K-12 and ESD SCHOOL FINANCE: State School Fund Distribution

Summary

This is the Oregon Legislative Revenue Office's July 2020 report, K-12 and ESD School Finance: State School Fund Distribution (Report #4-20). It describes how the State School Fund and local revenue are combined and distributed to K-12 school districts and Education Service Districts through an equalization formula. The report says state funding stands at 67.8% for the 2019-21 school years, compared with less than 30% before 1990-91. It says the K-12 school share of formula revenue has been 95.5% and the ESD share 4.5% since 2011-12. Voters approved Measure 5 in 1990 and Measure 50 in 1997, which limited property taxes for school districts.

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“K-12 and ESD SCHOOL FINANCE: State School Fund Distribution.” Original at www.ed.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/department-of-education-pdf-www-ed-gov-ef55e57ee5/, SHA-256 a05e494ef04d3db8fcee9564cf3e09858b55306bcc79bc64512174d43a0658ec.

Full text

July 2020
Legislative Revenue Office
160 State Capitol Building, Salem, Oregon 97301 | 503.986.1266

K-12 and ESD SCHOOL FINANCE:
State School Fund Distribution

BACKGROUND
The Oregon Constitution declares that the Legislative Assembly shall provide by law for the establishment
of a uniform and general system of Common schools. The same Constitution directs the Legislative
Assembly to appropriate in each biennium a sum of money sufficient to ensure that the state's system of
public education meets quality goals established by law. This report describes Oregon’s school finance
system for the distribution of State School Fund dollars to K-12 school districts (SDs) and Education Service
Districts (ESDs).

The operating revenue of K-12 public education in Oregon has been primarily funded through a
combination of state and local resources. 1 The relative shares between state and local revenue resources
have shifted over time, primarily in response to structural changes to the state’s property tax system. In
fact, the school finance system distributes combined revenue, commonly known as the formula revenue,
from both the state and statutorily defined local sources (or local revenue). The report first describes the
principles used to define financial equity for school districts and their implementation in the K-12
equalization formula. The report also describes the rationale for the financial equity of ESDs and the
method of ESD equalization.

The current finance system is a legacy of two constitutional property tax measures. Voters approved
Measure 5 in 1990 and Measure 50 in 1997. These two measures drastically changed Oregon’s school
finance system by limiting property taxes for SDs and ESDs. They led to a substantial shift in funding source
from local property taxes to the state general fund.

In response to the Measure 5 property tax reductions and resulting insufficiency of local revenues, the
1991 Legislature increased state funding. That legislature also adopted a K-12 funding equalization
formula and implemented its phase-in. It also began providing state funds to ESDs to make up a share of
property tax losses. By the end of the 5-year tax limit phase-in, the state primarily funded the school
system and the implementation of the equalization virtually eliminated local control over school funding.

Measure 50 during the 1997 Legislative Session continued the shift to state funding 2. Measure 50 added
another property tax limitation more restrictive than Measure 5. Consequently, the 1997 Legislature

1
Federal resources account for roughly 10% of total operating revenue.
2
In 1996 voters passed Measure 47, dramatically changing the property tax system. However, the measure could
not be implemented as written, so the Legislature crafted Measure 50 adhering to the spirit and intent of M47.
ended up raising the level of state funding even higher and further modified constraints to the school
equalization formula.

State funding, which had been less than 30% of total available formula revenue prior to 1990-91, increased
to about 70% in 1999-00. State funding currently stands at 67.8% for the 2019-21 school years. Beginning
in 2011-12, the K-12 school share of this state and local formula revenue has been 95.5% and the ESD
share 4.5%.

SCHOOL DISTRICT EQUITY
The 1991 Legislature created a new measure of financial equity for school districts. What were acceptable
differences in funding per student prior to 1991 were deemed unacceptable following the passage of
Measure 5. A new measure of fairness was implemented. It was influenced by the outcomes of school
finance court cases at the time.3

Equity as a measure of fairness does not necessarily mean that all school districts get the same funding
per student. School districts face different problems and costs that may justify different funding levels.
Thus, defining equity is, to some extent, a matter of policy about which reasonable people can disagree.

The measure of equity is reflected in the K-12 school equalization formula. The basic structure of this
formula has not changed since the initial adoption in 1991. The formula is a statutory definition of fairness
applied to the financial needs of school districts. Using school district data, the K-12 equalization formula
determines an equalization funding for each district. This funding level is each school district’s share of
available state dollars (called State School Fund) and local revenue used in the formula. State School Fund
dollars for each district make up the difference between the district's equalization funding and its local
revenue.

