TO THE ADMINISTRATOR ADDRESSED:
Re: School Finance Legislation
The purpose of this letter is to provide written information
concerning the implementation of school finance provisions for
school districts and open-enrollment charter schools as they
finalize budget plans for the 2001-02 school year. This letter
addresses major finance related topics in some detail, provides a
general description of less significant changes, and provides
information on the relationship between health insurance funding and
the school finance system. The intent is for this letter to
supplement materials that are contained in the briefing book
published earlier by the agency. Current agency understandings and
interpretations are provided for statutory changes as needed.
Sections of the Education Code impacted by recent legislation are
noted, and relevant interpretations are provided.
MAJOR FINANCE TOPICS
Foundation School Program Formulas
The following significant formula changes were made:
· Increase the guarantee level for Tier 2 to $25.81 in 2001-02 and to $27.14 in 2002-03
· Increase the equalized wealth level to $300,000 in 2001-02 and to $305,000 in 2002-03 (and proportionate increases for districts eligible for the hold-harmless in Chapter 41)
· Increase the number of cents that may be equalized in the existing debt allotment (EDA) to $0.29
There was no change in the basic allotment or any of the program funding weights in Subchapter C, Chapter 42. There were a few changes in Chapter 42 that could have an impact on funding for some school districts or open-enrollment charter schools. Note that formula funding increases are directly related to new public school employee group health insurance requirements, as will be discussed later.
ADA Declines
School districts that experience declines in total average daily attendance (refined ADA) that exceed 2% may be allowed to use 98% of the previous year's ADA for state funding purposes. The use of an adjusted ADA count is subject to appropriation limits. For the next state fiscal biennium, a total of $22 million was appropriated, and it is expected that $11 million will be available each year for this adjustment. School districts that expect to have a decline in student attendance greater than 2% from 2000-01 to 2001-02 school years will be asked to complete a worksheet in September using enrollment data as of September 7, 2001 to justify a preliminary adjustment. At that point, it will be possible to estimate whether the $11 million appropriation will be sufficient to adjust ADA up to the level of 98% of prior year. It should be noted that open-enrollment charter schools are specifically not covered by this adjustment. (See HB 2879 and SB 450; both amend Texas Education Code §42.005)
Compensatory Education Allotment
Certain school districts and open-enrollment charter schools that do not participate in the national school lunch program can have students counted for purposes of compensatory education funding. The commissioner is authorized to adopt rules governing the counting of students for this purpose. There are approximately seven school districts and several dozen open-enrollment charter schools that currently do not participate in the national program. It is expected that the counting of students for this purpose will be defined in rule to be as comparable to the current statutory method as possible, including a six-month averaging of eligibility counts and the use of prior-year counts for funding purposes. More details will be provided upon adoption of the rule. (See HB 2879 and SB 702; both amend TEC §42.152)
Gap Funding
School districts that are ineligible for Tier 2 funding due to their property wealth level, but not subject to Chapter 41, will be eligible for additional state assistance during the next two years that is equivalent to the revenue gains that will be available to those districts eligible for Tier 2 funding. This additional state aid, known as "gap funding", is related to the public school employee health insurance programs and requirements enacted by the legislature, and its role in health insurance funding will be discussed later in this letter. There are approximately 36 school districts in the state that appear to qualify for gap funding. The amount of funding for the biennium is limited to $37 million, and the $2.44 increase in the guaranteed yield ($24.70 v. $27.14) that would be the equivalent revenue gain is reduced in the 2002-03 school year by increases in the tax bases of eligible school districts. (See HB 3343, which adds a new TEC §42.2513)
Taxpayer Protest Protection
School districts that are significantly impacted by taxpayer protests of valuation may be eligible for a temporary adjustment to property values or tax collections to offset the impact of the taxpayer's withholding of tax payments. The commissioner is authorized to adopt rules and make adjustments for the withholding of tax payments by major taxpayers that are protesting valuations under Chapter 42 Tax Code. The adjustment affects the state aid for Texas Education Code Chapters 42 and 46, and the amount of recapture under Chapter 41. Commissioner's rules will be proposed this summer that define who a major taxpayer is in terms of the value protested and taxes withheld, as well as the computation process for temporary relief. Note that the terms of this adjustment require that any additional state aid that is not earned as a result of the final determination of the protest must be repaid no later than two years after the adjustment is initially made. The adjustment is to be paid from surplus funds appropriated for the Foundation School Program, and funding for other items (IFA funding for new awards in 2002-03, EDA tax rates above $0.12 in 2002-03, property value declines, and optional homestead recognition) are prioritized higher for receipt of any surplus funds available. For the 2001-02 school year, it is unlikely that sufficient surplus funding will exist to be able to make the adjustments for taxpayer protest. School districts that anticipate a major shortfall in tax collections in 2001-02 as a result of large taxpayer protests of valuation should contact the State Funding Division for further instruction after reviewing the forthcoming rules. (See HB 2879, which adds a new TEC §42.2531)
Existing Debt Allotment Eligibility and Limits
House Bill 2879 made two significant changes to the existing debt allotment program related to funding limits and debt eligibility. First, it raised the maximum tax rate for which debt is equalized (EDTR in the formula) to 29 cents. This increase is effective for the 2001-02 school year, and is a permanent change. However, HB 2879 contains a specific provision limiting the rate to 12 cents for the 2002-03 school year unless the commissioner determines that sufficient surplus funds are available to provide for the higher tax rate. In determining that a surplus exists, the commissioner is directed to refrain from overpaying state aid to those districts that experience more rapid increases in property value than projected by the statewide growth rate of 6.01%. Because of direction in law to create a cash surplus if possible in the second year of the biennium (2002-03), it seems likely that there will be funds for the higher tax rate limit. A formal determination will not be made until at least January when the Comptroller certifies preliminary property values that will be used for funding the 2002-03 school year. If surplus funds are available, $50 million of the surplus must first be allocated to the Instructional Facilities Allotment program before the $0.12 limit can be increased.
