New York State Education Department

September 2000

This analysis uses a three-tiered framework for analyzing school district tax effort consistent with that presented in 1999 and is meant to provide an update on school district local tax effort using 1998-99 data.

The failure of school districts to either maintain local tax effort or to respond to State Aid increases by lowering tax rates has been a traditional concern of public finance experts. In New York State, a district’s capacity to achieve a given spending level on behalf of its students involves a State and local partnership. Thus, even among low wealth districts who benefit from high wealth equalized aid formulas, the willingness and ability to raise funds locally to support education is essential in assuring that all children have the resources needed to achieve high academic standards. In light of the Regents emphasis on targeting State Aid to high need school districts, a clear understanding of school district local tax effort has become an issue of even greater importance to New York State policymakers. Any diminution of local tax effort in high need school districts, particularly if local tax effort is "inadequate" to begin with, poses a significant policy concern.

Accordingly, two related study objectives will be addressed this year. These objectives are:

• The scope of the tax effort problem  will be clearly defined and described; and
• Patterns of changes in local effort and State Aid distributions will be analyzed in order to better understand school district fiscal response to aid changes .

This analysis was conducted to provide the Regents a clear picture of the tax effort problem. Tax effort was examined using a modified version of the three-tiered approach in an October 1999 Regents report. Three measures of tax effort were used to describe the problem: a) "lost levy" – which refers to the amount of local tax revenue that districts lost in 1998-99 by taxing themselves below the statewide median tax rate of $17.34 per $1,000 actual value; b) "effective lost levy" – which refers to that portion of the lost levy that would have to be raised in order to bring a district up to the median¹ statewide spending level of $10,021 per pupil. This second criterion was necessary to address the fact that many districts with high property wealth can still generate substantial local levies per pupil at relatively low tax rates. Because of their high spending levels, these types of districts would be eliminated from the effective lost levy category.

The third criterion used to define the local effort problem was student performance. Some school districts may tax themselves below a statewide median tax rate, and fall below the median spending level, but still have students that achieve high standards. For these high performing districts, their low taxing and spending behavior is viewed to be less problematic, given the level of performance obtained by their students. Therefore, in order to identify low taxing, low spending, and districts needing to improve their academic performance, the same notion of effective lost levy was applied in conjunction with average student performance on the New York State 4^th and 8^th grade English Language Arts and Math examinations. For the purpose of this study, any district with an average score below Level 3 on any two or more exams was considered to be in need of improvement.

For the purpose of this analysis, the tax rates were calculated using a local levy that includes School Tax Relief (STAR) payments provided to school districts by New York State. This approach is consistent with the way tax rates are calculated for State Aid purposes. Another option would have been to remove the STAR payment from the local levy. If STAR was not included in the local levy, the median tax rate would be $16.30 per $1,000 actual value. This change would result in the identification of 92 districts with poor performance having an effective lost levy of $469 million. The districts identified would be virtually identical.

The magnitude of the lost levy problem statewide was $1.46 billion in 1998-99. New York City had a lost levy of $592 million, which represented 41 percent of the total lost levy. Downstate suburban districts had a lost levy of $492 million, which represented 34 percent of the total.

When considering only those low taxing districts that are also spending below the median expenditure per pupil of $10,021, the effective lost levy is $617 million total. There were 190 districts found to be low taxing and low spending, thus placing them into the effective lost levy category. New York City had an effective lost levy of $489 million (Chart 1).

As shown in Chart 1, as we shift our focus from an exclusive concern with low tax effort, to a narrower policy concern with both tax effort and spending levels, the downstate districts were eliminated completely from consideration leaving mainly New York City, upstate, and rural districts. New York City accounted for 79 percent of the total effective lost levy. Eighty-four of the 179 rural districts were found to fall into the effective lost levy category. The levy lost by rural districts due to low tax and spending behavior was $57 million, which accounted for nine percent of the effective lost levy (Chart 1).

If we further narrow the definition of effective lost levy districts to only include those with low academic performance, 88 districts were found to be in this category. For these 88 districts, the total effective lost levy amounted to $542 million, of which New York City’s levy loss share ($489 million) amounted to 91 percent. The Syracuse school district was identified as having an effective lost levy that totaled $5 million in 1998-99 and accounted for one percent of the total effective lost levy in districts with low academic performance. The fact that, when considering student performance, the number of effective lost levy districts decreased from 190 to 88 implies that there are important differences between districts that may not be accounted for by simply observing their local tax effort. Selected characteristics of these different types of lost levy districts follow.

Rural districts were disproportionately represented in the effective lost levy category. That is, while rural districts account for 26.3 percent of all districts in the State, they comprise 45.5 percent of the 88 districts with effective lost levy and poor performance.

As shown in the decile table in Chart 2 below, there was a strong relationship between a district’s need relative to fiscal capacity and the low taxing and low spending condition. As district need/fiscal capacity status worsened, the likelihood of falling into the effective lost levy category increased. In the five lowest need/fiscal capacity deciles, only 13.9 percent of the districts were found to be low taxing and low spending, whereas in the five highest need/fiscal capacity deciles, 41.8 percent of the districts were identified as effective lost levy districts.

