Kathy Kitchen, Editor

Funding and the Standards of Quality (SOQs)

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.

The basic methodology for funding the Standards has remained unchanged since the JLARC recommendations were implemented. JLARC recently included funding for elementary and secondary education as part of its study plan for the 2000-2001 fiscal year.

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 methodology 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).

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, and
• 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 personnel, 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 costs:

  Recognize whatever school divisions spend
  Recognize reasonable cost

• Governance and control of schools dictated to JLARC to use reasonable cost

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, and
  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, and

• Affords the greatest weight to costs clustered around the middle cost.

• Most school division’s 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) and
  Support costs (50 distributions).

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. Which programs should be equalized (based on ability-to-pay)?
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.

Which programs should be 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?

• The 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 percent 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 (ADM) 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: 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

Since 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.

However, concerns have remained 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, has placed a study of funding for elementary and secondary education on its agenda. According to information released by JLARC, the proposed study issues are:

• Is the State currently implementing the SOQ cost methodology and fully funding SOQ costs? Are all localities funding their share 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?
• To what extent is funding distributed based on local ability-to-pay?
• For what specific practices do localities make expenditures in excess of recognized SOQ costs? 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 by funding certain practices that exceed the current SOQ, what options are available and what are the associated costs?

Timeline for study

Since the mid-1980s, the majority of states have had the status of school finance and its constitutionality challenged in court. Some, like New Jersey, have had multiple cases before the lower courts and at the state supreme court level. In 10 states, the plaintiffs have won at the state supreme court, resulting in significant changes to the state’s funding system. The most notable of these was in Kentucky, where the Kentucky Education Reform Act affected not only the funding system, but instituted an accountability system and a revamped assessment system as well.

Virginia is one of 12 states in which the plaintiffs lost at the state supreme court level and either no additional complaints were filed or further complaints were also ruled by the courts in favor of the state system. A state by state listing of complaints and decisions can be found at www.coe.ilstu.edu/boxscore.htm.

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 inequities continue to exist. In many cases, even with reforms in place, statistics show that spending disparities continue and often widen.

The focus has slowly shifted from the level of funding provided to school districts to how the funds are being spent to increase student achievement. Among states and within states, spending patterns are surprisingly consistent. The percent spent on classroom instruction, transportation, maintenance, and other large categories does not vary much among school districts. However, the majority of new resources are not being placed in the regular classroom, but are being directed to programs outside of the classroom to serve special needs. The special needs continue to grow in areas such as special education, English as a Second Language, and remedial programs to address standards based reform efforts.

Several 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.
• With the infusion of funding at both the local and state levels for technology, the need for technical support and instructional personnel as well as replacement of equipment is increasing at an outstanding pace.
• Programs designed to assist students in meeting the Standards of Learning and passing required tests are becoming more and more necessary. While the state has provided funding for some of these programs, it is fragmented and is becoming increasingly more difficult for localities to track funding to specific programs.

Consideration of these issues is a must during the upcoming study. However, inclusion of any of these costs will require significant infusions of state resources and likely will impact some of the Commonwealth’s smallest and poorest localities as well.

As this study progresses, additional information will be included on this site.

Click here for summary of recent Virginia Legislative history of “Funding and the Standard of Quality (SOQs).”

“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.

Briefing by JLARC staff on the proposed JLARC Study on Funding for Elementary and Secondary Education, 2000.

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