Impact-Aid Office Eyes State Finance-Equity Plans

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WASHINGTON--Over the past two years, school-finance-equalization plans in three states have fallen out of compliance with federal regulations for the impact-aid program.

The states' failure to meet the requirements has altered the financial outlook for some school districts and involved the federal government in local arguments over education finance. The situation stems from a combination of tight state budgets and heightened scrutiny by the Education Department.

As a result, Congress is expected to revamp the equalization provision in the upcoming reauthorization of elementary and secondary education programs, which is also likely to feature proposals for a broader federal role in promoting school-finance equity within states.

The experience with the little-known equity provisions under impact aid "could help establish the direction'' Congress takes on the wider issue of equalizing resources, said John Forkenbrock, the executive director of the National Association of Federally Impacted Schools.

The impact-aid law, which assists districts whose tax bases are limited by the presence of federal property or workers, bars states from negating the federal subsidy by reducing their own aid to impact-aid districts.

At issue in the equity disputes is an exception that allows states to consider impact aid part of a district's resources for the purpose of an equalization plan. To prevent states from withholding funds from impact-aid districts without actually equalizing resources, federal rules were drafted defining an acceptable plan.

Three Still Have Approval

At the beginning of 1991, seven states had federal approval to count mpact aid under their equity plans: Alaska, Arizona, Kansas, Maine, Michigan, New Mexico, and Wisconsin. Now only three of them--Alaska, Michigan, and New Mexico--qualify under the federal rules.

The first state to lose Education Department approval was Arizona. In April 1991, federal officials ruled that the state could not withhold aid from impact-aid districts in fiscal 1991, and that its applications for 1989 and 1990 were denied also.

Kansas lost its approval last December, but has applied for approval of its new finance plan. State financial constraints have prompted Maine not to seek renewed approval.

In Wisconsin, an investigation revealed that the state's finance formula did not deduct any funding from impact-aid districts, according to federal and state officials. Therefore, it was decided that the state had submitted unnecessary applications for more than 10 years.

Meanwhile, Nebraska, a state not among the seven previously approved, is now seeking approval of its finance-equity plan.

A state can qualify for federal approval by showing that the per-pupil disparity between its highest- and lowest-spending districts is less than 25 percent, or by showing that 85 percent of its districts' education funds are raised in a "wealth neutral'' way, so that each district receives the same amount of money for an equal tax effort.

In 1988, Charles E. Hansen became the director of the Education Department's impact-aid office and the employee who had reviewed equalization plans retired. Mr. Hansen will not comment on whether plans have been incorrectly approved in the past, but he has acknowledged that scrutiny by "fresh sets of eyes'' led to conclusions that differed from those made in earlier years.

'Neither Side Won'

In Arizona, where a legal challenge to the school-finance system by property-poor districts is still pending, the threat from the Education Department's 1991 ruling on the system was more immediate.

In theory, the state owed some of its school districts about $50 million, and the state's schools faced having to repay some $120 million to the federal government. (See Education Week, June 19, 1991.)

Congress solved that problem last year with an amendment absolving states of penalties for improper impact-aid deductions in fiscal 1989 through 1992.

The dispute in Arizona ended "like the Korean War,'' said Patrick E. Graham, an administrative assistant in the Window Rock Unified School District, an American Indian-reservation district heavily dependent on impact aid. "Neither side won, but we established a truce.''

The districts agreed to drop their past claims and to accept fiscal 1992 deductions. The state dropped its appeal of the federal ruling, and agreed not to make deductions in 1993 or 1994. And the federal law barred states from deducting aid before their plans were approved.

Because its finance law requires the state to fund districts at a minimum level, Arizona had to come up with an additional $15 million to compensate for funds that had been taken from impact-aid districts, said Gene M. Gardner, the state director of school finance. He said some districts have "more money than they can spend'' under state limits, and have to petition the state to transfer it to their capital-improvement budgets.

Mr. Graham of the Window Rock district said impact-aid districts suspect that the impact-aid situation triggered state officials' decision last year to take 27 percent of any funds left in districts' budgets at the end of the fiscal year and redistribute it.

But Mr. Gardner said that situation was not the impetus, noting that the policy also applies to non-impact-aid districts.

A hearing is scheduled this month on whether the policy is allowable under the impact-aid rules.

Maine and Kansas

The Congressional amendment was already in place when Maine officials acknowledged that they would not meet the equity standards in fiscal 1992, and when Kansas lost its certification late last year.

Federal officials ruled that Kansas had counted as "wealth neutral'' types of state funding that were not. Dale M. Dennis, the state's assistant commissioner for finance, contended that the officials "changed their interpretation of the definition.''

The Kansas legislature last year approved a new finance system that sets statewide spending and tax levels. Mr. Hansen of the impact-aid office said the plan is expected to pass muster, allowing Kansas to resume making impact-aid deductions in the current fiscal year.

In Maine, the education budget "has been level-funded for two years,'' said Suzan C. Cameron, a school-finance consultant for the state. "Because we're not pushing money out through our equalization formula, they're raising more money locally, and that's not equalized.''

As a result, the state's 25 impact-aid districts will receive a windfall, while other districts "will have to eat the $1.8 million'' that had been deducted, Ms. Cameron said.

Vol. 12, Issue 21

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