Photo of frustrated studentWith a number of lawsuits filed that challenge the school finance system (See 2012 school finance lawsuits overview) and Texas’ accountability and testing system undergoing a long and complicated revision, Texas educators and school districts are left to figure out how to deal with the effects on students and campuses when resources are less than expectations.

In this article, we provide an overview of the school finance lawsuits and detail possible solutions to the main challenges. While the cases will be heard in court in October 2012, any decisions are expected to be appealed to the Texas Supreme Court, with a lengthy road to resolution.

Also see our 2012 Update on new accountability system's development, which covers the development of the new state accountability and testing system. Due to that system's high-stakes nature, development has been an extensive and complicated process that began in 2007 and will not be fully completed until the 2013-14 school year.

School finance litigation resumes

Four lawsuits filed against the State of Texas have been consolidated into one court case that will be heard Oct. 22, 2012, by Travis County District Judge John Dietz. Dietz will also consider a plea in intervention filed by a group spearheaded by former House Public Education Chairman Kent Grusendorf asking for massive deregulation and more charter schools.

As in the past, the plaintiffs in the suits are asking the court to issue an injunction to the Texas Comptroller of Public Accounts and the Texas Commissioner of Education to discontinue distributing all state funding to public schools until the Texas Legislature creates a constitutional school finance system. Any decision the district court makes in fall 2012 will almost certainly be appealed to the Texas Supreme Court.

If any of the school districts or plaintiffs in the cases prevail, Judge Dietz could issue the order to shut down state funding for schools by the time the Texas Legislature convenes in January 2013. If this happens, an injunction would not likely go into effect while the cases are appealed to the Texas Supreme Court, which would probably not have time to issue a final decision by the end of the 2013 legislative session.

For this reason, most observers do not expect any direct action on public school finance prior to the 2014-15 school year and possibly even as late as 2015-16. If the courts find against the state and direct the Legislature to create a different school finance system by 2014-15, the Legislature would have to convene in special session to do so, as the next regular session of the Texas Legislature would not convene until January 2015.

The three main challenges

The big question is whether the prospect of a district court order and a possible required special session will put enough pressure on the Texas Legislature in spring 2013 to overcome the political pressures that have traditionally kept it from creating a constitutional school finance system.

With the exception of the intervention filed by the Grusendorf group, the challenges to the school finance system fall into three basic categories.

  • Funding for public schools must be equitable. While the constitution does not specifically mention equity, it does require an efficient system. According to the Texas Supreme Court in Edgewood v. Kirby back in 1989, when the state relies on local property taxes to fund public schools as much as it does it creates vast disparities in taxable property wealth per student. That, the courts said, creates a system that is not efficient as required by the constitution. In Edgewood, the court held that school districts must have “substantially equal access to similar revenues per pupil at similar levels of tax effort.”
  • Funding for public schools must be adequate. As with equity, the concept of adequacy is not specifically mentioned in the constitution. The challenge is based upon wording in the constitution that requires the Legislature to make “suitable provision for the support and maintenance” of the public school system. While previous court decisions have discussed the issues of adequacy and suitability, the Texas school finance system has never been found to be unconstitutional based upon an argument of adequacy or suitability.
  • The school finance system cannot constitute a statewide property tax, as this is specifically prohibited by the Texas Constitution. This issue formed the basis of the last successful challenge to the school finance system as upheld by the Texas Supreme Court in 2005 in the case of Neeley v. West Orange-Cove Consolidated ISD. In that case, the plaintiffs successfully demonstrated that enough school districts in the state were taxing at the maximum operations tax rate allowed by law — $1.50 — and the state had essentially created an unconstitutional statewide property tax. According to the court, school districts must have meaningful discretion in setting local property tax rates to comply with the constitutional prohibition.

The response of the Texas Legislature in 2006 was to buy down school district maintenance tax rates by one-third. For instance, if a district was at the maximum property tax rate of $1.50, the state rolled down the tax rate to $1 and used state general revenue to allow that district to maintain the same level of funding per weighted student that it had in 2006. This level of funding is commonly known as “target revenue.”

Although “target revenue” was originally intended to be a temporary measure to ensure districts that had taxes rolled back by one-third did not lose any revenue at the lower tax rate, it has continued to be the basis for funding most school districts in the state. The state gave school districts additional taxing capacity by giving them the authority to raise taxes by an additional 17 cents, but any increases of more than 4 cents require approval by the voters of each school district.

The state has made some adjustments to the school finance system since then, even increasing funding for schools in 2009, but the only way for districts to increase funding per weighted pupil in the future is to increase local property tax rates.

