Chapter III

Educational Cost Sharing Grant Program

The focus of this chapter is a description and analysis of each component of the ECS formula pictured in the figure below -- base aid; supplemental aid; regional bonus; density supplement; and special adjustments.

The impact of these formula factors on total ECS funding levels is outlined below, both in terms of formula aid -- the grant amount computed under the basic formula without special adjustments or any density supplement - and entitlement aid, the ECS payments towns actually receive after all factors are applied.

Base Aid

The base aid component is the most significant in that it is responsible for about 99 percent of the total ECS aid distributed by the state. The formula for calculating base aid is shown below. It will be repeated with the relevant component highlighted at the start of each subsection.

Foundation

The foundation is one of the key components used in calculating base aid. Theoretically, the foundation represents the minimum amount of money necessary to provide an adequate education for an average student on a per-pupil basis. The intent was for the foundation to have a built in cost-adjustment factor based on costs of the 80^th percentile need student. The 80^th percentile need student was determined by ranking all towns from high to low based on their regular program expenditures three years prior to the year in which the foundation was being set.

However, in 1992 the foundation was frozen at $4,800. In 1995, it was raised to $5,711 to compensate for the consolidation of special education funding into the ECS formula. The foundation is currently $5,891.

To demonstrate the impact of changing the foundation level on aid amounts, Table III-1 shows the results of adjusting the original phased-in foundation of $4,800 and the 1995 level for inflation. The table also shows what the foundation would be if it was set at the current 80^th percentile.

The key findings are listed below.

• Using the cost of 80^th percentile need student to establish the foundation as set forth in the original ECS statute would require a foundation level of $7,349, and increase of $1,458 over the current level of $5,891.
• Adjusting the original foundation level for inflation would require a present day foundation of $6,871, and increase of $980.
• Per pupil spending by every town in the state exceeds the current foundation level.
• The gap between the current foundation level and the statewide median net current expenditures per pupil for 2000 was $1,451
• The spread between real net current expenditures per pupil and the current foundation has been growing at annual rate of slightly more than 3 percent a year over the last four years.

Committee staff believes as the gap between the state foundation level and the actual spending by school districts widens the credibility of the entire formula is threatened. To assure the integrity of the ECS grant program is maintained, the committee recommends the following.

Establishment of an educational cost commission to set and systematically update the foundation level.

The commission's initial foundation level shall be reported to the governor and General Assembly on January 1, 2003, and every four years thereafter.

The governor and General Assembly shall in all actions relevant to state financing of local education follow the foundation level set by the commission.

The commission shall consist of seven members including the commissioner of education; two representatives of local boards of education appointed by the governor; two representatives of superintendents of local school districts, one appointed by the speaker of the house and one by the minority leader of the senate; and two representatives of local school district teachers, one appointed by the senate president pro tempore and one appointed by the minority leader of the house of representatives.

The foundation shall reflect the minimum amount of money necessary to provide an adequate education for an average student.

In developing the foundation the commission shall contract with the Connecticut Center for Economic Analysis at the University of Connecticut or a similar entity to provide technical support and services.

Need Students

Need students refer to the number of resident students in a town, weighted for three student characteristics generally recognized to increase educational need -- poverty, remedial-level performance on standardized proficiency tests, and limited English proficiency (LEP).

The figure below shows the factors and weights used in the current formula for calculating each town's need students:

Resident student count: number of children enrolled in public school, pre-kindergarten to grade 12, at the expense of the town. The resident student count is also weighted for an extended school year and tuition free summer school and credit for pupils who participate in the statewide interdistrict ("OPEN Choice") program is shared (half each) between the sending and receiving school districts.

TFA count: number of children in the town aged five through 17 who are eligible for the Temporary Family Assistance (TFA) program.

Mastery count: number of resident students times the town's mastery percentage, a three-year rolling average of the proportion of state mastery test scores at or below the remedial level.

LEP count: number of children with limited English proficiency who are not served by mandatory bilingual education programs.

The idea of weighting certain classes of students is a carryover from the GTB formula, which added .50 to the resident student count for each child considered eligible for antipoverty assistance. The initial ECS program reduced the poverty weight to .25, but added a weight of .25 for performance below the remedial level on the mastery test. In 1995, the .10 weighting for students with limited English proficiency was included in the ECS formula.

To demonstrate the impact of the need weighting on ECS formula and entitlement aid committee staff examined the outcome of eliminating and doubling the weights. The results are shown in the Table III-2.

In reviewing the Connecticut's system for weighting need students the committee staff found the following factors.

• The weights increased the statewide resident student count for October 2000 by about 6.6 percent.
• On a town-by-town basis, weighting for need increased the student count from less than 1 percent (Simsbury) to nearly 23 percent (Hartford).
• Fifty-seven percent of the weighted students are in the state's 17 poorest towns (The state's five largest cities contain 48 percent of the state's total weighted students).
• Changing the weights has a large impact on formula aid (Doubling all the weights increased formula aid in 2002 by $188.8 million, while eliminating the weights reduces formula aid by $188.2 million).
• There is no statistical evidence supporting the size of the current weights for poverty, performance, or English proficiency used in the ECS formula.

The committee believes the weights assigned to various classes of students should reflect the actual cost differences associated with educating such children. Therefore, the committee recommends the following.

The educational cost commission established to set and systematically update the foundation level should also set and systematically update the weights assigned to students exhibiting characteristics of poverty, remedial-level performance on standardized proficiency tests, limited English proficiency, and any other characteristics specifically designed by state statute.

