The Senate of the State of 107 North Main Street, Room 302, Concord, N.H. 03301-4951

KATHLEEN G. SGAMBATI Office 271-2111 District 4 TTY/TDD 1-800-735-2964

MEMORANDUM TO: The Honorable John H. Lynch, Governor The Honorable Sylvia B. Larsen, President of the Senate The Honorable , Speaker of the House Michael York, State Librarian

FROM: Senator Kathleen Sgambati, Co-Chair Representative Randy Foose, Co-Chair

DATE: January 16, 2009

RE: Submission of Final Report New Hampshire Senate Bill 539, Chapter 173:14, Laws of 2008

Pursuant to SB539, Chapter 173:14, Laws of 2008, and on behalf of our fellow Study Committee Members, enclosed, please find the Final Report of the Joint Legislative Committee on Fiscal Capacity, Transition Aid and Diseconomies of Scale.

Should you have any questions or comments regarding this report, please do not hesitate to contact me.

Senator Kathleen Sgambati Co-Chair

KS/mcl

Enclosures Cc: Senate Clerk House Clerk New Hampshire State Library Report of the Joint Legislative Committee on Fiscal Capacity, Transition Aid and Diseconomies of Scale (Senate Bill 539)

To: GoveMor John H. Lynch Senate President Sylvia B. Larsen House ,SpedIcer Terie Norelli

From: Senator Kathy Sgambati, Co-Chair Representative Randy Foose, Co-Chair

Date: January 16, 2009

In addition to establishing the cost for an adequate education and providing for the distribution of fiscal capacity disparity aid, Senate Bill 539 established the Joint Legislative Committee on Fiscal Capacity, Transition Aid and Diseconomies of Scale.

The charge of the Committee was to "study the need for providing fiscal capacity and transition aid to municipalities, as well as additional aid to address the lack of economies of scale for some small schools / districts."

The members of the Committee included: Senator Kathy Sgambati, Co-Chair Representative Randy Foose, Co-Chair Senator Deborah Reynolds Representative Senator Lou D'Allesandro Representative Neal Kurk Senator Molly Kelly Representative Emma Rous Senator Representative Senator Martha Fuller Clark Representative Judith Reever

The short time frame for the Committee's review of its complex assignment dictated that only a limited review of the underlying questions would be possible.

The Committee met on three occasions and held a public hearing on October 21, 2008. The Committee heard from a variety of legislators, education professionals, and municipalities as part of its work.

A summary of key discussion items and outcomes from each meeting follows.

October 2, 2008 By committee agreement, Senator Sgambati and Representative Foose were named co-chairs of this Committee.

The Committee members discussed the scope of their inquiry. There was consensus that the purpose of this group was not to revisit the costing formula for delivering an adequate education. This Committee was charged specifically with examining the need and criteria for distributing fiscal capacity disparity aid and implementing transition aid. The charge also included a review

1 of the unique "diseconomy" of scale issues that face small, isolated schools in very rural parts of the state.

The Committee heard from Senator Estabrook who was the primary architect of the Fiscal Capacity Disparity Aid (FCDA) funding plan adopted in SB 539. She explained that FCDA was included to supplement adequacy funds because the poorest communities in New Hampshire have a significant need for state financial assistance with education costs beyond the constitutionally required adequacy funds. Senator Estabrook answered preliminary questions about the inputs and rationale for the current distribution of FCDA as adopted. She emphasized the difficulty of separating adequacy funds from fiscal disparity funds now that SB 539 has passed because both funding streams are integrated in the transition plan as adopted.

Several Senate members of the Committee echoed caution about revisiting the fiscal capacity and transition plans because they are intertwined with the distribution of adequacy funds during the transition years FY 2010 and 2011. Some House members expressed a desire to have a more detailed understanding about what alternate ways of distributing FCDA were ruled out or could be considered in the future.

Given all the work that had been done in 2007 and 2008 on developing costing formulae and methodologies, and in light of the short timeframe for the work of this Committee, the Committee agreed to limit the scope of its inquiry to the following:

1) Should there be additional data or factors considered in the distribution of FCDA in future years (beyond 2010-2011 biennium)?

2) Should there be any changes to the components of the transition plan (often referred to as "the collar")?

3) Should there be any additional resources or special consideration of the needs of small isolated schools?

The Committee agreed to schedule a public hearing for October 21st to take testimony on the above questions.