Equity Principles
The measure of equity adopted by the legislature is essentially equal financial resources per student for
similar groups of students. This was the primary measure of equity used in school finance in 1991. Funding
equity per student may generally provide for similar educational programs and opportunities. However,
funding equity does not necessarily result in equal educational outcomes or achievement levels.

The logic of funding equity is that differences in revenue resources among school districts must be justified
in a rational manner. Now that the state is the primary source of K-12 education funding, the goal is to
either justify or eliminate the variations in resources among districts that existed prior to the 1990 passage
of Measure 5.

To accomplish this goal, the following four principles guided the development of the new formula:

• Share all school funding sources statewide.
Method: Combine and allocate all state and local general operating revenue.

• Let school districts decide how to spend their allocation.
Method: Distribute state aid in lump sum, not in categorical grants.

3
In 1991, in Coalition for Equitable School Funding, Inc. v. State, the plaintiffs challenged then-current state
education finance system on equity grounds. There was also a prior challenge to the system on equity (Olson vs
State, 1976) but the Oregon Supreme Court concluded that the school finance system was not necessarily desirable
but, nonetheless, was not violating either the equal protection or education clauses of the Oregon Constitution.

Report #4-20 Page |2
• Create funding differences only for uncontrollable cost differences.
Method: Justify revenue differences in a rational manner.

• Avoid incentives for school districts to increase their allocation.
Method: Minimize number of classifications and set limits.

In short, every district should get the same amount per student, adjusted only for unavoidable differences
in costs. Implementing these principles provides the following general formula for equity:

State Aid + Local Number of Base Funding x Cost
to District Revenues
= Students
x
Per Student or + Factors

Under this simplified formula, the amount available for distribution is the sum of state aid and local
revenues. The base funding per student is the same for all districts and is determined by the amount of
money available for distribution. The cost factors adjust each district’s allocation higher or lower to reflect
uncontrollable cost differences.

The Legislature has changed these factors over time. They will no doubt be periodically reviewed and
revised by future legislatures. Hence, equity is an evolving target over time, and an analysis of the
movement toward equity is one snapshot of a moving picture.

With application of this formula, each district’s share of total state and local funding depends solely on
the base funding and the cost factors. If local revenues are high, state aid is low. If local revenues are low,
state aid is high. In effect, the formula converts local school revenue resources into part of available
statewide funds for all schools. It does not matter what a district receives in property taxes or other local
revenues. The only revenue that matters is the statewide sum of state and local dollars. This statewide
sum, minus statutorily listed expenditures from state fund, is commonly called the formula revenue
available for distribution.

K-12 SCHOOL EQUALIZATION FORMULA
District Formula Revenue General Transportation High Cost Facility
(State and Local) = Purpose Grant + Grant + Disabilities Grant + Grant

The school equalization formula, illustrated above and to be explained in detail, allocates state and local
general operating revenue to local school districts. The formula allocates this revenue based on the
relative need of each district for funding by using various cost factors. Cost factors are used in four
separate grant calculations that together determine the total allocation. Before discussing the formula
itself, essential terms are defined.

Report #4-20 Page |3
DISTRICT FORMULA REVENUE
District formula revenue is the school
district portion of the State School Fund and District State
Local
local revenue (school district operating Formula = School + Revenue
property taxes plus statutorily listed other Revenue Fund Grant
sources). The local revenue portion stays with the district where collected but is treated like a state
resource. A later section provides more information on local revenue sources.

Formula revenue is available for general operations. It does not include bond revenue or state and federal
categorical aid. These funds are dedicated to specific programs and cannot be used for general purposes.

State School Fund
The Legislature allocates money to the State School Fund (SSF) primarily from the state General Fund and
lottery resources available for distribution. Thanks to Measure 91 in 2014, SSF added one more source of
the fund - Marijuana taxes. Most recently, the 2019 legislature created a Corporate Activity Tax and added
some of its revenue as a source of the SSF. Finally, a transfer of Education Stability Fund in times of
economic crisis becomes a part of the SSF. The share of the State School Fund for all SDs is 95.5% of the
formula revenue less all school districts’ combined local revenue.

The State School Fund grant to an individual school district is its equalization formula revenue less its local
revenue. If local revenue is more than the equalization formula amount, then the district does not receive
a state school fund grant. However, it does keep its local revenue in excess of its formula amount. Only a
few school districts have seen excess local revenue in the past.

