
• Depending on property 50.0%

value growth rates, 45.0%

recapture could constitute 40.0%

a greater share of public 35.0%

education funding than 30.0%

state tax revenues as early 25.0%

20.0%
as 2028. 15.0%

• The State Share could fall 10.0%

to 20% within the next 10 5.0%

to 15 years. 0.0%
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

State Share Recapture Share

Note: Any projections this far into the future are speculative. These projections show general trends, not certainty for the future.

Texas Commission on Public School Finance 11/13/18

With fixed M&O tax rates, the state share of education
funding declines as property values rise.

This shifting of the tax burden from state tax revenues

to local property tax bills is unsustainable.
 School Property Taxes are the Largest Part of
a Texan’s Tax Bill – And Rates Don’t Decline
• Tier 1 M&O Property Taxes – the
largest portion of the largest
portion of a Texan’s property tax
bill – do not decrease when
property values increase.
• The current school finance
system functionally requires
most districts to tax at a $1.00
tax rate.

Source: TEA Texas Commission on Public School Finance 11/13/18

Fixed Tax Rates – Coupled with Property Value Growth –
Cause Property Tax Bills to Grow Faster than Ability to Pay

200%
192%
180%

160%

140%

120%

100%
65%
80%

60%

40%

20%

0%

Increase in Est. Average Taxable Value Single Family Homes Increase in Median Household Income

Texas Commission on Public School Finance 11/13/18

Despite past efforts, taxes continue to increase
statewide because tax rates have been fixed since 2008
2008 2017 2027 (est.*)
Average Taxable Value Single
$ 107,493 $ 144,188 $ 262,759
Family Home (Statewide)
Tier 1 Tax Rate $ 1.00 $ 1.00 $ 1.00
Tier 1 portion of Tax Bill $ 1,075 $ 1,442 $ 2,628
Increase from 2008 + 34% + 144%

*The 2027 estimate reflects the historic property value growth rate projected forward for the next
decade. These projections show general trends, not certainty for the future.

Texas Commission on Public School Finance 11/13/18

The current recapture system is more
unfair than many people realize

Texas Commission on Public School Finance 11/13/18

How people believe “Robin Hood” works

Local
Revenue
(Popcorn)

Recaptured
Funds
District’s
Entitlement
(Bucket)

Texas Commission on Public School Finance 11/13/18

How it often actually works
It doesn’t matter how Recapture always You can start paying
much money the happens at a recapture before your
formulas say you designated equalized bucket has been
should receive. wealth level. filled.

Texas Commission on Public School Finance 11/13/18

 91 4 $49m
Number of districts Number of Amount of
who made
ISDs that paid Houston
recapture
payments in 2017 more than ISD’s Tier 1
so large they didn’t 100% of Tier deficit
have enough Tier 1 1 collection because of
money to meet in recapture recapture
formula needs.
in 2017. in 2018.

Texas Commission on Public School Finance 11/13/18

To solve these problems, the
state must do more to support
public education

Texas Commission on Public School Finance 11/13/18

How should the state do more?
• Target additional state resources to data-proven
strategies to improve student outcomes
• Use state revenues to ease the over-reliance on
school property taxes
• Compress property tax rates, as property values rise
so local property taxpayers don’t face skyrocketing
tax bills
• Reduce reliance on recapture funding, solving for
current flaws in the calculation process

Texas Commission on Public School Finance 11/13/18

Additional State Resources to Improve Student Outcomes
The Outcomes and Expenditures Working Groups have
recommended meaningful reforms to improve student
outcomes across Texas:
• Pay the best teachers more, especially when teaching in more difficult
classrooms
• Focus additional state resources on early childhood education
• Reward the districts that achieve targeted student outcomes, especially when
achieved among low-income students
• Promote equity by removing outdated formula elements and using these funds
to increase the basic allotment

Texas Commission on Public School Finance 11/13/18

The State Should Fund These Reforms –
But it Must Do More…
 Increasing State Funding, Without Addressing Local Property
Taxes or Recapture, Will Not Resolve Current Trends
State/Local Share Under Current Formula Trends State/Local Share with $2.5 Billion Increase In
Annual State Spending
70.0% 70.0%

60.0% 60.0%

50.0% 50.0%

40.0% 40.0%

30.0% 30.0%

20.0% 20.0%

10.0% 10.0%

0.0% 0.0%
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

State Share Recapture Share Local Share State Share Recapture Share Local Share

Texas Commission on Public School Finance 11/13/18

To Balance the State Share and to
Protect Taxpayers, School Property Tax Rates
Should Decline as Property Values Increase
 State revenues will be
utilized to ensure
The 2.5% Tier 1 M&O districts do not lose
Revenue Cap money as a result of
this compression of tax
collections

Texas Commission on Public School Finance 11/13/18

The 2.5% Tier 1 M&O Revenue Cap
• How It Works:
• Cap the increase in additional local property tax revenue a school district can
collect for Tier 1 M&O at 2.5% per year.
• As property values rise on a district level, this cap would cause the Tier 1 tax
rate to decline. So long as a district taxes at this new district compression
ratio, it would still be entitled to its full Tier 1 M&O formula allocation.
• Ex: If a district currently taxes at $1.00 for its Tier 1 M&O, but property value growth indicates
a need to drop to a $0.96 tax rate to stay within the cap, the district would still receive its full
Tier 1 M&O allocation so long as it taxes at the $0.96 rate.
• As the years pass, and the district’s property values continue to rise, the tax rate would
continue to decrease to $0.92, $0.88, $ 0.84, etc.