October 21, 2008 Public Hearing On the issue of Fiscal Capacity Disparity Aid the Committee heard testimony from Dean Michener (NH School Boards Association), Pat Remick (The Coalition Communities) and Representative Kenneth Gould (Deny).

Mr. Michener expressed concern that there would be any further changes to the education funding plan adopted in SB 539. He urged the Committee to avoid further redistribution of the same amount of aid, highlighting that adapting to unexpected and unpredictable changes has a negative effect on districts, schools and students.

2 Pat Remick questioned whether Median Family Income (MFI) was a reliable indicator of fiscal capacity in a community and urged consideration of Median Household Income (MHI) as an alternative. She cited previous work done for the Coalition Communities by Dr. Daphne Kenyon which concluded that MHI was a more accurate reflector of modern households because it includes unmarried partners and other types of non-marital living arrangements.

Representative Gould expressed the financial hardship felt by the community of Derry which is losing over $7 million in FY2012. This amounts to almost 10% of that community's education budget. He hopes this Committee will re-examine ways to distribute adequacy or fiscal capacity aid that will not result in such a sizable loss.

On the issue of Transition Aid, the only testimony provided was from Pat Remick. Ms. Remick raised a concern on behalf of 5 of the former "donor" communities (Portsmouth, Alton, Grantham, Hampton and Hanover). Prior to SB 539, these 5 communities had not received state education grants but they are all now scheduled to receive adequacy grants in FY2012 under the SB 539 formula. Their concern is that because the 15% increase in funds which applies during the two-year transition period is based upon FY2009 state education grants, and because these 5 communities received no grants in FY2009, that they are not going to benefit from the transition component with additional funds in the interim. They asked the Committee to recommend to the full legislature funding some transition component for FY2010 and 2011 for communities in this situation. Written testimony elaborating this request is attached to this report.

The most input was offered on the topic of small, isolated schools and their diseconomies of scale. Mark Joyce and Jack Robinson (Superintendent of the Governor Wentworth School District) provided the Committee with an overview of the per-pupil cost differentiation from district-to-district across the state and they explained the significant factors that contribute to these variances. Transportation was used as an example of a major cost item that varies greatly from district-to-district. While consolidation and adoption of cooperative school districts can create efficiencies, they can also lead to increased transportation costs. Mr. Joyce also pointed out that there are actually some statutes that provide that certain services and programs must be offered in a student's home district and this limitation had made regionalization impossible, even where it could help achieve greater efficiencies.

Mike Schwartz from the Dept. of Education indicated that it has been very hard to standardize and analyze transportation costs because of different choices made at the district-level such as how much distance between bus stops?; what is the acceptable limit for time for students to spend on a bus ride?; what portion of transportation cost is for extra-curricular travel or sports teams?. The wide variety of answers to such questions has made it impossible for the Department of Education to fully and objectively produce comparative cost analyses. Written submissions from Mr. Joyce and Mr. Robinson are attached to this report.

October 21, 2008 Committee Meeting Immediately following the public hearing, the Committee met to determine what next steps to pursue in its inquiry.

3 There was very little support for revisiting the FCDA formula in the upcoming biennium although Committee members did request that staff prepare a spreadsheet comparing the use of Median Family Income (MFI) with Median Household Income (MHI). They also requested that further information about the existing criteria be prepared in writing to be reviewed at the next meeting.

The Committee members were most intrigued and interested in further exploring the issues/costs of small schools. Senator D'Allesandro expressed concern about distinguishing between schools that are small by choice and those who are small based on geographic isolation. Members agreed that only help for the latter group should be explored. Representative Rous and Representative Foose explained that the adequacy costing commission considered but specifically opted against providing additional aid for very small schools. The present committee recognized that there are complex questions about how to define and identify what constitutes a "small and isolated" school and how to calculate any additional funds that might be provided to such schools. At the request of the Committee members, Representative Rous agreed to further investigate possible initiatives in this area for discussion at the next meeting.

November 20, 2008

The Committee reviewed several of the outstanding questions that were raised after the October 21St public hearing. Jennifer Frizzell, Senate Policy Director, prepared a memo for Committee members explaining the background and details of the Fiscal Capacity Disparity Aid adopted in SB 539. She presented the information in the memo and answered questions from Committee members. Representatives Major and Almy offered concern that the census data upon which this formula is based on 1999 data from the 2000 census. But members were informed that given the decennial nature of the census that this was the most recent available for this purpose. Representative Kurk was troubled that the cut offs for FCDA were harsh and provided for "all or nothing" eligibility for communities with no smoothing.

