This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. It is not a verbatim transcript of the hearing, but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.
The Texas Education Agency published a video covering recapture provisions in HB 3 on July 26 as part of the “HB 3 in 30” series.
Recapture Background
- Texas Education Code makes provisions for certain districts with excess local revenue to pay funds into the Foundation School Program (FSP) for distribution to other districts.
- Excess local revenue is revenue that exceeds a school district’s formula entitlement. Funds that are distributed by district’s subjected to these provisions are recaptured by the school finance system to assist with the financing of public education for all school districts.
FAQ
- Are recapture payments from school districts used to fund other functions of the state budget?
- No. Recaptured funds are appropriated in the General Appropriations Act as a method of finance to help pay for the FSP.
Basic Structure of School Finance
- The FSP ensures that all school districts receive substantially equal access to similar revenue per student at similar tax effort. The FSP determines the amount of state and local funding due to school districts under Texas School Finance Law and provides the share of this funding to school districts.
- Step 1: Formula Entitlement.
- With some caveats, districts are entitled to an amount of funding based upon then students that are enrolled.
- Step 2: Local Share (Property Taxes).
- The system first assumes the districts collect local property taxes.
- Step 3: State Aid.
- The state then makes up difference to meet entitlement.
HB 3 Reduces Recapture
- The amount of recapture receipts in 2019 from 220 districts was $2,836,854,546.
- The amount in 2023 prior law projection was estimated to be $4,827,991,774 for 292 districts.
- The amount in 2023 HB3 projection is estimated to be $2,348,173,192 for 161 districts.
- As a result of HB 3, recapture receipts will decrease over time.
HB 3 Reduces Recapture in 3 Primary Ways
- The calculation of recapture is now based on local revenue in excess of entitlement instead of equalized wealth levels.
- CEI: disparities between recapture and non-recapture districts caused by the CEI have been eliminated.
- Transportation: costs for transportation are now funded equally between recapture and non-recapture districts.
- Entitlement prevails over recapture: districts are now guaranteed that recapture will not reduce revenue below their entitlement level.
- Total entitlement increased
- New allotments were created.
- Existing allotments were expanded.
- Lowered property tax rates
- HB 3 lowered tax rates, resulting in fewer collections.
- HB 3 contains a mechanism to lower future property tax rates.
- Recapture is projected to be reduced over prior law by $3.6 billion in the next biennium.
Cost of Education Index (CEI)
- Repeals the CEI, so districts no longer receive funding based on a decades-old metric.
- With prior law recapture districts only received half of their CEI allocation. Now, recapture and non-recapture districts are treated the same.
- HB 3 requires TEA to study geographic variations in resource costs and cost of education, including transportation.
- The CEI had not changed since initial data was gathered in 1989.
- Some areas had notably different CEI values even though the districts were adjacent.
Transportation Funding for Recapture Districts
- Prior to HB 3, recapture districts did not receive the benefit of the transportation allotment because transportation was excluded from the calculation of weighted average daily attendance (WADA), which was used to determine a districts wealth level.
- Under HB 3, transportation funding is treated the same between recapture and non-recapture districts because school districts will not be sending recaptured dollars back to the state for costs associated with basic student transportation.
Under HB 3 Entitlement Prevails Over Recapture
- If (Tier 1 M&O tax collections – Recapture) is less than (Tier 1 entitlement – ASF payment)
- Then: Entitlement prevails over recapture (Recapture payments are reduced).
Other Formulas Involving Recapture
- The previous method used prior year values to arrive at a proportional tax base reduction percentage.
- This percentage was applied to current year tax collections to arrive at recapture amount.
- Created budget instability.
- Shift to current year values aligns recapture with entitlement.
Equitable Distribution of the Available School Fund (ASF)
- Prior to HB 3, not all districts benefited equally from the ASF.
- For non-recapture districts, the ASF was a method of finance.
- For most recapture districts, ASF was provided on top of the locally generated entitlement funding.
- To provide this funding more equitably, under HB 3 all districts now receive ASF funding as a part of their Tier One entitlement.
Early Agreement Credit Repealed, New Payment Option
- Early agreement credit on recapture was repealed, with funding redirected to the basic allotment.
- Therefore, the September 1 deadline to submit contracts to reduce local revenue levels in order to receive the early agreement credit is no longer relevant.
- Under HB 3, districts now have the option of making one lump-sum payment in August.
- The payment option to submit 7 equal payments from February through August remains unchanged.
- Districts subject to recapture will select a payment option in the Excess Local Revenue subsystem of the online FSP system to the TEA by January 15 annually.
Notification of Local Revenue in Excess of Entitlement
- Since the 2019 DPV is unknown at this time, for the 2019-2020 school year, the 2019 DPV was estimated by applying the comptroller growth assumption of 5.76% to the 2018 tax year DPV.
- Allows districts to move forward with preparation for an election under TEC, Chapter 49, if necessary.
Netting Option to Reduce Local Revenue Level
- Section 41.0041, Education Code, was repealed which provided certain districts the option of authorizing the Commissioner to withhold state aid in lieu of holding an election.
- However, provisions in the TEC allow districts to offset the reduction of excess local revenue against Chapter 48 funds provided in Subchapter F.
- All districts will have the option to use state aid calculated under Subchapter F, Chapter 48, Education Code as an offset to their attendance credit for purposes of reducing their local revenue level.
Next Steps for TEA
- Notifications to districts with local revenue in excess of entitlement were sent July 11, 2019.
- Rulemaking.
Next Steps for Districts
- If you received the notification:
- Districts must submit the district intent/choice selection from indicating which options the district intends to reduce local revenue in excess of entitlement for school year 2019-2020 by September 1, 2019.
- Allows districts to move forward with preparation for an election under TEC, Chapter 49, if necessary.
- Submit agreement contract to reduce excess local revenue by January 15, 2020.