The School Foundation and Equalization Act

In 1967, Senator Warner introduced LB 448 to create the School Foundation and Equalization Act.¹ In the few years since his first election to office in 1962, Warner had already won the respect of his colleagues in the areas of tax policy and public education finance, although no major school finance reform had yet been adopted.  Legislative attempts in both the 1963 and 1965 Sessions failed to produce a change in the way schools were funded.  In 1967, however, the situation was one of desperation, and the time was right for change, not only in the area of tax policy but also school finance.

As implied in the name of the law, the School Foundation and Equalization Act would have a dual purpose as Warner's biographer noted:

[P]rovide aid to schools on the basis of average daily pupil attendance during the previous year-the foundation part-and create a formula to regulate distribution of aid in relation to the wealth of the district-the equalization part.²

In fact, there was a third element to the legislation, which provided incentive aid to school districts that offered summer school programs and/or employed teachers with advanced degrees.³ However, the bulk of the funding under the new formula would be used for foundation aid with the remaining available appropriations used for equalization aid and incentive aid.

Under the Act, state financial assistance to school districts was base upon the annual financial reports submitted by each district.⁴  Foundation aid was distributed at various flat per pupil rates, multiplied by the previous year's average daily membership in each grade category, as shown in Table 1.

School districts had to meet a minimum levy requirement in order to be eligible for foundation aid.  Class I (elementary only) districts had to maintain a minimum levy of ten mills, Class VI (high school only) districts had to maintain a levy of seven mills, and all other classes of districts had to maintain a minimum levy of at least 16 mills.⁵ The purpose of the minimum levy was to ensure that each local school district produced a minimum level of funding for its own use and did not rely excessively on state support.

Equalization aid under the new formula was designed to meet the financial needs of a district when such needs exceeded the local revenue and state aid received from the foundation allotment, property taxes, and other funding sources.  The Act established a formula to be used in calculating equalization aid along with several factors to adjust the aid for each district.  The formula took into consideration low-density county populations and permitted extra aid allocations to those districts.⁶  The equalization formula also gave additional weight to those districts that provide "a special program for (1) gifted children, or (2) culturally and educationally deprived children... ."⁷  Such programs had to be approved by the State Board of Education.  The formula also gave weighted status for each student eligible to be "transported by bus".⁸

In order to determine whether and how much equalization aid was due to each district, the formula subtracted the available funding resources from the target level of funding prescribed in the Act.⁹ In other words, the Act specified the level of funding the Legislature believed to be sufficient to provide an education.  If a district's available resources, including state foundation aid and local property taxes, exceeded the level of funding prescribed as sufficient by the Legislature, then no equalization aid would be awarded.  If the opposite was true, and the available resources were less than what the Act provided as sufficient funding, then equalization would be owed to that district to make up the difference.

The third funding mechanism under the Act was incentive aid, extra financial support above and beyond any other aid if a district met certain qualifications.  These qualifications were obviously designed to encourage districts to enhance the educational experience and opportunity for students.  The first qualification provided that each district would receive incentive aid for each teacher holding advanced educational degrees.  Districts were to receive $150 in incentive aid for each teacher with a bachelor's degree, $250 for each teacher holding a master's degree or equivalent, and $350 for each teacher holding a doctorate degree.¹⁰  The second qualification related to summer school programs.  The Act provided incentive aid in the amount of 20¢ "per student hour for each student participating in a summer school program."¹¹

Senator Warner's new school finance system essentially embodied three funding programs, two of which were meant to compliment each other (foundation aid and equalization aid).  The incentive aid program would provide additional aid over and above that received under the other two programs.  However, the key to the success of the new school finance system was sufficient funding, and this was exactly where things went awry in the 1967 Legislative Session.

In his biography, Warner proclaims that the bill was designed to provide state aid to schools "to cover, on average, 40 percent of their costs."¹²  The estimated cost of the new law was $67 million for implementation in the first year.¹³  In the final analysis, however, the Legislature appropriated only $20 million, under LB 667 (1967), to fund the new school finance formula.¹⁴  The decreased level of funding meant choices had to be made and priorities had to be established.  A provision was added to LB 448, which designated the foundation aid as the first priority of funding and incentive aid as the second priority.¹⁵ Equalization aid was not mentioned in the bill as a priority, perhaps in part due to the obvious cost involved in providing such financial assistance.  The bulk of the cost to fund the new system derived from the foundation aid, the least costly of the three programs was incentive aid.

The inadequate initial appropriation was due largely to arguments by some legislators that the new formula would fail to provide any appreciable level of property tax relief.  The Legislature was therefore reluctant to fully fund the measure at the level suggested by Senator Warner.  As noted by his biographer, what disheartened Warner was the emphasis of the Legislature on property tax relief rather than worrying about equity in educational opportunities.  Warner's biographer wrote:

Dick Herman, who covered the 1967 legislative session for the Lincoln Journal, says Warner's plan to equalize educational opportunities throughout the state was 'corrupted' by politics as senators were pressured by constituents to concentrate on reducing property taxes.  Over the years, state aid to education bills have been weighted toward tax relief and haven't done much for equalization.  'The state failed to take Jerry's view,' Herman says regretfully.¹⁶

Warner would endeavor in later sessions to increase funding for the new formula, but it was always the level of appropriation that "drove" the formula, as opposed to permitting the formula to establish the level of appropriation necessary for adequate funding.

At the height of its existence, the School Foundation and Equalization Act provided only 13% of the total funding for public schools (in 1989-90), which meant the bulk of the funding derived from local property taxes.¹⁷ The result was the accusation that the formula failed to provide property tax relief.  In truth, the formula was never fully funded to the extent that an accurate measure of its success or failure on property tax relief could be known.  Moreover, as Warner lamented, the intent of the formula was to provide equal educational opportunities for students, not necessarily to provide sweeping property tax relief.

The School Foundation and Equalization Act was amended 20 separate times between 1969 and 1986.  The flat rate per-pupil provision under the foundation aid program was eliminated in favor of a more complex system with the grade 1-6 category serving as the base.  Average daily membership (ADM) in the kindergarten category was allotted a slightly lower index, while ADM in grade categories 7-8 and 9-12 were awarded a higher index.  The general theory, in use even today, is that the cost of educating a student increases in higher grade levels.