The Committee discussed and deliberated whether there were alternate criteria that should be recommended for legislation to change the FCDA. Most of the Committee members recognized the political difficulty of altering this aid program and there was very little support or rationale for changing the program in the upcoming biennium. Though the Committee will not recommend legislative change, they will encourage the Finance and Education Committees in future years to revisit the issue of best available data to predict fiscal capacity and to reconsider whether FCDA should be distributed on a "slope" rather than in "steps" to avoid significant cut offs.

The Committee reviewed the list of ideas and information (dated 10/21/08) that had been generated by Representative Rous of the issue of small, geographically isolated schools. After some discussion about whether the issue needed to be studied further or whether it was ripe for legislative action the group agreed that some initiative should be advanced in the upcoming legislative session.

4 Senator Sgambati agreed to prepare a draft report which summarizes this Committee's work and embraces these conclusions and the legislative recommendation. When complete she will circulate it and ask that any comments or proposed edits be coordinated directly through her or Senate staff.

Conclusions / Recommendations After consideration of the legislative history of Senate Bill 539, the public and staff testimony offered, and the substantial experience and expertise of the members of this Committee, the Committee offers the following conclusions:

1) The Fiscal Capacity Disparity Aid as adopted in SB 539 should not be altered for the FY 2010-2011 biennium. Thereafter, at such time as the population and income data from the 2010 US Census is available for analysis at the town-by-town level, this legislature should revisit what elements are most current and correlative indicators of a community's fiscal capacity and adjust any FCDA distribution criteria based on such findings.

2) The 2-year Transition Aid plan as adopted in SB 539 provides a rational mechanism to phase in the increases and decreases in anticipated funding for schools and communities. The Committee does not recommend any changes or adjustments to this portion of the legislation. While the committee recognizes that the unintended impact of the transition formula results in 5 communities not receiving a grant during the transition period, the Committee found the formula provides a rational mechanism for the transition and creating a different transition formula for these 5 communities would not be equitable to all others impacted by the existing formula. Furthermore, the committee notes that 2 of these 5 communities are provided additional funds under the second, hold-harmless prong of the transition formula.

In addition, the Committee makes the following recommendation for legislation:

1) Legislation should be developed which further examines the needs of small, geographically isolated schools. Such legislation should addresses issues such as transportation, specialized and support services, and the possibility of regionalizing some collaborative programs or further consolidating school administrative functions. Providing incentives for smaller districts to consolidate to achieve greater economic efficiency should be a part of this legislative effort.

In summary, the committee affirmed the previous legislative action and agreed that the current formulae for disparity aid and plan for transition should stand. Further examination should wait until such time as the state has had actual experience with these mechanisms and when more current census data is available, The issue of small schools should move forward through legislative action and the details of identifying what constitutes a small and isolated school as well as whether and how much additional funding is appropriate should be refined by the education policy committees in the House and Senate. The Committee agreed that these actions would take place in the normal course of legislative business and there is no need to continue the work of this committee beyond the completion of this report.

5 The following members of the Committee concurred with the adoption of this report:

Senator Kathy Sgambati, Co-Chair Representative Randy Foose, Co-Chair Senator Deborah Reynolds Representative Norman Major Senator Lou D'Allesandro Representative Neal Kurk Senator Molly Kelly Representative Emma Rous Senator Martha Fuller Clark Representative Susan Almy Representative Judith Reever

6 NEW HAMPSHIRE SCHOOL ADMINISTRATORS ASSOCIATION

CHAMPIONS FOR CHILDREN

To: The Joint Legislative Committee on Fiscal Capacity, Transition Aid, and Diseconomies of Scale.

From: Dr. Mark V. Joyce

Re: 173:14 Joint Legislative Committee on Fiscal Capacity, Transition Aid, and Diseconomies of Scale.

Date: October 21, 2008

Language of the Law

"173:14 Joint Legislative Committee on Fiscal Capacity, Transition Aid, and Diseconomies of Scale.

I. There is hereby established a joint legislative committee on fiscal capacity, transition aid and diseconomies of scale. The members of the committee shall be as follows:

(a) Six members of the house of representatives, which shall include 2 members of the house finance committee, 2 members of the house ways and means committee, and 2 at-large members, appointed by the speaker of the house of representatives.

