The Arizona Constitution and Title 15 of the Arizona Revised Statutes, which were enacted into law by the Arizona Legislature, govern School Budget and Finance systems in Arizona. School districts are required by law to follow the prescribed budget formulas to determine the budget available to that school district. Several factors must be taken into account and guidelines followed when budget formulas are being constructed.
Arizona’s school finance process uses a lot of acronyms that refer to specific sections of the budget and their revenue sources. Some of these are historical. Prior to 1980, Arizona school districts funded their budgets primarily from local property taxes. Although they did receive state aid on a per pupil basis, it was supplementary and there was no restriction on local expenditures other than they had to spend it all each year because none could be carried over. The property tax portion of their budget had an exception, called "30/60" levies, which allowed schools to levy a thirty cent tax rate (unified districts could levy sixty cents) on whatever property they had in their districts and accumulate it from year to year in a capital reserve.
In 1980, the Arizona Legislature implemented a major school finance reform that radically changed how schools were budgeted. All school districts were given precise spending limit amounts per pupil for maintenance and operation (M&O) expenses in one budget and precise amounts per pupil in another budget for capital. This “equalization formula” was implemented so as to provide equal dollars per pupil for school operations through a balancing of the local Qualifying property Tax Rate (QTR) and state financial assistance. The idea was to control the amount of revenue that school districts could raise, and the M&O limit was called the Revenue Control Limit (RCL), while the capital limit was called the "Capital Outlay Revenue Limit" (CORL). The RCL is actually the sum of the Base Revenue Control Limit (BRCL) and the Transportation Revenue Control Limit (TRCL). And each of these have a per-pupil formula to determine precisely how much money each school district would be allocated.
The state legislature also dictated that a system be implemented to uniformly maintain local school district financial records and reports. The system that was designed is the Uniform System of Financial Records (USFR). The USFR prescribes the minimum internal control policies and procedures for school districts for accounting, financial reporting, budgeting, attendance reporting, and state and federal compliance.
The first element in establishing a school district’s working budget is determining the Expenditure Budget for the fiscal year. The Expenditure Budget is divided into several categories from which school districts may spend money throughout the fiscal year. To determine the amount of Expenditure Budget available, 3 of these categories involve formulas. Those categories are Maintenance & Operation, Unrestricted Capital Outlay and Soft Capital Allocation. The M&O fund is the general fund of the district and as such accounts for all financial resources of the district, except those required to be accounted for in other funds. The Unrestricted Capital Outlay and Soft Capital Allocation Funds were established to account for district expenditures related to capital purposes and certain non-capital expenditures.
Maintenance and Operation BudgetThe Maintenance and Operation Budget is the portion of the budget where most of the day-to-day expenditures take place. Some examples may include: salaries, benefits, supplies, utilities, maintenance & repair and other miscellaneous expenses not of a capital nature. The Maintenance and Operation budget is composed of several formulas, which are determined, by the number of students, Average Daily Membership (ADM) the district has during the first 100 days. The formulas for Base Support Level (BSL), Transportation Revenue Control Limit (TRCL), and Capital Outlay Revenue Limit (CORL) are the common components for the typical Maintenance and Operation Expenditure Budget.
Base Support Level (BSL)The Weighted Student Count, Base Level Amount and Teacher Experience Index determine Base Support Level.
•Weighted Student Count ~Weighted Student Count allows a district to receive credit for the additional costs of educating certain classifications of students. The student count takes into consideration the size of the district, whether the students are in elementary or high school and special needs children. There are two groups of students, Group A and Group B.
Group A Students ~All students are Group A students. Student counts are multiplied by the following factors to determine weighted counts. (for districts with over 600 students)Pre-School Handicapped1.450 weightingK-8 Grades1.158 weighting9-12 Grades1.268 weightingGroup B Students ~These factors give additional credit to school districts based on the number of special needs students that were served the previous year. These counts are calculated then added on to the Group A counts to determine the Total Weighted Student Count.
Hearing Impairment4.771K-30.060ELL (English Language Learners)0.115MD-R, A-R and SMR-R (4)6.024MD-SC, A-SC and SMR-SC (5)5.833Multiple Disab. Severe Sensory6.531Orthopedic Impairment (Resource)3.158Orthopedic Impairment (Self-Cont)5.576Preschool-Severe Delayed3.595ED, MIMR, SLD, SLI and OHI (6)0.003Emotionally Disabled (Private)4.647Moderate Mental Retardation4.421Visual Impairment4.806•Base Level Amount ~The Base Level Amount represents the amount of money, per weighted student count (Group A and Group B combined), that the legislature deems it will provide to public school districts. For budget year 2004-2005 the base level is $2893.18 and $2929.34 with Teacher Compensation.
