Kathy Kitchen, Editor

Funding of Standards of Quality
by Kathy Kitchen

Over the past 30 years, Virginia’s school finance system has been significantly impacted by two significant occurrences. First, the State Constitution, ratified in 1971, contains two provisions that relate specifically to school funding contained in Article VIII

• “Standards of quality for the several school divisions shall be determined and prescribed from time to time by the Board of Education, subject to revision only by the General Assembly”
   
• “The General Assembly shall determine the manner in which funds are to be provided for the cost of maintaining an educational program meeting the prescribed standards of quality, and shall provide for the apportionment of the costs of such program between the Commonwealth and the local units of government comprising such school divisions”

Second, beginning with the 1986-88 biennial budget, the General Assembly adopted a method proposed by the Joint Legislative Audit and Review Commission (JLARC) for costing the Standards of Quality, followed in 1988-90 with distribution changes proposed in part 2 of the JLARC study.

After the JLARC recommendations were implemented, the basic methodology for funding the Standards remained unchanged until the 2004 Session of the General Assembly, when changes were made based upon the February 2002 JLARC report, “Review of Elementary and Secondary Funding.”

Local school divisions are not able to keep expenditure data that relates to specific standards. Therefore, the method used to “cost” the Standards of Quality has been of issue since the Constitution was ratified in 1971. Governor Holton appointed the Task Force on Financing the SOQ to study the issue and make recommendations. The task force presented two reports, the first in December of 1972 and the second in July of 1973.

The methodologies recommended in the task force reports differed in their approaches. The first task force determined the number of instructional personnel required to meet standards by type of position. Average salaries were then used to determine the cost of the personnel component, with statewide expenditures for other services averaged.

The second task force recommended the instructional component be calculated by using a predetermined instructional personnel ratio (suggesting that a ratio ranging from 48 to 52 personnel per 1,000 students in membership would be adequate). The concept of calculating positions according to specific standards was not included in the report.

As a result of these reports, in 1974 the Commonwealth made several significant changes to educational funding:

• The Standards of Quality were adopted, setting forth the instructional personnel and support services required by each local school division
   
• The minimum reasonable cost per pupil of funding these requirements was established
   
• The one-cent state sales and use tax distributed to localities based on school-age population was subtracted from the calculated cost
   
• The State committed to paying approximately 50% of the SOQ costs on a statewide basis, with the localities funding the remaining 50%
   
• The composite index of local ability-to-pay was created to determine the actual apportionment of costs between the state and the individual localities

The methodology recommended by the second task force remained in effect until the 1986-88 biennium when recommendations made by JLARC in Funding the Standards of Quality Part 1: Assessing SOQ Costs were implemented.

Two events led the General Assembly to direct JLARC to conduct an in-depth analysis of the funding methods used to support K-12 education. First, local school and government officials continued to express concerns that the Commonwealth was not “fully funding its share of the SOQ.” Second, JLARC had completed an analysis of all state mandates and concluded that education funding was not consistent with state requirements.

The General Assembly asked that JLARC first look at the methods used to calculate the SOQ costs and then analyze the methods used to distribute state funding to the localities. These studies were published as Senate Document No. 20 in 1986 (Funding the Standards of Quality Part 1: Assessing SOQ Costs) and as Senate Document No. 25 in 1988 (Funding the Standards of Quality Part 2: SOQ Costs and Distribution).


Funding the Standards of Quality Part 1: Assessing SOQ Costs

The first report recommended changes to the methodology in both instructional and support costs.

Instructional Positions

The Standards of Quality set forth minimum staffing levels for instructional personnel. Rather than calculate a statewide number of positions per 1,000 students in membership, JLARC applied the various requirements at the school level.

