A First Step Toward a Constitutional School Finance System

By David Thompson

On May 31, 2006, Governor Rick Perry signed House Bill
11 at the Houston Independent School District administration building, effectively concluding the work of the 79th Texas Legislature’s third special session, which was called to address problems with the Texas public school finance system. During this special session, the Legislature passed several bills significantly revising the State tax system, particularly House Bill 3,2 which overhauled the franchise tax. The Legislature also passed House Bill 1, which contains the most dramatic reduction in local school property taxes in Texas history, makes other important changes in how Texas pays for public schools, and implements several revisions to laws governing public school operations.
This third special session since the end of the 2005 regular session was more successful than previous efforts for several important reasons. First, and most important, was the Texas Supreme Court’s decision on November 22, 2005, in West Orange-Cove CISD et. al. v. Neeley et. al.,3 finding that the State’s system to support public schools had evolved into an unconstitutional State property tax. The Court gave the Legislature until June 1, 2006, to revise the system and eliminate the unconstitutionality; otherwise, the system would be enjoined and the public schools would begin shutting down. Another important reason was the work of Governor Perry’s Texas Tax Reform Commission, chaired by former Comptroller John Sharp. This Commission’s recommendations set the stage for the Legislature’s success. Third, the recent primary elections provided a reminder of the importance of public schools to many communities across Texas, and helped the Legislature return to Austin more focused on proposals with broad support.
With regard to local school property taxes, House Bill 1 uses State revenues to reduce these taxes by about 17 cents for the 2006-2007 school year, and an additional 33 cents for the 2007-2008 school year, for a total reduction of about 50 cents over a two-year period. In addition to these reductions, House Bill 2 creates the Property Tax Relief Fund, and leaves open the potential for further reductions in school property taxes in future years.4 However, at this time, the fiscal notes on the bills revising the State tax structure do not indicate available revenue for such further reductions.
Once new State revenues are used to reduce school property taxes, local schools will have some opportunity to raise additional funds to meet the particular needs of their communities. Local school boards may raise up to 4 cents of enrichment, and local voters may authorize up to an additional 13 cents of enrichment.5 The first 6 cents of this local discretion will not be “recaptured” but will be equalized – that is, wealthier districts will not be required to send local property taxes to the State or other districts, and poorer districts will see these 6 cents raised in value to the level of Austin Independent School District.6 This local flexibility and capacity is absolutely essential, because the legal requirement for the State to meet the Supreme Court’s order and begin to dismantle the unconstitutional State property tax is to ensure that local districts have “meaningful discretion” over their own tax rates and budgets.7
Although Governor Perry’s proclamation calling the third special session was limited to responding to the Supreme Court’s order and deadline and did not include broader issues of school reform, as House Bill 1 moved through the legislative process, a number of additional measures that had some measure of broad support were included. For example, House Bill 1 includes a $2,000 salary increase for teachers, counselors, nurses and librarians, and it converts to salary a $500 State health care supplement for both professional and support staff.8 Also, the bill creates a new high school allotment of $275 per student,9 and sets aside about $300 million for performance incentive programs for teachers and campuses.10
In addition to these financial provisions, House Bill 1 significantly revises the State accountability system, and increases the power of the Commissioner of Education to intervene in low-performing campuses and districts. Also, several issues that are not necessarily reforms, but have been part of the debate over the past few years, were addressed. House Bill 1 mandates that, beginning in the 2007-2008 school year, the uniform school start date will be the fourth Monday in August, with no exceptions.11 Also, school board elections must be held either on the general election date, or held jointly with a municipality in the district on another permissible date.12
Does House Bill 1, in conjunction with the other legislation passed during the recent special session, resolve all of the issues with how Texas funds public schools? The answer clearly is no, although the State made some significant progress in the right direction. The fundamental problem that gave rise to the unconstitutional State property tax – the State’s reliance on, control over, and use of local school property taxes as if they were State revenues – still remains. Under House Bill 1, about 96-97 percent of local taxes that are available without further authorization by local voters will be controlled and used by the State. Also, as the State continues to raise performance standards and expectations, which is needed, it must keep in mind the cost of these increased requirements. If the State slips back into underfunding its own requirements, and if districts have to use any of their discretionary revenue to make up for this underfunding, the State property tax problem quickly will re-emerge.
The State successfully met the Supreme Court’s June 1st deadline, and on May 26, 2006, Judge John Dietz signed the order dissolving the injunction. However, there is still considerable work to be done by the State before it has established a stable funding system that will enable districts and students to meet the high standards that the State itself has set, and which are so important to the social, economic and educational future of Texas.

David Thompson is a partner in the law firm of Bracewell & Giuliani LLP, specializing in the representation of public school districts and other public entities. He was co-counsel for the Plaintiff in Neeley v. West Orange-Cove Consolidated Independent School District, and argued the case before the Supreme Court of Texas.

Endnotes
1. 79th Tex. Leg., 3d Called Spec. Sess., ch _ 2. 79th Tex. Leg., 3d Called Spec. Sess., ch 1 3. Shirley Neeley, et al. v. West Orange-Cove Consolidated Independent School District, et al., 176 S.W.3d 746 (Tex. 2005) 4. 79th Tex. Leg., 3d Called Spec. Sess., ch 3 5. HB1, SECTION 1.08, Tex. Educ. Code, § 42.302; HB1, SECTION 1.09, Tex. Educ. Code, § 42.303; HB1, SECTION 1.12, Tex. Educ. Code, § 45.003 6. HB1, SECTION 1.01, Tex. Educ.Code, § 41.002; HB1, SECTION 1.08, Tex. Educ. Code, § 42.302 7. Neeley, supra 8. HB1, SECTION 4.05, Tex. Educ. Code, § 21.402; HB1, SECTION 4.09, Tex. Educ. Code, § 22.107 9. HB1, SECTION 1.04, Tex. Educ. Code, § 42.2516; HB1, SECTION 5.06, Tex. Educ. Code, § 39.114 10. HB1, SECTION 4.08, Tex. Educ. Code, Chapter 21, Subchapter N 11. HB1, SECTION 9.02, Tex. Educ. Code, § 25.0811; HB1, SECTION 9.03 and 9.04 12. HB1, SECTION 11.01, Tex. Educ. Code, § 11.0581

Text is punctuated without italics.

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