(b) Six members of the senate, which shall include 2 members of the senate finance committee, 2 members of the senate ways and means committee, and 2 at-large members, appointed by the president of the senate.

IL The committee shall study the need for providing fiscal capacity and transition aid to municipalities, as well as additional aid to

1 Bow BROOK PLACE, 46 DONOVAN STREET, SUITE 3 • CONCORD, NH 03301 TEL: (603) 225-3230 • FAX: (603) 225-3225 address the lack of economies of scale in small school districts, and the source of funds for such aid.

HI. Following a public hearing, the committee shall report its findings and recommendations concerning the need for fiscal capacity disparity aid, transition aid, and small school district aid, and the need for additional legislation, to the governor, the speaker of the house of representatives, the president of the senate, and the state librarian no later than December 1, 2008."

Dear Members of the Committee,

I am writing to share a brief summary of my comments and observations regarding the charge of the Committee as it relates to the language of SB 539, approved during the 2008 Legislative Session, and I am offering this testimony by invitation on October 21, 2008.

In particular, I am writing to address the needs of small school districts and other districts, as we consider "the economies of scale" of NH school districts. I would be pleased to also address the need for fiscal capacity and transitional aid to school districts and taxpayers, in other opportunities.

There is no doubt that the size of a school district and its geographic location/size play a major role in determining its ability to offer services (often required services) at an economical or uniform cost. Among the variables that are affected are those listed in the following text. Let me illustrate examples of each below:

Transportation Costs: The geographic size of the school district has a major impact on the percent of its budget that is spent on transportation services. As an example, Pittsburg, NH is a community that includes 282 square miles averaging about 3 people per square mile. In Pittsburg, they spend about 4.1% of their total budget on transportation costs. In comparison, Manchester, NH is a community of about 33 square miles with about 3,313 people per square mile, spends about 2.9% of its budget on transportation. Not only small geographically isolated communities spend a larger portion of their budget on transportation, but our Cooperative School Districts also spend a larger portion of their budget on

2 transportation than a typical school district. (E.g. CONVAI - 5.9% and White Mountains - 4.4%). In fact, in the CONVAL school District their buses each day, run the distance in miles from Peterborough, NH to Fairbanks, Alaska.

Continuum of Service and Required Program Offerings: Smaller school districts have a great deal of difficulty in meeting the required program offerings that are mandated by the Federal and NH laws and rules. As an example, Pittsburg High School with about 50 students, struggles to offer a comprehensive program to its students. At PHS it is not uncommon to have only 2 or 3 students in a science class. The school district has considered alternatives, like forming a relationship with other communities, however, its geographic location would result in very long bus rides.

Limitation on Itinerant Specialized Staff: Geographically isolated and smaller districts have a real challenge in securing and retaining the specialized services to meet the unusual needs of some students. Northern and western NH communities have a real challenge in attracting positions like: speech pathologists, behavior intervention specialists, and autism teachers. These challenges are made more difficult because they often have a need for just a part-time position. While the communities have attempted informal collaborative programs, the costs tend to be quite high.

Administrative Costs: Smaller districts especially those isolated by geography struggle to efficiently comply with the ever-increasing administrative requirements created by laws and rules. It is important to remember that no matter how small a district is they must complete all "paper work" and compliance documents required by law or rule, with significantly less administrative assistance.

Availability of Support Services: Smaller and geographically isolated school districts have a great challenge in attracting and retaining specialized staff members and programs to meet the unique needs of children and offer a complete "continuum of services" within the district, as expected by laws and rules. As an example, NH schools are expected to offer a free and appropriate education in the least restricted environment. Small schools struggle to offer sufficient options for placements

3

within their schoolsin a cost efficient manner and as a result incur a disproportionate high cost in meeting the needs of students. Failure to offer an acceptable program or service then requires and even higher cost out of district placement. (E.g. Clarkville).

The above are a few examples of how costs of adequacy vary significantly among NH school districts. Perhaps one consideration for the Committee would be to study the advantages of a state sponsored collaborative regionalized programs to meet the needs of low incidence high need students.

Thank you for the opportunity to address the Committee and the members of NH School Administrators stand ready to assist the Committee in its challenging work.

