Improving Student Outcomes and Maintaining Affordability through Comprehensive Education and Tax Reforms. October 29, 2018

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Gervais Henry
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1 Improving Student Outcomes and Maintaining Affordability through Comprehensive Education and Tax Reforms

2 Goals For Education and Property Tax Reform Focus state resources on dataproven strategies to improve student outcomes Pay the best teachers more, especially when teaching in more difficult classrooms Focus on early childhood education Reward the districts that achieve targeted student outcomes Slow the growth of skyrocketing tax bills Compress tax rates as property values rise Promote housing affordability and economic development by capping annual property tax revenue increases Reduce recapture s projected growth, keeping tax dollars local

3 Improving Student Outcomes through Comprehensive School Finance Reforms

4 The future of Texas is in our classrooms today. That future depends on paying our best teachers more, rewarding districts for student achievement and growth, prioritizing spending in the classroom and reducing the burden of ever-increasing property taxes. We must seize this moment to build a better future for Texas. -Governor Abbott

5 What is the goal of our education system? The Texas Constitution requires the Legislature to maintain an efficient system of free public schools in order to preserve liberty and fundamental rights.

6 College Career Military

7 Are we meeting our goals?

8 Too few Texas students are prepared for college 30.0% % Above "Passing" on SAT/ACT Non Economically Disadvantaged 25.0% 6.1 point rise 31% increase 20.0% 15.0% All Students In Texas 10.0% Economically Disadvantaged 5.0% 1.8 point rise 45% increase 0.0% Economically disadvantaged Not economically disadvantaged All

9 Too few Texas students are prepared for the military

10 Will we reach our 60x30 goal?

11 Lack of post-secondary credentials is costing Texas Estimated Lifetime Earnings by Education Level, H.S. class of 2010 $3 M $2.5 M $2 M $1.5 M Gap: ~$1 Million $1 M $0 M Completes P.S. Credential Does Not Complete P.S. Credential # students, 2010 HS cohort 79, ,378

12 There are state budgetary consequences when students graduate unprepared. Skills Mismatch: ~300,000 unfilled jobs per Texas Workforce Commission vs. ~544,000 unemployed Texans 11 Uninsured Medical: ~$6.0B annual cost to Texas for people without the health benefits typically associated with living wage jobs Incarceration: ~147,000 inmates costing ~$3.3B annually ($22k per inmate), or 2x what we spend on K-12 student Within each Texas H.S. graduating class, students subsequently not earning a postsecondary credential lose a combined $201 billion in future lifetime earnings (equal to 1/8th of Texas $1.6 trillion GDP).

13 Texas does well in 235 demographically-adjusted assessments. Meaning, all Texas student groups do relatively well compared to national figures Reading Grade 4 Adjusted Scores Texas-White US-White Texas-Hispanic US-Hispanic Texas-Black US-Black

14 Reading Grade 4 Non-adjusted Score BUT, site selectors and employers do not adjust for demographics in their business or hiring decisions US California Florida Massachusetts New York Texas Our future economic success as a state will require that all children have a chance to learn and achieve.

15 The college, career, and military readiness challenges will only increase in the coming years Econ Dis. %

16 Our School Finance Problems Don t Stop With a Need To Improve Student Outcomes We Must Also Address The Recurring Growth in School Property Taxes

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

17 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, with significant negative financial consequences for dropping the local tax rate.

18 Fixed Tax Rates Coupled with Property Value Growth Cause Property Tax Bills to Grow Faster than Ability to Pay 200% 180% % 160% 140% 120% 100% 80% 60% 62.50% 40% 20% 0% Increase in Est. Average Taxable Value Single Family Homes Increase in Median Household Income since 1996

19 Despite past efforts, taxes continue to increase Average Taxable Value Single Family Home (Statewide) $ 118, $ 159, $ 281, Tier 1 Tax Rate $ $ $ Tier 1 portion of Tax Bill $ 1, $ 1, $ 2,816.58