The weights should reflect the amount of money necessary to provide an adequate education for the average student in the classification being weighted.

In developing the weights the commission shall contract with the Connecticut Center for Economic Analysis at the University of Connecticut or a similar entity to provide technical support and services.

The commission's initial weights shall be reported to the governor and General Assembly on January 1, 2003, and every four years thereafter.

The governor and General Assembly shall in all actions relevant to state financing of local education follow the weights set by the commission.

Base aid ratio

The base aid ratio represents the portion of the minimum amount of money necessary to provide an adequate education for an average student that the state would support in the absence of special adjustments. Its purpose is to assure a town's ability to pay is a significant factor in determining the amount of state aid a town receives.

In developing a town's aid ratio its ECS wealth is divided by the State Guaranteed Wealth Level (SGWL), which is 1.55 times the median ECS wealth level for all the towns. The result obtained from this procedure is subtracted from one and is known as the base aid ratio.

To assure all towns are eligible for some amount of base aid the General Assembly set a minimum base aid ratio of .06. The ECS equation for the base aid ratio is shown below.

The methods used to calculate a town's wealth and define the SGWL are the result of many policy choices made in creating or amending the state's ECS formula. Analyses of the impact of the SGWL and key alternatives for measuring town wealth are presented below.

State Guaranteed Wealth Level. The SGWL is a key factor in determining how much local tax effort is required to meet the minimum amount of money necessary to provide an adequate education. It is the wealth level below which the state will pay a town a portion of the funds necessary to provide an adequate education and above which towns are deemed able to pay all of their educational costs.

The original SGWL was twice the median town's wealth. Over time the level has been lowered four times and raised once. It currently stands at 1.55 times the median wealth. In the opinion of the program review committee the changes have been used by the state to control its funding obligations to towns.

To demonstrate the impact of changes in the SGWL on ECS aid committee staff analyzed the outcome of increasing it to the original level or dropping it to the median level. The results are shown in the Table III-3. The table illustrates that decreasing the guaranteed wealth level decreases state aid and increasing the level increases state aid to towns.

• Lowering the factor to 1.00 reduces formula aid statewide by $483 million (32.1 percent) and total entitlement aid by $17.8 million (1.2 percent).
• Increasing the statutory wealth factor from 1.55 to 2.00 increases the formula aid in the aggregate by over $312 million (20.7 percent) and entitlement aid by more than $25 million (1.7 percent).

Town Wealth. The Educational Cost Sharing grant formula uses a multi-step process to calculate town wealth. The formula incorporates two forms of wealth:

• property wealth; and
• income wealth.

Property wealth is included because it is the base upon which local taxes are levied to support education. The inclusion of income wealth is related to its role as a measure of the capacity of a town's residents to pay taxes.

Under the ECS formula each town's property wealth is modified based on the ratio of the assessed valuation of real property to the fair market value of such property as determined by actual sales. This adjusted property wealth is referred to as the Equalized Net Grand List (ENGL).

An average of the three most recent years for which ENGL data are available is calculated for each town (AENGL). Property wealth, as defined in the ECS formula, is computed by taking the average of a town's AENGL per need student and AENGL per capita. The calculation is expressed as follows:

		AENGL		AENGL
Property Wealth	=	Need Students	+	Population
			2

In terms of income wealth the ECS formula uses two measures, per capita income (PCI) and median household income (MHI). Income wealth is calculated as the average of a town's PCI divided by the PCI of the town with the highest PCI, and a town's MHI divided the MHI of the town with the highest MHI. The result is known as a town's income adjustment factor and is expressed as:

Income Adjustment		PCI		AENGL
Factor	=	Highest PCI	+	Highest MHI
			2

The two wealth concepts are combined in the manner shown below to calculate a single ECS wealth factor for each town.

		(Property Wealth)				(Income Wealth)
		AENGL		AENGL		PCI		MHI
Town Wealth	=	Need Students	+	Population	*	Highest PCI	+	Highest MHI
			2				2

Alternatives for calculating wealth can be found in the records of the Educational Equity Study Committee, which in 1987 did the initial work on developing Connecticut's cost sharing formula. Among the many methods for computing town wealth evaluated by the study commission, the program review committee found four of particular interest. The four represent fundamental issues related to defining town wealth. These include:

• Defining town wealth solely in terms of property wealth and not employing an income adjustment factor;
• Defining town wealth by adjusting for resident's capacity to pay only the residential portion of the ENGL;
• Defining income wealth as either the PCI or MHI -- but not both -- in developing an income adjustment for property wealth; and
• Defining town wealth only in terms the income of its residents.

The analysis of town wealth factors relies on two indicators -- base aid ratio and base aid share -- to measure the effect on towns of changes in definition of wealth. The aid ratio provides an unfiltered measure of changes in the percentage of the foundation cost per pupil the state would pay to a town in the absence of intervening variables such as supplemental aid, regional bonus, density supplement, and other special adjustments. From these data the types of towns most affected and the direction of the effect can be determined. The base aid share provides a means of measuring the relative portion of the base aid directed at a town or group of towns under a specific definition of wealth, regardless of any changes in the amount of base aid available. The share is important since it is independent of changes caused by movement of the base aid level, and therefore, allows the relative effect of changes in measuring town wealth to be analyzed.