Mark V. Joyce [email protected]

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4 State of New Hampshire - Sample of Transportation Cost of Selected Districts Cost Per Pupil and Pupils Per Square Mile 2006 - 2007 School Year

Sorted by Cost Per Pupil ... lowest to highest Transportation Cost Per Area in Pupils Per DISTRICT ADM-A Expense _ Pupil , Rank . Sq. Miles Sq. Mile Rank Manchester 16,643.85 4,577,958 275.05 1 34.92 476.63 1 . Laconia 2 26.11 84.75 8 2,212.92 617,894 279.22, Portsmouth 2,534.22 801,940 316A4 3 16.81 150.76 4 Newmarket 1,042.77 366,152 351.13 4 14.18 73.54 10 Claremont 1,918.03 673,652 35122 5 44.05 43.54 13 Salem 5,314.41 2,042,283 384.29, . 6 25.88 205.35 2 Franklin 1,361.08 536,656 394.29 7 s. 29.15 46.69 11 Rochester 3,946.78 1,567,254 , 397.10 8 45.43 86.88 7 Dover 4,534.74 1,844,761 406.81 9 29.05 156.10 3 Lebanon 1,837.94 780,666 ' 424.75 10 41.27 44.53 12 Keene 3,598.91 1,537,774 42729 11 37.29 96.51 6 Hoppington 1,012.88 477,683 471.61 12 45.08 22.47 15 Londonderry 5,198.09 2,482,141 ,477.51 13 42.12 123.41 5 Goffstown 2,977.31 1,555,667 522.51 14 37.60 79.18 9 Winnisquam Coop. 1,630.64 877,440 538.10 15 90.45 18.03 16 Moultonborough 653.11 358,013 548.17 16 75.07 8.70 20 Fall Mountain Reg. 1,844.15 1,021,244 553.77 17 , 169.47 10.88 18 Inter-Lakes Coop. 1,196.63 775,773 648.30 18 164.94 7.25 22 Governor Wentworth Reg. 2,604.62 1,741,804 668.74 19 290.14 8.98 19 Pittsburg 148.55 103,297 695.37 20 291.29 0.51 24 New Found Area 1,410.89 1,074,363 761.48 21 223.35 6.32 23 Kearsarge Reg. 1,998.28 1,561,898 781.62 22 272.32 7.34 21 Monadnock Reg. 2,228.39 1,880,135 = 843.72 23. 200.36 11.12 17 Oyster River Coop. 2,022.55 1,887,300 933.13 24 76.20 26.54 14 State of New Hampshire - Sample of Transportation Cost of Selected Districts Cost Per Pupil and Pupils Per Square Mile 2006 - 2007 School Year

Sorted by Pupils Per Square Mile ... most to the fewest Transportation Cost Per Area in Pupils Per DISTRICT ADM-A Expense Pupil Rank Sq. Miles Sq. Mile Rank Manchester 16,643.85 4,577,958 275.05 34.92 1 ' 476.63 1 Salem 5,314.41 2,042,283 384.29 6 25.88 205.35 2 Dover 4,534.74 1,844,761 406.81 9 29.05 156.10 3 Portsmouth 2,534.22 801,940 316.44 3 16.81 150.76 4 Londonderry 5,198.09 2,482,141 477.51 13 42.12 123.41 5 Keene 3,598.91 1,537,774 427.29 11 37.29 96.51 6 Rochester 3,946.78 1,567,254 397.10 8 45.43 86.88 7 Laconia 2,212.92 617,894 279.22 2 26.11 84.75 8 Goffstown 2,977.31 1,555,667 522.51 14 37.60 79.18 9 Newmarket 1,042.77 366,152 351.13 4 14.18 73.54 10 Franklin 1,361.08 536,656 394.29 7 29.15 46.69 11 Lebanon 1,837.94 780,666 424.75 10 41.27 44.53 12 Claremont 1,918.03 673,652 351.22 5 44.05 43.54 13 Oyster River Coop. 2,022.55 1,887,300 933.13 24 76.20 26.54 14 Hoppington 1,012.88 477,683 471.61 12 45.08 22.47 15 Winnisquam Coop. 1,630.64 877,440 538.10 15 90.45 18.03 16 Monadnock Reg. 2,228.39 1,880,135 843.72 23 200.36 11.12 17 Fall Mountain Reg. 1,844.15 1,021,244 553.77 17 169.47! 10.88 18 Governor Wentworth Reg. 2,604.62 1,741,804 668.74 19 290.14 1 8.98 19 Moultonborough 653.11 358,013 548.17 16 75.07 8.70 20 Kearsarge Reg. 1,998.28 1,561,898 781.62 22 272.32 7.34 21 Inter-Lakes Coop. 1,196.63 775,773 648.30 18 164.94 7.25 22 New Found Area 1,410.89 1,074,363 761.48 21 223.35 6.32 23 Pittsburg 148.55 103,297 695.37 20 291.29 0.51 24 The Coalition Communities Alton...8thigewater..Carral..Centex Harbor..Dublin..Easton..Eatan..11wirenia-Fteedon .GreenkuuLffarnpton..Hamptim Fails...Hanaver