• Tested the validity of traditional Appropriation Act standard
   
• Identified all references to staffing requirements or pupil/teacher ratios in codified SOQ and the Standards of Accreditation
   
• Applied these standards against enrollment at each grade level in each school
   
• Accumulated number of instructional personnel by school division actually required to meet the SOQ
   
• Established traditional Appropriation Act standard as floor or minimal level of staffing funded
   
• Instructional staffing levels funded by state ranged from 59.5 per 1000 students to 100.0 per 1000 students, with a statewide average of 62.9

Support Costs

As opposed to the number and type of personnel required, quantifiable standards are not available for instructional salaries and other support costs (administration, transportation, health, operations and maintenance). To accurately determine the cost of “doing business,” these costs must be identified.

> Two options for recognizing operating cost

• Recognize whatever school divisions spend
• Recognize “reasonable” cost

> Governance and control of schools dictated to JLARC to use “reasonable”

What is “Reasonable” Cost?

Department of Education had previously used the statewide average to determine the cost

• A few large school divisions determined the funding level for the rest of the school divisions
• Average cost exceeded the actual cost in most school divisions

JLARC said “reasonable” cost should be what most school divisions spend and therefore settled on “prevailing” cost

What is “Prevailing” Cost?

• Counts the cost experience of every school division but is not overly influenced by the highest or lowest cost
   
• Weighted average cost where weights are determined not by size but by proximity to the middle cost in the distribution
   
• Affords the greatest weight to costs clustered around the middle cost
   
• Most school divisions’ actual costs are either a little less or a little more than the prevailing cost
   
• Prevailing cost is less than the statewide average but higher than the median
   
• The prevailing calculation was used on all costs not quantified by the SOQ
  • Salaries (7 distributions)
  • Support costs (50 distributions)

Funding the Standards of Quality Part 2: SOQ Costs and Distribution

The second JLARC report dealt with the question of how SOQ funds should be distributed. Despite perceptions to the contrary, the key decisions about the distribution of SOQ funds did not come from JLARC but from policy decisions made by the Governor and the General Assembly.


Six basic questions determine state funding of the SOQ:

1. How should total SOQ costs be shared between the state and localities?
2. The cost of which programs should be shared between the state and the localities based on ability-to-pay (i.e. equalized)?
3. How should ability-to-pay be measured?
4. How should sales tax revenue be distributed?
5. What level of local effort should be required?
6. How much should be appropriated as state aid?

How should costs be shared?

Prior to the JLARC study, the state had paid on average 50% of the basic operating costs and 100% of recognized fringe benefit costs. To reduce disparity, it was determined that the state should increase its share of the operating costs to 55%. A decision was also made to reduce the state share of recognized fringe benefit costs to 55%. These changes increased the overall cost to localities.

The cost of which programs should be shared based on ability-to-pay (i.e. equalized)?

Prior to the study, only Basic School Aid and Gifted funding were equalized. A decision was made to equalize all program funds that related to the Standards of Quality.

        - Basic Aid                                 - Remedial Education
        - Gifted and Talented                - Pupil Transportation
        - Vocational Education              - Fringe Benefits
        - Special Education

How should ability-to-pay be measured?

• JLARC study presented several measures of ability-to-pay that were technically sound
  1. Composite Index: Measures local wealth through property values, adjusted gross income, and sales tax collections; doesn’t really measure local ability to generate revenue; 50/40/10 weights are artificial; is well-known and understood
  2. Revenue Capacity Index: Measures the revenue a locality would generate if it levied average tax rates for each tax; is linked to local ability to raise revenue, but is technically complex
  3. Equalized Effort Index: Ensures that each locality would have to tap its overall tax base equally in order to meet SOQ costs; produced tax equity in one action, but was a radical change
   
• Both the revenue capacity and equalized effort index were technically superior to the composite index in measuring ability-to-pay
   
• Decision was made to retain composite index because of its level of acceptance and general accuracy

How should sales tax revenue be distributed?

• Use of school-age population to distribute the 1 cent state sales and use tax was a compromise carried forward from the early 1970’s
   
• JLARC study produced several alternatives for distribution other than this measure
  • Average daily membership
  • Population
  • Several combinations of school-age population and ADM
   
• Decision was made to retain school-age population because it was generally accepted

What level of local effort should be required?

