Ohio Law: School Funding Investment Regulations Explained

In 2021, Ohio passed a new school funding formula for its 600-plus school districts and 300-plus public charter schools. This formula, known as the Cupp-Patterson or Fair School Funding Plan, was designed to address the disparities in funding between richer and poorer districts, and to ensure that the state's constitutional responsibility of properly funding K–12 education was met. The new formula includes a base cost model that calculates the cost of educating an average student, and an equalizing mechanism that ensures state funds are directed towards poorer districts. This mechanism, known as the state share percentage (SSP), takes into account both property values and resident income to measure districts' wealth and determine the level of state funding required. While the new formula has received bipartisan support and backing from school officials and teachers' unions, there are concerns about its long-term sustainability due to the increased costs involved.

The role of local property tax revenue

In Ohio, public schools have historically been funded by a combination of local property tax revenue and state funding. Local property tax revenue plays a significant role in the funding of schools in Ohio. All districts receive substantial sums through property taxes, including dollars raised through a state-mandated minimum property tax rate of 2% (20 mils). This local revenue stream is crucial for supporting the state's 600-plus school districts and 300-plus public charter schools.

In the fiscal year 2022, Ohio districts received approximately $11 billion in local revenue, showcasing the importance of local property tax revenue in the state's education funding landscape. However, one challenge with relying solely on local funding is the disparity in property wealth and income across different districts. Affluent districts with higher property values tend to generate more local revenue, while urban and rural districts with lower property values often face funding shortfalls and struggle with dilapidated facilities.

To address these disparities, the state intervenes by providing additional funding to "level up" poorer districts and create a more equitable playing field. This additional state funding is allocated based on factors such as the number of high-need students, special education requirements, and the district's property wealth. By combining local property tax revenue with state funding, Ohio aims to ensure a more balanced distribution of resources across its school districts.

The local property tax revenue also plays a role in influencing the state's funding decisions. Districts with higher local revenue may receive relatively modest state funding, while poorer districts with lower local revenue receive more state support. This dynamic ensures that state funds are directed towards districts with the greatest financial need, complementing the local property tax revenue to provide a more comprehensive education funding framework.

While local property tax revenue is a significant component of school funding in Ohio, it is just one part of a complex hybrid funding system. The state's funding formula, legislative decisions, and other revenue sources also play crucial roles in ensuring that Ohio's schools receive the necessary financial support to provide a thorough and efficient education to their students.

The impact of wealth disparities

Ohio's public schools have historically been funded by a combination of local property tax revenue and money from the state. This has resulted in disparities in the quality of education, with more affluent districts benefiting from higher property values and, therefore, greater funding. In contrast, urban and rural districts with lower property values have faced funding shortfalls and dilapidated facilities.

The impact of these wealth disparities is significant. Students in more affluent districts have access to better resources, including quality buildings, facilities, up-to-date instructional materials, and equipment. On the other hand, students in less wealthy districts must often contend with leaking ceilings, makeshift gymnasiums, and outdated computers and textbooks. This creates an uneven playing field and leads to achievement gaps between students from different socioeconomic backgrounds.

The funding system, which relies heavily on property taxes, further exacerbates these disparities. Affluent areas with higher property values end up with well-funded schools, while low-income areas struggle with inadequate funding. According to the Education Trust, school districts with larger populations of Black, Latino, or Native American students receive around $1,800 less per student than districts with fewer students of color. Similarly, there is a $1,000 per student funding difference between low-income and high-income areas.

The impact of these funding disparities is far-reaching. Students in underfunded schools may face challenges in keeping up with their peers from better-funded districts. They may have limited access to extracurricular activities, advanced coursework, or college preparation resources. Additionally, schools in low-income areas may struggle to attract and retain high-quality teachers, further impacting the quality of education.

To address these issues, Ohio has implemented a new school funding formula. The formula aims to provide more state aid to districts with less capacity to generate local dollars and those serving a higher number of high-need students. The latest iteration, the Cupp-Patterson plan, or the "Fair School Funding Plan," calls for an estimated increase of $2 billion per year in state education expenditures. While this is a step towards addressing wealth disparities, the effectiveness of these reforms will depend on their implementation and long-term sustainability.

The state share mechanism

At its core, the state share mechanism serves as an "equalizing" tool, aiming to bridge the financial gap between wealthy and less affluent districts. By design, it ensures that the state covers a larger portion of the base funding for poorer districts, while wealthier districts with greater local funding capabilities receive less state support. This approach helps create a more level playing field among districts, addressing the disparities in property wealth and income that often exist across different areas.

The calculation of the state share percentage involves a few steps. Firstly, district "capacity" is assessed by considering property values and resident income. Property values are a direct indicator of a district's ability to generate local funding through property taxes. Meanwhile, resident income is factored in as higher-income districts are more likely to gain voter approval for higher property tax rates, further enhancing their capacity to raise funds.

The second step involves calculating a district's median income relative to the state median, resulting in a "median income index." This index is then multiplied by specific numbers to determine a "local capacity percentage," which represents the assumed local tax rate that a district can levy. This step includes all districts, even those with assumed tax rates below the state-mandated minimum property tax rate of 2%.

