Basic Education Terminology
The State determines how much money a school district will receive. It is known as basic education funding or the basic formula allowance.
The state sets funding formulas that both allocate money to the schools (state aid) and determine the maximum amount a school district can request from their voters through local property tax (bond or levy referendums). The state also decides what portion of funding comes from local property taxes, state aids and other sources.
A school district receives basic funding from the state according to the average number of students attending school during the school year. This number, referred to as ADM, or average daily membership, is then transferred into units called adjusted pupil units.
Why is school funding so complicated?
School funding was created by the state to address many interests and needs. Lawsuits have led to legal precedents for the legislature to follow when enacting school finance legislation. Continuing demands on public education are expressed through the political process to create the present complicated system.
The legislature also has tried to address unique needs such as rural sparsity, desegregation and high concentrations of poverty by developing "categorical" funding formulas. These formulas reflect the political compromises made to reach agreement on how to serve these special needs.
Finally, the state also sets school tax levies and the amount of money a local school district may request from its voters. Together, these factors produce an extraordinarily complex set of school funding laws. Because these laws are so difficult to understand, they contribute to a certain level of distrust by politicians, the public and the media of school spending.Click here for more information: Financing Education in Minnesota
School Finance TerminologyThe following terms and concepts are essential to understand Minnesota’s school finance program.Adjusted Marginal Cost Pupil Units (AMCPU): The counts of pupils used for most school funding formulas through fiscal year 2014 and replaced by “adjusted pupil units” for fiscal year 2015 and later. The count is adjusted (meaning students actually served by the district), marginal (the greater of the current year’s count, or 77 percent of current year’s count and 23 percent of the previous year’s count), and weighted by grade level (pupil units).Adjusted Net Tax Capacity (ANTC): The net tax capacity of a school district as divided by the sales ratio. The purpose of the adjustment is to neutralize the effect of different assessment practices among the taxing jurisdictions of the state.Adjusted Pupils Units: Beginning in fiscal year 2015, adjusted pupil units, or adjusted weighted average daily membership, is the primary pupil count used in school-funding formulas. The count is weighted by grade level (.55 for half-day kindergarten, 1.0 for full-day kindergarten and elementary grades, and 1.2 for secondary grades) and “adjusted” to reflect students served. Marginal costs pupils are removed from this count.Aid Entitlement: 100 percent of the state aid due a school district for a fiscal year, regardless of when the aid is actually received by the school district.Appropriation: Amount of state aid paid to a school district during a fiscal year. The appropriation consists of a portion of the aid entitlement for the current year (for fiscal year 2017 this is 90 percent) and the remaining cleanup payments owed by the state to the school district for the previous fiscal year (10 percent).Average Daily Membership (ADM): The sum for all pupils of the number of days in the district’s school year that each pupil is enrolled, divided by the number of days the schools are in session.Basic Skills Revenue: Basic skills revenue includes compensatory, English learner (EL) and EL concentration revenues. The funding for basic skills revenue is based on separate formulas for the individual components.Categorical Aid: Funds paid by the state to school districts and designated for specific purposes, such as transportation, special education for disabled children, and career and technical education. Categorical aids are relatively minor compared to general education revenue, the main school district funding stream.Declining Enrollment Revenue: Districts that experience declining enrollment from year to year are eligible for declining enrollment revenue.Elementary Sparsity Revenue: Revenue available to small, sparsely populated school districts. Elementary sparsity revenue is part of general education revenue. To qualify for elementary sparsity revenue, a district must have an elementary school that is at least 19 miles from the next nearest elementary school and have an average of 20 or fewer students per elementary grade.Equalizing Factor: The maximum amount of adjusted net tax capacity per pupil unit a district may have without going “off the formula” that is, becoming disqualified from receiving that specific education aid. A district receives no education aid for that formula when the amount raised by the tax rate times its adjusted tax capacity exceeds its revenue (i.e., number of pupil units times the formula allowance). The equalizing factor is computed by dividing the formula allowance by the tax rate. Many school funding program formulas have a statutorily fixed equalizing factor.Equity Revenue: Equity revenue is intended to reduce the per pupil disparity between the highest and lowest revenue districts on a regional basis.Extended Time Revenue: Allows students to generate up to an additional 0.2 ADM, which is multiplied by the extended time formula amount.Fiscal Year: A 12-month period between settlements of financial accounts. The fiscal year for the state and school districts runs from July 1 through June 30 and is identified by the calendar year in which it ends. For example, fiscal year 2017 runs from July 1, 2016, through June 30, 2017. A fiscal year is interchangeable with a school year for school finance purposes. For example, fiscal year 2017 is equivalent to the 2016-17 school year.Formula Allowance: The dollar amount per pupil unit used to calculate each district’s basic general education revenue the “front end” of the formula. The formula allowance for fiscal year 2017 is $6,067.General Education Aid: Funds paid by the state to school districts as part of the general education revenue program and permitted to be used for any operating expense. Replaces foundation aid.General Education Levy: Portion of general education revenue received through the property tax. For fiscal years 2003 through 2012, there was no general education levy. A modified form of the general education levy was reinstituted in fiscal year 2013 under the name “student achievement levy.” The 2015 Legislature repealed this levy beginning in fiscal year 2019.
