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All of these provisions present problems. If the first hold-harmless was "designed to reduce the impact of changes in entitlements," as the Conference Report states, then it should not become effective until 1976 when the major changes occur. Since it is scheduled to become operative in 1975 one might conclude that it was also designed as insurance against low levels of funding for “A” and “B” children. For example, an applicant who received a special payment in 1974 for a substantial decrease in federally connected children would be unlikely to remain eligible for another such payment in 1975. In this case it is possible that the 1975 payment will be less than 80 percent or 90 percent of the 1974 payment. Then such an applicant would benefit from the provision. If the intention was to fund all such applications for several years on this special basis, they could easily have been included in the second hold-harmless clause which presently relates only to military decreases and which can be funded from the regular appropriation. The first hold-harmless must be funded separately from the regular appropriation.

The requirement that estimates for two of the hold-harmless provisions be furnished within 15 days of a regular appropriation is unreasonable. It is impossible to predict the numerous changes in entitlements and then apply all of the hold-harmless provisions to each changed entitlement and to other holdharmless provisions before all applications are initially processed. Since final reports are not due until September 30 and cannot be fully processed until the end of the next fiscal year, it is more reasonable to request estimates for the hold-harmless provisions at the end of the first fiscal year following the fiscal year of entitlement. Or, estimates for about three-fourths of the school districts could be ready by the end of January following the close of the fiscal year. However, such action does not permit making funds available to an LEA, if required, in the year of application.

Inequities in impact aid

In addition to the administrative problems discussed above, I think it would be useful to reiterate this Administration's concern with the inequities in the impact aid program. The following items are based upon the findings of the Battelle Memorial Institute Study of five years ago, but, unfortunately, these conditions remain essentially unchanged and would be only slightly modified by the new provisions of P.L. 93-380.

In general, current impact aid payments result in unjustified payments to many school districts, and thus constitute an inequitable use of Federal funds. The major sources of impact aid "windfalls" which still prevail are:

Payments that far exceed the costs of the local government of educating Federal pupils.

Payments to districts that, even without the Federal assistance, are wealthy and well able to support their own schools from local sources with a lower tax effort than most districts in the State.

Payments based on non-taxability of Federal property where activity on that property generates taxes sufficient to defray the education costs of children of persons working on the property.

Double payments to districts that receive funds through in-lieu-of-taxes payments or shared revenues and again through impact aid.

Double payments to districts that receive funds from their State government on an equalization formula.

Higher per pupil payments to rich districts than to poor ones resulting from the methods used to calculate the rate of payment.

Payments based upon children who would likely be attending schools there even if the Federal government had never come into the district.

Payments that do not reflect the economic stimulus that the Federal government may cause in a community.

As a result of such overpayments, districts with a large percentage of federally-connected students are characterized by lower pupil-teacher ratios, higher per pupil expenditures, and lower tax rates than districts with less Federal impact or no impact at all.

Theoretically there should be some reduction in the payments to the wealthier districts, particularly in the Washington, D.C. area, as a result of new provisions giving no payment to out-of-State "B" pupils, but the operation of the variety of "hold-harmless" provisions including one directed specifically at that situation push any real reduction far into the future.

Facing this kind of inequity in a program which has continued to grow in appropriations, the Administration proposes to simplify impact aid and focus

its benefits on only those districts which can truly be said to suffer a Federal impact. Our proposal would continue the pattern adopted in appropriations for the last several years of giving higher priority to "A" pupils by creating an eligibility based on a 100 percent payment for heavy impact "A" districts and 90 percent for other "A's". "B" pupils would be paid at 68 percent and "B" out-of-State pupils would not qualify, thus reducing payments to wealthy school districts. No payments would be made for public housing pupils. Moreover, to make certain that we make payments only where there is a substantial impact, we propose to deduct five percent of the district's previous years current operating expenditures from its total eligibility and pay only the difference. About 900 districts presently receive more than five percent of such expenses from P.L. 874 funds and thus would be eligible for payment in 1976. Of the current districts receiving impact aid approximately 2,400 receive less than 2 percent of their total operating funds from that source. In a period when Federal dollars are at a premium, we believe that this program is a logical candidate to provide savings which are now necessary. But even without the fiscal constraint we feel the program must be brought in check.

In conclusion, Mr. Chairman, we believe that the new provisions of P.L. 874 which take effect in FY 1976 are extremely difficult to administer. We would also note that as a result of the handicapped and public housing provisions, the Federal government for the first time has a mandate to check on the utilization of impact aid funds at the local level. This eliminates one of the major advantages of these funds in the eyes of school administrators—their general purpose use. We suspect these may be the first steps in the direction of a full categorical program which moves far away from the bill's original intent.

We believe that this program has now reached a critical point in terms of administrative complexity, inequities in application, and lack of clarity of purpose. Only a major revision of the program will suffice. We urge that you consider our proposal and proceed to develop a new law which will eliminate or at least reduce the legislative-executive battles which have prevailed in this area for the past quarter century.

Thank you, Mr. Chairman. My colleagues and I will be happy to try to answer any questions you may have.

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Mr. BELL. Mr. Chairman, my statement will be brief. I will read part of it. I will refer to part of it and ask one of my colleagues to summarize so we will try to be careful with the time.

I have with me Charles Cooke, Deputy Assistant Secretary for Legislation, Bill Stormer, who is the Acting Director of the division that manages this program, and Al Alford, who is Assistant Commissioner for Legislation.

We appreciate this opportunity to appear before the committee to discuss the impact aid program and report on our progress in implementing the SAFA portion of Public Law 93-380.