The eligibility requirements for the EDA were also changed. Under prior law, only those debts for which districts levied and collected taxes in 1998-99 were considered eligible for funding under the program. In addition to rolling forward the 1998-99 levy and collection requirement to 2000-01, HB 2879 now allows bonds to be eligible for EDA assistance if the district made a payment on the bonds in 2000-01. The most significant effect of this change is to make any debt for which a district makes a payment in the 2000-01 school year eligible for EDA funding, even if the district makes an interest-only payment from a reserve account in August of 2001.
Notwithstanding the eligibility definition change, there is a substantial caution for districts expecting additional state aid from the EDA eligibility change. Under Texas Education Code §46.034(b), the tax rate for which a district may receive EDA funding (EDTR in the formula) is limited to the I&S tax rate the district had in the last year of the preceding state fiscal biennium (2000-01) for eligible bonds. If a district made a payment from a non-tax (I&S) source in 2000-01, the debt for which the payment was made would be eligible, but the limit on funding under TEC §46.034(b) would not recognize that payment. School districts with debt that was newly issued in the 2000-01 school year should expect the limit on EDA to be increased only if the debts were issued early enough in the fiscal year to affect the tax rate and tax collections for debt service in 2000-01. If that is not the case, the eligible debts would most likely impact the EDA state aid in the 2003-04 school year if the district levies taxes for those debts in 2002-03 (the next "second year of the previous biennium" year).
In some instances, districts that issued debt during 2000-01 may be able to receive EDA funding for the newly issued eligible debt even if the district did not actually levy and collect taxes for that newly issued debt in 2000-01. If a district had a declining debt obligation for those debts for which it taxed in 2000-01, it will have a limit set under TEC §46.034(b) that may exceed the funding requirements for those older debts, thereby allowing a newly eligible debt to receive partial or full funding under the EDA program. Districts that believe they may have a circumstance that meets these requirements are strongly advised to notify the State Funding Division of this situation early so that appropriate adjustments can be made to the EDA payment that will flow in September. Any request for adjustment should be accompanied by complete debt schedules for the relevant issues and a letter describing the basis of the debt's eligibility and its impact on the EDA state aid requirements.
As a reminder, the payment of facilities assistance for both the EDA program and the Instructional Facilities Allotment stand as first priorities in distribution of state aid. Should the appropriations for either program be insufficient to meet the distribution requirements, TEC §46.009 and 46.035 direct that sufficient funds from the Chapter 42 state aid distributions be transferred to meet the spending requirement for EDA and IFA.
Lastly, it is important to carefully review the debt information used on the summary of finances existing debt worksheet that will be provided to all districts. Please verify that the payment information is correct and up to date, and notify the State Funding Division of any changes. This will make the payments more accurate and reduce the need for settle-up adjustments in the following year.
Attribution of Certain Taxes to Local Shares of IFA and EDA
New provisions were added to the law concerning the Instructional Facilities Allotment (IFA) and Existing Debt Allotment (EDA) programs that allow certain taxes that have not previously been used to qualify for state assistance in Chapter 42 or Chapter 46 to be attributed to the local share requirements of the IFA or EDA programs. If a district collected taxes in the current or prior school years (only back to 1999-2000) that exceeded the maximum Tier 2 tax collection amount for maintenance taxes or the local share requirements for either IFA or EDA for debt service taxes, those taxes may be attributed to a current-year EDA or IFA local share requirement. In general, the existence of these excess taxes will be indicated by an accumulated fund balance, particularly in the debt service fund. Under prior law, school districts that used accumulated fund balances to make a debt-related payment would not receive any matching state funding for that portion of the payment, since the IFA and EDA programs were set up to be tax rate equalization programs. The change in law will allow the use of such balances to meet local share requirements and thus generate state aid in the IFA and EDA programs.