General Education Tax Rate: The tax rate that when multiplied by the adjusted net tax capacity of all districts, raises the dollar value specified in statute. Prior to levies made in 1985, the legislature set the tax rate instead of the total dollar value that was to be raised. The general education tax rate equaled zero for fiscal years 2003 (taxes payable in 2002) through 2014. The general education tax rate (student achievement tax rate) is 0.30 percent for fiscal year 2017 and 0.16 for fiscal year 2018.General Education Revenue: General education revenue is the primary formula for providing general operating funds to school districts and charter schools and is composed of basic general education revenue; extended time revenue; declining pupil revenue; local optional revenue; gifted and talented revenue; basic skills revenue, including EL and compensatory revenue; elementary and secondary sparsity revenue; transportation sparsity revenue; operating capital; equity revenue; small schools revenue; and transition revenue.Gifted and Talented Revenue: Districts qualify for $13 per pupil for gifted and talented revenue. Gifted and talented revenue must be used to identify gifted and talented students, to provide programming for those students and to provide staff development for teachers of those students. All districts and charter schools qualify for a total of $12.05 million in gifted and talented revenue.Levy: A tax imposed on property. The amount of property taxes that a school board may levy is limited by statute. Each autumn, the Minnesota Department of Education computes the exact amounts of the limits on the permitted levies for each district. For levies based on adjusted tax capacity, the previous year’s adjusted tax capacity value is used. Each year, school boards hold truth-in-taxation hearings, vote on how much of their maximum they want to levy, and “certify” that amount to the county auditor. Most districts certify the maximum levy possible. A levy certified in the late fall is collected in the calendar year beginning the following January. (See Table 80 on page 124 for an illustration of the relationship among the years for valuation, certification, collection, and use of levies.)Local Optional Revenue: The 2013 Legislature added an additional component to the general education program called location equity/local optional revenue. It allows school districts to access up to $424 per adjusted pupil unit in board-approved revenue. Initially in FY15 the revenue authority was available only to metro and regional center districts. In FY 2016 the revenue authority was expanded to all districts and retitled local optional revenue.Net Tax Capacity (NTC): This value is derived by multiplying the taxable market value of each parcel by the appropriate class (use) rate for that parcel. Class rates for taxes payable in 2015 and later range from 0.45 percent on certain homesteads owned by disabled persons (residential homesteads with market values of less than $500,000 are subject to a class rate of 1 percent) to 2 percent for most commercial/industrial property.Nonresident School District: A district other than the student’s district of residence that provides educational services to the student (same as serving school district for funding purposes).Operating Capital Revenue: Operating capital revenue replaced the capital expenditure facilities and capital expenditure equipment formulas.Pupil Units: A weighted count of pupils in ADM used in the calculation of state aid and local tax levies.Referendum Revenue: Referendum revenue allows districts to increase their general fund revenue with the approval of the voters in the district, and in limited cases, by board approval.Resident District: The district where the student’s parent or guardian lives.Serving School District: The district providing educational services to a student.Sales Ratio: A sales ratio is a statistical measure prepared by the Department of Revenue that measures the difference between the actual sale prices of property and the assessor’s market values on those properties. The purpose of the sales ratio is to neutralize the effect of different assessment practices among the taxing jurisdictions of the state. The sales ratio is divided into the taxable value (net tax capacity) to obtain the adjusted tax capacity of a school district.Secondary Sparsity Revenue: Revenue paid to small, sparsely populated school districts. The secondary sparsity revenue formula takes into account the secondary enrollment, the distance between high schools, and the geographic area of the district. Secondary sparsity revenue is a component of the general education revenue program.Tax Capacity Percentages: Statutory classification percentages that are applied to market values. Tax capacity percentages replace classification ratios.Tax Capacity Rate: The rate arrived at by dividing each district’s levy amount by the district’s net tax capacity. Tax capacity rate replaces the term “mill rate.”Transition Revenue: Transition revenue guarantees a district that changes to various funding formulas will not result in the district receiving less money in the current year than it received in the prior year.Transportation Sparsity Revenue: Component of the general education revenue program used to provide additional revenue to school districts that have a relatively low ratio of pupils to the square mile area of the school district.Transportation Sparsity Revenue: Transportation sparsity revenue provides districts with additional funding based on the number of pupils per square mile in a school district.Uniform Financial Accounting and Reporting Standards (UFARS): Rules and instructions adopted by the former State Board of Education under legislative mandate to govern the methods by which school districts record financial transactions and inform the Department of Education about their finances.