• Until the JLARC study, required local effort meant matching basic aid and gifted funding only
   
• To fully fund the calculated cost of the SOQ, a local share for all SOQ programs needed to be appropriated
   
• During the 1988 session, required local effort was changed to require a local match for all equalized accounts:
  
  - Basic Aid                         - Pupil Transportation
  - Gifted and Talented        - Remedial Education
  - Vocational Education      - Fringe Benefits
  - Special Education
   
• For most localities this did not require any more local funding than already being appropriated; some localities were affected, however

How much should be appropriated as state aid?

• Totally the decision as to how much to appropriate for public schools is left to the General Assembly
   
• The General Assembly has fully funded the requirement according to the JLARC methodology since its inception
   
• Additional state funding has been provided for other programs not included in the methodology

After the completion of these two studies, Virginia’s SOQ funding system was challenged in court. In 1994, the Virginia Supreme Court upheld the system when it was challenged on education disparity grounds.

Review of Elementary and Secondary School Funding

Concerns remained, however, about either the adequacy of the standards themselves or the costs that are determined to meet the standards. The 2000 session of the General Assembly asked JLARC to conduct a study on the adequacy of funding of the SOQ. Specifically, the language amendment was as follows:

“The Joint Legislative Audit and Review Commission shall study the funding of the Standards of Quality (SOQ) and prevailing school division practices for elementary and secondary education in the Commonwealth. The study shall include, but not be limited to, a review of (i) current statutory and budget provisions governing the calculation of SOQ costs and funding; (ii) the practices of local school divisions that exceed the Standards of Quality and that are not currently funded by the Standards of Quality, including the costs for technology; (iii) potential enhancements to the methodology for calculating the costs of the Standards of Quality, and potential methods for calculating the costs of other prevailing school division practices; (iv) the extent to which school division practices which exceed the Standards of Quality are associated with local ability-to-pay; (v) the Department of Education’s processes and procedures for calculating and distributing state funds based on the current funding methodology; and (vi) the extent to which the state distribution of funding for elementary and secondary education, through the Standards of Quality or other means, is based on local ability-to-pay. The Commission shall submit an interim report to the 2001 Session of the General Assembly and a final report by June 1, 2001.”

Governor Gilmore vetoed this language amendment. The Joint Legislative Audit and Review Commission, however, placed a study of funding for elementary and secondary education on its agenda. Based on concerns expressed by legislators during the 2000 General Assembly session, broad issue questions for the review were identified. Regional input sessions provided JLARC staff with information about the expenditure areas of greatest concern at the local level. Seven issue questions were developed to generally guide the review:

• Is the State currently implementing the SOQ cost methodology and are the State and all localities fully funding their shares of SOQ costs?
   
• Are there improvements or enhancements to the SOQ methodology that appear appropriate?
   
• Are there “funding gaps” for State-mandated or sponsored programs, where the State does not fund, or does not adequately fund, a share of the costs?
   
• To what extent is funding distributed based on local ability-to-pay?
   
• For what specific practices do localities make expenditures that exceed recognized SOQ costs, and how widespread are these practices? Is the extent to which the practices are used related to local ability-to-pay? How much is spent for these practices? (The proposed issue would include capital outlay and debt service costs.)
   
• What factors should be considered in determining the degree of State support that may be appropriate for local practices that exceed the SOQ?
   
• If the General Assembly wishes to enhance the level of State support for elementary and secondary education, what options are available and what are the associated costs?

JLARC’s report, issued in February 2002 contained seven primary findings:

• Localities that support educational programs going beyond the SOQ have some valid reasons to be concerned about the level of responsibility that they bear for education costs.
   
• As it has recently indicated it will do, the Board of Education needs to re-examine the SOQ, particularly for instructional staffing positions, to ensure that the standards are realistic in relation to the Commonwealth’s current educational needs and practices.
   
• Some of the changes made to the JLARC staff methodology during the 1990s raise questions as to whether the State’s foundation cost estimates have become less current and less realistic in relation to educational practice.
   
• Adjustments should be considered to make the State’s foundation cost estimates more accurate and current for the years in which the funds are provided.
   
