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New Hampshire's Latest School Funding Formula

Executive Summary

Date: April 17th, 2009

In 1997, the Supreme Court issued four mandates regarding the state’s public education system. In September 2006, the New Hampshire Supreme Court ruled that the existing school funding formula – defined by HB 616 (2005) – was unconstitutional. The Court said that the existing definition of an adequate education was not sufficiently precise to form a basis for an education funding formula. The Court also stated that, should the legislature fail to define a constitutionally adequate education, it would require that a court-appointed expert be hired who would define it on the state’s behalf.

In response, the legislature enacted HB 927 (2007), which defined an opportunity for an adequate education as a subset of the state’s Minimum Standards for Public School Approval. The minimum standards, in general, include a set of both input (resource) and outcome (performance) requirements that serve as a floor above which schools would be required to perform in order to be granted certification by the state. These minimum standards were developed and approved by the State Board of Education, and, as the name suggests, represent the state’s perception of resources and outcomes to meet basic requirements.

Following up this definition of adequacy, the legislature passed SB 539 (2008), which defined the cost of an opportunity for an adequate education and developed a formula used to distribute aid to communities meeting the Supreme Court’s criteria in the 2006 decision. The base per student cost of this new plan has two components: 1) “Universal Cost,” which is applicable to all students; and, 2) “Differentiated Aid” - additional funding for special programs to assist at-risk students and other special populations. Together, SB 539 mandates that these funds be distributed directly to schools, a significant diversion from previous policy.

SB 539 also promises two other components. First, the legislation included “Fiscal Capacity Disparity Aid,” which distributes aid directly to towns with an exceptionally limited local property tax base. Second, SB 539 includes an additional transition adjustment for the 2010-2011 biennium, capping increases in a town’s grant to no more than 15% compared to the current amount they receive in FY2009 and holding towns that would lose funding to the same grant amount as they currently receive. The net impact of these changes, when included with the universal cost and differentiated aid identified above, was that under this legislation, no community would lose and gains would be limited.

The plan offered by SB 539 displays several policy differences compared to the formula previously in place. Most significantly, the majority of state aid is calculated on a per student basis, which shifts resources to the bigger schools, creates an incentive for schools to align their student-teacher ratios to maximize funding, and will increase or decrease with overall changes in the student population. This plan also allocates aid directly to schools instead of being distributed at the school district level. The impact of these policy shifts on how local funding is distributed cannot yet be understood.

SB 539 in its entirety – including universal, differential, fiscal disparity and transition aid – would increase state aid to schools; larger communities are the primary beneficiaries. The total estimated state cost in FY2010 will amount to approximately $941 million, $50 million more than the state’s commitment in FY2009. In aggregate, the result of this plan is an average state grant of $2,943 per pupil to cover the cost of an adequate education. This represents an increase of 11% over the average per pupil grant under the previous school funding formula for fiscal year 2009 of $2,650.

Compared to current state-wide average cost per pupil – $11,416 – the per pupil state grant under the SB 539 plan plus the statewide education property tax (SWEPT) contribution will cover less than half that cost, at $4,793 per pupil, on average. Although this represents an increase in the state support over the previous school funding formula, local communities will maintain their significant role in funding local schools.

The manner in which SB 539 ultimately targets aid to communities – based on characteristics of the student population, median income and property value – is very similar to the previous education finance formula. The majority of aid, on a per pupil basis, continues to go to the poorer communities – those with a high level of economically disadvantaged students and a lesser ability to raise local revenues to support schools. The towns with the lowest property values will receive, on average, $4,901 per student in state aid; this is more than nine times the grant per student to the towns with the highest property values.

In October 2008, the Supreme Court ruled that in enacting SB 539 (2008) the State has met the mandate to define an adequate education. However, many questions remain regarding the fulfillment of the other mandates set forth in the 1997 decision. While the state has also identified a cost associated with this definition of adequacy (the second of the original four Court mandates), the tasks of funding the cost of the new formula and creating an accountability system for the distribution and use of funds remain to be carried out.

It is not clear how different the outcomes of this reform effort are from previous reform efforts. As noted, the new formula links aid to a set of understandable inputs, distributes aid to bigger schools, and increases aid to local communities, but does not significantly change the distributional impacts based on some measures of need. A major policy question for this legislative session is whether the benefit of these changes in education aid warrants the additional state expenditure, in a difficult budget climate.

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