Property Tax System TerminologyIn order to understand education finance, it is important to be familiar with Minnesota’s property tax terminology and its two types of property tax bases that are used to compute and spread school district levies.
Tax Base TermsMarket Value: Each individual parcel of property is valued by an assessor. This value is referred to as estimated market value. Estimated market value is the value, as the name implies, that the property would bring in a sale on the open market.Property Tax Classification Rates: Percentages applied to the market value of property to arrive at the adjusted net tax capacity.Taxable Market Value: State law excludes a portion of each home’s market value for property tax purposes. The property’s estimated market value less the homestead market value exclusion is its taxable market value.Referendum Market Value: Referendum market value is the taxable market value of all taxable property in the school district excluding seasonal recreational and agricultural lands. School taxes for the local share of the operating referendum, local optional revenue, equity revenue, and transition revenue are computed and spread against referendum market value.Net Tax Capacity (NTC): The legislature has established class rates for different types of property (e.g., homestead, commercial, residential, rental, etc.), and the assessor applies the appropriate class rate to the taxable market value of each parcel of property. The resulting value is called tax capacity or net tax capacity. Tax capacity is the value of the property that the property taxes will be levied against for all school funding formulas, except for the levy share of operating referendum revenue, local optional revenue, equity revenue, and transition revenue (which are levied against the referendum market value of the school district).Adjusted Net Tax Capacity (ANTC): School funding formulas that are spread on net tax capacity are generally calculated using adjusted net tax capacity. Adjusted net tax capacity is the net tax capacity of the district divided by its sales ratio.Calculating and Paying School TaxesTax Rates: The property taxes levied against each parcel of property are computed by the county auditor, who adds up the total dollars of property tax levied by each local unit of government and determines what rate of taxation needs to be applied to the tax capacity of the taxing jurisdictions in order to raise that dollar amount. The rate of taxation is called the tax rate. A net tax capacity tax rate is expressed as a percentage of taxable value. A 50 percent tax rate, therefore, raises $50 for each $100 of taxable value (tax capacity). A similar tax rate is calculated for tax levies spread on referendum market value.Tax Statement: The property taxpayer receives a statement listing the total tax rate levied by each taxing jurisdiction (school district, county, and city or township) and the total dollar amount of taxes owed. A preliminary version of this statement, called the Notice of Proposed Property Taxes, is sent out in November each year. The final version is sent out the following spring.Payment of Property Taxes: The taxpayer makes two payments to the county treasurer for the total taxes owed, and the county treasurer then forwards the remitted amounts to the appropriate taxing jurisdiction (city, county, or school district).
Minnesota funds the majority of its K-12 programs on a rather involved count of the number of students attending each school. For fiscal year 2015 and later, for most funding programs, the pupil count, known as adjusted pupil units, is used to determine school revenue amounts.Determining Pupil UnitsThere are three steps involved in calculating the student count, called adjusted pupil units, that are used in most of the K-12 funding formulas.
Average Daily Membership (ADM): Students are counted in average daily membership. Average daily membership is the count of resident students in the district for the full school year. A “resident” student means a student who lives in that school district and attends a school district, charter school, or other public K-12 education program. Students that are present for only part of the year are prorated for their time attending the school. Excused absences from school (for things such as illness, etc.) do not reduce a school district’s ADM.
Adjusted Pupils or Adjusted Average Daily Membership (AADM): The ADM student count is adjusted to reflect only the students actually served by the district. Each district’s pupil count is reduced by the number of students leaving the district to attend a charter school or through open enrollment and increased by the number of students entering the district from another district.
Adjusted Pupil Units: Each student is weighted by grade level according to the weights listed in Table 9. The different weights are intended to reflect differing educational costs across the grade levels.
Other Pupil Counts
There are a variety of other counts used for select school finance formulas. The following is a brief list of these counts.
Resident Pupil Units or Weighted Average Daily Membership (WADM): For fiscal year 2015 and later, for purposes of calculating a school district’s operating referendum revenue aid and levy shares, resident pupil units or WADM are used. This count is the same as the adjusted pupil units except that it is based on resident pupils, instead of pupils served by the school district.
Enrollees: Student enrollment is based on the count of students as of October 1 of the school year. This count of students is used only for a few school formulas, where a site count is necessary, such as the alternative compensation revenue calculation. Enrollment counts are also used as the denominator for formulas such as compensatory revenue, where the numerators are based on free and reduced lunch counts, which are taken as part of the October 1 census data.