The maintenance and operations (M&O) funding mechanism for school districts in Texas is student population. An elaborate school finance formula exists that takes into account a weighted average daily attendance of all students in a district and provides a statutory allotment for each student.
The main mechanism for collecting M&O revenue, though, is property taxes, which are based on property value and have nothing to do with a district’s student population or their weighted average daily attendance. The fact that the funding mechanism and the collection mechanism are not directly linked creates complexities in school finance.
The idea behind the state’s funding formula is that school districts must collect what they can from property taxes and then the state will pay the difference between the statutory allotment and the amount of money generated locally by the district. The problem is, the state uses last year’s property values to decide how much money needs to be provided to each district. So while FISD is collecting property taxes based on the current value of the property within its boundaries, the state is paying its share based on last year’s property value. The difference between how much the state pays (using last year’s property values) and how much the state owes (using this year’s property values) is known as property value lag.
Let’s assume for simple math that the statutory allotment for M&O is $200 and FISD was able to collect $100 locally last year and $120 locally this year because of rising property values. Using the formula of State Share + Local Share = Total Allotment, we would assume that funding for this year would look like this:
$200 Total Allotment - $120 Local Share (this year’s value) = $80 State Share
But because the state use’s last year’s property value to determine their share, they pay FISD using this formula:
$200 Total Allotment - $100 Local Share (last year’s value) = $100 State Share
That $20 difference between what the state paid FISD ($100) and what they really owed the District ($80) is the property value lag.
If property values continue to grow year after year, as they have done in Frisco ISD, the property value lag creates the illusion of revenue growth and it appears as a surplus in the District’s budget. This picture is an example:
The overpayments depicted above are not considered sustainable sources of funding that can be relied upon year after year. That’s because if property values stop growing, or even decline, the District would be left with less money to spend than the year before, as shown below.
Because of rapid growth, Frisco ISD relies on some amount of property value lag each year to balance the budget. This is done conservatively, though, and FISD always plans as if the growth will slow. This means FISD generally receives some amount of overpayment revenue each year when values grow by more than the conservative estimates. However, because that revenue is not retained, it would not be prudent for the District to utilize it for permanent, recurring costs, such as employees’ salaries, which make up more than 80 percent of the budget. It is used for one-time expenses or assigned to the District’s fund balance, which helps the District cover bills each fall before FISD begins collecting taxes and state aid.
It is important to understand that fund balance is not a savings account – it’s a snapshot of the District’s assets on the last day of the fiscal year. Think of it like taking a snapshot of your bank account the day after you get paid. Just as you use the money in your bank account to pay bills throughout the month, school districts use fund balance to pay bills during the first three or four months of the school year because districts don’t get paid again until late in the fall. As Frisco ISD grows, monthly bills also grow, so it’s important for the District’s fund balance to grow proportionally. Property value lag is the mechanism by which FISD makes sure the fund balance is healthy enough to pay all of the bills necessary during the fall semester.
You can learn more about property value lag at the 10:00 minute mark of the Looking Beyond Your Tax Bill video.