Hart s Location..liebrtm..Hoidemess....lacksoraineal li th..ffoultonboraugh.New Castle..New London..1%lewington NerthHampton..Pittsbury..Portzinowth-Rye.,Sandwich..Seabroak..Staddard. Sugar Hill..Sunapee.74(tonboro..Wcrtervitle Valley Telephone: 603 610-7281. Fax: 603 427-1575 E-Mail: Coalitionerach.citvofnortsmouth.corn www.CityofPortsmouth.com/Coalition

Testimony from Pat Remick, Coordinator, Coalition Communities Joint Legislative Oversight Committee on Fiscal Capacity, Transition Aid and Diseconomies of Scale Oct. 21, 2008

Good morning. I am Pat Remick, coordinator of the Coalition Communities. We are 35 former "Donor" communities spread across the state, many of which are scheduled to return to that status on July 1. 2011, because of high property values due to geographic location.

However, five of our member communities would receive state grant funding in FY2012 under the new education funding formula. But they were not allotted transition aid in FY2010 and FY2011 because the 15% collar provision compared grants to what was received in FY2009 and these municipalities received no grants under the formula used for FY09.

According to the formula in the new law, Portsmouth, Alton, Grantham, Hampton and Hanover need state grant funding to provide an adequate education to their schoolchildren. For SB539 to truly have a transition component, we believe it should apply to all eligible communities.

We became aware of this problem shortly before adoption of SB539. When I brought it to the attention of House Legal Counsel David Frydman and John Beardmore of Legislative Services, both said it was an oversight. Mr. Frydman suggested this Joint Committee was the best place to address the issue.

Under the spreadsheets distributed prior to passage, the grant for Portsmouth was $1.5 million; Hampton, $1.3 million; Alton, $382,858; Grantham, $318.245; and Hanover, $275,650.

If these municipalities receive 15 percent of that total under the so-called collar--the transition amount applied to every other community under the new law--Portsmouth would receive $225,000; Hampton, $195,000; Alton, approximately $58,000; Grantham, approximately $48,000 and Hanover, just over $42,000 for a total of approximately $568,000.

We ask that you recommend to the full Legislature that this oversight be corrected prior to the start of Fiscal Year 2010 so the new education funding law will truly contain a transition component for all eligible communities.

I also would like to briefly address fiscal capacity. As some of you may know, a few years back our Coalition invested a great deal of time and money in trying to develop an education funding plan to put forward to the Legislature. Although it was not adopted, many of the elements suggested by our economist, Dr. Daphne Kenyon, were included in subsequent formulas. Our proposal measured fiscal capacity based on equalized property values and median hou,svhold income, rather than median family income. Median household income is a more accurate reflection of fiscal capacity in a community because "family income" eliminates consideration of the income of unmarried partners or other living arrangements. Our lbrinula also factored in school district economies of scale and area cost-of-living.

I would like to note that our research showed there is a little correlation between a community's property's wealth and the income of its citizens. For example, low-income communities may have a larger share of industrial and commercial property, resulting in lower tax rates.

Conversely, exclusionary zoning policies may zone out commercial and industrial use, as has occurred in some bedroom suburbs, which may result in higher property tax rates. In addition, a wealthy community may opt to spend far more on schools, also resulting in a higher tax rate. If high-income communities make these choices, should such decisions make them more deserving of state aid? We believe combining equalized property values with median household income, plus consideration of economies of scale and cost of living differences, can give the most accurate picture of fiscal capacity.

Thank you. MEMORANDUM To: Senator Kathy Sgambati

From: Jennifer Frizzell

Re: Fiscal Capacity Disparity Aid in SB 539

Date: November 18, 2008

In response to your inquiry, and after a request you received from some of the members of the Joint Legislative Committee on Fiscal Capacity Disparity and Transition Aid, I prepared this brief summary of the rationale and considerations for the Fiscal Capacity Disparity Aid (FCDA) component of SB 539 as adopted by the NH Senate. I would be happy to answer further questions as I am able at your Committee's upcoming meeting on November 20.

