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4,581 LEAS in the program for fiscal year 1973. In addition, we analyzed data from the 16 states to determine the relationship between increasing percentages of federally connected children and taxable property values and how such a relationship might be reflected in such school financing indicators as tax rates applied to property values to raise revenue for schools, per pupil expenditures, and ratios of pupils to teachers. Correlation analysis was used to test for relationships between percentages of federally connected students and the other factors listed. Details are given in Appendix II in the report.

Effect of withdrawal of impact aid funds:

Without impact aid entitlements, 48 percent of the 1,671 LEAS analyzed would need annual property tax increases of less than five percent and 18 percent would need tax increases from five to ten percent.

Our tests of the effect of the withdrawal of only 3(b) entitlements showed that most LEAS could replace their lost entitlements with only a small increase in local property taxes. About 55 percent of the LEAS analyzed would require an increase of less than five percent in property taxes, and another 21 percent would require an increase of 5 to 10 percent. Eight percent of the LEAS would require a tax increase of 25 percent or more.

Our estimates of the effect of loss of aid are conservative because we used 100 percent of the entitlements and school year 1971-72 property valuations in our analyses. Whenever funds appropriated for section 3 are not adequate to pay total entitlements, the funds are prorated. Prorations were necessary in fiscal years 1951 and 1955 and in every year since fiscal year 1967. However, even under conservatvie assumptions concerning loss of aid, our analysis showed that most LEAs would not have to impose major tax increases to replace 3(b) aid.

Our estimates of the effect of loss of aid are conservative because we used 100 percent of the entitlements and school year 1971-72 property valuations in our analyses. Whenever funds appropriated for section 3 are not adequate to pay total entitlements, the funds are prorated. Prorations were necessary in fiscal years 1951 and 1955 and in every year since fiscal year 1967. However, even under conservative assumptions concerning loss of aid, our analysis showed that most LEAs would not have to impose major tax increases to replace 3(b) aid.

Because not all states place the same reliance on local property taxes to finance education, large percentage changes in taxes are not always large dollar changes and vice versa. Therefore, we calculated the dollar change in taxes on a home with a market value of $40,000 to determine whether stating the effects in this manner would show any major differences from the percentage change analyses.

An increase of less than $50 in annual local property taxes on a home with a market value of $40,000 would result for 73 percent of the LEAS without their total entitlements, and for 81 percent without their 3(b) entitlements only. Our analyses showed that a great majority of LEAS-and especially those with low percentages of federally connected children-could replace their entitlements

with only small monetary, as well as percentage, changes in local taxes.

Effect of changes to program eligibility and payment provisions: Previous HEW-financed studies on the effects of federally connected children on LEAs recommended changes in methods for determining eligibility for aid. In general, the proposed changes were intended to develop the concept of paying only for aboveaverage Federal impaction in any LEA. These changes and several variations we developed assume different measures for what constitutes above-average impaction.

Depending on the alterntive provisions applied, the proposed changes could reduce total impact aid entitlements by $68 million to $351 million, using fiscal year 1973 as a basis.

The bases for the alternatives were eligibility characteristics of the impact aid program and various recommendations made by previous HEW-financed studies to more closely reflect sources of tax revenues. A list of the alternatives and the reduction in impact aid resulting from application of the alternatives is presented as an enclosure to our statement.

The alternative proposals would eliminate much of the aid now received by LEAS with small percentages of federally conected children. For example, under some of the alternatives LEAs with less than three percent federally connected students would no longer receive aid.

Our analyses show that entitlements to LEAs under the impact aid program are quite sensitive to change in eligibility and payment provisions. Because above average impaction can have many definitions, the number of LEAs qualifying as above average and the aid they are entitled to can vary considerably. In general, however, as eligibility and payment provisions become stricter, fewer and fewer LEAS are eligible for aid and a higher percentage of aid would be directed toward those LEAS having larger percentages of federally connected children.

Federally connected children and LEA prosperity:

We analyzed data from 16 states to determine the relationship between increasing percentages of federally connected children and taxable property values and how such relationship might be reflected in such school financing indicators as tax rates applied to property values to raise revenue for schools, per pupil expenditure, and ratios of pupils to teachers.

Taxes available for schools are the product of some measure of property valuation times a tax rate. Assessment rates determine what proportion of total property values will be taxed, and millage rates are the tax rates applied to the assessed valuations.