The commissioner is given rulemaking authority over this computation and attribution. School districts should expect to be required to submit appropriate documentation of the existence of previously unequalized tax collections. More instructions will be forthcoming after initial publication of the proposed commissioner's rules this summer. (See HB 2879, which added TEC §46.003(d) and 46.032(c))
Chapter 41 Revenue Hold Harmless for Certain Districts
School districts that are subject to wealth reductions under TEC
Chapter 41 may choose to have their equalized wealth level computed
under a revenue hold harmless provision that allows the district to
retain as much revenue per WADA as the district had available in
1999-2000. Only districts that did not offer all twelve grades in
the 1999-2000 school year are eligible for this alternative
computation. Special worksheets have been developed to assist the
affected districts in determining the financial consequences of this
selection. School districts must maintain the tax effort level of
1999-2000 in order to qualify for the adjustment, and those choosing
this adjustment will lose the adjustment to taxable property value
for any tuition payments and will not be protected by the limit on
tuition under TEC §25.039. Please see other correspondence on the
requirements for Chapter 41 school districts (Chapter 41
notification letter and manual) for more direction on this subject.
OTHER FINANCE ISSUES AND INFORMATION
Salary Schedule
There are no changes to the state minimum salary schedule for the 2001-02 school year. House Bill 2879 did change the salary schedule factors used to compute the minimums, but the change is actually only a technical clean-up to produce the same salary schedule as existed for the 2000-01 school year. Under prior law, the commissioner was directed to compute the amount of state and local revenue available per weighted student to a district eligible for Tier 2 funding at the maximum tax rate. In 1999, a change to the computation of weighted students was authorized under TEC §42.152(s), and the commissioner was directed by TEC §42.152(t) to compute a new yield for the Tier 2 formula that would distribute the same amount of state funds with the different count of weighted students. The minimum salary schedule factors were computed using the definition of weighted students that existed prior to 1999, and the resulting salary schedule amounts for the past two years reflected the result of using the old definition of weighted students. House Bill 2879 removed the provisions that direct the commissioner to recompute the Tier 2 yield, so to prevent the salary schedule computation from resulting in lower minimums when the new definition of weighted students became the default count used in the schedule computations, the factors had to be increased slightly. (See HB 2879, which amends TEC §21.402, and also repeals §42.152(t))
House Bill 3343 increased the Tier 2 yield, which normally would impact the minimum salary schedule. House Bill 3343 also contains an amendment to TEC §21.402 that directs that none of the increase in funds available as a result of the Tier 2 increase be counted toward the minimum salary computation. This action was taken to assure that the Tier 2 increase would be available for funding public school employee group health insurance benefits.
Tuition for Ineligible Prekindergarten Services Authorized
Senate Bill 596 authorizes school districts to charge tuition to the parents of children who attend half-day or full-day prekindergarten programs but do not meet the eligibility requirements for funding under the Foundation School Program. School districts are also authorized to charge tuition for an additional half-day of prekindergarten instruction to eligible students. School districts must submit proposed tuition charges to the commissioner for approval. At the present time, no final determination of the acceptable level of tuition has been made. As a general guide, school districts should expect the limits on tuition to be equal to or less than the amount of state assistance that would be generated in the Foundation School Program. The agency has published amounts that should serve as a guide for the full-day tuition limit for each school district. Half-day tuition would be half the amount published. These amounts can be found on the agency web site under the prekindergarten expansion grant program information at www.tea.state.tx.us/school.finance/prek/prek5.html. Please note that an eligible student for whom tuition is charged for an additional half-day program is ineligible for prekindergarten expansion grant funding. Prekindergarten expansion grant funding is also not available for any ineligible student at the present time.
Special Open-Enrollment Charter School Considerations
For existing open-enrollment charter schools, the funding changes in HB 2879 to Tier 2 or the equalized wealth level will result in increases in funding per student compared to prior years. The same funding mechanism that refers back to the district of residence of charter school students will be in place over the next two years. Beginning in 2003-04 school year, House Bill 6 directs a 10-year transition to the use of state average funding elements for computation of state assistance.
For new open-enrollment charter schools that do not provide instruction prior to September 2, 2001, funding will be based only on state averages beginning with the 2001-02 school year. Commissioner's rules will be proposed this summer to provide additional information on this computation. Estimates of these averages will be available by the end of July. Because the Foundation School Program formula funding elements have increased, each new school will also benefit in a comparable manner through the use of state average adjustments and tax effort.