Additionally, as need/fiscal capacity status worsened, districts that were low taxing and low spending also experienced substantial drops in academic performance. Of the 88 districts that were identified as low taxing, low spending and low performing (column J of Table 2), 84.1 percent fell into the four highest need/fiscal capacity deciles.

Table 2 displays the lost levy and the effective lost levy for New York City and the Big Four cities. While New York City, Buffalo, Syracuse and Yonkers all had tax rates below the median, only New York City and Syracuse fell into the effective lost levy category. Both New York City and Syracuse were found to have performance below Level 3 on two or more of the statewide exams. New York City had a lost levy per pupil of $455 and Syracuse had a lost levy per pupil of $213. Appendix A contains tables representing districts by need/resource category and by district type.

Additionally, it is important to note that this framework identifies only those districts that are low taxing, low spending and low performing as districts of greatest local effort concern. Districts that are low taxing and low performing, but are spending above the median, could also be considered to have a local effort problem, particularly if they rely heavily on State revenues to achieve their spending levels, but fail to make adequate local effort. There are a total of 53 districts, including Yonkers and Buffalo, that fall into the category of low taxing and low performing, but spending above the median expense. This group of districts must be further examined on a case-by-case basis to understand the extent to which their effort may be inadequate.

As displayed in Chart 3, when categories of effective lost levy districts were compared to all districts in the State, it was evident that effective lost levy districts tended to be somewhat smaller in size, lower in wealth, and have greater pupil need relative to fiscal capacity. The disparity increased when considering districts that are also low performing. For example, the median extraordinary needs percent in effective lost levy districts was 54.16 percent, as compared to 39.99 percent statewide. The median extraordinary needs percent for the 88 effective lost levy districts found to be performing below Level 3 on two or more of the four statewide exams was 62.35 percent.

On measures of teacher quality, the median salary of teachers in effective lost levy districts was found to be 88 percent of the median salary of teachers statewide. A smaller percentage of teachers with a Master’s Degree plus 30 graduate credits or a doctorate were found in effective lost levy districts (10 percent) when compared to the State as a whole (15 percent). Little or no difference was found between categories of lost levy districts in terms of median years of teacher experience and pupil teacher ratio.

Approximately 1.22 million students attend these 88 low performing, low effort school districts, representing 43 percent of the students in New York State. When New York City is removed from this calculation, the percentage of students in these districts decreases to 5.3 percent.

Of the 88 districts with effective lost levy and low performance, it is important to note that a small number of districts (16) had a residential property tax to income ratio above the State median of 2.98 percent. In effect, despite local property tax effort rates, which fell below the statewide median, this alternative income-based measure indicates that, in such districts, it may be difficult to raise the tax levy. In the remaining 72 districts (including New York City), the residential property tax to income ratio was below the median. Such districts may have the fiscal flexibility to raise taxes.

In a previous report, local effort was examined using 1996-97 data. Due to several added refinements in the measures used in the current study, it is difficult to compare, with precision, the results presented for 1996-97 and 1998-99 for individual districts. However, it is useful to note the changes for districts in general, and New York City in particular.

In 1996-97 the total effective lost levy for the 70 districts identified at that time as low taxing, low spending and low performing was $878 million, of which New York City’s levy loss share was 95.85 percent of the total. In 1998-99, there were 88 districts identified as low taxing, low spending and low performing. The total effective lost levy for these districts was $542 million, of which New York City’s levy loss share was 91 percent. Therefore, the total lost levy attributed to New York City’s local effort has decreased from 1996-97 to 1998-99 by 44 percent. Chart 4 describes some of the changes for New York City in order to understand the apparent decrease in the magnitude of the local effort problem.

An important difference to note with respect to New York City is the change in the calculated tax rate. While the median tax rate statewide has apparently increased,⁴ New York City’s tax rate has also experienced an increase by $1.53 per $1,000 actual value. This increase has placed New York City $2.08 per $1,000 actual value below the median tax rate, which results in a lost levy per pupil of $552. This drop in lost levy per pupil between 1996-97 and 1998-99, a $248 per pupil "improvement in tax effort," represents a 31 percent decrease in lost levy per pupil. It is interesting to note that in both years, New York City was below the median expenditure per pupil (although this distance has diminished considerably). Additionally, if New York City were to contribute 100 percent of the shortfall per pupil due solely to low taxing behavior (lost levy), it would be above the median expense by $97 per pupil for 1998-99, as opposed to $222 per pupil below the median in 1996-97.

As shown in Chart 5, when the number of low taxing and low spending effective lost levy districts in 1996-97 is compared to those in 1998-99, there was an increase of five districts. When considering districts with effective lost levy and low performance, there was an increase of 18 districts from 1996-97 to 1998-99.

It is interesting to note that, when New York City is excluded from both effective lost levy and effective lost levy with low performance, the magnitude of the effective lost levy problem appears to have grown from 1996-97 to 1998-99, despite the fact that the magnitude of the local effort problem in New York City appears to have decreased.