Local Revenue
The chart to the right lists local revenue sources that are
offset against a district's equalization formula revenue. LOCAL REVENUES
Some are not collected by school districts and hence may
not appear to be local but are local in the sense that the Operating property taxes collected
revenue is dedicated for school funding, even though Common School Fund
County School Fund
collected by another entity.
Federal forest revenue (school 25%)
County trust forest revenues
Permanent-rate-based operating property taxes are ESD shared revenues Supplantable federal
about 95% of these local revenues. Property taxes funds Payments in-lieu of property taxes
collected include taxes paid in the current year for any Local option taxes above limit
prior year delinquent taxes and interest.

Common School Fund (CSF) revenue is the portion of the Fund's earnings distributed to school districts.
CSF is a constitutional state fund for schools. County School Fund is a statutory fund with various revenue
sources. Federal forest revenue, of which 25% go to schools, is timber related funds. County trust forest
revenue comes from former county timberland (mostly in Tillamook and Clatsop counties) managed by
the state 4. ESD revenue is excess local ESD revenue, above the ESD share of the total formula revenue,

4
In November 2019, a Linn County Circuit Court jury ruled that the state of Oregon breached its contract with certain
timber counties by failing to generate enough revenue through logging on state managed forestlands. The jury
awarded $1.06 billion to thirteen counties. If upheld, revenue from state managed county forestlands will increase.

Report #4-20 Page |4
shared directly with school districts an ESD is serving (called component school districts). Federal funds
are not offset against state aid because federal law generally prohibits using these funds to offset
(“supplant”) other revenues. Local revenue includes only supplantable federal funds. Local option
property taxes over the statutory cap become part of local revenue.

Local revenue sources included in the total formula revenue were traditional sources of school funding.
They were also mandatory payments to school districts. The policy decision was to share the benefits of
these mandatory payments statewide. Other sources of local funds such as school fees and public or
private contributions are not included. The use of public contributions from local government probably
was not contemplated in 1991. If sources of voluntary contributions were included, then these
contributions probably would not be made.

The equalization formula, in effect, overrides whatever formula may exist for the distribution of each of
these local revenues to school districts. (For example, Common School Fund is apportioned to each school
district based on its average daily membership, or roughly student count, from the prior year.) Although
each specific local revenue distribution still operates, the equalization formula cancels its effect by
offsetting the local revenue against its equalization formula revenue. This is why including voluntary
contributions as local revenue would likely result in these contributions not being made.

Cost Factors
In the four grants on the right-hand side of the equalization formula, five different factors adjust for cost
differences among school districts:

• Weighted student count
• Teacher experience adjustment
• Transportation costs
• High cost disability students
• New facility costs

GENERAL PURPOSE GRANT
The general purpose grant is weighted students times the targeted per student amount, adjusted for
teacher experience and balanced to total State School Fund and local revenue available. There are no
constraints on how this money can be spent at the district level. The grant accounts for a little over 95%
of formula revenue. Thus, number of students and their associated weights are very important
determinants of district formula revenue.

General Students $4,500 Target Adjusted by Teacher Experience
= X
Purpose Grant (ADMw) & Balanced to Total Funds

Weighted Student Count
Rather than attempting to generate an individual cost factor for each district or type of district, the formula
incorporates a system of weights directly into the student count.

The student count begins with average daily membership (ADM) that is attributable to a district. This
becomes resident ADM (ADMr). The ADMr count is then adjusted to reflect the differences in cost of
educating different types of students. For example, a special education student (one with an individualized
education plan or IEP) receives an extra weight of one. The total cost weight the student is then 2.0. In

Report #4-20 Page |5
effect, one student counts as two students. Technically, the student counts as 2 ADMw, where the “w”
stands for weighted.

The double weighting primarily reflects a national study in 1988 that showed districts were on average
spending about twice the norm for services to special education students. Although some special
education students cost much more than twice the average and others cost less, the Legislature wanted
to avoid creating a complicated weighting scheme that would encourage districts to classify students in
categories that generated more funds.

The table below shows the weights in the formula. In looking at these weights, please note the following:

• A district must get approval of the Department of
Education to qualify more than 11% of its
students for the special education weight.

• The poverty weight is based on the number of
children in poverty families. It is not based on
identifying individual students, but a group.
Likewise, state data on students in foster homes
and in facilities for neglected and delinquent
children are group counts. Because these three
counts do not identify individual students, they
are not included in a 2.0 maximum additional
weight per student.

• Elementary districts are those that do not offer a high school. Data showed these districts typically spend
less than the average per student while the union high schools that serve these areas spend more than
the average. The union high and elementary weights are designed to shift funds between these districts
without affecting the total available in the geographic area.