Additional funding guidance for charter schools will be provided separately through the State Funding Division. Note that formula funding increases are directly related to new public school group health insurance requirements, as will be discussed later.
Rollback Issues
A rollback computation worksheet has been published by the State Funding Division on the agency web site. The rollback tax rate limitation will allow school districts to maintain tax effort for state funding purposes (2000-01 tax collections divided by tax year 1999 Comptroller certified value as appropriately adjusted, then multiplied by tax year 2000 certified value) and receive the benefit of the formula increase to the Tier 2 yield or the equalized wealth level. Because some school districts have reported significant increases in tax base for tax year 2001, it is possible that the rollback tax rate limit for the 2001-02 school year will be lower than the tax rate adopted for 2000-01 school year. For those districts that are considering adoption of tax rates that exceed the rollback limit, there is a strong likelihood that the November 2001 uniform election date is the default for the rollback election. While the legislature changed the traditional August uniform election date to September, the bill that made the change does not go into effect until September 1, 2001, which does not leave sufficient time to publish the appropriate notices of a September election. For more information on election date issues, contact the Texas Secretary of State's Elections Division at 1-800-252-8683.
Recent and Future Communications
As of this date, the agency has published state aid templates and Chapter 41 templates on its web site for the 2001-02 school year. In addition, the Worksheet to Assist School Districts in Calculating Rollback Tax Rate has also been published as an Excel spreadsheet on the web site. There are manual versions of the worksheets available as well. The preliminary 2001-02 Summary of Finances is being mailed at approximately the same time as this letter.
By the end of July, school districts will receive instructions to
assist in completing the Notice of Public Meeting to Discuss Budget
and Proposed Tax Rate.
PUBLIC SCHOOL EMPLOYEE GROUP HEALTH INSURANCE
General Discussion of HB 3343
House Bill 3343 created a statewide program and requirement for public school employee group health coverage beginning in 2002-2003. Certain school districts, generally those with fewer than 500 employees, will be required to participate in the statewide program. Other districts (generally those with 500 to 1,000 employees) and open-enrollment charter schools have either the option to join the statewide program or continue providing employee coverage through their traditional means. These districts and open-enrollment charter schools will have important decisions to make by September 1, 2001 or September 30, 2001. The Teacher Retirement System is the primary administering agency for the health insurance program, and both TEA and TRS have roles in funding the program. Additional information will be provided directly from TRS by the end of July concerning the requirements of the program, options available to the different entities, and plan descriptions.
As a general description, the legislature created two primary streams of funding for the health insurance program, at least two supplemental streams, and multiple requirements that school districts and other entities must implement. In general, formula funding in the Foundation School Program (including the changes to the Equalized Wealth Level for Chapter 41) was increased sufficiently to provide at least $900 for each employee that participates in group health insurance, regardless of whether the district participates in the system administered by TRS. If formula gains are not sufficient, a supplemental amount of state aid will be paid. The TRS will separately send $1,000 per year per employee that may be used at the employee's discretion for additional or higher coverage, a health care reimbursement account, or additional compensation. School districts must maintain current employer contributions toward health insurance coverage, and over time will be required to meet a minimum level of contribution of $1,800 per participating employee. School districts that currently do not meet the $1,800 employer contribution level are eligible for state transition assistance, although the assistance will decline over time.
The remainder of this section will provide a description of funding and examples to illustrate the health insurance funding structure.
Funding and How to Compute Gains
As mentioned above, the legislature increased the formula for
Tier 2 funding in 2002-03 to be $27.14 per penny per WADA, compared
to $24.70 per penny per WADA under prior law. The equalized wealth
level was increased from $295,000 to $305,000. Note that the
determination of gain is made by comparing the change in formulas as
enacted by HB 3343 for a given year,
holding all data constant for that year. The measurement of gain is
not a comparison of state aid between two different years.
For those districts that are eligible for Tier 2 funding, the gain from formula changes can be approximated by multiplying the difference in the yield ($27.14 - $24.70 = $2.44) by the number of weighted students, then by the district's tax effort for Tier 2 purposes (expressed in number of cents), not to exceed the maximum tax effort for Tier 2.
