School Finance Reform: The First Two Years

to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire s future. One Eagle Square Suite 510 Concord, NH 03301-4903 (603) 226-2500 Fax: (603) 226-3676 www.nhpolicy.org Board of Directors Martin L. Gross, Chair John B. Andrews Cotton M. Cleveland John D. Crosier Frederick W. King Donna Sytek Betty Tamposi Kimon S. Zachos Plumbing the Numbers #6 School Finance Reform: The First Two Years Co-Executive Directors Douglas E. Hall (603) 798-5579 doughall@nhpolicy.org Author: Douglas E. Hall Co-Executive Director Richard A. Minard, Jr. (603) 226-2500 rminard@nhpolicy.org In association with the Institute for Policy and Social Science Research, University of New Hampshire October 2002

Plumbing the Numbers #6 page 1 Summary: Property Tax Rates Less Disparate; Education Spending Disparities Essentially Unaffected In their first two years, New Hampshire s education-finance reforms of 1999 produced a dramatic leveling of property tax rates across the state, providing significantly reduced tax payments by property tax payers in many of the less affluent school districts. In their first two years, however, the reforms did not reduce the disparities among school districts in how much money they chose to spend on their pupils. In 1999, the New Hampshire Legislature passed sweeping, albeit temporary, reforms in how the state pays for public education. In the first two years that followed that action, every town and school district in the state faced decisions about how to respond either to an infusion of new state revenues for schools or, in the case of donor towns, extraction of property-tax revenues. A town-by-town analysis shows that virtually all school districts decided to increase their school budgets, and by essentially the same amount across the economic spectrum, leaving the prereform disparities in spending per pupil essentially unchanged. As the legislature had intended, the less property-rich districts used the state revenues to replace revenues they had been raising through local property taxes. Thus, the reforms significantly reduced the inequities in local property tax rates. This paper uses graphs and tables to illustrate the town-by-town response to the reforms in the first two budget years following their enactment: 2000 and 2001. In a general way, the Claremont case against the State of New Hampshire was based on what the plaintiffs had identified as (1) inequities in educational opportunity for students in different school districts and (2) inequities in tax burden imposed on taxpayers in different school districts. The Claremont II decision of the New Hampshire Supreme Court in December 1997 resulted in enactment of school reform legislation in 1999. That reform established the cost of the state s responsibility for the provision of an adequate education at $825 million. The reform legislation also raised about half of the adequacy amount by the imposition, for the first time since 1939, of a uniform statewide property tax. The remainder was raised through a combination of tax increases, new taxes, transfers from the state s general fund, and other revenues. The 1998 tax year was the last year prior to the institution of the new tax regime. The 1998/99 school year was the last school year under the old school finance regime. Data are now available for the second year after reform took effect: the 2000 tax year and the 2000/01 school year. 1 In light of the importance of the changes that have taken place and the judicial, political, and policy efforts that have been expended to achieve them, we believe it is 1 While data for the third tax year, 2001, are available, the spending data for school year 2001/02 will not become available for a few more months. We limit this analysis, therefore to the second year. We will update this report when the third year of school spending data becomes available.

