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Cost of Education Index (CEI)

The concept of adjusting education funding for variations in cost began in a 1984 special session with the creation of the Price Differential Index. The State Board of Education (SBOE) was directed to create a replacement for this temporary index and undertook this effort in 1987, but the study was moved to the Legislative Education Board (LEB) and the Legislative Budget Board (LBB) in 1989. The Foundation School Fund Budget Committee adopted rules based on research by LEB and LBB in 1991.

The current CEI attempts to adjust for varying economic conditions across the state, based mainly on the size of the district, the teacher salaries of neighboring districts and the percentage of low-income students in the district in the 1989-90 school year. The index has not been updated since that time. Updating the Cost of Education Index would require action of the state legislature.

FISD administrators and School Board members speak often with elected representatives about school finance and the various aspects of the funding formula that create challenges for FISD, including the Cost of Education Index. Leaders are also actively working to update and refine the District’s legislative priorities so elected representatives will have them in time for the 2019 legislative session. You can see a list of priorities from the most recent legislative session as well as a list of representatives who represent Frisco ISD voters here.

It’s difficult to determine the exact impact an updated Cost of Education index (CEI) would have on FISD because the current CEI was based on an economic model built in the late 1980s. The model itself would need to be re-run to reflect today’s economic environment. There has been some work done since the CEI was adopted, but how that would impact FISD depends not only on the index value, but how the legislature might incorporate that new value into the school finance structure.

Some of the models run in recent years that follow a similar methodology to the current CEI indicate that an update to FISD’s index value, if implemented the same way as the current value, could yield as much as $30-60 million in additional revenue annually. However, an updated index would likely be expensive for the state to simply plug into the existing formula, so it is anticipated that some form of scaling would take place to help the state reduce costs.

Property Taxes and Tax Rates

State law places a tax rate cap of $1.17 per $100 valuation on M&O tax rates, and requires voter ratification of any M&O tax rate higher than a district’s rollback rate, which is $1.04 for FISD. Changing those rules would require an act of the state legislature.

The I&S rate is determined by the amount of debt required to be paid during the year, and is subject to a cap of $0.50 per $100 valuation. If a district cannot make its entire debt payment without exceeding the $0.50 cap, M&O funds must be used to service the excess debt, but because the I&S rate is levied specifically based on how much debt is owed, a district may not use those funds to pay for operations

Frisco ISD’s August 2016 Tax Ratification Election (TRE) asked voters to approve a maintenance & operations tax rate of $1.17 per $100 valuation, which is $0.13 higher than today’s M&O tax rate of $1.04 per $100.

The passage of a $0.13 TRE would have altered the funding formula for FISD in two ways:

  • Frisco ISD would have been able to increase its compressed tax rate by two cents and would no longer be fractionally funded. This means Frisco ISD’s basic allotment would have increased from $5,037 to $5,140 per student.

  • FISD would have been required to pay recapture on the additional 11 cent increase, equal to approximately 30 percent of the revenue generated from those 11 cents.

At the time, an M&O tax rate of $1.17 per $100 valuation would have yielded FISD approximately $30 million in annual revenue after recapture. Recapture is a mechanism in state funding formulas that ensures that a district's property wealth does not exceed certain levels, known as equalized wealth levels. You can read more about recapture on pages 20-21 of the Texas Public School Finance Overview published by the Texas Education Agency.

School tax revenue is divided into two categories: maintenance & operations (M&O), which pays for the daily operations of the District, and interest & sinking (I&S), which pays debt. As the District’s tax base gets bigger, the revenue generated from the I&S tax rate rises proportionally. This allows FISD to pay more debt each year without increasing the tax rate. However, the funding formula for M&O works in such a way that school districts do not benefit from additional property value, regardless of whether that value comes from appreciation of existing homes/businesses or new development. As property values rise, the amount of revenue that can be generated locally also rises. Therefore, the state’s share is reduced proportionally.

There are three ways to increase maintenance & operations revenue under the current funding formula:

  • An increase in student enrollment will increase overall revenue because school districts are funded based on the number and type of students served. However, enrollment growth also increases overall cost to the District.

  • An increase in the maintenance & operations tax rate would yield additional revenue per student under the formula, which would increase overall revenue. A tax rate increase would create the additional cost of recapture, which is a mechanism in the state funding formula that ensures a district's property wealth does not exceed certain levels. However, the increase in revenue would exceed the amount required to be repaid.

  • An increase in the allotments per student appropriated under the formula would increase overall revenue without any additional cost to the District; however, this would require an act of the state legislature.

No. The Texas Economic Development Act does allow school districts to abate a business’ property tax burden to enhance the local community, improve the public education system, create high-paying jobs and advance the economic development goals of the state. However, FISD has not entered into any such agreement.