In the third step, the local capacity per pupil is subtracted from the base amount, resulting in the base state funding allocation. From this, the state share percentage is derived. Consequently, districts with higher wealth receive a lower state share percentage and vice versa.

While the concept of the state share mechanism is relatively straightforward, its implementation is complex. One challenge lies in the methodology used to calculate district "capacity." The new formula, introduced in 2021, takes a more "absolute" approach by measuring each district's wealth independently. However, this can lead to issues with inflation, as districts may appear wealthier over time due to rising property values and incomes.

Another factor impacting the state share mechanism is the base amount, which has remained relatively constant. With local wealth increasing due to inflation, the state share percentages have declined. This dynamic could lead to questions about the long-term sustainability of the mechanism and the potential need for adjustments in future budgets.

In conclusion, the state share mechanism in Ohio's school funding formula plays a crucial role in ensuring equitable funding for poorer districts. While it faces challenges related to the calculation of district wealth and the impact of inflation, it represents a step towards creating a more balanced and fair education funding system in the state.

The base cost model

Under the previous funding formula, the state set a "fixed" base amount that applied to all districts and charter schools. This approach was simple and transparent, and lawmakers could easily adjust the base to increase or decrease education expenditures. However, opponents of this approach argued that the base amount was arbitrary and did not cover the costs of educating the average student.

The new base cost model seeks to address these concerns by implementing a set of calculations that yield a "variable" base amount that differs for each district. This model uses staff-to-pupil ratios, statewide average salary data, and other expenditure data on things like supplies and building operations to determine the cost of educating a typical student. This approach allows legislators to demonstrate the rationale behind the base amount, rather than being accused of setting an arbitrary base.

However, the new base cost model also presents several challenges. Firstly, it drives much higher funding amounts, leading to a statewide "cap". Under the old formula, the most recent base was $6,020 per pupil in FY 2021, but the new formula's statewide average base is $7,352 per pupil. This higher base amount resulted in a "cap" on state funding allocations, with only a portion of the additional funding being implemented.

Secondly, the base cost model will generate new, additional costs for the state when salary "inputs" are updated. The current calculations are based on FY 2018 average salaries, but these salaries have since increased, and schools are also receiving billions in federal Covid-relief money, which is likely to be spent on salaries to keep up with rising inflation.

Thirdly, the base cost model includes guaranteed staffing minimums that inflate the base amounts of small districts. For example, all districts receive at least six special teachers, even if the ratios would yield lower numbers. This creates an unfair system that gives special treatment to small districts and discourages them from operating efficiently.

To address these issues, state lawmakers have two main options: return to a flat, universal base amount, or modify the base cost model to bring it under control. Returning to a flat base amount would require political courage as it would upset proponents of the new formula, who see the base cost model as its centerpiece. Modifying the base cost model could include ditching the staffing minimums and prescribing positions based on staffing ratios, as well as tying salaries to a multiple of the state's minimum teacher salary schedule to give state lawmakers more control over salary costs.

The equalizing mechanism

The "state share" is the equalizing mechanism in Ohio's school funding formula, which ensures that state dollars "level-up" poorer districts. The state covers a larger portion of the base funding for poorer districts, while wealthier districts that can raise more money locally receive less state aid. The state share is calculated using property values and resident income to measure districts' wealth. Property values are used because they directly impact how much districts can generate through property taxes. Income is used because higher-income districts are more likely to gain voter approval for higher property tax rates, further increasing their capacity to raise local funds.

The new formula, enacted in 2021, applies both factors in all districts' calculations. It uses two slightly different measures of income: 1) the total federal adjusted gross income of a district’s residents, and 2) a district’s median income multiplied by the number of state tax returns filed by its residents. This data is combined to create a composite wealth measure for the district. This index is then multiplied by specific numbers to yield a "local capacity percentage", which appears to be the local tax rate the state assumes districts have the capacity to levy.

The local capacity per pupil is then subtracted from the base to produce the base state funding allocation, from which the state share percentage is derived. As a result, wealthier districts have a lower state share, while poorer districts receive more state funding. For example, a high-wealth district like Bexley has a lower state share and receives just $361 per pupil in state aid, while its poorer neighbours receive more state funding.

The state share is a complex mechanism, but it works to identify the state's neediest districts and direct more aid their way. However, it is unclear how the mechanism will function over time. Between 2022 and 2023, the first two years of the new model, nine out of ten districts experienced declines in their state shares, while only eighteen out of roughly 600 districts registered an increase. This could be due to inflation and the formula's stronger emphasis on "absolute" wealth, which makes districts look wealthier over time.

To address this issue, the base amount of funding should be raised. However, Ohio is currently not funding schools at the full base amount of roughly $7,300 per pupil. Instead, it is somewhere around $6,500 per student, reflecting the phase-in of the large, $2 billion-per-year increase in state spending called for under the new formula. It remains to be seen if the state will be able to increase the base amount in the future, as this will require additional resources and funding.

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