As an example, assume a district with less than $247,000 of taxable value per WADA, 400 WADA, tax effort of $1.40, and maximum tax rate for Tier 2 of $0.54:
Change in guarantee level $2.44
Tax effort, assuming maximum × 54
Result $131.76
Multiply by WADA × 400
Resulting gain from formula $52,704
For a district that is subject to Chapter 41, the difference can be approximated by computing the proportion of tax base reduction in both cases, then applying that change to the maintenance tax collections projected for 2002-03 school year. First, multiply the number of WADA projected for the district by $295,000, then divide that number by the projected tax base for state funding purposes for 2002-03 school year (tax year 2001). Districts eligible for a higher hold harmless tax base under Chapter 41 should use the tax base that may be retained in place of the $295,000 number. Subtract the result from 1, and multiply by the projected tax collections for maintenance and operations in 2002-03. This is an approximate level of recapture payment in 2002-03 under prior law before discounts and adjustments are applied. Next, the computation process would be repeated using $305,000 (or the appropriately adjusted hold harmless tax base retained) to derive an approximate recapture under new law. The difference between the recapture amounts is the approximate level of gain that results from the change in law.
As an example, assume a district has a tax base of $200,000,000, tax collections of $2,800,000, and 400 WADA:
Prior law equalized wealth level $295,000
WADA × 400
Tax base retained prior law $118,000,000
Divide by actual tax base ÷ $200,000,000
Result 0.59
Subtract from 1 (1-0.59) 0.41
Multiply by tax collections × $2,800,000
Recapture projection prior law $1,148,000
New law equalized wealth level $305,000
WADA × 400
Tax base retained new law $122,000,000
Divide by actual tax base ÷ $200,000,000
Result 0.61
Subtract from 1 (1-0.61) 0.39
Multiply by tax collections × $2,800,000
Recapture projection new law $1,092,000
New law recapture $1,092,000
Prior law recapture $1,148,000
Change in recapture - $56,000
The district would pay $56,000 less recapture, and therefore has benefited by $56,000.
Some school districts will not benefit from either the change in Tier 2 or the equalized wealth level for Chapter 41. The legislature created a temporary funding structure known as "gap funding" to address funding needs for these districts. For the next two years, districts in this situation will receive additional state aid comparable to the formula gains made by a district eligible for Tier 2. There are approximately 36 districts in the state that appear to fall into this category. Separate worksheets have been created to address this additional funding component. Note that the statute decreases the amount of the assistance to the extent that the district property wealth increases in the second year of the biennium. (See HB 3343 Section 2.04, which adds TEC §42.2513)
The methods for computing gains shown above are approximate. In reality, the actual gains from formula changes will be computed substituting all relevant pieces of data into two different computations of Tier 2 and net recapture after any applicable discounts. Additional worksheets for these computations will be forthcoming later this summer. If estimation of the formula gain is important to program participation decisions of districts (those that have options to join the state program), the affected districts are encouraged to work with the State Funding Division to validate the estimates of gain that will be made in 2002-03 school year. Note that open-enrollment charter schools will receive the benefit of the formula gains through the current funding structure to the same extent that the district of residence is benefited.
Use of Formula Gains
Each year, the commissioner will certify the amount of gain that is attributed to formula changes and gap funding. (See HB 3343 Sections 2.07 and 2.08, which add TEC §42.2591 and 42.260 respectively) It is expected that this certification will be made in late August on a preliminary basis.
For the 2001-02 school year, the law allows the district to use formula gains for any lawful purpose, including capital outlay and debt service. Districts that choose to use funds for debt service should be aware that there could be consequences for state funds that are generated in the EDA or IFA programs if taxes are not collected for debt service requirements.
For 2002-03 and subsequent school years, school districts and participating open-enrollment charter schools must use a portion of the certified gain only to pay contributions under a group health coverage plan for district or school employees. The portion that must be used in this manner is the lesser of 75% of the certified gain or the sum of $900 per employee participating in a group health coverage plan plus the difference between the district's or school's minimum effort requirement and maintenance of effort requirement for health insurance contributions (discussed later). The commissioner is authorized to adopt rules for these sections, and those rules will be published later this summer.
Additional State Aid for School Employee Benefits
While the provisions related to the use of gains describes a requirement to spend only a specified amount of the gain on health insurance contributions, a separate provision was added to Chapter 42 to provide additional state assistance to reach a funding level of $900 per participating employee. If the cost of $900 per participating employee is more than 75% of the amount of gain from formula changes and gap funding, the state will provide the district or school additional funds to reach the $900 level. These additional funds must be used to pay contributions under a group health coverage plan. The commissioner is authorized to adopt rules for this section, and the rules will be published later this summer. (See HB 3343 Section 2.05, which adds TEC §42.2514)
District or School Maintenance of Effort
Under the Insurance Code provisions of HB 3343 (See Section 1.03 of the bill, which adds Insurance Code Article 3.50-9), each school district, participating open-enrollment charter school, or other entity subject to the group health insurance requirements must maintain the level of employer contributions made toward health care in the 2000-01 school year. The maintenance of effort requirement is computed by dividing 2000-01 health coverage contributions made by the employer by the number of full-time employees in the district or school, then multiplying the result by the number of full-time employees in the appropriate year. The result of this computation is an aggregate contribution toward health insurance of a dollar amount that will change over time based on the number of full-time employees in the district or school. The maintenance of effort amount is not a function of the number of participating employees. Please refer to the attached examples for illustrations of this point.