• Students enrolled in a qualified small school receive extra weight. The weight is based on grade level,
average grade size, and distance to the nearest school site. The smaller the school, the higher the weight.
This weight is based on the size of each school, not the size of a school district. A few large school districts
have remote small schools qualifying for this additional funding. A small school must have remained in
the same location since 1995 and have qualified as a small elementary school in 1995 or small high
school in 2009. To qualify, elementary schools must be remote, which is defined as more than 8 miles
from the nearest elementary school in the same school district. Public charter schools qualify as small
schools under conditions specified in statute. If small high schools merge, the combined weight for four
grades is the higher of (1) the sum of the extra weight each small high school was eligible for prior to
the merger or (2) the eligible extra weight of the merged high school if still a small high school.

Weighted students in the formula include students in the Youth Corrections Education Program (YCEP)
and students in the Juvenile Detention Education Program (JDEP). The state provides the education
programs for these students. These programs are treated as though they are special school districts. Each
YCEP student counts as two ADMw and each JDEP student counts as 1.5 ADMw. These students are not
counted by their resident school district.

The formula uses the higher of the current year ADMw or prior year ADMw. Extended ADMw is the term
for the higher ADMw of the two years.

Report #4-20 Page |6
Teacher Experience Adjustment
The teacher experience adjustment is a cost factor for differences in salary costs related to years of
experience. Virtually all school districts have pay schedules based in part on teacher experience. As
teacher experience increases, so do salaries. Incorporating this into a student weight was a significant
issue, so an adjustment factor was added to the base funding per student. This factor increases (or
decreases) each district’s base funding per student by $25 for each year the district’s average teacher
experience exceeds (or falls short of) the statewide average. Statewide, these district gains and losses
roughly balance out.
Teacher Experience
Adjustment = $25 X (District Average - State Average)

Per Student Target and Balancing to Available Funds
To initially make the formula easier to understand, the pre-adjustment base funding per student was
arbitrarily set in law at a target of $4,500 per weighted student in 1991. However, this target must be
factored up or down depending on total funds available for allocation by the formula and the amount of
this total used for the other three grants. The balancing ratio intentionally started out below 100%. Hence
the reference to $4,500 as a target. The balancing ratio is about 188% in 2019-20. Thus the $4,500 with a
188% balancing ratio is $8,460 with a 100% ratio.

Target ($4,500 + Teacher Experience Adjustment) X Balance Ratio
Balanced =

TRANSPORTATION GRANT
The transportation grant uses actual costs as the factor to adjust for different transportation costs per
student.

The transportation grant is 70% to 90% of approved transportation costs. Approved costs are those
attributable to transporting students from home to school (if over 1 mile from elementary school or 1.5
miles from high school), between schools, on field trips and for other reasons in special cases. This is a
categorical grant only available for actual transportation costs. This grant is similar to the 60%
transportation reimbursement provided in the pre-Measure 5 formula (1990).

To determine which districts receive a higher percentage the average transportation cost per student is
calculated for each district. Districts are then ranked from the highest to the lowest cost per student. The
top 10% of highest cost districts qualify for 90% grants and the next 10% qualify for 80%. The remaining
districts receive 70% grants.
District Rank % of Costs
Transportation Grant 70% to 90% of Top 10% 90%
= Transportation Costs Next 10% 80%
Bottom 80% 70%

The other 10-30% of approved transportation costs is not directly funded. Districts likely fund it from their
general purpose grant. Each dollar of increased transportation costs means 10-30 cents for transportation
from other funds. This was likely adopted to encourage efficiency.

Before the change in 2003, the transportation grant was 70% of approved transportation costs. If a district
has a very high transportation cost per student, for example $800, its 30% or $240 is much higher than

Report #4-20 Page |7
for the average cost district (about $75) and its general purpose grant for other than transportation costs
is less per student.

To deal with this situation the 2003 Legislature decided that the very highest transportation cost per
student districts should have 80% or 90% of costs included in the transportation grant. The grant did not
change for the bottom 80% of districts.

The highest cost districts tend to be rural districts with a low density of students where most of the
students ride a bus over considerable distances. These districts are helped by the change in the
transportation formula. The higher transportation grants reduce funds available for general purpose
grants so that districts with 70% transportation grants receive a little less state funding.

HIGH COST DISABILITIES GRANT
The high cost disability factor is actual costs above $30,000 per disability student to help compensate for
the uneven distribution of high cost disability students. High cost special education students tend to be
concentrated in urban areas where medical and therapeutic services are available. The cost for their
education can be disproportional to the revenue generated from the double weighting of these students
in the school equalization formula. This was viewed as an extra burden not fairly shared by all districts.