20 Without tax reform, the state share of education will continue to decline 70.0% 60.0% 50.0% 40.0% Current Law Projections: State vs. Local Share of M&O Funding The state s share will plummet to below 30% by % 20.0% 10.0% 0.0% State Tax Revenues Recapture Revenues Local M&O Revenues

22 Without Tax Reform, Recapture Will Also Skyrocket As property values have increased, more districts have entered recapture and those districts in recapture have seen their payments continue to increase. Without reform, the total amount of recapture and the size of district recapture payments will continue to grow rapidly. $7,000,000, $6,000,000, $5,000,000, $4,000,000, $3,000,000, $2,000,000, $1,000,000, $- Recapture Actuals ( ) and Projections ( )

23 If Current Trends Hold, What Will Texas Look Like in 2028? 0.8 If current trends hold for the next decade, and the state does not compress local property taxes, Robin Hood payments may form a larger percentage of school funding than state tax dollars by State Share % Local Share % Recapture %

24 A comprehensive redesign of the entire school finance system is needed

25 Incentives in our system must be aligned Prioritizing money to teachers Incentivizing improvement in student outcomes, especially for low-income students Removing outdated elements Easing the over-reliance on school property taxes

26 Improve Student Outcomes by Paying Our Best Teachers More, Especially If They Teach in the Most Difficult Classrooms

27 Teacher Quality Allotment Accomplished Distinguished Masters

28 Statewide Teacher Salary Distribution ( School Year) 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% $25,000 to $29,999 $30,000 to $34,999 $35,000 to $39,999 $40,000 to $44,999 $45,000 to $49,999 $50,000 to $54,999 $60,000 to $64,999 $65,000 to $69,999 $70,000 to $74,999 $75,000 to $79,999 $80,000+ Source: Texas Education Agency PEIMS Data

29 Statewide vs. Dallas Teacher Pay ( School Year) 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% $25,000 to $29,999 $30,000 to $34,999 $35,000 to $39,999 $40,000 to $44,999 $45,000 to $49,999 $50,000 to $54,999 $60,000 to $64,999 $65,000 to $69,999 $70,000 to $74,999 $75,000 to $79,999 $80,000+ Source: Texas Education Agency PEIMS Data

30 Dallas ISD has focused on placing its best teachers in the toughest classrooms in the lowest grades. This has resulted in dramatic academic improvements in just one year. 5th Grade Reading at Meets 5th Grade Math at Meets CF Carr ES (92% EcoDis) JN Ervin ES (97% EcoDis) JW Ray ES (94% EcoDis) Titche ES (84% EcoDis) Hernandez ES (84% EcoDis) 0 CF Carr ES (92% EcoDis) JN Ervin ES (97% EcoDis) JW Ray ES (94% EcoDis) Titche ES (84% EcoDis) Hernandez ES (84% EcoDis)

31 After Three Years, ACE Schools Continue to Show Good Results. % Proficient for 5 th Grade Reading at Meets % Proficient for 5 th Grade Math at Meets Blanton ES (92% EcoDis) Umphrey Lee ES (92% EcoDis) Mills ES (91% EcoDis) Pease ES (92% EcoDis) 0 Blanton ES (92% EcoDis) Umphrey Lee ES (92% EcoDis) Mills ES (91% EcoDis) Pease ES (92% EcoDis)

32 Financially Incentivize Districts to Improve Student Outcomes Especially When Achieved Among Low-Income Students

33 College Career Military

34 3 rd Grade High School

35 The concept is that bonus levels are driven by student adjustments Basic Allotment Student Adjustments District Adjustments Bonus Funding

36 The goal of a school finance system should be to ensure that similar children receive similar funding, regardless of where they live.