Plumbing the Numbers #6 page 2 useful to determine to what degree the two goals have been achieved: (1) reducing inequities in relative tax burdens for education and (2) reducing inequities in educational opportunity. Because nearly all school districts had already adopted their budgets for 1999/2000 school year before the new law took effect, there was little opportunity for districts to change their spending patterns in that first year. Thus, while this report looks at the second year of spending and taxation under the new law, there was actually only one year of opportunity in which school districts could effectively adjust their budgets upward or downward to reflect increased state aid or increased tax burden. 2 Differences in Tax Rates for Schools Have Been Greatly Reduced Department of Revenue Administration tax rate data show that the differences among equalized tax rates imposed for the purpose of maintaining schools were dramatically reduced from 1998 to 2000. 3 Figure 1 displays each town s equalized tax rate for schools in 1998, sorted from the town with the lowest rate to the town with the highest rate. For each town, a bar indicates how much higher or lower the 2000 rate was in comparison to the 1998 rate. (The 1998 points make up the smooth part of the curve; the 2000 points rise or fall from the curve, with the darker bars showing which towns increased their tax rates and the lighter bars showing which towns reduced their tax rates.) Six municipalities are labeled as examples. Freedom and Moultonborough are property wealthy communities whose taxpayers enjoyed very low school tax rates under the old regime and saw tax increases because of the reform. Taxpayers in Nashua and Manchester, the states two largest cities, experienced reduced tax rates due to the reform. Taxpayers in Allenstown and Greenville, two relatively property poor communities, also saw large reductions in equalized tax rates. About 85 percent of municipalities experienced lower equalized tax rates for schools while 15 percent experienced higher rates. Figure 2 displays the same data as Figure 1 but the tax rates for 2000 have been sorted from high to low. This figure clearly shows that tax burdens were generally reduced and that the lowest tax rates, those below $9.00, were raised. The slope of the line for 2000 is closer to horizontal than the slope of the line for 1998, clearly indicating that inequalities in tax burdens had been generally reduced. 4 2 Additional information on the changes in the first year is contained in Plumbing the Numbers #4: Where Adequate Education Aid Went in 1999 and 2000, NH Center for Public Policy Studies, March 2001. 3 The equalized tax rate for schools for each town was calculated by multiplying that town s tax rate for schools by its equalization ratio. For 1998 the local school tax was used; for 2000 the sum of the local school tax and the statewide school tax was used. 4 A tax regime in which taxpayers in all municipalities paid the same equalized tax rate for schools would appear on this graph as a straight horizontal line.

Plumbing the Numbers #6 page 3 Figure 1 $35 $30 Equalized Tax Rate for Education 1998 & 2000 Allenstown Greenville Equalized Rate (per $ 1,000) $25 $20 $15 $10 $5 2000 rates higher than 1998 rates Freedom Nashua Manchester 2000 rates lower than 1998 rates $0 Moultonborough one vertical line for each town (sorted from low to high for 1998) Figure 2 Equalized Tax Rate for Education 1998 & 2000 $35 $30 Equalized Rate (per $1,000) $25 $20 $15 $10 1998 2000 $5 $0 one dot for each town (sorted from low to high for each year)

Plumbing the Numbers #6 page 4 Table 1 Equalized Tax Rate for Schools 1998 2000 Median town $19.61 (Tamworth) $14.45 (Wilton) 6th lowest town $4.65 (Jackson) $7.39 (Center Harbor) 6th highest town $30.03 (Madbury) $21.25 (Keene) 6th lowest as % of median 24% 51% 6th highest as % of median 153% 147% 6th highest/6th lowest 6.46 2.88 Table 1 contains some specific numbers. The equalized tax rate for schools of the median town fell from $19.61 in 1998 to $14.45 in 2000, a decline of 26 percent. Because it is often misleading to compare the most extreme cases, the outliers, we compare the 6 th highest and 6 th lowest in both years. In 1998 the equalized tax rate for schools in the 6 th highest town was 6.46 times the tax rate for the same purpose in the 6 th lowest town. In 2000 that ratio was only 2.88, dramatically lower. Differences in School Spending Remain Unchanged Educational opportunity should not be equated simplistically with spending alone. However, the plaintiffs in the Claremont case clearly pursued reduction of inequities in spending as one of their goals. The court decision cited spending differences among communities. And legislators who enacted the reform legislation clearly expected the change in the school finance system to result in some equalization of spending patterns among school districts. Department of Education data for school years 1998/99 and 2000/01 show that the differences have remained essentially without change. We use Per Pupil Expenditure for elementary schools (PPE-e) as the measure of spending. 5 It is important to note that PPE-e does not include certain spending categories such as debt service, school lunch programs, transportation, capital items such as buses and computers, summer school, and tuition paid to other districts. Figure 3 displays each town s PPE-e for school year 1998/99, sorted from the town with the lowest to the town with the highest. 6 Each town s 2000/01 spending is shown directly above or below its earlier spending level. PPE-e was increased in almost all towns, some more than in others. As in Figure 1, six towns are labeled. Note that the towns with low 1998 tax rates, Freedom and Moultonborough, had high spending levels while towns with high tax rates in 1998 also had low spending levels. The two largest cities had moderate tax levels and low PPE-e. Figure 3 5 PPE for high school or middle schools could also be used. However, there are only 78 different high schools and many school districts do not separately cost their middle school years. PPE for elementary schools is the best proxy for total school spending that allows for comparison across most towns. 6 Waterville Valley is not displayed on the chart. Its PPE-e was so much higher than all other towns ($14,000 in 1998/99 and $19,044 in 2000/01), that including it would squash the vertical axis and other differences would be less visible.

