The Continuing Saga of the Funding Formula Distraction -- A Tale of Two Cities

I'm not sure if Jennifer D. Jordan is speaking for herself or indirectly quoting State Senate Majority Leader Teresa Paiva-Weed in the highlighted section of this excerpt from Wednesday's Projo…

A state law known as Senate Bill 3050 also went into effect this year; the law gradually lowers the cap on the amount cities and towns can raise through property taxes to finance municipal services and schools. The intent of the bill was to control escalating property taxes and force communities to analyze and rein in spending, not encourage teachers to strike, said state Senate Majority Leader, M. Teresa Paiva-Weed, a Newport Democrat who designed the bill.

But the property-tax cap was never intended to solve the problem of school financing — that must come from the development of a statewide school financing formula, which Paiva-Weed says she will push lawmakers to focus on this year,

…but whoever is saying that a "funding formula" by itself can solve the problem of school financing is wrong. A funding formula can shift money from one place to another, but the problem of school financing can only be solved by raising taxes or reducing spending.

This is most clearly illustrated with real numbers. A target proposed in a Rhode Island Public Expenditure Council study that Ms. Jordan reported on earlier this year is a good place to start…

The proposal would more evenly split the burden of paying for schools between the state and local communities, gradually requiring the state to cover 44 percent over a period of several years.

Last year, the state paid about 38 percent of school costs statewide — or $645 million. Another 10 percent came from $181 million in federal financing. Property tax revenue from cities and towns made up the rest — more than $1 billion, or 52 percent.

Increasing the state's share of education aid from 38% to 44% would require increasing the total amount of state aid by about 16%. Now, let's compare what this could mean for two Rhode Island communities, the two largest municipalities in the state, Providence and Warwick. Different approaches are possible; here are two that demonstrate the range of possibilities....

"The Providence Plan"

One approach to increasing the percentage of education funding provided by the state would be to increase the total amount of state aid while keeping the share received by each RI community the same. We'll call this “the Providence Plan” (the reason for this will be obvious by the end of the analysis). To hit the RIPEC target with the Providence Plan, every community would individually receive a 16% aid increase relative to their current baselines. Had that plan been implemented this year, Providence would have received an additional $31 million (16% of its $194 million in aid) while Warwick would have received an additional $6 million (16% of its $38 million). Both cities could then reduce their local tax-collections by their additional aid amounts, without reducing spending on education.

But would this mean true “tax relief” for both communities?

Increasing every district's state aid by 16% would require a total of about $110 million in new state-level revenues, generated mostly from income taxes, sales taxes and gambling. (The figure is $110 million because total aid to cities and towns was closer to $690 million than the $645 reported in Ms. Jordan's article. I suspect the difference comes from the fact that aid to the Central Falls district, run directly by the state, is treated separately in the budget from other districts).

For a first estimate, we will assume that each community contributes an amount to state revenues that is proportional to its population. Given the progressive nature of the income tax, this probably understates the contribution from the suburbs and the exurbs, but sales tax and gambling revenues help flatten things out. Based on population, Providence residents (16.4% of Rhode Island's population) would be expected to contribute about $18 million dollars to the state, while Warwick residents (8.1% of the population) would contribute about $9 million.

“Tax relief” is the difference between the reduction in local taxes made possible by new state aid and the new state-level taxes necessary to pay for that aid…

1. Providence would get community tax-relief of $13 million, $31 million dollars in new state education aid minus $18 million dollars in new state taxes.
2. Warwick would get property tax cuts summing to $6 million while paying out $9 million dollars in new state taxes -- for a community tax increase of $3 million.

Bottom line: Under the Providence plan, Warwick residents pay an aggregate tax-increase to help fund tax cuts for Providence.

“The Warwick Plan”

The “funding formula” could be approached in a different way. Instead of keeping the existing state-aid percentages fixed, each community could be given an aid increase that attempts to match their new contribution to state revenues. That would be the "fair and equitable" thing to do, would it not?

Again using a proportion-of-population approximation of the state tax distribution and a target of $110 million in new revenues, Providence would receive $18 million dollars in new state aid (16.4% of $110 million) while Warwick would receive an additional $9 million (8.1% of $110 million). Both communities could then reduce their property tax-burden by these amounts to break relatively even at the community level.

But will the politics of this plan fly? Under this plan, Providence's percentage of state aid drops from about 28% to 26.5%, while Warwick's increases from 5.5% to 7%. Will the urban communities still be interested in signing on to the funding formula as the answer to all of their problems, if it means that their total share of state aid will be reduced? Or will they only support a version specifically designed to increase the urban subsidies?

Senator Paiva-Weed has said that a new funding formula should focus on helping the second-tier and suburban communities, suggesting she supports something closer to the Warwick plan. I doubt that's what Mayor David Cicilline has in mind when he talks about new funding formula being needed to help Providence. The important point is that generic talk about a "funding formula" is currently being used to obscure honest and necessary debate about whether the legislature's priority is raising statewide taxes to fund increased urban subsidies, or if it is reducing the current imbalance that strongly favors urban districts.