Teacher Compensation ~A district can increase its Base Level amount by an additional 1.25% for the budget year if its teacher performance evaluation system receives approval from the State board of Education.
Career Ladder~A district may also increase its Base Level amount by up to an additional 5.5% if it participates in a pay for performance program titled “Career Ladder”.
•Teacher Experience Index (TEI) ~The purpose of this factor is to allow extra budget capacity for school districts with teachers whose average years of experience exceed the State of Arizona average. Districts who qualify are allowed to increase the support level by 2.25% for each year of experience above the State of Arizona average.
Transportation Revenue Control Limit (TRCL)Determining the Transportation Revenue Control Limit first begins with calculating the Transportation Support Level. This varies depending on the average daily route miles per eligible student transported. Districts are required to use the prior year Approved Daily Route Mileage in calculating the amount for the new year’s budget. Eligible students are determined by their residence of greater than one mile for K-8 and greater than one and a half miles for grades 9 – 12.
To begin calculating you must divide the district’s total daily route miles by the total number of eligible students transported by district buses. Students that live within the “walk-zone” of a district may be transported on district buses, but they may not be used in the calculation factors of this funding formula. The ratio obtained from this calculation is used in the following chart to determine the district’s funding per route mile.
Daily Route MileageState SupportPer Eligible StudentLevel Per RouteTransportedMile for previous year0.5 or less$2.07More than 0.5 – 1.0$1.68More than 1.0$2.07The eligible factor from the table above is multiplied by the total route mileage used by the school district to determine the school route support level. A district receives an additional level of support for academic, vocational and athletic trips. This additional amount varies by type of district.
If a district transports disabled students for an extended school year, these route miles are also multiplied by the appropriate State Support Level and included in the Transportation Support Level.
Once the Transportation Support Level has been determined, the Transportation Revenue Control Limit can be calculated. The Transportation Revenue Control Limit for the new year’s budget is the sum of the previous year’s Transportation Revenue Control Limit and the increase computed for the new year Transportation Support Level over the previous year’s Transportation Support Level.
The new year’s Transportation Revenue Control Limit is then added to the Base Support Level to obtain the Revenue Control Limit.
Unrestricted Capital Outlay Revenue LimitThe Capital Outlay Revenue Limit is determined by using the unweighted student count, ADM based on the 100th day, and multiplying by the appropriate factor based on the students’ grade placement. The current formula for district of 600 students or more is:GradeFactorPreschoolHandicapped$225.76Kindergarten – 8$225.769 – 12$267.94*Student Growth Adjustment: If a district has experienced student growth greater than 5% over the previous year’s 100th day ADM, the district may increase the calculated Capital Outlay Revenue Limit by the actual percentage increase of the district’s student count. If growth is less than 5%, no adjustment is used.
The Maintenance and Operation Budget may be adjusted with increases beyond the formulas discussed thus far. These increases may be determined by several factors.
A district’s Base Support Level and Revenue Control Limit for the current year is created using the previous year’s 100th day ADM’s. When a district is experiencing growth and the district qualifies for the student growth adjustment as discussed previously, the district is also allowed to make adjustments in the student Group B category.
A district is also allowed to increase its budget by up to an additional 10% of its Revenue Control Limit if the voters elect to override the budget by this increase. When a budget override is approved by the voters it is effective for up to seven years. If the additional increase if elected effective for five years or more, the percentage of the increase remains constant until the last 2 years when the percentage decreases to two-thirds of the initial override in the next to last year and one-third of the initial override in the last year. If a district passes another election, it may renew its authorized full original percentage in the last two years of the override. Overrides are not included in the equalization formula for state assistance.
A district is allowed to budget an additional amount of revenue that is obtained from tuition or costs of certificates of educational convenience students.
Districts may also budget for utility costs that are exempt from the Revenue Control Limit. Excess utilities are the amounts that exceed the base limit designated for operation in areas of heating, cooling, water, electricity, telephone communications and sanitation and fees. The base amount is calculated by a percentage increase each year from the 1984-1985 fiscal year. A district may use funds from the excess utility category only after it has exhausted the full amount in the base utility budget lines. The 03/04 FY is capped at the level of actual excess utilities expended in the 01/02 FY. The ability to increase a district’s budget by excess utilities will end after the 08/09 FY.