Defining town wealth solely in terms of property wealth. Under the current ECS formula a town's wealth is calculated by adjusting its property wealth based on resident's income. The intent is to use an income adjustment factor (IAF) to modify a town's property wealth, such that the lower the income the greater the reduction in property values and the greater the amount of state aid the town would receive. The rationale for the adjustment is based on the belief income is a good measure of the capacity of a town's residents to pay property taxes.

Committee staff analyzed this approach to defining town wealth using 2002 data. Holding all other factors in the ECS formula constant, eliminating the income adjustment factor for the 2002 fiscal year would have decreased the total amount of base aid called for by the formula the from $1.5 to $1.43 billion. On an individual town basis the changes in base aid would have ranged from a decrease of nearly $20 million to an increase of almost $8 million.

Table III-4 categorizes towns by deciles based on ENGL per student. The table shows by deciles the number of towns benefited and harmed by using income to adjust property wealth.

• Using only property to define town wealth changes the base aid ratio of 134 towns -- 54 increased and 80 decreased.
• Using only property to define town wealth negatively affects the state's poorest towns.
• Using only property to define town wealth has almost no impact on the wealthiest towns.
• Using only property to define town wealth has a mixed impact on towns in the middle deciles (52 increase, 47 decrease).

Figure III-1 illustrates the distribution of base aid share among the deciles with and without using the income adjustment factor.

• If property wealth was the sole means of measuring town wealth, the two poorest deciles would continue to receive more than 50 percent of total base aid.
• If property wealth was the sole means of measuring town wealth, the base aid share of the three lowest deciles would be reduced modestly (about 4.4 percent of base aid share), with the proceeds spread among the other seven deciles.

Table III-4 and Figure III-1 demonstrate the income adjustment of property wealth helps direct state aid toward the poorer towns. This is evident by the fact that when the income adjustment factor is not used to modify property wealth, 90 percent of the towns in the three poorest deciles experience a decline in their base aid ratios and their share of formula aide decreases from 69 to 65 percent. If offsetting adjustments such as changes in the foundation or SGWL were not made the lowest three deciles would experience a net base aid decrease of nearly $110 million.

Adjusting only the residential property component of each town's ENGL. The concept of limiting the adjustment of property wealth to residential property was considered by the legislature in 1986 and later by the Educational Equity Study Committee. The basis for this method is the idea individuals pay residential property taxes out of personal income, while taxes on other properties are paid out of business income. The assumption is residents of towns with a high percentage of residential property have a heavier tax burden and this should be addressed in the ECS formula.

Committee staff analyzed this concept using 2002 data and applying the current income adjustment factor only to the residential portion of each town's property wealth. In absence of any changes in other parts of the ECS formula, adjusting only residential property would have reduced base aid from $1.5 to $1.34 billion. On an individual town basis the changes in base aid would have ranged from a decrease of nearly $34 million to and an increase $5 million.

The deciles depicted in Table III-5 are based on ENGL per student. The 17 poorest towns in terms of their ENGL per student are grouped into the 10^th decile and the wealthiest 16 towns are grouped into the first decile.

• only residential property was adjusted for income:
• 130 towns would have their base aid ratios changed -- 57 increased and 73 decreased.
• The residential adjustment creates winners and losers among the towns within all but the wealthiest decile.
• The greater the percent of residential property the more likely a town is to benefit from adjusting only the residential portion of the ENGL.
• Shifts in base aid among towns would be substantial. Hartford would lose $34 million, New Haven $18 million, and Bridgeport $15 million. At the other end of the scale, Simsbury and Newington would each gain $5.2 million and Newtown would add $4.7 million.

Figure III-2 below depicts the following observations.

• If only residential property is adjusted the share of net base aid would be increased in all deciles except the 3^rd, 8^th, and 10^th.
• The residential property adjustment would have no impact on the share of net base aid for the 8^th decile and would reduce net base aid for the 3^rd and 10^th deciles.

Measuring income. Associated with the decision to adjust property wealth based on income is a policy choice concerning how to measure income. The two alternatives most often considered are per capita income and median household income. Committee staff analyzed the effects of having either PCI or MHI as the only measure of income used in calculating the income adjustment factor. The results are shown in Table III-6 below.

• Using either PCI or MHI as a measure of income causes about three-quarters of the towns' base aid ratios to change.
• Within most of the wealth groupings the PCI and MHI have opposite effects --where one income measure tends to increase the base aid ratios of a majority of the towns within one of the deciles, the other tends to decrease about the same number.
• There is little change in the aid ratios of towns in the wealthier deciles, this is primarily attributed to the statutorily mandated .06 minimum base aid ratio.

Substituting the newly calculated base aid ratios into the 2002 ECS formula and holding all other factors constant produced the following results.

• The total amount of base aid increased by $43 million if MHI was the sole measure of income and decreased by $41 million if only PCI was used.
• On an individual town basis, measuring income by MHI increased the base aid for 83 towns compared to an increase of 50 towns when PCI was used.
• 48 towns had their base aid decreased when MHI was employed as the sole measure of income compared to 75 when PCI was used.
• In every instance a town whose base aid was increased by one measure experienced either a decrease or no change when the other income measure was used.

The decile containing the 17 poorest towns is the most volatile in terms of change in the amount of base aid under the two income measures. It had the biggest increase among all deciles ($9.3 million) when MHI was used as the measure of income and the biggest decrease ($11 million) when PCI was used.

Figure III-3, depicts the share of net base aid across all deciles when income is measured by PCI, MHI, or the arithmetic average of the two.