High Cost Up to Sum of Costs above $30,000
Disabilities Grant = per Disability Student

A district’s high cost disabilities grant is the sum of the approved disability costs for each special education
student that exceeds $30,000 per year. The school district can add ESD special education costs incurred
for the same student for the student’s total special education cost.

The Legislature imposed a cap on total high cost disabilities grants of $18 million per year starting in 2007-
08. The cap increased to $35 million a year in 2015-16. (Starting from 2020-21, this grant cap is going to
be $55 million per year.) If eligible costs exceed the cap, grants are prorated. Grants are typically lower
than actual costs, often substantially lower.

The 2005 Legislature increased the student cost threshold to $30,000 from the $25,000 initially adopted
by the 2003 Legislature. This reduced the expected number of eligible students by about half and
increased the percent of eligible costs covered by the grant. The grant was also made a permanent part
of the formula by removing the sunset date.

Adding a high cost disabilities grant to the formula reduces the general purpose grant total by the same
$35 million. Thus, all districts share in the cost and those with high cost disability students benefit by their
high cost disability grant exceeding the reduction in their general purpose grant.

FACILITY GRANT
The cost of new facilities to increase classroom space is the differentiating cost factor for districts with
new classrooms to equip. Districts with rapidly growing student populations have these costs much more
often than districts with stable or declining student populations.

Report #4-20 Page |8
The facility grant is 8% of the total construction costs of new school buildings excluding land. New
buildings include new school buildings, structures added onto existing school buildings and
premanufactured structures added to a school district if those buildings or structures are to be used for
instructing students. The grants to districts cannot exceed $7 million per biennium and are prorated if 8%
of eligible costs exceed $7 million. The 2005 Legislature increased the biennial limit to $25 million
beginning in 2007-09 from the initial $17.5 million limit. The grant went through a series of reduction and
the current $7 million cap was established starting from 2019-20.

Facility Grant = Up to 8% of Construction Costs

EQUALIZATION FORMULA SUMMARY
The equalization formula allocates available revenue to each school district using a measure of relative
financial need. The formula uses weighted students as the primary determinant of funding. A school
district’s equalization formula revenue is its State School Fund grant and local revenue.

This equalization formula amount is derived by summing a general purpose grant, transportation grant,
high cost disabilities grant and facility grant. Statewide, the general purpose grant is a little over 95% of
equalization funding, transportation is a bit less than 4%, and high cost disabilities and facility are the
remainder. Previous discussions make it clear that general purpose grant uses ADMw, but three other
grants do not. In fact, these three grants are considered set-asides within SD share of available formula
revenue (95.5%), while a general purpose grant allocates the remainder that is net of three grants.

Combining the calculation of each of the four grants yields a completed equalization formula.

K-12 SCHOOL EQUALIZATION FORMULA

District Formula Revenue
(Equalization Funding) General Purpose Grant

State School Local
= Students $4,500 Adjusted by Teacher Experience
+ (ADMw)
X
Fund Grant Revenue and Balanced to Available $

Transportation High Cost Facility
Grant Disabilities Grant Grant
+ 70%-90% of + Up to Sum of Costs + Up to 8% of
Transportation above $30,000 per Construction
Costs Disability Student Costs

This is the current formula for 2019-20. The formula is permanent in the sense that it continues to operate
until changed by new legislation. Temporary constraints or exceptions to the equalization formula ended in
2000-01. Constraints usually took the form of minimum grants that provided funding above the formula
allocation during the phase-in. Prior minimum grants were commonly known as flat grants and stop-loss
grants.

Report #4-20 Page |9
The chart below for the 2018-19 school year illustrates how the amount of formula revenue varies across
school districts - which are on the horizontal axis. The formula generates a narrow band of revenue per
weighted student (formula revenue per ADMw), with occasional exceptions for some small school districts.
Facility grants are not included here as they vary substantially year to year, but now they are relatively
minimal relative to the size of formula revenue.

School district formula revenue per ADM (in blue color) shows a very wide range between $10,000 and
$60,000. High formula revenue per ADM (roughly head-count) for a district just means that the district has a
relatively large number of students whose education is more costly than other districts. When adjusted for
cost weights, per student formula revenues become much more comparable to one another. This weight-
adjusted formula revenue, or formula revenue per-ADMw, is shown in brown color. It shows a little variation
across school districts, only with occasional exceptions.