Yes. Property taxes are ad valorem taxes levied on real or personal property. Therefore anyone owning property within the jurisdiction of a school district pays school district property taxes.

Indirectly, yes. Property taxes are ad valorem taxes levied on real or personal property. Therefore, the owner of the apartment complex is required to pay school property taxes based on the value of the complex as a whole. Generally, the cost of those taxes is one of the many factors used to determine the cost of rent for each tenant.

2018 is the first year in more than 20 years that FISD has not had a school under construction. Enrollment growth patterns have changed in such a way that allows the District to address most enrollment growth with existing building capacity. As building needs slow down, the rate at which FISD issues debt will also slow down, and that creates some flexibility within the interest and sinking fund. FISD administration and the School Board are actively considering different options, which may include a more aggressive debt repayment plan, a reduction in the I&S tax rate, or some combination of the two.

There are many ideas being discussed related to property tax reform, but it is difficult to determine how exactly FISD would be impacted until a bill is filed in the state legislature. It’s important to understand, though, that property tax reform and school finance reform are tied very closely together, and it’s difficult to accomplish one without the other. Under the current system, limits on property value growth would require additional money to be appropriated for schools in the state’s budget, because as local districts become limited in the amount of revenue they can generate, the current formula requires the state to fill in the gap. As the legislature addresses property tax reform, lawmakers will also need to address school finance by either identifying a mechanism to fund that gap or changing the formulas in such a way that could potentially reduce overall funding for public education.

The School Board adopts the tax rate once per year, before September 30. The Board has the authority to call for a Tax Ratification Election at the time of tax rate adoption, if the adopted M&O tax rate exceeds the district’s rollback tax rate, which for FISD is $1.04 per $100 valuation.

First, it’s important to understand that FISD only sets the school property tax rate. The District does not appraise property, so it has no control over how quickly property appreciates in value. The robust Texas economy is creating demand for new homes and driving up property values across the state. In fact, the state’s budget for this biennium assumes 14 percent growth in property values state-wide over the two-year period.

While property values are out of Frisco ISD’s control, the authority to set the property tax rate, within limits established by the state, rests with the School Board and voters. FISD continues to maintain a below-median tax rate compared to surrounding districts in Collin and Denton counties. The Frisco ISD community and its elected officials must balance its needs and expectations for public education with the desire to keep taxes as low as possible. The Looking Beyond Your Tax Bill presentation aims to educate the community about the way property taxes work to fund schools, and to inform taxpayers that the responsibility for funding Frisco ISD schools is gradually being shifted from the state to local homeowners.

A portion of Texas Lottery funds does go to support education, but it’s a relatively small amount compared to the overall cost of education in the state, and an increase in lottery sales doesn’t necessarily mean a lot more money for public education. According to the Texas Lottery Commission website, 25.8 percent of the Texas Lottery, or $1.3 billion goes toward the Foundation School Program, which funds public education. Total payments from the Foundation School Program for 2017-18 are estimated at approximately $19.2 billion; therefore the Texas Lottery proceeds make up about 6.7 percent of the total

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 “extra” or surplus revenue each year when values grow by more than the conservative estimates. That surplus revenue goes into fund balance to help the District cover bills each fall before FISD begins collecting taxes and state aid.

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.

Wondering what property value lag is? Watch an explanation at the 10:00 minute mark in the Looking Beyond Your Tax Bill

Financial Benchmarking

Because Frisco ISD has such a rapid growth rate, the school districts FISD compares itself to changes slightly from year to year. The District re-evaluates its “peer group” on an annual basis to look for nine other school districts across the state that look most like FISD, using criteria such as student population, demographics, home values and proximity to large urban areas. This year, Frisco ISD’s group of peer districts included Allen, Conroe, Fort Bend, Humble, Katy, Lewisville, McKinney, Plano and Round Rock ISDs.

Education is a very people-intensive business, and therefore the largest expense for any district will be salaries and benefits. Frisco ISD finds that most districts spend between 80-85 percent of their operating budget on payroll.

The direct cost to educate a student in FISD is just under $7,700. This number can be broken down in the following way:

  • Direct Instruction - $5,337 – This includes classroom instruction and materials, instructional resources like libraries and media services, curriculum and instructional staff development.

  • Instructional Support - $1,227 – This includes campus and instructional leadership, guidance counseling and evaluation services, social work services, health services and extracurricular activities.

  • Operations - $983 – This includes student transportation, facilities maintenance, security and data processing.

  • Leadership - $147 – This includes the general administrative expenses of the school district.

Less than 2 percent of FISD’s operating budget is spent on general administration. General administration includes things like salaries and expenditures of school district leadership, budgeting, accounting and fiscal affairs, human resources, legal and risk management, planning and research, community and public relations and records management. To provide context, peer districts range from 1.9 to 3.4 percent for general administration spending.

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