Resolving the School Funding Debate

• May 23, 2007

Executive Summary

For over 30 years, Illinois leaders have debated how to properly fund education to ensure a quality education for all children no matter where they live. Through economic boom and bust, school districts with inadequate resources have been unable to provide the level of education that more prosperous districts provide. Areas with high property tax rates have struggled to attract investment from businesses and homeowners. During this time, some schools have fallen chronically short of state learning standards, often the very same ones without local tax base to support their schools. The state’s fiscal position also has deteriorated, especially in regards to its unfunded pension liability.

Two detailed pieces of legislation have been proposed to address these challenges: Senate Bill 1 (SB 1), embodying Gov. Rod Blagojevich’s FY 2008 Budget Proposal, and House Bill 750 (HB 750). While there are significant differences between the two packages, there are common aspects that meet several principles MPC and A+ Illinois have long supported. Both packages aim to:

• provide adequate support for quality education in all areas of the state;
• secure a sound, stable source of revenues; and
• address weaknesses in the state’s unfair property tax system.

MPC recommends the following principles be used for developing a hybrid plan that will enhance accountability, raise sufficient revenues fairly across taxpayers, improve the system to address fu ndamental weaknesses, and provide long-term changes to assure lasting reforms (see table on page 6 of the full report):

1. Invest in education and targeted property tax relief.

• Fully fund General State Aid (GSA) to meet the Education Funding Advisory Board’s recommendations for a minimum foundation level of $6,405 per student. The $828 million as proposed by SB 1 is a good start for FY 2008, to be phased up to $2.2 billion by FY 2011 to meet the target, adjusted for inflation.
• Raise state support for special education, targeted intervention strategies, early childhood education, and teacher mentoring and induction programs to implement proven strategies on a scale that will improve the level of education for all children.
• Invest in capital needs of schools – by building new schools and updating older schools.
• Provide $1.2 billion in targeted property tax relief through a flat grant to the top third of wealthiest areas, and a much greater reduction (up to 50 percent of education related property taxes) for distressed areas of the state.

2. Base the funding reform on the state income tax. It is the broadest tax available, is transparent, and closely matches ability to pay. There are also mechanisms to protect working families from increases in the income tax:

• Raise the personal exemption to $4,000 (double the current $2,000 level; $1.2billion credit).
• Expand the Earned Income Tax Credit to 30 percent of the federal level ($424 million credit).
• Consider a child tax credit of 20 percent of the federal credit ($318 million credit).

With a 5 percent income tax rate and the above credits to prevent increased taxes on working families, the net change would be $2.66 billion in the first year and $5.64 billion once fully phased-in.

In order to cover education reform and property tax relief, the total increase of the corporate income tax would be $475 million in the first year, and $1 billion when fully phased-in.

3. Share tax burdens across all classes of taxpayers. Businesses need to be part of the solution, but relying on one single group of taxpayers to shoulder the entire burden (as proposed by SB 1) would harm Illinois’ ability to retain jobs.

• Because the Governor’s Office has not released data necessary to determine how to it calculated the expected GRT revenues, MPC has not been able to recommend a modified formula. However, a combination of deducting input expenses (essentially by implementing a value added tax rather than gross receipts) and utilizing a rate far lower than has been proposed by the governor and SB 1, could yield the $800 million goal. Such a proposal would need to allow a deduction of the corporate income tax on the value added tax, or vice versa, to be constitutional in Illinois .
• MPC has serious concerns regarding the cost of projected growth of proposed health crae benefits over the next four years. Natural growth of new revenues will not be sufficient to cover the Governor’s projected $3.7 billion in new costs by FY 2011.

4. Adopt reform measures to ensure new revenues are well spent.

• Improve the quality and dissemination of student achievement data to make informed decisions on support systems and interventions that are needed in the state.
• Improve systems, invest in, and regularly evaluate teacher and administrator supports, including mentoring and induction support systems programs.
• Improve school spending financial systems and transparency as recommended in “Strengthening the Financial Accountability of Illinois School Districts ” by the Metropolitan Mayors Caucus.
• Reduce pension debt by both implementing reforms as recommended by the 2005 Governor’s Pension Reform Commission and other fiscally sound reforms, and by determining ways to pay down the debt, including considering the benefits versus costs of leasing the lottery and a pension obligation bond.

Addressing the state’s education funding, property tax and pension liabili ty crises are extremely important for Illinois ’ students, families and communities. The reforms proposed by the Metropolitan Planning Council will put the state on more solid fiscal footing and reduce the need to find cuts each year to pay for existing obligations. There are other issues that will also need to be addressed in the near future, including a long-term state capital plan that puts a strong emphasis on transit, housing investments, and infrastructure needs tied to smart planning decisions.

Yet another critical element to address in this year’s State budget is the dire need of transit operating revenues, particularly for the Regional Transportation Authority. The RTA needs state authorization of $280 million from the northeastern Illinois region and a continuation of $70 million of state funding to address critical operating needs for CTA, Metra and Pace. Several additional sources of funding are being debated for this purpose and MPC is strongly supportive of the General Assembly reaching consensus on this budget to address transit operating needs. These options include increasing the sales tax rate in the RTA service area, including consumer services in the sales tax; and fees on parking facilities and congestion pricing on toll roads to encourage transit.

The reforms summarized in this report are not the only solutions. However, they do illustrate the state has workable solutions that meet revenue needs, are responsive to taxpayer fairness, and will result in tangible outcomes in Illinois for years to come.

Click here to read the full report.

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