• DOE needs to ensure that all localities are providing sufficient local resources to meet SOQ requirements.
   
• There are a wide variety of actions the State could pursue to enhance its support of elementary and secondary education beyond the full costs of the SOQ.
   
• The current framework that is utilized for making the determination of State and local share responsibilities for education appears to compatible with constitutional provisions (referring to the Composite Index of Local Ability-to-Pay).

The funding items set forth in the report were divided into three distinct tiers. Tier One dealt with the current methodology and meeting SOQ costs. Tier Two included enhancing the Recognition of Instructional Personnel and At-Risk Pre-School Funding. Tier Three included debt service to supplement current state funds for capital purposes and teacher salary costs. For the 2002-2004 biennium, the total estimated costs of all three tiers ranged from nearly two billion to nearly three billion dollars over the two-year period. (The full JLARC report can be found on the JLARC website at http://jlarc.state.va.us).

The 2002 Session of the General Assembly addressed some of the Tier One recommendations. A total of $24.9 million in FY2003 and $50 million in FY2004 was provided to phase out the practice of deducting prevailing locally generated revenues from the Basic Aid cost calculation. In addition, $4.1 million in FY2003 and $54.2 million in FY2004 was provided to restore 72% by FY2004 of the prevailing cost of certain administrative support positions that had been dropped from the SOQ cost calculation.

In June of 2003, the State Board of Education approved changes to the Standards of Quality addressing some of the Tier Two recommendations contained in the JLARC report. These changes included (1) requiring one full-time principal at each elementary school; (2) requiring one full-time assistant principal for each 400 students in each school; (3) funding elementary resource teachers in art, music, and physical education; (4) reducing the secondary school pupil to teacher funding ratio from 25:1 to 21:1 to support scheduled planning time for secondary teachers; (5) reducing the state required speech language pathologist caseload from 68 to 60 students; (6) funding two technology specialist positions per 1,000 students in grades K-12 division wide, one to provide technical support and one to serve as a resource teacher for instructional technology; (7) revising the formula for the calculation of funding support for SOQ prevention, intervention, and remediation; and (8) requiring one full-time position per 1,000 students to serve as a reading specialist. These changes were subject to funding by the Governor and General Assembly during the 2004 Session.

The 2004-2006 budget introduced by the Governor to the 2004 Session of the General Assembly contained more than $1 billion for the re-benchmarking of the Standards of Quality and did address some of the Tier One recommendations made by JLARC. These included updating inflation factors, updating health care premium costs, and funding the prevailing cost of administrative positions. The budget included funding for only one of the State Board of Education’s proposed SOQ changes – a revised formula for the SOQ prevention, intervention, and remediation. In addition, contingent upon passage of recommended tax changes, the budget included increased funding for at-risk 4-year old programs, fully funding the cost of competing for support positions, and increased ESL staffing. To accomplish these goals, the Governor’s budget reinstated the deduction of certain local revenues and for the first time proposed deducting certain federal revenues from the SOQ calculation.

After a lengthy and sometimes contentious session, the 2004-2006 biennium budget was adopted by the General Assembly and signed by the Governor. The Public Education Standards of Quality/Local Real Estate Property Relief Fund authorized in HB5018 provides one-quarter cent of sales tax revenue for public education, estimated at $167.0 million in FY2005 and $210.7 million in FY2006. Half of this amount (1/8 of a cent) each year is distributed based on the most recent triennial census of school-aged population, consistent with the distribution of the one-cent sales tax dedicated to public education. The remaining half (1/8 of a cent) each year is appropriated to Basic Aid to support the three new SOQ standards recommended by the Board of Education and approved by the General Assembly. These are:

• Five elementary resource teacher positions per 1,000 students in grades K-5 (based on all membership) in order to provide three periods of instruction per week in the areas of art, music, and physical education;
• One-quarter of the funding for the required planning period for middle and high school teachers in FY2005 (resulting in a 24:1 school-level pupil-teacher ratio) and the full amount of funding in FY2006 (resulting in a 21:1 school-level pupil-teacher ratio); and,
• One support technology position per 1,000 students in FY2005 and one support technology and one instructional technology position per 1,000 students in FY2006.