As you know, this law has been revised substantially through the new language. The entitlement formulas and other methods of making payment are drastically changed. As a result, what was a complex law has become even more complex and confusing to both applicants and administrators.

The major implementation problem for 1975 relates to the question of equalization. This, Mr. Chairman, is the matter that the Senator from New Mexico was discussing.

As you know, a provision exists in section 5 (d) (2) of Public Law 874 which prohibits States from taking impact aid payments into consideration when determining eligibility for or the amount of State funding.

Because of this prohibition school districts in some States received payments under the State aid program and under Public Law 874 which in some cases results in windfalls.

To counteract these adverse effects of this prohibition, Congress has added by means of Public Law 93-380 a means whereby this prohibition may, in effect, be waived in cases where States have a viable equilization program.

Under section 5(d) (3), a State is permitted to take into consideration SAFA payments to a school district in the determination of State aid under the State aid program designed to equalize expenditures among the local educational agencies.

The SAFA payments may be taken into account in determining relative resources or relative need for purposes of the State aid program but only, to use the statutory language, "in proportion to the share that local revenues covered under the State equalization program are of total local revenues."

In order to implement this amendment the Commissioner is required to promulgate regulations containing standards for determining which programs of State aid qualify for the exception.

Members of my staff have worked hard to develop these regulations. from a number of alternative approaches.

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We set forth our tentative approach to the problem in a so-called concept paper which was shared and discussed with representatives of affected State educational agencies, local educational agencies and other interested persons, as well as with interested congressional staff members.

We are now considering comments received in connection with drafting the actual notice of proposed rulemaking for clearance within the Office of Education and the Department.

Under our current thinking a State aid program would be evaluated under section 5(d) (3) in terms of a basic standard which would measure the degree of disparity in revenue or expenditure per pupil among local educational agencies in the State.

If such disparity was no greater than 20 percent then the program would be deemed to qualify for the exception and SAFA payments could be taken into account for the affected districts but only in the proportion allowed by the statute.

In the calculation of the disparity, allowance would be made for expenditures for children with special educational needs so as not to adversely affect a State aid program which took such needs into account in its distribution of State aid.

I might just say parenthetically that some State programs give weightings for handicapped students, for vocational students, and so on. Our formula, Mr. Chairman, would allow for that. It wouldn't penalize for what we think is a good program here.

If the program did not qualify under this so-called "disparity" test but the state could show that the application of that standard to the program was inequitable because of peculiar circumstances related to expenditures in that State, then the program might nevertheless qualify under a set of evaluative criteria which would take into account such matters as the degree of school revenues equalized, whether education expenditures were predominantly a function of school district wealth and the like. Provision of course would be made for administrative determinations and hearings.

In our reflection on this subject we have been guided by indications in the legislative history that the section 5(d) (3) exception was not to be "widely used" and that the Commissioner should make "very careful and deliberate determinations" in granting exemptions. We drew this from the hearing language of this committee.

In addition our views have been refined as a result of comments on our concept both from affected State and local educational agencies and congressional staff.

We will move as quickly as we can to place in the Federal Register a notice of proposed rulemaking which will permit all parties to react formally to our regulatory proposal.

At the conclusion of the rulemaking process we will be in a position to make determinations under section 5(d) (3), including determinations for those several States which were previously found out of compliance with section 5(d) (2).

A number of important changes are scheduled to go into effect in fiscal year 1976.

These include:

Creation of several subcategories of A children; exclusion from A and B categories children whose parents are employed outside the


State of the school district. School districts would need to continue to survey and claim these children for possible eligibility under one of the hold-harmless clauses.

One change would count all children who reside on Indian lands in the A category regardless of the employment status of their parents. Another change would provide for establishing of new subcategories for B children to provide varying local contribution rates for children who reside on Federal property only and those whose parents are employed in the same county as the same school district and those employed out of the county but in the same State and those in the uniformed services.

Another change would include the addition of a payment for handicapped children of parents in the uniformed services in both A and B categories equal to 111⁄2 times the usual rate if a special program for their educational needs is being provided.

There would be provision of three tiers for making payments when appropriations are not sufficient to provide full entitlement.

There would be an authorization of payments for low-rent housing children in the first and third tiers but not in the second. Such payments must be used for programs and projects designed to meet the special educational needs of educationally deprived children from lowincome families.

Another change is a modification and extension of assistance for decreases in Federal activities and new hold-harmless provisions, two of which began in fiscal 1975.

While we agree with some of these changes and in fact include them in our own bill we do anticipate major administrative problems with the majority of them.

At this time, Mr. Chairman, with your permission I would like to depart from my regular testimony and call on Mr. Stormer from our impact aid program to review at this time the complexities of these calculations under the new law.

You have a chart that is before you. The chart has impressed us with the intricacies of the tremendous task of making the calculations. I think it will also impress you and the members of the committee.

I am so convinced of the complexities that I believe that we actually need experts that are deeply involved in it to discuss it.

I would like to ask Mr. Bill Stormer at this time to discuss the overlay material that you have before you to give you a better concept of how complex these problems are growing.

Then I will continue with just a few more words on my testimony. Then we will be through, Mr. Chairman.

Chairman PERKINS. Go ahead.

Mr. STORMER. Mr. Chairman, I will try to use this overlay to illustrate the complexities of computing entitlement for a local educational


I will refer you to the base chart which we have supplied. The upper half of the chart represents the A category pupils. The lower half represents the B category pupils. We have made an assumption of a uniform local contribution rate of $500. This is shown at the top of the chart.

In this illustration the school district would be entitled to the dollar amount times the number of children in each category or subcategory.

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