YELLOW SHEET
Office of the State Auditor of Missouri
Claire McCaskill
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YELLOW SHEET Office of the State Auditor of Missouri |
April 16, 2003
Report No. 2003-36
The following problems were discovered as a result of an audit conducted by our office of the Department of Elementary and Secondary Education (DESE), Educational Funding.
For school year 2002, there were 524 public school districts in Missouri with a fall enrollment of approximately 890,195 students. The amount of aid distributed to Missouri’s public school districts by the state is calculated by what is commonly referred to as the foundation formula, which is established by state law. In school year 2002, the foundation formula distributed to the public school districts approximately $1.6 billion for basic entitlement and an additional $328 million for the at-risk entitlement. The basic entitlement distributions account for about 24 percent of the total revenues districts received. In addition, various categorical add-ons to the formula provided approximately $509 million of additional funds to public school districts.
The foundation formula contains a hold harmless provision, which states that no district shall receive less state aid per pupil under the new formula than it received in school year 1993. As a result of 1998 legislation, some hold harmless districts receive funding in excess of school year 1993 levels due to increases in the number of at risk students within the district. Hold harmless districts receive more monies than what is calculated by the basic entitlement. This occurs when the combined total of local, state, and federal revenues is greater than the amount calculated as the basic entitlement for the district.
According to DESE calculations, this provision allowed fifty-four districts to receive a revenue advantage of approximately $244 million in school year 2002. The revenue advantage these districts receive allow the districts to have increased educational expenditures. Hold harmless districts have the ability to spend more per pupil with less of a local tax burden. It should also be noted that hold harmless districts would not be affected should funding cuts be made to basic entitlement distributions. This holds true because the hold harmless provision requires these districts to receive no less state aid per pupil than received in school year 1993. While the number of hold harmless districts will vary from year to year due to the various funding factors in the foundation formula, hold harmless districts have increased from 10 districts in school year 1993 to fifty-four districts in school year 2002.
Current proposals to remove gambling proceeds from the formula calculations would result in less equitable distributions to public schools. This is true because the gambling proceeds would no longer be available to offset disparities in local revenues which exist among school districts.
Our audit found that expenditures per pupil data among school districts is less equitable now than before the formula was rewritten in 1993. Also, in 2002, Education Week issued its "Quality Counts" report. This report was based on school year 1998 funding, and graded each state on the equality of expenditures among school districts. Missouri received a grade of D+, one of 17 states to receive a grade less than a C. In Education Week's January 2003 report, Missouri's equity score dropped to a D- with only 2 other states receiving a lower score. Further, the DESE does not periodically provide relevant information regarding the equity of educational funding to the legislature. The audit recommends the DESE annually calculate, and report to the legislature, six nationally recognized measures for determining school finance equity.
The foundation formula, which determines each district's state aid entitlement, uses the district income factor as one component in its calculations. This component of the formula is based on information provided by the Department of Revenue (DOR). The DOR summarizes adjusted gross income from Missouri income tax returns that indicate the school district information on individual returns. The 2000 tax return information was used for the school year 2003 foundation formula calculations. However, after DOR performed an edit check to apply or correct school district codes on state returns, 283,197 returns were missing a school district code and 173,416 returns had an erroneous code. These returns account for about 19 percent of the returns filed for the year and approximately $25 billion, or 23 percent, of the Missouri adjusted gross income. Since approximately one-fourth of the state's adjusted gross income is not considered in the formula calculations, educational funding may not have been distributed as equitably as intended by the formula.
The audit also noted six districts received approximately $1,142,000 from foundation formula distributions due to the districts levying an operating tax greater than allowed by state law. In addition, the audit reports the state is not in compliance with certain statutory funding requirements, and the state has not made necessary calculations to ensure that it is in compliance with a constitutional provision.