• Most of the base aid is directed at towns in the poorer deciles regardless of the income measure employed to calculate the income adjustment factor.
• PCI and MHI have the opposite effect on the share of net base aid computed for each of the deciles.
• Using PCI as the sole measure of wealth tends to raise the base aid share of the lower deciles slightly and decrease the share of the middle deciles. The reverse occurs when MHI is used.
• Using an average of MHI and PCI to measure income has a moderating effect

It is important to note, while employing PCI increases the share of net base aid going to towns in the poorest deciles, the amount of aid is decreased compared to the current amount because, the base aid total calculated with PCI is much smaller. Once again, the opposite holds true when MHI is used as the sole measure of income.

The analysis demonstrates the sensitivity of base aid to changes in how income is measured. It shows PCI and MHI act as opposite forces on towns in terms of their affect on base aid. Finally, the analysis indicates averaging of the two income measures moderates the opposite forces found in PCI and MHI.

Defining town wealth solely in terms of income. This section examines the effect of eliminating property wealth and using the income of a town's residents as the sole measure of town wealth. Specifically, under this approach town wealth would be defined as the average of PCI and MHI. The rationale for this approach is based on the view that income wealth is a better measure than property wealth of a town's residents' capacity to pay for education.

As with the previous analyses committee staff used 2002 data to assess the income-only approach and found:

• 159 towns would have experienced a change in their base aid ratios, with 74 increasing and 85 decreasing;
• if none of the other formula factors were changed, net base aid would have decreased by $164.5 million; and
• on an individual town basis changes in base aid would have ranged from a decrease of $41 million to an $18 million increase.

Table III-7 depicts the effect on each of the deciles of measuring town wealth only in terms of income.

• When wealth is measured only in terms of income the base aid ratios of all of the towns in the poorest four deciles decrease.
• When wealth is measured only in terms of income the base ratios of nearly all of the towns in the top four deciles either increased or remained constant at the .06 minimum level set in statute.

• When wealth is measured only in terms of income the base aid ratios of all of the towns in the poorest four deciles decrease.
• When wealth is measured only in terms of income the base ratios of nearly all of the towns in the top four deciles either increased or remained constant at the .06 minimum level set in statute.

Figure III-4 depicts for each of the deciles their share of base aid. It shows:

• the top five deciles experience a net gain in their share of base aid, while the bottom four deciles suffer net loses;
• a shift in base aid share away from the poorer towns toward the wealthier towns; and
• despite a shift of base aid away from the lower deciles nearly half the base aid would be distributed among the 34 towns in the two lowest deciles.

Compared to the measurement of wealth currently used in the ECS formula, the analysis determined eliminating property wealth and relying solely on income wealth would affect more towns than any of the other alternatives reviewed. Also, it the shifted a greater portion of base aid from the poorer to wealthier deciles than any of the other alternatives examined. In the absence of any changes to other parts of the ECS formula, the magnitude of the loss to the poorer towns is large, totaling $250 million among the towns in the lowest two deciles.

Summary of committee findings

The five alternative methods of measuring town wealth analyzed by the committee produced common and unique effects. The key findings in both areas are summarized below.

• How town wealth is measured is a policy choice having a significant impact on the amount of state educational aid a town receives.
• Current policy directs nearly 60 percent of ECS base aid to the 34 poorest towns (bottom 20 percent) and slightly more than 2 percent to the 33 wealthiest towns (top 20 percent).
• The five alternative methods of measuring town wealth examined by committee staff caused between 125 and 159 towns to experience a change in base aid.
• Of the five alternative methods of measuring town wealth examined by committee staff, only median household income increased the amount of base aid called for under the ECS formula. (MHI resulted in an increase of $41 million, while the decrease called for by the other four ranged was from -$165 to -$43 million.)
• All five alternative methods of measuring town wealth examined by committee staff except per capita income caused a shift of base aid share away from the 34 poorest towns (bottom 20 percent) toward the 33 wealthiest towns (top 20 percent).
• In most instances, whether a change in how wealth is measured would cause a town's base aid to increase or decrease defied a systematic explanation.

Recommendation

In making its recommendation the committee took into account a number of factors. The primary criterion was whether the result of a change would be consistent with applicable court decisions. A second consideration was whether the outcome of a change would have a systematic effect such that seemingly similar towns would be treated in a similar manner, and the result could be explained in simple terms. A factor of lesser importance was the number of towns affected and the magnitude of the impact.

A factor not considered by the committee was the effect of a change on the level of base aid. The reason for this decision was the ease with which the base aid amount could be changed by altering the SGWL of foundation. This is the reason the focus of the analysis was on changes in base aid share and not the amount.

Using this framework, committee staff assessed each of the alternatives for measuring town wealth. In the judgment of the staff none of the alternatives completely satisfied all of the criteria. Most of the alternatives retargeted aid in a manner not consistent with the thrust of court directives. Only one produced results that were systematic, but it was the alternative most at odds with what the court has said. Based on its analysis, the committee recommends:

the current method of measuring town wealth should be continued.

Supplemental Aid

In 1995, P.A. 95-226 revised the ECS grant formula. Included among its many adjustments was a provision for supplemental aid. The purpose of supplemental aid is to provide additional financial support to towns based on a proportion of children:

• whose families receive Temporary Family Assistance (TFA); and
• who score below the remedial level on the statewide mastery tests.

As shown in the figure below, determination of the supplemental aid component of the ECS formula parallels the calculation of base aid component with its use of the foundation level, students, and aid ratio as formula factors.