Some districts have raised maintenance tax rates to the maximum of $1.17, but most have been unable or unwilling to take tax increases of more than 4 cents to local voters due to the difficulty in getting local tax authorizations passed when the country is facing the worst recession since the Great Depression.

The situation was made even worse when the state cut funding for the school finance formulas by $4 billion in 2011. There also was an additional cut to public schools of more than $1 billion from funds that had been provided to public schools outside the school finance formulas.

While some politicians continue to argue that the state did not reduce state funding for public schools in 2011 due to the fact that the 2009 increases were largely funded by federal stimulus funds, the effect on public school districts was a reduction in the amount of revenue per weighted student. This reduction was a result of the state’s failure to make up for stimulus funds used in 2009 and its failure to compensate for student enrollment growth.

The main problem with the current funding of public schools is that the state did not create an adequate revenue stream to pay for the lowered property taxes in 2006. It cost the state about $7 billion per year to lower school maintenance tax rates by one-third. The revised state business tax and cigarette tax increases enacted in 2006 raise only about $2.5 billion. This creates what is known as a “structural deficit” of more than $5 billion per year.

With no mechanism for additional funding from the state, school districts must increase local property tax rates to pay for increased costs arising from inflation and ever-increasing accountability measures. The failure of the state to pay for enrollment growth in 2011 was the straw that broke the camel’s back, prompting the current round of lawsuits.

Three basic solutions

If the school finance system is found to be unconstitutional due to inequity or inadequacy, or because it constitutes a statewide property tax, there are only three basic solutions:

  • The state would have to substantially increase the general revenue funds it allots to public schools.
  • The state would have to redistribute more local property tax proceeds from wealthier districts to poorer ones.
  • The Legislature could try to amend the Texas Constitution, which would require voter approval. For instance, the constitution could be amended to authorize a statewide property tax. Recently, soon-to-be former Senate Finance committee chairman Sen. Steve Ogden suggested the statewide property tax as a possible solution to the school finance conundrum, as did the chairman of the powerful State Affairs committee, Sen. Robert Duncan. The constitution could also be amended to limit or eliminate judicial revenue of the school finance system.

Grusendorf group shifts focus from real issues

In the intervention filed by the Grusendorf group calling itself the “Efficiency Intervenors,” the complaint is that the current school finance system is inefficient due to such factors as the state limits on open-enrollment charter schools, which do not have to comply with “cumbersome” regulations such as those that provide for the minimal contractual protections and teacher rights such as duty-free lunch and planning and preparation periods.

The intervenors also complain about the “inefficiency” the state exhibited when it required districts to spend a portion of the last two funding increases it provided to them on teacher pay raises.

Hopefully, the court will quickly dismiss these complaints and focus on the important school finance issues, as these have been quite intractable in the past, and they will continue to require the courts’ attention for the foreseeable future.

Raised standards may come into play

While none of the previous school finance lawsuits against the state were won based on a conclusion of inadequate funding, the Texas Legislature may have strengthened that argument by continuing to raise standards while failing to fund the current funding formulas.

Previous court decisions provide that the Texas Constitution grants to the Texas Legislature the authority to set education standards that will provide for “a general diffusion of knowledge.” The Legislature then has a constitutional duty to make suitable provision for a school finance system that will fund the expectations it has set.

The educational standards the state has set include high curriculum standards, increasing expectations with regard to college or workforce readiness, decreasing dropout numbers and continuously increasing standards on tests such as the STAAR and EOC examinations that are being phased in at the same time budgets are being cut.

In the West Orange-Cove case, the Supreme Court adopted a “rational basis” test in determining whether the Legislature has met its constitutional school funding obligations. With regard to adequacy, the Court explains this standard as follows:

“It would be arbitrary, for example, for the Legislature to define the goals for accomplishing the constitutionally required general diffusion of knowledge, and then to provide insufficient means for achieving those goals.”

Even though the Court held in 2005 that the funding system was not arbitrary with regard to adequacy, it indicated that the funding system just barely met the standard, going so far as to quote former Lt. Gov. Bill Ratliff in the following statement, which he made to the trial court, so it basically makes the statement part of the Supreme Court decision:

“I am convinced that, just by my knowledge of the overall situation in Texas, school districts are virtually at the end of their resources, and to continue to raise the standards ... is reaching a situation where we’re asking people to make bricks without straw.”

Although each lawsuit has a different focus, all four address the state’s failure to provide suitable support for meeting the education standards that continue to be implemented.

TCTA will keep you posted

TCTA will be on hand for school finance discussions and provide testimony as needed. Sign up for our eUpdates to stay up-to-date on the school finance case and other important issues.

For more on the 2012 school finance litigation, read TCTA Executive Director Jeri Stone's summer 2012 message from "The Classroom Teacher."