37 District A District B District C

12 Judson: 1.11 Lackland: 1.05 North East: 1.11 Northside: 1.11 Randolph: 1.

38 Fold the CEI into the basic allotment Alamo Heights: 1.08 East Central: 1.10 Edgewood: 1.15 Floresville: 1.08 Ft. Sam Houston: 1.06 Harlandale: 1.12 Judson: 1.11 Lackland: 1.05 North East: 1.11 Northside: 1.11 Randolph: 1.06 San Antonio: 1.14 Schertz-Cibolo Univ. City: 1.09 South San Antonio: 1.14 Southside: 1.10 Southwest: 1.11

39 District with CEI of 1.08 ABC ISD (CEI = 1.08) ABA = BA (((CEI 1) 0.71) + 1) ABA = $5,140 (((1.08 1) 0.71) + 1) $5,432 per student in average daily attendance District with CEI of 1.17 XYZ ISD (CEI = 1.17) ABA = BA (((CEI 1) 0.71) + 1) ABA = $5,140 (((1.17 1) 0.71) + 1) $5,760 per student in average daily attendance

40 Put student weights on a spectrum Lowest Need Highest Need

41 Compensatory Education Poor Poorer Poorest

42 School districts are pioneering new ways to calculate compensatory education

43 English Language Learners Year 1 Year 2 Year 3 Year 4 Year 5

ELs Long-Term K-12 Achievement Normal Curve Equivalents on standardized tests in English Reading Two Way Dual Language Ed One Way Dual Language Ed Transitional Bilingual Ed (Academic content)

44 ELs Long-Term K-12 Achievement Normal Curve Equivalents on standardized tests in English Reading Two Way Dual Language Ed One Way Dual Language Ed Transitional Bilingual Ed (Academic content) Transitional Bilingual Ed (Taught Traditionally) ESL taught with academic content ESL pullout from mainstream Proposition 227 in California Thomas, W.P., & Collier, V.P. (2012). Dual language education for a transformed world. Fuente Press: Albuquerque, NM.

45 Merely increasing spending will not solve our education problem, but more money spent in a better way can improve student outcomes.

48 New State Spending, Without Local Tax Reform, Will Not Stop The State Share Decline 70.0% Without Compression, The State Share Always Falls - Even With Massive Infusions of State Revenue 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% State (No Compression) Local (No Compression) Recapture (No Compression)

49 You can t fix school finance without fixing how you pay for schools

50 Our Proposal: The 2.5% Tier 1 M&O Revenue Cap This caps the increase in additional local property tax revenue a school district can collect for Tier 1 M&O at 2.5% per year, plus new property value. As property values rise on a district level, this cap would cause the tax rate to decline. So long as districts tax at this new individual district compression ratio, they would still be entitled to their full Tier 1 M&O allocation. State revenues will be utilized to ensure districts do not lose money as a result of this compression of tax collections.

51 Our Proposal: The 2.5% Tier 1 M&O Revenue Cap Simplified Impact of 2.5% Revenue Cap on Tax Rates for District Growing at 10% Annually $2,500,000, % $2,000,000, % 80% $1,500,000,000 60% $1,000,000,000 40% $500,000,000 20% $0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 0% Property Value Tax Rate

52 Projected Tax Effects - Austin ISD Note: All projections are in draft form and are subject to change. $1.20 $1.10 Total M&O tax rate projection M&O Property Tax revenue projection $2,000,000,000 $1,933,235,477 $1,900,000,000 $1,800,000,000 $1.00 $1,700,000,000 $0.90 $ $ $1,600,000,000 $1,500,000,000 $1,506,173,936 $0.80 $ $ $1,400,000,000 $0.70 $1,300,000,000 $1,200,000,000 $0.60 $ Austin Tax Rate under Current Law Austin Tax Rate under Revenue Cap $1,100,000,000 $1,139,631,510 $1,000,000, Austin M&O Revenue under Current Law Austin M&O Revenue under Revnue Cap

53 Projected Tax Effects - Houston ISD Note: All projections are in draft form and are subject to change. $1.10 $1.00 Total M&O tax rate projection $1.04 $1.04 $1.04 $ $ M&O Property Tax revenue projection $2,400,000,000 $2,249,810,203 $2,200,000,000 $0.90 $ $ $2,000,000,000 $1,933,055,465 $1,800,000,000 $0.80 $1,600,000,000 $1,672,011,369 $0.70 $1,400,000,000 $0.60 $1,200,000,000 $ Houston Tax Rate under Current Law Houston Tax Rate under Revenue Cap $1,000,000, M&O Revenue under Current Law M&O Revenue under Revnue Cap