Formula for Calculating a Town's Supplemental Aid
Supplemental Aid	=	Supplemental Students	X	Supplemental Aid Ratio	X	Foundation

Supplemental students are the number of students added to the town's resident student population as a result of the weights set for students with the special needs associated with poverty and remedial academic help (Limited English Proficiency students are not counted).

As shown below, a town's supplemental aid ratio is .04 times the ratio of its supplemental aid factor -- the average of the percentage of TFA children residing in the town and the percentage of students performing poorly on the mastery test -- divided by the highest town's supplemental aid factor. However, any town whose proportion of TFA students exceeds 25 percent automatically receives the maximum supplemental aid ratio of 4 percent.

Committee staff using 2002 ECS data undertook an analysis of the supplemental aid component of the ECS formula. Key findings of the analysis are as follows.

• Supplemental aid adds only $6 million to the ECS formula aid total (about 0.4 percent).
• On a town-by-town basis, supplemental aid ranges from a low of $20 to a high of $1.5 million with the median value is $1,220.
• Ninety-three percent of the supplemental aid is distributed to 10 percent of the towns.
• The five largest cities accounted for 72 percent of all supplemental aid.
• The number of students added to a town's residential student count based on the weighted need criteria is the variable most highly correlated with supplemental aid (.98).

As the above findings indicate the supplemental aid component has a relatively small impact in terms of the amount of money involved and the number of towns getting more than a token share of the total. In general, the greater the increase in a town's resident student count based on the weights assigned to students meeting special poverty and academic achievement criteria, the greater the amount supplemental aid targeted to a town.

The committee believes the use of need students in the regular ECS formula is designed to provide extra compensation to towns by counting for students with special needs as one plus the assigned weight. As discussed in making the previous recommendation, the adequacy of this procedure is a function of the accuracy of the weights in reflecting the true cost of educating students with the special needs associated with poverty and low achievement.

It seems to the committee once weights for special needs have been established in accordance with the recommendation in a previous section, the continuation of this supplemental aid component would be redundant. It would provide towns a second opportunity to be compensated for the same problem. Therefore, the committee recommends:

the supplemental aid component of the ECS formula shall be terminated at the end of FY 03 in conjunction with the adoption of a set of weights for counting students with special needs recommended by the education cost committee.

Regional Bonus

Since it was established in 1988, the ECS formula included a bonus payment for member towns of regional school districts. The total bonus amount a town receives depends on:

• the number of students enrolled in the regional district; and
• the number of grades kindergarten through grade 12 in regional district.

Towns that are members of K-12 regional districts receive $100 per student enrolled. Towns that are members of secondary regional school districts are paid $100 per enrolled student times the number of grades in the district divided by 13. Towns with elementary districts that tuition students to designated secondary schools are not eligible for the bonus.

Analysis of the regional bonus data found the following.

• The regional bonus adds just over $2 million to ECS formula aid, the amount provided to towns before the cap and other special adjustments are applied.
• Forty-seven towns were entitled to a regional bonus in amounts ranging from almost $1,700 to more than $318,000 for FY 02.
• The exact contribution of a regional bonus to a town's final ECS grant is difficult to determine, given the effect of special minimum and maximum aid provisions on final payments.

As the above findings indicate the regional bonus, like the supplemental aid component, has a small impact in terms of the amount of money involved and the number of towns getting aid. The fact it is targeted to a select number of towns to meet a specific purpose means it has a distorting effect within the ECS formula. If the bonus is needed it would be better to provide the funds as part of a categorical grant program aimed at helping consolidated school districts. Therefore, the committee recommends:

the regional bonus component of the ECS grant program should be terminated at the end of FY 03 and funding to address specific needs of consolidated school districts should thereafter be part of a categorical grant program.

Special Adjustments

The ECS grant program has been adjusted to establish minimum and maximum aid amounts regardless of funding levels towns should receive under the basic formula. A cap on ECS grant increases was initiated in 1992 to reduce state spending. To ensure towns do not experience a substantial drop in state education aid from one year to the next, ECS stoploss and hold harmless provisions have been adopted. Several minimum aid measures that apply only to priority and transitional school districts have also been enacted. For FY 02, the ECS grants of only two towns were not affected by special adjustments.

ECS grant cap. The current formula for determining a town's maximum grant under the provisions of the cap is illustrated in the figure below. The cap varies with a town's wealth up to a maximum of 6 percent over the ESC payment -- excluding any density supplement -- received for the prior year.

In FY 02 supplemental funding was provided to towns affected by the cap. Capped towns were given a proportional share of $25 million supplement aid in the first year of the budget biennium and $50 million in the second (FY 03), with each town's share based on the difference between its "target aid" (i.e., its ECS formula aid amount) and its capped grant amount. In accordance with P.A. 99-217, the cap is scheduled to terminate at the conclusion the FY 04 year.

Committee staff analyzed the cap's impact. The findings are illustrated in Figure III-5 and summarized below.

• Between FY 96 and FY 01 the money withheld from towns based on the imposition of the cap ranged from about $67 million to almost $152 million per year.
• Between FY 96 and FY 01, only 21 towns were not affected by the cap, many were capped for multiple years, and 35 were capped every year.
• In FY 02, 60 percent (101) of all towns were subject to the cap.
• Taking into account a $25 million grant cap supplement made available to capped towns in FY 02, the ECS cap is estimated to save the state just over $90 million for FY 02.
• The estimated cap supplement received by the 101 capped towns for FY 02 ranges from $2,719 to $1,692,139. In about a dozen cases, a town's cap supplement is greater than the ECS grant payment it is entitled to under the capped formula.