In addition, the budget contained funding to reverse 100% of the deduction from Basic Aid from locally generated revenues and to reverse 70.78% of the deduction from federal revenues. This action leaves 29.22% of these revenues deducted from Basic Aid. According to language contained in the reports of the General Assembly, this is the estimated portion that is used by school divisions for support costs.

For many years, the General Assembly and state officials have often been concerned when additional state funds provided for education have been used to supplant local funds. Many have cited circumstances where additional state funds for education have been “used” to support other local government services – i.e. “buying a fire truck.” In an unprecedented move, language was included in the 2004-2006 Appropriation Act (2004 Virginia Acts of Assembly Special Session I) relating to the Public Education Standards of Quality/Local Real Estate Property Tax Relief fund stating, “These additional funds are provided to local school divisions and local governments in order to relieve the financial pressure education programs place on local real estate taxes.” In a more direct manner, work papers of the Assembly stated that these funds could be used to lower the real estate tax rate of local governments. While this writer has no official data on the impact this language has had on local government funding in support of education, the media reported in the spring of 2004 that some local governments lowered local support in an amount equal to the additional state funds (the school division received no additional funding) while others “shared” the resources with the school system. To the extent that local governments have been spending significant resources above that required by the Standards of Quality for many years, this would seem appropriate. School advocates on the other hand, cite the new and difficult challenges school divisions are facing each year due to the Standards of Learning, No Child Left Behind, and demographic and socio-economic changes in student populations that require increasing financial support.

A survey conducted by the Virginia Municipal League and Virginia Association of Counties in the Summer, 2004, asked localities how additional state revenue for education generated by the legislature’s action affected their FY05 budgets. The responses indicated that localities took various actions, including that the new money did not affect the local transfer to education, that it allowed the locality to reduce the local transfer to education, that it enabled funding of additional school or local priorities, or that it enabled lowering the local real estate tax or prevented an increase in tax.
 

Over the years, the primary debate in school finance has focused on the unequal property tax base among local governments. Following a great deal of debate and many court battles, states have taken different approaches to attempt to address the inequality in per pupil spending. States that previously used a foundation program moved to a guaranteed tax base approach, with others moving in the opposite direction. Some states have combined a foundation program with a guaranteed tax base approach to attempt to ensure an identified per pupil spending goal. In 1993, Michigan replaced the property-tax-based system with one financed in large part by an increase in the state sales tax.

Regardless of the state system in use, without capping the amount of funding that local governments can provide to education, fiscal equities continue to exist. In many cases, even with reforms in place, statistics show that spending disparities continue and often widen.
 

Even with the recent major infusion of new state funding for public education, two major issues immediately come to mind when discussing current state funding of the Standards of Quality.

• Pupil/teacher ratios set out in the Standards of Quality are significantly higher than the current practice in most school divisions. This leaves localities with the burden of funding 100% of the cost for teachers and other instructional personnel not recognized by the Standards of Quality.

• Even though the State has begun to appropriate some funding in support of construction, costs for debt service and/or construction and renovation of facilities continue to be primarily a local burden.

Click here for summary of recent Virginia Legislative history of “Funding of the Standards of Quality.”

“Funding of the Standards of Quality Part 1: Assessing SOQ Costs, Joint Legislative Audit and Review Commission, Senate Document No. 20, 1986.

“Funding of the Standards of Quality Part 2: SOQ Costs and Distribution, Joint Legislative Audit and Review Commission, Senate Document No. 25, 1988.

Governor’s Commission on Educational Opportunity for All Virginians Final Report, 1991.

“Overview of Direct Aid to Public Education, Review of State Funding of the SOQ”, House Appropriations Committee Staff and Senate Finance Committee Staff, May 1990 and updated by the Department of Education, December 1993.

“Review of Elementary and Secondary School Funding,” Joint Legislative Audit and Review Commission, February 2002.
 

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