54 Projected Tax Effects - Dallas ISD Note: All projections are in draft form and are subject to change. Total M&O tax rate projection M&O Property Tax revenue projection $1.10 $ $ $ $1,700,000,000 $1,663,693,653 $1.00 $1,600,000,000 $0.90 $0.80 $ $ $ $ $1,500,000,000 $1,400,000,000 $1,326,833,256 $1,300,000,000 $0.70 $1,200,000,000 $0.60 $1,100,000,000 $ Dallas Tax Rate under Current Law Dallas Tax Rate under Revenue Cap $1,067,514,829 $1,000,000, Dallas M&O Revenue under Current Law Dallas M&O Revenue under Revnue Cap

55 Projected State vs. Local Share Effects 70.0% Impact of 2.5% Revenue Cap on State vs. Local Share of M&O Funding (Left: Current Law FY 18-23; Right: Current Law FY and Proposed FY 20-23) 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% State Tax Revenues Recapture Revenues Local M&O Revenues State Tax Revenues Recapture Revenues Local M&O Revenues

56 Projected Effects - Recapture As property values continue to grow, the amount of recapture paid and the rate at which it increases will continue to grow. Adopting the 2.5% proposal will reduce future recapture payments districts would limit the state s reliance on recapture as a method of finance for public schools. $6,000,000,000 $5,000,000,000 $4,000,000,000 $3,000,000,000 $2,000,000,000 $1,000,000,000 Annual Recapture under Current Law and 2.5% Proposal $5,864,489,288 $2,851,599,912 Recapture Current Law Recapture 2.5% Proposal 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% Recapture as a % share of total state and local funding 4.21% 5.11% 6.39% 7.71% 3.88% 4.65% 4.35% 4.68% 4.66% 9.05% 10.52% 5.12% Recapture Current Law Recapture 2.5% Proposal $ %

57 Projected Recapture Effects - Statewide $7,000,000,000 $6,000,000,000 $5,864,489,288 $5,000,000,000 $4,916,305,699 $4,122,550,986 $4,000,000,000 $3,334,885,070 Recapture under Current Law Recapture under 2.5% Proposal $3,000,000,000 $2,000,000,000 $2,618,550,103 $2,386,206,672 $2,101,300,966 $1,933,330,728 $2,283,407,402 $2,509,863,992 $2,541,215,585 $2,851,599,912 $1,000,000,000 $

58 Projected Recapture Effects (Austin ISD) $1,400,000,000 $1,244,099,974 $1,200,000,000 $1,107,355,350 $1,000,000,000 $980,442,061 $836,655,808 $800,000,000 $600,000,000 $664,011,482 $600,296,543 $528,955,169 $494,335,576 $627,155,787 $673,848,354 $695,177,216 $743,087,610 Recapture under Current Law $400,000,000 Recapture under 2.5% Proposal $200,000,000 $

59 Projected Recapture Effects (Houston ISD) $800,000,000 $700,000,000 $667,930,790 $600,000,000 $549,125,271 $500,000,000 $438,640,647 Recapture under Current Law $400,000,000 $300,000,000 $242,746,945 $271,574,629 $230,715,221 $335,957,237 $254,023,280 $248,974,089 $315,300,236 Recapture under 2.5% Proposal $200,000,000 $180,943,810 $189,008,650 $100,000,000 $

60 Projected Recapture Effects (Dallas ISD) $500,000,000 $450,000,000 $431,624,122 $400,000,000 $350,000,000 $319,135,859 $300,000,000 $250,000,000 $200,000,000 $215,229,802 Recapture under Current Law Recapture under 2.5% Proposal $150,000,000 $100,000,000 $102,245,120 $95,788,596 $50,000,000 $20,187,583 $44,976,898 $

61 The system is more unfair than people realize

62 How people believe Robin Hood works Local Revenue (Popcorn) District s Entitlement (Bucket) Recaptured Funds

63 How it actually works It doesn t matter how much money the formulas say you should receive. Recapture always happens at a designated equalized wealth level. You can start paying recapture before your bucket has been filled.

