June 8, 2016
TO THE ADMINISTRATOR ADDRESSED:
Subject: Adjustment to the Compressed Tax Rate for Certain School Districts
The 84th Legislature amended Texas Education Code, §42.101, to allow for the adjustment of compressed tax rates (CTR) for school districts that had 2005 maintenance and operations (M&O) tax rates below the maximum allowed M&O tax rate of $1.50 per $100 of valuation.
Eligibility Criteria: The following circumstances must be in place for your school district to take advantage of this provision:
- Your CTR, which can be found on line 16 of your district’s Summary of Finances (SOF), must be below $1.00.
- Your current year M&O tax rate must be higher than your current CTR plus $0.06.
- For the 2015–2016 and 2016–2017 school years, you must request that the Texas Education Agency (TEA) make this adjustment.
Effect of Adjustment to the CTR: This change will have the effect of shifting tax effort out of Tier 2 into Tier 1. By shifting tax effort out of Tier 2 into Tier 1, tax rate conversion will:
- increase the adjusted allotment used to calculate the Tier I entitlement;
- increase the local share of Tier I;
- reduce overall recapture; and
- reduce the allotment under Additional State Aid for Tax Reduction (ASATR) for those districts that receive it by increasing the local share of school districts’ revenue target.
If your district receives allotments under ASATR, the shift could reduce rather than increase overall revenue. You should run local estimates of state aid using a school finance template to determine whether tax rate conversion is beneficial. You can find templates to assist you in estimating the impact of tax rate conversion on our website under “Resources” at the following link:
Requesting an Adjustment: The TEA will not adjust your district’s CTR without a request. If you want the adjustment made during the legislative payment estimate (LPE) funding cycle for the 2016–2017 school year, you must send a letter, signed by the superintendent and board president, to the Office of School Finance. The letter must include:
- certification by the superintendent and board president that the adjustment should be made and
- the district’s adopted 2016–2017 M&O tax rate.
A sample letter that you can use for this purpose is attached. You will have a second opportunity to request an adjustment for the 2016–2017 school year when you submit your district’s 2016 Tax Information Survey (TIS) in summer 2017. Adjustments requested through the TIS will be reflected on the district’s near-final SOF in September 2017. Beginning in school year 2017–2018 the adjustment will be automatic.
Impact to State Funding: If a school district elects to use this adjustment, some tax effort currently allocated to the second level of Tier 2, equalized at $31.95 per penny of tax effort per student in weighted average daily attendance (WADA), will be shifted into Tier 1. For school districts subject to the recapture provisions of Chapter 41, some tax effort currently recaptured based on an equalized wealth level (EWL) of $319,500 of property wealth per WADA will be shifted into the first level of recapture, based on an EWL of $514,000 of property wealth per WADA. Tax rate conversion will not impact the level of tax effort that is allocated to the first six pennies beyond the CTR, sometimes referred to as the golden penny tier.
The CTR for eligible districts will increase by the number of pennies available for tax rate conversion. The following limits apply to tax rate conversion:
- Only pennies beyond the CTR plus $0.06 are available for conversion.
- CTRs may not exceed $1.00.
The table below contains several examples of current CTRs, adopted M&O tax rates, and new CTRs.
M&O Tax Rate
No change can be made because the adopted rate is not greater than compressed plus $0.06
$0.08 is shifted from Tier 2 to Tier 1
$0.10 is shifted from Tier 2 to Tier 1
$0.10 is shifted from Tier 2 to Tier 1
Questions: If you have any questions about this adjustment or how to notify the agency of your district’s selection, please contact me by email at firstname.lastname@example.org or by phone at (512) 463-8732.
Assistant Director, State Funding
(See "Word version" for the sample letter)