Plumbing the Numbers #6 page 5 $14,000 Per Pupil Expenditure for Elementary Schools $12,000 $10,000 School Year 2000/01 $8,000 $6,000 Moultonborough $4,000 $2,000 Allenstown Manchester Nashua Greenville School Year 1998/99 Freedom $0 one dot for each town (sorted from low to high by 1999 PPE-e) It does not appear that lower spending towns have increased their spending any more or less than higher spending towns. Figure 4 displays the same data as Figure 3 but the PPE-e for 2000/01 has been sorted from high to low. This figure clearly shows that spending per elementary pupil increased generally. While the average expenditure per pupil rose 20 percent over the two years, the rise in spending among lower spending schools was almost identical to that among the higher spending schools. In contrast to Figure 2, the slopes of the two lines in Figure 4 are almost exactly the same. 7 7 A spending regime in which all municipalities spent the same per elementary pupil would appear on Figure 4 as a straight horizontal line.

Plumbing the Numbers #6 page 6 $14,000 Figure 4 Per Pupil Expenditure for Elementary Schools $12,000 $10,000 $8,000 School Year 2000/01 $6,000 $4,000 School Year 1998/99 $2,000 $0 one dot for each town (sorted from low to high for each year) Per Pupil Expenditure for Elementary Schools (PPE-e) Table 2 $5,945 (the eight towns of Monadnock Regional School District) 1998/99 2000/01 Median $7,173 (Laconia) 6th lowest $4,223 (Allenstown) $5,133 (Chester) 6th highest $8,760 (Hampton Falls) $10,872 (Portsmouth 6th lowest as % of median 71% 72% 6th highest as % of median 147% 152% 6th highest/6th lowest 2.07 2.12 Table 2 contains some specific numbers. The PPE-e of the median town rose from $5,945 in 1998/99 to $7,173 in 2000/01, a 20 percent increase. As we did in Table 1, we compare the sixth highest and sixth lowest towns. In both 1998/99 and 2000/01 the town with the sixth lowest PPE-e was spending at about 70 percent of the median while the town with the sixth highest PPE-e was spending at about 150 percent of the median PPE, or just about 2.1 times the spending level of the sixth lowest town.

Plumbing the Numbers #6 page 7 Changes in Spending and Changes in Tax Rates Whether the changes in pupil spending by districts over the two years were related to the changes in school tax rates over the same period can be investigated by a scatter chart. In Figure 5, each town is plotted as a single dot, representing the change in equalized tax rate and PPE-e for that town. Those towns that had equalized tax rate increases (to the right of the vertical axis at $0) appear to have increased their spending about the same amount as those that had declines in their tax rates (to the left of the vertical axis at $0). While there is variation among the towns there is no apparent relationship between spending increases and changes in tax rates. Figure 5 $6,000 $5,000 Change in PPE-e and Change in Tax Rate There is no apparent relationship between the change in equalized tax rate over the two years and the change in per pupil expenditure for elementary school students. Towns with increased taxes were just as likely to increase spending as towns with decreased tax rates. Plaintiff towns in the Claremont case are identified by black circles PPE-e Change 1999-2001 $4,000 $3,000 $2,000 $1,000 $0 -$1,000 -$20 -$15 -$10 -$5 $0 $5 $10 Equalized Tax Rate Change 1998-2000 The Plaintiff Towns How much did taxes and school spending change in the named plaintiff towns in the Claremont case? Table 3 presents the changes in these towns. Elementary school spending rose more rapidly in these five towns than the state as a whole. The equalized tax rate for schools showed a large decrease in three of the five towns. The plaintiff towns can also be distinguished in Figure 5 where they are indicated by black circles. They generally fall to the middle of the distribution of towns in tax rate changes but above average in the increase in spending in elementary schools.