Each district or participating open-enrollment charter school must deposit the district contribution in a special fund at TRS for those that are participating in the statewide insurance program, or in another fund that meets the requirements prescribed by the Texas Education Agency. Staff in the School Financial Audits Division are currently developing the guidance for school districts that will not participate in the statewide program, and should have that direction available by the end of the summer. (See HB 3343 Section 1.03, which adds Insurance Code Article 3.50-9 Sec. 2)
Minimum Effort
In addition to the maintenance of effort requirements, each district or participating open-enrollment charter school must meet a minimum effort requirement. The employer contribution toward health insurance must be at least $1,800 per participating employee. The maintenance of effort funds count toward meeting minimum effort. School districts are allowed to use unrestricted state aid received under Education Code Chapter 42 to meet the minimum effort requirements, although there is an exclusion for funds associated with excess formula gains above $900 per participant.
If the district's maintenance of effort amount does not meet the minimum effort requirement, there is transition assistance available. For districts that have an adopted tax rate of $1.50, the district may receive transition assistance for the full cost of $1,800 per participating employee cost, less the sum of the amount of maintenance of effort and any amount by which 75% of the formula gain amount exceeds $900 per participating employee. This protection appears to be provided on a permanent basis for this group of districts, but it is limited for those districts that are not at $1.50 tax rate in 2002-03 school year. The additional state aid under this provision for districts that have $1.50 tax rates cannot exceed the previous year's state aid for that purpose.
For districts that have not reached the $1.50 tax rate, in 2002-03 the transition assistance is computed as the full cost of $1,800 per participating employee, less the sum of the amount of maintenance of effort and any amount by which 75% of the formula gain amount exceeds $900 per participating employee. In 2003-04, transition assistance is limited to $1,500 per participating employee, less the sum of the amount of maintenance of effort and any amount by which 75% of the formula gain amount exceeds $900 per participating employee. For each subsequent year, the limit is reduced by $300 per participating employee until it reaches $0 in 2008-09. (See HB 3343 Section 1.03, which adds Insurance Code Article 3.50-9 Sections 3 and 4)
The additional state assistance for transition to meet minimum effort is paid by TRS. As transition assistance expires, the biennial limitation on the tax rate for Tier 2 computation purposes is increased to allow districts to obtain additional revenue through the equalized system. In addition, the rollback limit is also increased sufficiently to allow a district to access additional local taxes. (See HB 3343 Section 2.06, which adds Education Code §42.253(e-1) and HB 3343 Section 2.11, which adds Tax Code §26.08 (k)-(m))
Excess Maintenance of Effort
In some cases, the computed maintenance effort amount for a district will exceed the minimum effort requirement. For those districts, the excess amount may be used only to provide employee compensation at a rate greater than the rate of compensation paid to an employee in 2000-01 school year, benefits, or both. (See HB 3343 Section 1.03, which adds Insurance Code Article 3.50-9 Section 5)
Active Employee Health Coverage or Supplemental Compensation
In addition to the flow of funds through the Foundation School Program formula increases that support the state contribution toward group health insurance, the legislature also adopted a separate flow of funds from the TRS to provide active employees with additional funding that could be directed to health insurance premiums, health-care reimbursement accounts, or direct compensation. An amount of $1,000 per employee is to be annually provided by TRS to each school district and each participating open-enrollment charter school that will be held by the district or school in trust for the employee's selection of benefit.
Each employee is to be provided the opportunity to designate the $1,000 for purposes of additional health insurance coverage (either a higher plan or coverage of dependents), a health-care reimbursement account under a cafeteria benefits program, to be taken as additional taxable salary, or some combination of those options. If the employee is not covered by a cafeteria benefits program, the entire amount will be paid as supplemental compensation, which may have tax consequences for the employee. The TRS will provide information later this year to all school districts on the process of establishing cafeteria benefit programs.
The supplemental compensation may not supplant other compensation to which the employee would have been entitled.
In a few instances, employee choices to take the supplemental compensation will cause some districts to have social security tax consequences. About 14 districts in the state are required to provide social security (retirement) benefits to all employees. In these districts, an additional payment will be made by TRS to offset the added social security expenses.
Payment from TRS will be in equal monthly installments.