Based on the staff review the committee believes the cap distorts the intent of the ECS formula. It functions as a secondary distribution system aimed at constraining the amount of state educational funds distributed. Given the objective of the ECS formula is to have an educational financing system that among other things rationally distributes state aid to local school districts based on their need and ability to pay, committee recommends:

the ECS cap should be terminated as scheduled at the close of the fiscal year ending June 30, 2003.

In a sense this process already began with the $25 million distributed to the capped towns in FY 02 and the $50 million budgeted for FY 03. At that point the cap distortion should be down to around $40 million.

Stoploss/ Hold Harmless/Minimum Increase. For nearly every year since it began, the ECS formula contained either some form of stoploss or hold harmless stipulation. Hold harmless is a provision under which no town would suffer an ECS aid decrease (or at times a minimum increase), and a stoploss provision establishes a maximum amount a town's ECS grant could decrease.

Legislation under which the ECS currently operates includes the following special adjustments which serve to increase the final amount to which towns would otherwise be entitled.

• Minimum base aid. Each town's state aid percentage (or base aid ratio) is calculated by determining the relationship between each individual town's wealth and the State Guaranteed Wealth Level as described above. Because many towns in Connecticut have high property values, they would be eligible for little state aid (or theoretically receive "negative aid") without the statutory prohibition against the base aid ratio from falling below 6 percent. This is in effect a guarantee that all towns are eligible to receive a minimum amount of educational base aid from the state.
• Minimum grant increase and hold harmless. In FY 02, each town was eligible for a minimum grant increase of 1.68 percent over its FY 01 grant. For FY 01, no town could receive a grant less than the previous year's grant. This provision is still in effect.
• Alternative minimums for priority and transitional districts. In addition to the hold harmless and minimum increase provisions to which all towns are eligible, priority school districts are guaranteed to receive no less than 70 percent of their current year formula aid; transitional districts must receive no less than 40 percent of their current year formula aid. Since 1998, priority districts also must receive aid at least the same per student rate as they did in the prior year. Thus, there are three alternative minimum aid provisions in effect for priority districts and two for transitional districts.
• Density adjustment hold harmless. The formula includes an enhancement to assist towns with high population density. The density supplement contains a hold harmless provision that provides no town may receive a density supplement less than the prior year's supplement.

The committee reviewed the staff's analysis of the impact of these special provisions. The committee's findings are summarized below.

• The minimum base aid ratio of 6 percent affects 44 towns and costs the state an estimated $28 million.
• Aside from the base aid ratio and before the FY 02 minimum increase is applied, hold harmless provisions assisted 58 towns in obtaining additional funding. This amounted to nearly $32 million, ranging from a low of $494 to $3.8 million per town.
• The percentage difference between what a town was entitled to and what it received due to the hold harmless provisions (other than the base aid ratio), ranged from less than 1 percent to over 200 percent. Twenty-eight towns received a percentage difference that was in the double digits or more
• Sixty-four towns benefited from the 1.68 percent minimum increase, receiving in the aggregate nearly $6 million more than last year. The total amount of this increase for each town ranges from approximately $2,200 to $420,000. All 64 towns received more than the ECS formula called for.
• At present, 14 towns have priority district status and another 13 have transitional school status. None of the priority districts and only one transitional district benefited from the special 70 percent/40 percent minimum aid provision for FY 02. This amounted to about a $580,000 increase.
• The alternative minimum increase based on prior year per student funding applied in the cases of two priority districts, increasing their ECS aid in total by nearly $39,000.

Based on the above findings, the committee recommends:

All but the minimum base aid ratio hold harmless provisions shall be terminated by the end of June 30, 2002, except for the fiscal year ending June 30, 2003, no town shall receive less than its total ECS grant for the fiscal year ending June 30, 2002. For purposes of calculating the ECS grant, fiscal year ending June 30, 2003, shall be considered the base year.

The committee believes these special provisions undercut the intent of the ECS formula. These provisions make the formula more complex for reasons that are not legitimately related to demonstrated educational needs. The "pure" ECS formula is fairly complex and adding such provisions raise suspicion and jeopardize the credibility of the formula.

The above recommendation establishes a base year in 2003 to assist towns in the transition. Beginning FY 03, towns would receive the greater of their ECS grant amount for fiscal year ending June 30, 2002, or their calculated ECS amount for FY 03. From that point forward, no town would receive an ECS grant that is less than its FY 03 amount.

Some have argued hold harmless provisions prevent sudden budget hardships for towns. These adjustments assist in assuring greater and consistent participation by the state. Unfortunately, hold harmless safeguards distort the purpose of an equalizing formula based on need. One reason why such provisions are supported is because the factors in the formula have been restricted -- providing another reason for reviewing the adequacy of the formula factors as recommended above.

At a time in which many towns are helped by these special provisions, others aid increases are capped. The committee believes public policy is better served by systematically reviewing the formula's ability to provide an adequate education, not just an equitable distribution. At the very least, there should be a recognition that granting some towns over $3.00 for every $1.00 of their entitlement, while giving capped towns on average 0.64 cents for every $1.00 to which they are entitled raises issues of fairness.