64 91 Number of districts who made recapture payments in 2017 so large they didn t have enough Tier 1 money to meet formula needs. 4 Number of ISDs that paid more than 100% of Tier 1 collection in recapture in $49m Amount of Houston ISD s Tier 1 deficit because of recapture in 2018.

65 With the changes in the Governor s plan, these problems are finally fixed.

66 Instead of this Non-recapture District Some Recapture Districts

67 The system will treat all districts the same. All Districts

68 But it gets even better

69 As a district collects more outcomes bonuses and hires better teachers, their entitlement grows and their recapture shrinks. Better teachers Better outcomes

70 What does this all mean for the future of Texas education?

71 Maintaining Affordability Through Comprehensive Local Tax Reform

72 Overview of Proposal Cap annual property tax revenue growth at 2.5% for cities, counties, and school districts, with a requirement that the impacted taxpayers have a right to vote if a governing body seeks to exceed this allowable rate Three Parts School M&O Taxes City/County M&O Taxes Transparency and Harmonization

73 Why do we need revenue caps?

74 Property taxes are increasing at an unsustainable rate From 2005 to 2015 (11 years) The County total property tax levy increased by 82.2% The City total property tax levy increased by 70.9% The School total property tax levy increased by 39.5% The Special District property tax levy increased by 92.6% Median Household Income increased by 36.34% Taxable home values have increased faster than incomes as well, as shown on the next slide Property taxes rising faster than the economy is growing is not a sustainable policy and threatens the Texas economic growth model People are being taxed out of their homes. Gentrification and an overall housing affordability crisis are significant problems across the state.

75 Background- Home values vs Median Income Statewide Single Family Home Values % 180% % 160% 140% 120% 100% 80% 60% 62.50% 40% 20% 0% Increase in Est. Average Taxable Value Single Family Homes Increase in Median Household Income since 1996

76 Background- Values by Property Category Harris County values by category % % % % % % % % 80.00% 60.00% 81.30% 63.97% 40.00% 20.00% 0.00% Ave Taxable Value- Single Family Home Avg Taxable Value- Multifamily Avg Taxable Value- Commercial Real Avg Taxable Value- Industrial Real

77 Why is there a need for a cap? Local Tax Trends - Austin Since 2014, the total tax bill on a median Austin home has increased 79.5% Austin ISD: 72.3% $1,662 median increase City of Austin: 57.2% $533 median increase Travis County: 28.6% $262 median increase 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% FY 15 FY 16 FY 17 FY 18 FY 19 Austin ISD City of Austin Travis County Recapture Actuals ( ) and Projections ( )

78 Why is there a need for a cap? Tax Rates do not Sufficiently Adjust Downward with Value Growth * * *

79 Why is there a need for a cap? Tax Rates do not Sufficiently Adjust Downward with Value Growth

80 Why is there a need for a cap? Tax Rates do not Sufficiently Adjust Downward with Value Growth

81 Why is there a need for a cap? Tax Rates do not Sufficiently Adjust Downward with Value Growth

82 Why is there a need for a cap? Tax Rates do not Sufficiently Adjust Downward with Value Growth

83 Why is there a need for a cap? Tax Rates do not Sufficiently Adjust Downward with Value Growth

84 Why is there a need for a cap? Property Tax Increases are Driving Gentrification

85 Quick Overview of Proposal By limiting allowable property tax revenue growth, cities and counties will reduce tax rates as property values decline. Voters will have an automatic say when a local government tries to raise property tax revenues by more than 2.5%. Local Governments can exceed 2.5% only for limited causes Law enforcement Critical infrastructure Fiscal restraint will be rewarded, as local governments can bank capacity for future years

86 What does this mean for the future of Texas?

Tax Reform in a Trump World

Tax Reform in a Trump World Government Fleet Expo and Conference Kenneth J. Kies Managing Director The Federal Policy Group San Antonio, Texas June 14, 2017 Overview The 2016 Election did not Change Our