Summary and Comments
School district and participating open-enrollment charter school requirements and choices are complex and differ depending on the circumstances of each entity and the future behavior of the entity's employees. All school districts will bear a responsibility to contribute a combined total of $2,700 per year toward health insurance premiums multiplied by the number of covered employees - $900 from state formula gains or hold harmless, and $1,800 from district maintenance of effort, transition assistance if earned, or increases in effort over time. Each employee in school districts and participating open-enrollment charter schools will be given the opportunity to buy additional coverage, and may use a $1,000 annual state supplement to do so, or take the state supplement as compensation.
A number of issues surrounding maintenance of effort and the different choices some districts must make have yet to be fully answered. In particular, a number of questions continue to be asked about "alternative plans" that some school districts have provided for those employees that have waived coverage in the past. No final decision on the treatment of district expenditures for this purpose has yet been made. Development of answers and associated guidance will continue to progress through the summer. School districts and open-enrollment charter schools should expect to receive additional correspondence from TRS on health insurance programs and rule development.
All concerned administrators are advised to frequently check the TEA and TRS web sites for new material posted on these subjects. Each agency has agreed to link its web site to relevant news at the other's site. In addition, TEA and TRS are working collaboratively to develop efficient payment systems for the various funds that must flow when the statewide health insurance program begins operating in 2002-03. Additional insurance participation information will be required from all entities, regardless of whether they participate in the statewide program.
This letter has attempted to address the major finance related provisions that were adopted by the 77th Legislature. There are many other bills of less universal importance that we have failed to describe fully here, but will incorporate in future letters as time allows. Continue to check the school finance portion of the TEA web site at www.tea.state.tx.us/school.finance for the most current information. We welcome your suggestions and comments on the subjects presented in this letter or those you would expect to be presented in future correspondence.
Sincerely,
Joe Wisnoski, Managing Director for
School Finance and Fiscal Analysis
Attachment on Health Insurance Examples
Example 1 of 4
· A school district has 175 full-time employees in 2000-01. It
has 25 other employees that are not full-time.
· The district contributed $350,000 toward employee health
insurance premiums in 2000-01.
· Only 145 employees participate in the health insurance coverage.
The remaining 55 employees waived coverage in 2000-01.
· The district gains $240,000 in state aid in 2002-03 as a result
of Foundation School Program formula changes.
· In 2002-03, the district employs180 full-time staff and 30 other
employees.
· In 2002-03, 185 employees participate in health insurance
coverage.
State Contribution toward Health Insurance (Maximum)
= 75% × Gain from Formula Changes
= 0.75 × $240,000
= $180,000
Additional State Aid for School Employee Benefits
= ( $900 × 2002-03 Participating Employees ) - ( 75% × Gain
from Formula Changes )
= ( $900 × 185 ) - ( 0.75 × $240,000)
= $166,500 - $180,000
= - $13,500
Result is less than zero, therefore no additional state aid for school employee benefits.
Maintenance of Effort
= ( 2000-01 Contribution ÷ 2000-01 FT Employees ) × 2002-03 FT
Employees
= ( $350,000 ÷ 175 ) × 180
= $2,000 × 180
= $360,000
Minimum Effort
= $1,800 × 2002-03 Participating Employees
= $1,800 × 185
= $333,000
Note that in this example the district has excess maintenance of effort, and is limited in what may be done with those funds.
Minimum Effort Transition Assistance
= ( $1,800 × 2002-03 Participating Employees ) - ( Maintenance
of Effort +
(( 75% × Gain from Formula Changes ) - ( $900 × 2002-03
Participating Employees)))
= ( $1,800 × 185 ) - ( $360,000 + (( 0.75 × $240,000 ) - ( $900 ×
185 )))
= $333,000 - ( $360,000 + ( $180,000 - $166,500 ))
= $333,000 - ( $360,000 + $13,500 )
= $333,000 - $373,500
= - $40,500
Result is less than zero, therefore no minimum effort transition assistance.
Example 2 of 4
· A school district has 175 full-time employees in 2000-01. It
has 25 other employees that are not full-time.
· The district contributed $350,000 toward employee health
insurance premiums in 2000-01.
· Only 145 employees participate in the health insurance coverage.
The remaining 55 employees waived coverage in 2000-01.
· The district gains $190,000 in state aid in 2002-03 as a result
of Foundation School Program formula changes.
· In 2002-03, the district employs180 full-time staff and 30 other
employees.
· In 2002-03, 185 employees participate in health insurance
coverage.
State Contribution toward Health Insurance (Maximum)
= 75% × Gain from Formula Changes
= 0.75 × $190,000
= $142,500
Additional State Aid for School Employee Benefits
= ( $900 × 2002-03 Participating Employees ) - ( 75% × Gain
from Formula Changes )
= ( $900 × 185 ) - ( 0.75 × $190,000)
= $166,500 - $142,500
= $24,000
Maintenance of Effort
= ( 2000-01 Contribution ÷ 2000-01 FT Employees ) × 2002-03 FT
Employees
= ( $350,000 ÷ 175 ) × 180
= $2,000 × 180
= $360,000
Minimum Effort
= $1,800 × 2002-03 Participating Employees
= $1,800 × 185
= $333,000
Note that in this example the district has excess maintenance of effort, and is limited in what may be done with those funds.