School District Formula Revenue 2018-19
per ADM vs. per ADMw
$60,000.00

per ADM per ADMw

$50,000.00

$40,000.00

$30,000.00

$20,000.00

$10,000.00

Report #4-20 P a g e | 10
Payment Schedule
Districts receive State School Fund payments according to the payment PAYMENT SCHEDULE
schedule listing. Using information from school districts, the Oregon July 15 16 2/3 %
Department of Education makes an estimate in March preceding the August 15 8 1/3 %
September 15 8 1/3 %
school fiscal year for budgeting purposes. The department makes
October 15 8 1/3 %
payments based on this March estimate during the following fiscal year November 15 8 1/3 %
until May when adjustments are made using a revised estimate. Based on December 15 8 1/3 %
new information during the fiscal year, the department periodically revises January 15 8 1/3 %
its pre-fiscal year March estimate and informs districts about the new February 15 8 1/3 %
estimate. March 15 8 1/3 %
April 15 8 1/3 %
May 15 8 1/3 %
June 15 0 %
100 %

OTHER STATE SCHOOL FUND ALLOCATIONS
Funding for some expenditures are allocated directly from the State School Fund. These allocations flow
to statutorily specified programs, independently of the formula described above. These expenditures are
often called carve-outs or off-the-top expenditures as they are taken directly from the SSF, and the
remaining SSF become part of the formula revenue available for distribution.

Educator Advancement Fund (previously Network of Quality Teaching and Learning)
In the 2013 regular session, the Legislature created the Network of Quality Teaching and Learning (NQTL).
NQTL is the predecessor to the Educator Advancement (EA) program created by the 2017 legislature. For
the 2017-19 biennium, EA Fund was provided by $6 million from the State School Fund, and $16.75 million
each from SDs and ESDs out of their respective formula revenues. EA Fund fluctuates proportionately with
the State School Fund.

English Language Learn Program
Each biennium, $12.5 million from the State School Fund will be transferred to the Statewide English
Language Learner Program Account. Moneys in the Statewide English Language Learner Program Account
are used for statewide activities related to English language learner programs.

Healthy School Facilities Fund and Office of School Facilities
Each biennium, $2 million from the State School Fund will be transferred to the Healthy School Facilities
Fund to be used as grants for costs associated with testing for elevated levels of lead in water used for
drinking or food preparation. Allocation to the Office of School Facilities is to assist school districts with
capital construction projects and is capped at $6 million per biennium.

Small High School
The Small School District Supplement Fund receives $2.5 million per year from the State School Fund.
Small school districts are districts under 8,500 weighted students with high schools having less than 350
students for four grades and 267 for three grades. Out of 197 school districts, about 90 school districts
qualify for a grant each year.

Each small school district receives its proportionate share based on its share of small high school ADM
(average daily membership) each year of the biennium. This policy started from in the 2003-05 biennium
and is scheduled to sunset at the end of 2020-21 school year.

Report #4-20 P a g e | 11
State Special Education Programs
Certain state education programs are funded directly out of the State School Fund. These are for students
in pediatric nursing facilities, long-term care facilities and the State School for the Deaf. The State School
Fund amount is limited to the statewide average net operating expenditure per student times the number
of student slots available in these special education programs.

Other Direct Expenditures from the State School Fund
Allocation to support the development of talented and gifted education is capped at $350,000 per
biennium and the speech language program receives up to $150,000 per biennium for its administration.
Other spending directly out of the State School Fund includes (1) $968,000 per biennium for grade 10
testing purpose, (2) $1,600,000 per biennium for purposes related to the Oregon Virtual School District
and (3) $2,850,375 per biennium, at no charge to the student, to students who are eligible for reduced
price lunches under the United States Department of Agriculture’s current Income Eligibility Guidelines.

Local option grants (varying annually) and charter school closure fund (limited duration) are other direct
expenditures. In 2001, the Legislature created a local option equalization grant for eligible school districts
levying a local option property tax. Districts with an assessed value per student less than the target district
are eligible.

OTHER STATE FUNDS FOR SCHOOLS
In addition to the State School Fund, the Legislature may distribute other state funds to school districts.

School Improvement Fund
The legislature has not allocated money to the School Improvement Fund for some time, but money has
been allocated in some years since the establishment of the fund in 2001. The Legislature has not made
an appropriation to the School Improvement Fund since the 2007-09 biennium. When funded, districts
receive an allocation based on their prorated share of weighted students. Many of policy goals of this fund
have been incorporated in the Student Success Act, funded through newly created a corporate activity tax
(CAT).