Texas Commission on Public School Finance 11/13/18

The 2.5% Tier 1 M&O Revenue Cap
Simplified Tax Rate Impact of 2.5% Revenue on ISD with 6% Property Value Growth
$1,800,000 $1.20

$1,600,000
$1.00
$1,400,000

$1,200,000 $0.80

$1,000,000
$0.60
$800,000

$600,000 $0.40

$400,000
$0.20
$200,000

$- $0.00
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Property Value Tax Rate

Texas Commission on Public School Finance 11/13/18

 Limiting Property Tax Growth Balances the State Share
and Slows Recapture Growth
Impact of 2.5% Tier 1 M&O Compression on the State Share of M&O Funding
60.0%
With 2.5% M&O tax
compression:
50.0%

• The state share of

40.0% public education
funding stabilizes going
30.0%
forward
20.0%
• Growth in property tax
bills slows
10.0% • Future recapture
growth slows
0.0%
State Share % Local Share % Recapture % State Share % Local Share % Recapture %

2019 2020 2021 2022 2023

With 2.5% Compression
Current Law Trends (2019-2023)
(2019-2023)
Texas Commission on Public School Finance 11/13/18
Across the state, communities with rising
property values will finally receive relief from a
decade of rapidly-increasing property tax bills.

By passing structural reform, homeowners will

receive long-term tax benefits rather than a one-
time, immediately-eroding impact.
 Projected Tax Effects – Statewide Average
Note: All projections are in draft form and are subject to change.

Average Tax Rate under Current Law Average Tax Rate under 2.5% Cap
$1.08

$1.06
$1.07
$1.06
$1.06
$0.12 in
$1.04
$1.02 estimated
$1.02 $1.01

$1.00 tax rate

$0.98

$0.96
$0.98
reduction by
$0.94
$0.94
2023
$0.92
2018 2019 2020 2021 2022 2023

Texas Commission on Public School Finance 11/13/18

And through compression of tax rates, the state
can dramatically slow future recapture growth.
 Projected Recapture Effects - Statewide
Note: All projections are in draft form and are subject to change.

ANNUAL RECAPTURE UNDER CURRENT LAW

AND 2.5% PROPOSAL
$1.87 billion $5,500,000,000
Recapture Current Law Recapture 2.5% Proposal

$5,028,495,423

decline in $5,000,000,000

$4,500,000,000
projected $4,000,000,000

recapture by $3,500,000,000

$3,000,000,000
$3,155,245,707

2023 $2,500,000,000 $2,076,939,484

$2,000,000,000

$1,500,000,000
2018 2019 2020 2021 2022 2023

Texas Commission on Public School Finance 11/13/18

Additional reforms can further slow – and
potentially decrease – recapture payments.
Rethinking Recapture
• Districts should not pay Tier 1 recapture payments so large that they
do not have the funding left to meet their formula-indicated needs
• Only property tax revenues in excess of formula-indicated need should be
recaptured.
• This will allow recapture districts to receive outcomes bonuses and the
benefits of targeted increases in the state formulas to improve student
outcomes.

• Districts should be able to purchase discounted attendance credits for

local students who are enrolled in charter schools

Texas Commission on Public School Finance 11/13/18

Fixing the Recapture Calculation Process is
Necessary to Ensure All Districts Benefit from the
School Finance Commission’s Reform Proposals

Texas Commission on Public School Finance 11/13/18

Instead of this…

Non-recapture Some Recapture

District Districts

Texas Commission on Public School Finance 11/13/18

The system should treat all districts the same

All Districts

Texas Commission on Public School Finance 11/13/18

Merging Recapture Reform with Outcomes Reform
As a district increases As a district’s bucket
The state will fully
teacher pay and improves get bigger, the district
fund all districts’
its outcomes, the state owes less money in
entitlements.
owes the district more recapture.
money.

Better
Better
teacher
outcomes
pay

Texas Commission on Public School Finance 11/13/18

Charter Attendance Credits
• Keep local tax dollars local, by funding local students in charter schools
with local property tax dollars that would otherwise become be
exported to the state as recapture.
• In 2018, $772 million in recapture payments are sent to the state from
school districts with large charter school presences in their counties.
• Chapter 41 school districts should be able to purchase discounted
attendance credits if the revenues associated are transferred to a local
charter school, in lieu of state tax revenues.
• Charter schools would not receive additional funding due to these
reforms. However, instead of state tax revenues, certain charters
would be funded with locally-collected property tax revenues.
Texas Commission on Public School Finance 11/13/18
What does this mean for the future
of Texas?
Effects of School Property Tax Reform
In addition to comprehensive public education reforms to improve student outcomes:

• The state maintains its share of public

education funding
• Increased state funding, paired with
compression of local tax rates, begins to
re-balance the state share
• Recapture payments slow, keeping tax
dollars local
• Capping tax growth and allowing districts to
purchase charter attendance credits
improves the projected trends
• Tax rates decline across Texas
• As property values continue to rise,
tax rates are compressed
• As tax rates decline, fewer Texans
face housing struggles caused by
rising property tax bills
• The state’s economy continues to
flourish as businesses can plan for
large capital investments

Texas Commission on Public School Finance 11/13/18