To help policymakers and stakeholders explore pathways to reforming Nebraska’s outdated K-12 funding system, Reason Foundation created the Nebraska K-12 Education Funding Reform Model. Because the tool requires background knowledge of the state’s current funding system, this column will first provide an overview of how the state currently funds public school districts and then give instructions on how to start using this interactive tool.
How the TEEOSA Formula Works
Nebraska’s core K-12 funding formula, the Tax Equity and Educational Opportunities Act (TEEOSA), controls about 94% of all state and local school operations funding in Nebraska. Put simply, the TEEOSA formula calculates school district funding as follows:
Needs – Resources = State Equalization Aid
The formula uses three basic steps:
Step 1- Determine School District Needs: The state first calculates each school district’s revenue entitlement, or Need, based on a wide array of factors. The key factors are student enrollment counts, concentrations of students in poverty, counts of limited English proficiency students, and qualifying special education expenses from the previous year. The result is a total revenue figure for each school district that will be covered by local and state funds.
Step 2- Determine District Resources: The state determines how much of a school district’s revenue entitlement can be covered by local property taxes, allocated income tax funds, and several other revenue sources. The property tax contribution is called the Local Effort Rate, and it was $1 for every $100 of adjusted property valuation in the 2020-2021 school year. Importantly, the Local Effort Rate is an assumed contribution, not a required one. Most school districts in Nebraska tax below the Local Effort Rate. Districts can also keep any revenues they raise locally that exceed their Need calculation.
Step 3- Determine State Equalization Aid: For any school districts that can’t cover their Need calculation from the revenue sources in Step 2, the state fills the difference with state equalization aid. This ensures that every school district in Nebraska at least receives its revenue entitlement as determined by Step 1. About two-thirds of Nebraska’s school districts don’t qualify for state equalization aid. This is very often because their Local Effort Rate is more than enough to meet their Need calculation.
How to Use the Nebraska K-12 Funding Reform Model
Improving the fairness of Nebraska’s K-12 finance system and alleviating property tax burdens will require shifting school district revenue sources and streamlining the state’s funding formula. Reason Foundation’s Nebraska K-12 Funding Reform Model allows users to simulate how changing the state’s school funding system might affect each school district in the state. With this tool, stakeholders can make changes to the school district’s Local Effort Rate and state funding formula mechanisms in the Model Input Panel on the lower-left corner of the screen. Once changes are made, users can hover over individual districts to view the financial effects and view summary impact charts on the right side of the screen.
Users can also select from three different pre-loaded scenarios to get a sampling of the tool’s capabilities. Note that none of the three scenarios are being endorsed by Reason Foundation or the Platte Institute.
Assumed Local Effort Tax Rates
Using this tool, users can make changes to the assumed Local Effort Rate. After decreasing the Local Effort Rate in the Model Input Panel under the Tax Rates tab, one can evaluate how any change will affect school district funding, district tax rates, and the additional state equalization aid required.
For example, if one decreases the statewide assumed Local Effort Rate from $1 (meaning $1 for every $100 of assessed property valuation) to $0.75, they can view different summary results on the right side of the screen. In this scenario, the model estimates that 73 school districts see an overall increase in per-student funding, 145 districts see an increase in per-student state equalization aid, and 157 districts see a decrease in tax rates. Moreover, the total amount of state equalization aid required increases from $880 million to $1.269 billion. Notice also that no changes are expected for the formula Need calculation since changing the assumed Local Effort Rate should have no impact on this calculation.
State Formula Mechanisms
The second major component users can change in the model is how the state funding formula is calculated. Nebraska funds school districts by calculating the Need for each school district. This calculation is based on a complicated formula that factors in both individual student characteristics—such as poverty, limited English proficiency (LEP), and special education—as well as district size and district comparison groups. In the Model Input Panel, users can change different aspects of the current formula by selecting tabs labeled Basic Funding, Poverty Funding, SPED Funding, or LEP Funding. Under any of these tabs, users can deviate from how that funding component is currently calculated and simulate how adopting a more student-centered formula would affect individual districts and state equalization aid.
For example, under Basic Funding, a user can select the “single base” option and make no adjustments for school district size. This selection models the effects of funding each school district based on a single per-student amount, regardless of size. If users select a single base amount of $10,000 per student, the model estimates that 30 school districts see an overall increase in per-student funding and 33 districts see an increase in their per-student formula Need calculation. Notice the model estimates no changes to tax rates, since changing formula calculations alone doesn’t impact tax rates.
Conclusion
Importantly, the Nebraska K-12 Funding Reform Model has limitations when it comes to modeling tax policy changes. For instance, the model can’t probe potential tax reform strategies such as broadening the state sales tax base or changing property valuation practices—two issues that require separate analyses. The model also doesn’t account for the impact of property tax credits on individual taxpayers. The tool is limited to evaluating how changes to the assumed Local Effort Rate can impact actual district-wide property tax rates. It also assumes that any additional state funds required to compensate for decreases in property taxes are available.
The Nebraska K-12 Funding Reform Model is an excellent resource for stakeholders to better understand the state’s funding system and its dependence on property taxes. The model also empowers users to explore potential reform pathways to make the state K-12 finance system more transparent and fair to both taxpayers and students.