In addition, transitional and priority school districts already have categorical grants targeted to their special needs. The specific alternative minimum aid provisions for these special districts do not add up to much money. If there is a desire to direct more money to these towns, it should be done through categorical grants and not cloaked within the complexity of the equalizing formula.

The committee believes in the preservation of the minimum base aid ratio for two reasons. First, if the state is to fully recognize that the education of each student is ultimately its responsibility, all towns should receive some amount of aid from the state. Secondly, while many interest groups and individuals express dissatisfaction with the amount of state aid distributed for education, virtually eliminating that aid to 44 towns severely jeopardizes the political acceptability of and broad-based support for the formula.

Density Supplement

In 1995, the ECS formula was amended to include an enhancement to assist towns with high population density. The underlying rationale is these towns have a higher demand for a wider variety of municipal services than do low density towns. A town is eligible for a density supplement if its population density (i.e. population divided by square miles) is greater than the statewide average.

Calculation of the density supplemental is similar the calculation of the ECS's base aid and supplemental aid components. All three use a student count, the state foundation, and an aid ratio. Calculation of the different aid ratios is the biggest variation among the three.

The figure below shows the density supplement is calculated by multiplying the town's density aid ratio (DAR) by the foundation level and the town's total need students.

The density aid ratio is the product of the density of a town divided by the density of the state's most densely populated town and the statutory density aid factor, currently set at 0.006273. The density supplement is not subject to the ECS grant cap and no town can receive a density supplement less than the prior year's supplement.

The key findings of the committee staff's analysis are listed below.

• The density supplement adds about $5.5 million to the formula aid, which represents approximately 0.4 percent of total ECS funding.
• In FY 02, 46 towns are entitled to receive a density supplement and the amounts ranged from approximately $8,000 to just over $1 million.
• Twelve towns account for over 70 percent of the density supplement aid distributed.

As the above findings indicate the density supplement, like the supplemental aid and regional bonus components of the ECS, has a small impact in the amount of money involved and the number of towns getting aid. The fact it targets aid specifically to densely populated towns rather to all towns results in the density component having a disequalizing effect within the ECS formula. If the bonus is needed, it would be more appropriate to provide the funds as part of a categorical grant program aimed at helping urban school districts. Therefore, the committee recommends:

the density supplement component of the ECS grant program should be terminated at the end of FY 03 and any funding to address specific needs of urbanized school districts should thereafter be part of a categorical grant program.

Distribution of Aid

There are four primary mechanisms used by the state to control its funding costs under the ECS grant program. The four are listed below.

• Foundation level
• State guaranteed wealth level
• Grant cap
• Hold harmless

The foundation and state guaranteed wealth level (SGWL) directly affect formula aid, which is the grant amount computed for towns under the ECS formula before most special adjustments are applied. Changes in either of these components impact all towns.

The grant cap and hold harmless provisions are imposed after a town's formula aid has been calculated. They affect entitlement aid, which is the grant payment a town actually receives after all adjustments have been made. Unlike the foundation and SGWL, the grant cap, and hold harmless provisions only impact towns meeting certain criteria.

The committee believes the principal objective of the state's actions with respect to three of the four factors has been to reduce the amount of aid the state would have to provide under the ECS grant program. Although the need to do this reflects the reality of budget constraints, it is not without consequences.

In the case of the foundation the original procedure put in place to keep the foundation current was repealed in 1992. While the foundation has been updated on six occasions its present level of $5,891 is below the $7,349 that would be required if the original procedure were used. A foundation level of $7,349 would have added $372 million to the FY 02 formula aid total.

With respect to the SGWL, since inception of the ECS grant program the state lowered the guaranteed wealth level three times and raised it once. In 1990 it was reduced from 2.0 to 1.83. The following year it decreased to 1.67 and in 1993 dropped to 1.54. The only increase came in 1996 when raised to the current level of 1.55.

Each reduction in the SGWL decreases the amount of formula aid. As the committee analysis showed, if the SGWL remained at its original level of 2.0, formula aid would have been $1.8 billion in FY 02 instead of $1.5 billion.

A cap on ECS grant increases was instituted in 1992 to reduce state spending. The cap varies with a town's wealth up to a maximum of 6 percent over the ECS payment -- excluding any density supplement -- received the prior year. At present, 60 percent of all towns (101) are subject to maximum increase provisions. Savings, attributable to the cap in FY 02 equaled $90million.

It should be noted, under current statutes the cap will be eliminated at the end of the FY 04. In a sense, it is being phased out with $25 million and $50 million pools created for distribution among capped towns in FY 02 and FY 03 respectively.

The hold-harmless provision provides no town can suffer an ECS aid decrease. The effect is to assure eligible towns receive more funds than the formula dictates. In FY 02 this added $32 million to the ECS grants not counting an additional $6 million for a provision guaranteeing each town received at least 1.68 percent more than the previous year.

Based on analysis the committee concludes:

• frequent changes in the foundation and state guaranteed wealth level aimed at saving state funds has begun to undermine the state's credibility when it comes to funding local education;
• imposing caps on the amount of state educational aid a town can receive distorts the outcomes of the ECS formula and implies it is flawed; and
• imposing a floor (hold harmless) on the amount of state educational aid a town can receive distorts the outcomes of the ECS formula and implies it is flawed.

Recommendation

The committee believes some type of budget constraint will almost always be needed. Indeed, if the cost commission created under previous recommendations proposes increases in the foundation level and weights for student needs, the amount of money called for by the ECS formula will almost certainly exceed the state's ability to pay. This will necessitate the need for some type of budget constraint.