Corporate Activity Tax
The 2019 Legislature created a corporate activity tax (CAT) based on commercial activity conducted by
businesses and dedicated the tax revenues to the programs initiated in the Student Success Act. After
administrative expenses and direct allocations to the SSF, the remainder of revenues from the CAT fund
three accounts - Student Investment Account (at least 50%), Statewide Education Initiatives Account (up
to 30%), and Early Learning Account (at least 20%). Moneys allocated to the Student Investment Account
are distributed to school districts based on ADMw with poverty weights doubled. In addition, HB 3427 of
the 2019 legislature specified that some of its revenues be used for the State School Fund.

Education Stability Fund
Voters approved a constitutional amendment converting the Education Endowment Fund to the
Education Stability Fund (ESF) in 2002, allowing the principal to be used to fund public education. The fund
receives 18% of lottery net proceeds. The size is limited to 5% of General Fund revenue. Use of the
principal requires meeting criteria reflective of an economic recession and approval by a 3/5 majority vote
in each legislative chamber. The principal can also be used if the Governor declares an emergency and
both chambers approve by a 3/5 majority vote. If approved by the legislature, money from the ESF can be
transferred to the State School Fund for distribution to SDs and ESDs.

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EDUCATION SERVICE DISTRICT EQUITY
The 2001 Legislature passed Education Service District (ESD) revenue equalization legislation. ESDs began
receiving State School Fund dollars after 1990's Measure 5 to help compensate for property tax cuts. From
1991 to 2001, each Legislature provided State School Fund dollars to ESDs only for the immediately
following biennium. The amount was based on a percent of property tax losses due to Measure 5 and 50.
However, the issue of an imbalance in state and local revenue per student among ESDs had not been
addressed.

The 1999 Legislature started to narrow the gap between high and low revenue ESDs, but ESD property tax
and state funds per student still varied substantially. These ESD funds were in the hundreds of dollars per
student, but the high per student amount was over four times as great as the low amount. This was a high
multiple compared to school districts. The discussion of funding equity issue was delayed until after the
completion of equalization for school district revenue.

School District and ESD Financial Equity
Defining permanent ESD equity was a two-step process. The first step defined equity between ESDs and
K-12 school districts. The 1999 interim Legislative Task Force on ESDs recommended a permanent split of
total state and local revenue available for allocation between K-12 school districts and ESDs. The
Legislature adopted the recommendation for a split of 5% for ESDs and 95% for school districts when fully
phased-in.

The 2005 Legislature reduced the ESD share by ¼ of a
percentage point and added it to the school share with
additional adjustment in the following year. Beginning in
2011-12, the K-12 school share has been 95.5% with the
ESD share remaining 4.5%.

Equity Rationale
The second step was to define equity among ESDs. The question was how the ESD portion of the total
should be fairly divided up among the 21 ESDs existing at the time. After consideration of various options,
the Task Force's Subcommittee on Finance reasoned along the following lines:

• ESDs support their school districts as a primary function
• ESD support services and funding levels vary significantly around the state
• ESDs provide many special education services
• K-12 school equalization formula already exists with special education weights
• Equalize ESDs using a percent of K-12 formula revenue allocated to their school districts.

Recognizing that ESDs are support districts for school districts, the task force recommended that ESD
equalization be measured by the K-12 school equalization formula. Consequently, an independent and
separate ESD equalization formula was not developed. The idea of piggybacking ESD equalization onto K-
12 school equalization was to recognize the reality that an ESD would face similar financial needs of school

Report #4-20 P a g e | 13
districts it was serving. Since the equity of financial needs among school districts were addressed in school
equalization formula, it was natural to take advantage of results from K-12 formula revenue distribution.

ESDs and School Districts
As of 2020, there are 19 ESDs. ESDs are distinct from school districts, but territorially are made up of
school districts. The school districts within the boundary of an ESD are the ESD's component school
districts. The student count for an ESD is the sum of students in its component school districts. However,
the allocation of revenue to an ESD does not directly use a measure of students in the ESD.

Equalization Revenue
The ESD share of total formula revenue is 4.5% beginning in 2011-12. Total formula revenue is the sum of
(1) State School Fund dollars available for distribution to school districts and ESDs and (2) statutorily listed
local revenue (primarily property taxes) from SDs and ESDs.

ESD EQUALIZATION
The ESD equalization calculation determines each ESD's operating revenue (or general services revenue)
from the State School Fund and local revenue. The allocation formula basically assumes that ESD revenue
should be proportional to the equalization formula revenue of its component school districts.