When a district experiences unused budget in its’ M&O budget, it may carry forward up to four percent into the new M&O budget.
Soft Capital AllocationSoft Capital Allocation is the amount of budget a district can spend for short-term capital items that are required to meet academic adequacy standards such as technology, textbooks, library resources, instructional aids, pupil transportation vehicles, and furniture and equipment. Soft Capital money may not be spent for maintenance and operation expenses. Once districts have complied with adequacy standards they may then use soft capital money to meet administrative soft capital purposes. Any unused budget in this category may be carried forward to the new budget year.
The formulary factor to determine a district’s soft capital allocation is $225 multiplied by the actual student count of preschool through 12th grade for districts with 600 students or more. For a district of less than 600 students, a district must make and application and obtain approval through the State Board of Education for a special adjustment.
The formulas discussed that comprise a school district’s budget are only part of the understanding necessary in the budget process. It is also important to understand where the dollars come from to fund these budgetary formulas.
The money to support a school district budget is obtained from two sources; the equalization assistance by state and county governments and property taxes.
Equalization AssistanceThe “equalization formula” was implemented as the legislature’s attempt to ensure that each district has an equitable budget compared to other districts in the state. The idea was to control the amount of revenue that school districts could raise so that all districts in the state may perform and provide for students on a more equal playing field. The equalization assistance is the amount of money which the state and county provide to school districts over and above a uniform tax rate which is called the qualifying tax rate. If the local tax rate necessary to fund the formulas previously discussed is equal to or lower than the qualifying tax rate, no state or county assistance is given. However, if the tax rate necessary to fund the formulas would be greater than the qualifying tax rate, state and county subsidy is proved in order to keep this portion of local property taxes uniform though out Arizona.
For formula purposes, the Equalization base is the sum of the Revenue Control Limit/District Support Level, the Capital Outlay Revenue Limit and the Soft Capital Allocation. The second factor is the District Primary Assessed Valuation divided by 100 and multiplied by the Qualifying Tax Rate. The Qualifying Tax Rate for the 03/04 fiscal year is $1.9583 for elementary and high school districts and $3.9166 for unified districts.
The formula would look like this:Equalization Base – (QTR X AV ) = Equalization Assistance100Property TaxesThe majority of school district funding is received from local property taxes on real and personal property within the school district. The formulas calculated are dependant on what money would be raised in each district based on a uniform tax rate. This system results in varied percentages from district to district. Districts with high taxable property values per student pay a higher percentage of the total budget costs while districts with lower taxable property values per student pay a lower percentage of the total budget costs.
Property tax rates are divided into Primary tax rates and Secondary tax rates. Primary values are used to calculate the primary taxes which are collected for the M&O budget portion of school districts, community colleges, cities and counties. The primary tax dollars on residential owner occupied property are limited to 1% of the primary valuation. Secondary values track the full cash value of the property. Secondary tax dollars are used to pay off the voter approved issues such as bonds and overrides.
The process utilized to compute a school district’s tax rate requires that the budgetary need be determined less the net cash available equals the amount to be levied. The amount to be levied is then divided by the accessed valuation (determined by the state or county) then divided by 100. The Primary tax rate is determined by the M&O Fund, Capital Outlay Fund, Soft Capital Fund and Adjacent Ways Fund. The total Budgeted Expenditures are determined then decreased by the total Estimated Revenue to determine the total Estimated Levy. The estimated levy is then divided by the accessed valuation divided by 100 to establish the Primary Tax Rate. The Secondary Tax Rate is determined by any M&O overrides and Bonds. The total budget for these funds is determined less cash available to determine the estimated levy. That number is then divided by the accessed value and divided by 100 to determine the Secondary Tax Rate.
Budget CategorizationsThe state legislature dictated that a system be implemented to uniformly maintain local school district financial records and reports. The system that was designed is the Uniform System of Financial Records (USFR). The USFR prescribes the minimum internal control policies and procedures for school districts for accounting, financial reporting, budgeting, attendance reporting, and state and federal compliance.
The requirements of the USFR are revised periodically for changes in laws, regulations and accounting pronouncements that cover school district accounting, financial reporting, and compliance with state and federal laws.
Arizona school district accounting, financial reporting, and compliance with state and federal laws is affected by the State Legislature, the State Board of Education, the Arizona Department of Education, school district governing boards, county school superintendents, the Office of the Auditor General, county treasurers, the federal government and the Governmental Accounting Standards Board, both directly and often indirectly due to complex interrelationships.
