The 87th Texas Legislature convened on Jan. 12, 2021, and will adjourn May 31, 2021. The legislature meets every two years to set the state’s budget and consider and implement new legislation. For each legislative session, the Arlington ISD issues a legislative agenda with a series of priorities that are important to the district and public education in Texas. The district shares the agenda and priorities with our elected officials and seeks their support.
The article below is the third in a series designed to share and explain the district’s legislative priorities with our stakeholders. This story addresses Legislative Priority B. For more information on all the priorities and to read the entire legislative agenda, please visit aisd.net/district/legislative-agenda.
Arlington ISD Legislative Priority B
Identify state revenue sources to sustain the finance system authorized through HB 3 and to continue buying down school district M&O tax rates.
House Bill 3, approved and signed into law in 2019, overhauled school finance in Texas. While far from perfect, the legislation did improve the state’s school funding system. Designed to reduce property tax rates while increasing compensation for school district employees, the goals were good and necessary. However, achieving those goals will require additional funding from the state. The Texas legislature needs to identify revenue sources to sustain this new finance system instituted under HB 3.
School District Finance
To begin to understand HB 3, you need a basic understanding of school finance in Texas. School finance in Texas is complex. However, funding for school districts comes primarily from two sources: local property taxes and state aid.
- PROPERTY TAXES
School property taxes in Texas consist of two separate tax rates: 1) Maintenance and Operations (M&O) and 2) Interest and Sinking (I&S).
The M&O rate provides funds for school district operations, including salaries, student programming, facility maintenance and more.
The I&S rate is used to pay off debt and cannot be used to subsidize maintenance and operations. This is the rate that applies to bonds and is used to pay them off.
- STATE AID
The state supplements tax revenue with an allocation based on student attendance data and demographics. So, for each student who attends, the school district receives a “basic allotment.”
However, the amount of state aid varies according to the level of tax revenue. So, the more that property tax revenue goes up, the less money the state sends to the district. Even though property tax revenue may increase with new construction and rising property values, the school district’s overall revenue does not increase.
House Bill 3
House Bill 3 did a lot of things, but it kept the basic school finance model in place – that school district revenue comes from two sources, local tax revenue and state aid. Highlights of the bill included full-day pre-K for eligible four-year-olds, requirements to increase teacher compensation, and an increase to the “basic allotment.”
Most importantly for taxpayers, HB 3 reduced local school district tax rates and implemented a plan to continue reducing – or “compressing” – tax rates on an annual basis. For Arlington ISD, HB 3 reduced the M&O tax rate the first year by $0.07 and could continue to compress it in future years.
That is a good thing, and Arlington ISD supports the state reducing – or “buying down” – local school district property tax rates. However, when tax rates go down, that means school district revenue may go down as well. If the tax revenue goes down – and continues to go down each year – the state will need to make up the difference.
HB 3 made an attempt to make up the difference in the first year with a small increase in the basic allotment. But now, and in coming years, as tax rates continue to be compressed, inflation increases and school district employees need cost-of-living compensation increases, the state will need to increase its funding for school districts.
It is out of this reality that Priority B comes, that the state identifies revenue sources to sustain the finance system authorized through HB 3, including buying down school district M&O tax rates.
“How are they going to fund raising the basic allotment?” said Darla Moss, Arlington ISD chief financial officer. “If they’re going to continue to buy down the M&O rate, then other sources of revenue should be identified.”
Not the fund balance
Those “other sources” should not be school districts’ fund balances. Some in the Texas legislature have suggested drawing from school districts’ fund balances as the way to generate the revenue the state needs to fund education.
That idea is based on the misnomer that school districts have fund balances just sitting somewhere unused and unneeded. That’s simply not the case. The amount of money that districts need in a fund balance varies based on the unique circumstances of each district. Here are just three of the reasons Arlington ISD’s fund balance is vital to our financial health.
- Like many other districts, Arlington ISD’s fiscal year begins July 1. However, local property taxes don’t arrive until December. That means districts need five months of operating expenses on hand to cover costs from July through November.
- COVID-19 is one of the most recent, tangible reasons why a strong fund balance is necessary. The pandemic introduced a host of unexpected costs that all districts paid to ensure uninterrupted services. While a pandemic is rare, emergencies and natural disasters are not. In the last year, Arlington ISD has dealt with a tornado that touched down and the statewide winter storm that left 28 of our schools with significant damage. The fund balance ensures we can make immediate repairs in those situations and continue serving our students and community no matter what.
- A strong fund balance grants a district a better credit rating. In Arlington ISD, we leveraged our strong financial position and policies to gain low interest rates for our bond. In our most recent bond sale, we achieved interest rates significantly lower than projected, which will mean a cost savings of millions of dollars. When we have a strong financial foundation, we can pay down our debt quickly and achieve the best financial outcomes for our district.
HB 3 is not without flaws. It attempts to create equity for districts across the state but fails to recognize that districts are not all the same.
“Every school district is different,” Moss said. “and those differences should be taken into consideration.”
Even still, HB 3 is a significant improvement and is particularly beneficial for our community in reducing school tax rates. The system needs to be sustained, which means the state has to provide more money for school districts.
To increase the allotment and ensure school districts are adequately funded while simultaneously reducing property taxes, the state needs to identify revenue sources – apart from using district fund balances – to sustain the finance system.