Plumbing the Numbers #6 page 8 Table 3 Per Pupil Expenditure for Elementary Schools (PPE-e) 1998/99 2000/2001 Change % Change Allenstown $4,223 $5,462 $1,239 29% Claremont $6,791 $8,025 $1,234 18% Franklin $4,838 $5,894 $1,057 22% Lisbon $5,822 $7,662 $1,841 32% Pittsfield $5,398 $6,956 $1,557 29% State Average $5,802 $6,715 $913 16% Equalized Tax Rate for Schools 1998 2000 Change % Change Allenstown $24.46 $18.13 -$6.33-26% Claremont $23.04 $22.09 -$0.95-4% Franklin $21.17 $14.12 -$7.05-33% Lisbon $28.51 $25.94 -$2.57-9% Pittsfield $25.84 $21.04 -$4.80-19% The Greatest Spending Increases Table 4 displays the 10 towns that had the greatest dollar increases in spending for elementary schools between the 1998/99 school year and the 2000/01 school year. The Greatest Tax Decreases Table 4 Towns with Greatest Increase in PPE-e 2000/200 Town 1998/99 1 Change Waterville Valley $14,000 $19,044 $5,044 Errol $7,895 $12,535 $4,639 Cornish $5,333 $9,425 $4,092 Washington $5,613 $9,561 $3,948 Monroe $8,945 $11,689 $2,745 Raymond $5,946 $8,590 $2,644 Gorham $6,203 $8,712 $2,509 Stoddard $6,229 $8,682 $2,453 Croydon $4,148 $6,575 $2,428 Landaff $5,273 $7,696 $2,423 State Average $5,802 $6,715 $913 Table 5 displays the 10 towns that had the greatest decreases in the equalized tax rate for schools between the 1998 tax year and the 2000 tax year.

Plumbing the Numbers #6 page 9 Conclusion Table 5 Towns with Greatest Decrease in Equalized School Tax Rates per $1,000 Valuation Town 1998 2000 Change Warren $30.20 $13.20 -$17.00 Stark $27.70 $11.73 -$15.97 New Ipswich $26.92 $13.36 -$13.56 Haverhill $30.25 $17.01 -$13.24 Orford $26.42 $13.42 -$13.00 Derry $26.69 $14.06 -$12.63 Greenfield $28.11 $16.06 -$12.05 Temple $25.96 $13.98 -$11.98 Troy $30.94 $19.17 -$11.77 Deering $23.90 $12.22 -$11.68 Most observers believed that the Claremont I and II decisions of the New Hampshire Supreme Court would result in state policies that would greatly increase parity among towns in both school spending and tax rates. During the second year of reform, the tax differences between the highest and lowest taxed towns had been cut in half, from more than 6:1 to less than 3:1. However, the elementary school spending differences between the highest and lowest spending towns remained unchanged at about 2:1. Prior to reform, citizens were willing to put up with great tax inequalities in order to provide school funding that was more nearly equal. Tax rate differences of 6:1 were tolerated in order to keep spending differences to about 1:2. Achieving even greater spending equity would have required yet higher tax differences because the low spending towns were also generally the highest tax-rate towns. It is important to note that citizens did not choose to make their tax rates more nearly equal, say 2:1 and force even larger differences in spending. This could have occurred had the citizens in the lowest spending towns chosen to cut their spending even further, perhaps in half. Essentially, the collective judgment of the citizens, expressed through budget votes at school district meetings and through elected representatives, was that they were willing to endure significant tax rate differences in order to minimize differences among their school systems. When the 1999 reform provided additional state aid for schools, citizens generally chose to use that aid to reduce the inequities in tax rates. While there was certainly increased spending on the schools (20 percent in median PPE-e in just two years), the increases in spending were not limited to the low spending towns. The higher spending towns, which had simultaneously been burdened with the addition of the statewide property tax, continued to increase their spending on their schools at the same rate as the lower spending towns. Had higher spending towns restrained their spending increases or had higher tax rate towns used more of the state aid to increase spending, greater equity in spending per student would have

Plumbing the Numbers #6 page 10 resulted. Neither occurred. Perhaps this should not be surprising since the fact was that tax differences were much greater than spending differences in the first place. Nevertheless, if spending is somehow equated with educational opportunity, then the first two years of school finance reform do not show any movement toward greater equity in this regard. Taxpayers certainly perceived the changed environment, but public school students did not. The Center will continue to monitor the changes in spending and taxes for schools and will issue an update to this report shortly after the data for the 2001/02 school year spending become available.