Districts must maintain an acceptable degree of compliance with the requirements of the USFR. The auditor General determines a district’s degree of compliance by reviewing the single audit reports and USFR compliance questionnaire prepared by the district’s auditors or by performing a procedural review.
The USFR Chart of Accounts prescribed for districts provides for the establishment of a complete fund accounting system. The account code structure provides a basis for financial reporting and budgeting as required. Each account code is comprised of required elements. Each element must contain the specified number of digits and must be in the specified location in the account code structure. Expenditure accounts consist of fund, program, function, object code and unit elements.
The 001 Fund is specified for Maintenance and Operations. After the governing board calculates and establishes the amount to be budgeted as part of the general operating fund, the parameters of spending for a fiscal year construct the M&O budget. The overall fund is further divided into specific programs. The three main ones are Regular Education, Special Education and Pupil Transportation.
The Regular Education program code (100) is used to account for expenditures relating to activities that provide students in grades K-12 with learning experiences. Expenditures that cannot be specifically assigned to other programs are classified here.
The Special Education program code (200) is used to account for expenditures relating to activities for students having special needs. Special Education includes specified handicaps as well as gifted, vocational, remedial bilingual and career education programs.
Program (300) is used for Title 8, special education disabilities.
Pupil Transportation program (400) is used to account for operating expenditures incurred with transporting pupils to and from school or school activities.
The Classroom Site Fund is where the portion of state sales tax collections provided to school districts as an additional source of funding for teacher salary increases and other specified maintenance and operation purposes is budgeted. This Fund comprises three budget funds.
Classroom Site Fund 011 is used for Base Salaries and includes 20 percent of the current Classroom Site Fund allocation and any prior year’s unexpended budget balance and interest earnings. Money in this fund may only be used for teacher base salary increases, teacher employment-related expenses, and registered warrant expenses for this fund.
Classroom Site Fund 012 is designated for Performance Pay and includes 40 percent of the current Classroom Site Fund allocation and any previous year unexpended budget balance and interest. Money in this fund may only be used for performance-based teacher compensation increases, teacher employment-related expenses, and registered warrant expenses for this fund.
Classroom Site Fund 013 comprises 40 percent of the current Classroom site Fund allocation and any prior year’s unexpended budget balance and interest. Money in this fund may only be used for Maintenance and Operations as it relates to class size reduction, teacher compensation increases, AIMS intervention programs, teacher development, dropout prevention programs, teacher liability insurance premiums and registered warrant expenses for this fund.
Additional Funds include Special Revenue Funds that are divided into 100-399 as Federal Projects, 400-499 as State Projects, 500-599 as Other Special Revenue Funds, 600 as Capital Project Funds, 700 as Debt Service Funds, 800 as Fiduciary Funds, and 900 as Proprietary Funds.
Arizona’s school funding formula is two decades old and badly in need of revision. Besides being arcane, difficult, and nearly impossible for the general public to understand, it does not give school districts the funds they need to cover routine costs. This has led the formula to be further complicated by a series of overrides which, while masking the true cost of running our public schools, also puts undue pressure on property tax rates. Policy makers, educators, and business leaders must hold each other jointly accountable for improvements in the financial and academic condition of our schools by working proactively to create long-term funding that supports long-term investment in Arizona and its future.
Anything less than the current level of funding for 2004-05 denies adequate investment in Arizona’s future. Educators must continue to seek efficiencies to see that the maximum dollars are going to the classroom. This current level of investment must support growth and inflation in order to promote continuous improvement.
Efforts to review or develop current or future funding mechanisms to fully fund the needs of the education system must be pursued consistent with principles of long-term economic sustainability for a diverse business sector. The Legislature needs to modify the current school finance formula to enable appropriate budget capacity for school districts to provide for the elements to meet adequacy in the K-12 system for all Arizona students.
Future investments in education should be based on economic data and sound educational research and practice. The state should determine what constitutes an adequate funding level to get a maximum return on its investment.
Research Sources CitedArizona Sate Legislature. 18 Nov. 2004 <http://www.azleg.state.az.us >.
Arizona School Boards Association, Inc.. 18 Nov. 2004 <http://www.azsba.org >.
Arizona Tax Research Association. 23 Nov. 2004 <http://arizonatax.org >.
"School Finance Summary Manual." N.p.: Arizona Association of School Business Officials, 2004.
Uniform System of Financial Records for Arizona School Districts. N.p.: Department of Education and Auditor General, n.d.