Background In 2008, Senate Bill 539 was the primary legislative initiative filed to implement the recommendations of the Joint Legislative Oversight Committee on Costing an Adequate education. At the time of the introduction of SB 539, there was a separate but related effort in the legislature to pass a constitutional amendment to modify the state's constitutional responsibility to allow for the state's financial obligations relative to an adequate education to be distributed in a targeted manner. Many legislators were of the belief that whether or not a CACR was successful, it was still important to target some portion of the state's education funds; a belief that acknowledged that absent the successful passage of a constitutional amendment and its subsequent ratification by NH voters, the only allowable manner to distribute targeted aid to New Hampshire communities and/or school districts would be to do so in an "above-adequacy" manner.

The Senate sponsors of Senate Bill 539 (Senators Estabrook, D'Allesandro and Foster) believed that some additional aid, beyond the funding of the costs of an adequate education, though not constitutional required, was warranted - especially for those communities that had traditionally had difficulty raising local education funds at the community level for the costs associated with providing educational programs beyond those that were deemed part of adequacy. These were additional funds were not intended to be "transitional" in nature, but instead to offer a secondary funding stream that would not be subject to the constitutional limitations which apply to adequacy.

Funding Criteria The cost of providing an adequate education in Senate Bill 539 as introduced was estimated by LBA at approximately $921 million dollars.

In developing the Fiscal Capacity Disparity Aid formula the Senate sponsors looked at the many demographic factors that had traditionally been part of NH's education funding formulae for which the data and financial impact were readily available. These included 1) local property tax capacity by community — as measured by the equalized value per pupil (EVPP), 2) median family income (MFI) by community and 3) numbers and percentage of students qualifying for free & reduced lunch. Given the inclusion of the free & reduced lunch data as a key component of the differentiated aid in adequacy calculations, the policy decision was made to devise a Fiscal Capacity Disparity Aid program using the first two factors. Amount of Funding The Senate considered the possibility of distributing an amount of additional funds that was equal to 5% of the amount of adequacy costs ($46 million) and it also considered several alternatives that would distribute an additional 10% of funds ($92 million). Ultimately there was only Senate support liar the additional 5% spending for fiscal capacity disparity aid.

The Senate then developed several different versions of distributing the $46 million in a manner that prioritized distribution of the greatest amount possible to communities that have the most severe financial burden in raising local funds based on the combination of (lack of) property tax wealth and income wealth. The Senate also wanted a distribution formula that was simple and easy to understand, distributing additional funding based on a per-pupil basis.

Methodology After reviewing many different possibilities for distributing Fiscal Capacity Disparity Aid the Senate sponsors of SB 539 settled on a plan with the following criteria: 1) Communities in the poorest 1/4 (quartile) based upon Equalized Value Per Pupil (EVPP) are eligible for FCDA IF those communities also had a median family income (MFI) less than the statewide average, and 2) The funds would be distributed in two tiers with an amount of $2000 per pupil distributed to the poorest 1/8 (or lowest half of the quartile) and an amount of $1250 per pupil in the 2" lowest 1/8 (or top half within the quartile).

The total cost for this proposal was determined to be $47.8 million dollars which was very close to the target of 5%.

Transitional Aid in the Senate The version of SB 539 that passed out of Senate Finance and was ultimately adopted by the full Senate also had an additional $9 million in "transitional aid" in FY 2010 and $4.5 million in FY 2011 that would have helped an additional group of communities transition from their state adequacy grants in 2008 — 2009 to those in 2010 — 2011 IF they were losing funds under the new adequacy calculations.

This transition plan was removed by the House when the legislation was under consideration in House Finance and replaced with the transition plan ultimately adopted (and often referred to as "the collar").

Fiscal Capacity Disparity Aid and Transitional Aid in the House The House Finance Committee did not alter the eligibility criteria for FCDA but they did combine it with adequacy aid for purposes of implementing the "hold harmless" and "no increase greater than 15%" provisions of their two-year transition plan. While I did sit in on some of the House work sessions on SB 539 I can't speak to their Committee's thinking on either of these matters.

Final Resolution Ultimately the Senate concurred with the House-adopted transition plan and there was no Conference Committee necessary on SB 539.