Minimum Effort Transition Assistance
= ( $1,800 × 2002-03 Participating Employees ) - ( Maintenance
of Effort +
(( 75% × Gain from Formula Changes ) - ( $900 × 2002-03
Participating Employees)))
= ( $1,800 × 185 ) - ( $360,000 + (( 0.75 × $190,000 ) - ( $900 ×
185 )))
= $333,000 - ( $360,000 + ( $142,500 - $166,500 ))
= $333,000 - ( $360,000 + $0* )
= $333,000 - $360,000
= - $27,000
* This computation cannot be less than zero.
Result is less than zero, therefore no minimum effort transition assistance.
Example 3 of 4
· A school district has 175 full-time employees in 2000-01. It
has 25 other employees that are not full-time.
· The district contributed $250,000 toward employee health
insurance premiums in 2000-01.
· Only 145 employees participate in the health insurance coverage.
The remaining 55 employees waived coverage in 2000-01.
· The district gains $240,000 in state aid in 2002-03 as a result
of Foundation School Program formula changes.
· In 2002-03, the district employs180 full-time staff and 30 other
employees.
· In 2002-03, 185 employees participate in health insurance
coverage.
State Contribution toward Health Insurance (Maximum)
= 75% × Gain from Formula Changes
= 0.75 × $240,000
= $180,000
Additional State Aid for School Employee Benefits
= ( $900 × 2002-03 Participating Employees) - ( 75% × Gain from
Formula Changes )
= ( $900 × 185 ) - ( 0.75 × $240,000)
= $166,500 - $180,000
= - $13,500
Result is less than zero, therefore no additional state aid for school employee benefits.
Maintenance of Effort
= ( 2000-01 Contribution ÷ 2000-01 FT Employees ) × 2002-03 FT
Employees
= ( $250,000 ÷ 175 ) × 180
= $1,428.57 × 180
= $257,142.86
Minimum Effort
= $1,800 × 2002-03 Participating Employees
= $1,800 × 185
= $333,000
Minimum Effort Transition Assistance
= ( $1,800 × 2002-03 Participating Employees ) - ( Maintenance
of Effort +
(( 75% × Gain from Formula Changes ) - ( $900 × 2002-03
Participating Employees)))
= ( $1,800 × 185 ) - ( $257,142.86 + (( 0.75 × $240,000 ) - ( $900
× 185 )))
= $333,000 - ( $257,142.86 + ( $180,000 - $166,500 ))
= $333,000 - ( $257,142.86 + $13,500 )
= $333,000 - $270,642.86
= $62,357.14
Example 4 of 4
· A school district has 175 full-time employees in 2000-01. It
has 25 other employees that are not full-time.
· The district contributed $250,000 toward employee health
insurance premiums in 2000-01.
· Only 145 employees participate in the health insurance coverage.
The remaining 55 employees waived coverage in 2000-01.
· The district gains $190,000 in state aid in 2002-03 as a result
of Foundation School Program formula changes.
· In 2002-03, the district employs180 full-time staff and 30 other
employees.
· In 2002-03, 185 employees participate in health insurance
coverage.
State Contribution toward Health Insurance (Maximum)
= 75% × Gain from Formula Changes
= 0.75 × $190,000
= $142,500
Additional State Aid for School Employee Benefits
= ( $900 × 2002-03 Participating Employees) - ( 75% × Gain from
Formula Changes )
= ( $900 × 185 ) - ( 0.75 × $190,000)
= $166,500 - $142,500
= $24,000
Maintenance of Effort
= ( 2000-01 Contribution ÷ 2000-01 FT Employees ) × 2002-03 FT
Employees
= ( $250,000 ÷ 175 ) × 180
= $1,428.57 × 180
= $257,142.86
Minimum Effort
= $1,800 × 2002-03 Participating Employees
= $1,800 × 185
= $333,000
Minimum Effort Transition Assistance
= ( $1,800 × 2002-03 Participating Employees ) - ( Maintenance
of Effort +
(( 75% × Gain from Formula Changes ) - ( $900 × 2002-03
Participating Employees)))
= ( $1,800 × 185 ) - ( $257,142.86 + (( 0.75 × $190,000 ) - ( $900
× 185 )))
= $333,000 - ( $257,142.86 + ( $142,500 - $166,500 ))
= $333,000 - ( $257,142.86 + $0* )
= $333,000 - $257,142.86
= $75,857.14
* This computation cannot be less than zero.