General Services (1) Base Revenue x % to Balance
Revenue = Higher of (2) A Minimum ($1.165 million in 2015-16)

GENERAL SERVICES REVENUE
General services revenue for an ESD is the sum of General State School
Local
State School Fund grant allocated to the ESD and Services = Fund Grant + Revenue
the local revenue of the ESD. Revenue

State School Fund Grant
The State School Fund Grant is the ESD’s allocated general services amount less its local revenue. If local
revenue is greater than the general services amount, then the State School Fund Grant is zero and there
is excess local revenue. Treatment of excess local revenue is discussed later in this report.

Local Revenue
Local revenue is the sum of two sources: permanent-rate property tax collections (current year and
delinquent payments and interest from prior years) and revenues from state managed county trust timber
(Oregon Revised Statutes Chapter 530). Like for schools, local revenue does not pass to the state for
reallocation to ESDs. Local revenue stays with the ESD (unless there is excess as described below).

BASE REVENUE
Beginning in 2011-12, the base revenue is 4.712% times the sum of the school formula revenue for the
ESD component districts. Since SDs’ share of formula revenue is 95.5%, by multiplying component school

Report #4-20 P a g e | 14
districts’ combined formula revenue by 4.172%, the aggregation of all ESDs’ formula revenue becomes
4.5% of the total formula revenue, thus exhausting all ESD share (4.712% X 95.5%=4.5%).

By using school district formula revenue as the basis for allocating general services revenue, ESD
equalization depends on the same factors as school district equalization. ESDs in their role of assisting
component school districts are assumed to have the same relative need for funds as their school districts.

Sum of
Base Component
= 4.712% X
Revenue School Districts
Revenue

Minimum Base
A district minimum allocation is $1.165 million starting from 2015-16 and fluctuates proportionately with
the State School Fund. This minimum has been increasing as SSF appropriation grows in the past several
years. If the base revenue allocation for an ESD is initially less than the minimum in a school year, the base
is increased to that minimum.

Percent to Balance
The 4.712% of component district formula revenue uses up the 4.5% of total formula revenue available
for ESDs. So, if extra funds are necessary to meet the minimum for certain ESDs, distributions to ESDs that
are receiving over minimum allocations will proportionately decline to compensate for the extra funds
needed for minimum receiving ESDs.

Excess Local Revenue
If an ESD’s local revenue is greater than its general services revenue for a school year, the State School
Fund grant is zero. Any local revenue in excess of the entitled allocation is distributed to component
districts proportional to the year’s extended ADMw and is included as local revenue for them for the
following year.

EQUALIZATION SUMMARY
To determine general operating revenue, the first step is to allocate 95.5% of total formula revenue to
each school district using the K-12 formula. The second step is to allocate to each ESD, 4.712% of its
component school districts' allocation. If all ESDs receive above a minimum for a school year, the
allocation from the second step is final. If there is at least one ESD receiving below the minimum in the
second step, allocation process moves on to the third step. The third step is to increase any ESD allocation
below the minimum to the minimum, which reduces collective allocation to ESDs receiving above the
minimum. The last step is to reduce the revenue of all ESDs above the minimum by the same percentage
to exhaust all remaining ESD share of the formula revenue that is net of sum of all minimum grants.

State School Local Higher of (1) Base Revenue x % to Balance
+ =
Fund Grant Revenue (2) A Minimum

Report #4-20 P a g e | 15
State Payment Schedule
The ESD July payment is 16.67% of the estimated State School Fund grant with 8.33% in each of the
following 10 months. There is no June payment. Adjustments for audited data are made the following
year. This is the same payment schedule as for school districts.

APPENDIX
Related Research Reports by the Legislative Revenue Office*

Corporate Activity Tax: Frequently Asked Questions (2020), Research Report #2-20
Oregon Public Finance: Basic Facts (2020), Research Report #1-20
Revenue Measures Passed by the 80th Legislature (2019), Research Report #3-19
K-12 and ESD School Finance: State School Fund Distribution (2010), Research Report #2-10
2009 School Finance Legislation: Funding and Distribution (2009), Research Report #8-09
Small School District Funding (2008), Research Report #4-08
Student Weights for Small Schools (2008), Research Report #3-08
2007 School Finance Legislation: Funding and Distribution (2007), Research Report #4-07
Student Weights: Individualized Education Program (2006), Research Report #7-06
Student Weights: English as a Second Language (2006), Research Report #2-06
2005 School Finance Legislation: Funding and Distribution (2005), Research Report #3-05
The Education Stability Fund (2004), Research Report #5-04
School Local Option Property Tax: Legislation and Utilization (2004), Research Report #4-04

*These publications are available at the Oregon Legislative Revenue Office website:
https://www.oregonlegislature.gov/lro

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