However, the form such constraint takes must be perceived as fair and should not weaken the credibility of the ECS grant program. The committee concluded past actions with respect to the foundation, SGWL, and grant cap, if continued, could jeopardize these principles. Therefore, the program review committee recommends:

for the fiscal year ending June 30, 2004, and each fiscal year thereafter, each town shall receive the same percentage of the funds budgeted for ECS grant program [in excess of the amount budgeted for the fiscal year ending June 30, 2003] as the town's percentage share of the total base aid calculated under the provisions of CGS Section 10-262h (6), except in no instance shall a town receive less in ECS grant aid than the amount of its ECS grant for the fiscal year ending June 30, 2003 in any succeeding year.

The two figures below demonstrate the difference between the current procedure for calculating a town's ECS grant and the proposed method. The current procedure as shown in the first figure has three main components (i.e., base aid, supplement aid, regional bonus) plus some special adjustments (e.g., grant cap, hold harmless, etc.) and a density supplement.

The committee recommendations presented in this chapter alter the ECS formula. In general, those proposals call for:

• elimination of the supplemental aid component immediately after new weights for need students have been developed and implemented;
• elimination of the region bonus and density supplement; and
• phasing out of all special adjustment except the 6 percent minimum base aid.

The recommendation proposes a town receive the same percentage of the total ECS grant aid budgeted by the state as the town's percentage of total base aid (i.e., Foundation X Need students X Base aid ratio) computed for all towns under the base aid formula. This formula is pictured below.

Adoption of this recommendation removes the distortions in town grants caused by the grant cap and hold harmless provisions. In the opinion of committee staff it would assure state budget problems impacting education financing would be spread among all towns based on the assumption the ECS formula in its purest form is fair in addressing the educational financing needs of local school districts.

Though some might fear it, the procedure would not hide the financial obligation of the state to support local education. The formula aid data used to determine each town's pro rata share of the available state funds would indicate the level of funding dictated by the pure ECS formula. Deviations would be clearly seen as induced by budget constraints.

The analysis below provides a sense of how the ECS grant money would have been distributed if the recommendation had been in place and the budgeted ECS grant money had been equal to the actual amount distributed in FY 02. Table III-8 shows the impact on towns in each wealth decile.

Table III-8. Effect on the ECS Aid of Distributing Funds on a Pro Rata Share Basis
Deciles	# Towns increasing	# Towns decreasing
1	16	0
2	12	5
3	12	5
4	10	7
5	7	10
6	9	8
7	6	11
8	6	11
9	2	15
10	4	13
Total	84	85

• The overall number of towns with increasing and decreasing grants under a pro rata share system is about equal.
• A majority of towns in the wealthier deciles had their grants increased, while a majority of the towns in the poorer deciles had their grants decreased.
• Of the 84 towns whose grants increased, the median increase was $280,000 with a range from $6,200 to $5.3 million.
• The increase in funding among towns in the wealthier deciles is attributable to the elimination of the cap effect under the proportional distribution system proposed in the recommendation.
• Of the 85 towns whose grants decreased, the median decrease was $350,000 with a range from $4,700 to $7.9 million.
• The decrease in funding among towns in the poorer deciles can be attributed to the elimination of the hold-harmless provision.

Figure III-6 shows the change in the share of ECS grant funds that would have occurred if the recommendation to distribute ECS aid based on a town's proportional share of formula aid had been in effect.

• Most deciles experience only slight changes in their share of ECS aid.
• The largest increase in share occurred among the towns in wealthiest decile, from 0.7 percent to 1.4 percent.
• The biggest drop occurred among the towns in the poorest decile, from a 48.8 percent share down to 47.8 percent.

The analysis demonstrates how the distortions in the current ECS system have affected towns. Their elimination could be painful particularly for the urban towns that will lose the hold harmless benefit. However, as noted in the recommendations dealing with the regional bonus and density supplement, if more needs to be done for specific types of towns then the categorical grant program is the mechanism that should be used.

The categorical grant program allows for the aid to be targeted directly to the towns with the specified need. It is far more efficient because money does not leak to towns not intended to receive the help. Further, it prevents distortions caused by using the ECS formula to target the needs of selected towns.

Public Access to the ECS Grant Calculation Procedure

The ECS formula will remain complicated even if the modifications recommended throughout this section by the committee to eliminate distortions and simplify the grant program are adopted. Determining the impact of changes in one or more parts of the formula, due either to year-to-year changes in town characteristics or proposed program revisions, therefore, requires many computations and a number of analytical steps.

Each year, SDE makes available on its website a detailed guide to the ECS grant as well as the MER provision. The guide includes worksheets and supporting data to help local districts calculate their expected state equalization aid and minimum education spending level. However, this information can only be reviewed and, if desired, copied; it is not in an interactive format. Since it cannot be manipulated electronically, the data cannot be easily used to identify and compare the impact of formula changes either within or across districts.

The department does maintain the entire ECS formula in an electronic spreadsheet format for its own use. It is shared with the legislature's Office of Fiscal Analysis, which provided a copy to committee staff to use for this study. The spreadsheet proved a valuable tool for understanding and analyzing the formula. The committee believes giving policymakers and other interested parties the opportunity to better understand the ECS formula can result in greater support for and confidence in the grant program. The program review committee recommends

the state education department make an interactive ECS grant calculation spreadsheet available on its website beginning January 1, 2003.

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