In our analysis tax rate is defined as the product of the millgae rate times the assessment rate and is the rate that would be applied to total property valuation to determine the amount of taxes to be paid. This procedure places all LEAS on the same basic taxing structure.

We further analyzed the data from seven of these states to determine what effect withdrawal of impact aid funds would have on the relationship with tax rates. In general we found the following conditions to prevail:

Increasing percentages of federally connected children tend to show a slight association with higher property values per pupil, but the association is very weak and is not consistent across all 16 states.

Increasing percentages of federally connected children generally are associated with lower tax rates to raise revenue for schools, higher per pupil expenditures, and lower ratios of pupils to teachers, but the associations are very weak and are not consistent across all 16 states.

Increasing percentages of federally connected children are associated with higher tax rates to raise revenue for schools when taxes are adjusted for loss of impact aid funds, but most of the relationships are moderately weak.

The conclusion for these relationships is that heavily impacted LEAS appear to be associated with favorable school financing indicators but that withdrawal of aid could change the tax relationships considerably if current levels of educational effort are to be maintained.

The fact that heavy impaction does not show a stronger relationship than it does with taxes adjusted for loss of aid, however, confirms our previous analysis that many LEAS would not require a great increase in taxes if impact aid was withdrawn. Although our results cannot be considered representative of the entire nation, they indicate that large percentages of federally connected children do not necessarily indicate serious economic burdens on LEAS. Comparison of impacted and nonimpacted LEAS.

Comparison of impacted and nonimpacted LEAS within a state can show some of the effects of federally connected children on LEAS. The results from 14 of the 16 states in our case study on impacted and nonimpacted LEAS showed that they differed greatly on several important characeristics.

For example, the LEAS receiving impact aid funds were generally the largest and most prosperous LEAS within a state. On the other hand, to raise the same amount of local revenue per child as LEAS not receiving aid, impacted LEAS in most states analyzed, on the average, would have to have higher property taxes than nonimpacted LEAS if the aid were not available.

The fact that this was not true in all states showed that the presence of federally connected children does not necessarily create a heavy tax burden. Even in those states where impacted LEAS have high tax rates, many individual LEAs that are impacted have lower tax rates than nonimpacted LEAS.

In addition to reviewing the validity of claims for impact aid funds, the impact aid payment rates, and the impact of federally connected children on local educational agencies, we developed information on:

The effect of one state's plan for equalizing educational revenues made available to its LEAS.

The effect of a recent amendment to Public Law 81-874 on payments to LEAS for children whose parents work on federal property located outside the LEA's county or state.

How impact aid payment rates compared to local educational

costs.

5.)

Our findings are discussed in detail in our report. (See Appendix

This concludes our statement, Mr. Chairman. We will be happy to answer any questions you may have.

[Additional information submitted follows:]

ENCLOSURE

ENCLOSURE

Effect of Changes to the Impact Aid Program
Eligibility and Payment Provisions

The bases for the following alternatives were eligibility characteristics of the impact aid program and various recommendations made by previous HEW-financed studies to more closely reflect sources of tax revenues.

The alternatives were:

1.

2.

3.

4.

5.

Eliminate LEAS that are eligible solely on
the basis of the number of students living in
low-rent public housing but are not receiving
aid for these students.

Reduce the payment rate for 3(b) students to
40 percent of the rate for 3(a) students.

Because LEAS generally are not eligible for
impact aid funds unless the number of federally
connected students exceeds 3 percent of ADA,
make payments only for those children who
exceed 3 percent of ADA (absorption).

In determining whether LEAS meet the 3-percent
eligibility requirement, count 3(b) students at
50 percent and pay for them at 50 percent of the
3(a) rate.

In determining whether LEAS meet the 3-percent
eligibility requirement, count 3(b) students at
40 percent and pay for them at 40 percent of the
3(a) rate.

6. Count 3(b) students at 50 percent in determining
eligibility, pay for them at 50 percent of the
3(a) rate, and require the LEAS to absorb 3 per-
cent of ADA before making any payments for
federally connected children.

Count 3(b) students at 50 percent in determining
eligibility, pay for them at 40 percent of the
3(a) rate, and require the LEAS to absorb 3 per-
cent of ADA before making any payments for feder-
ally connected children.

Our analyses of the above alternatives for all 4,581 LEAS which received impact aid in fiscal year 1973 showed that total entitlements of $678.6 million for that year could have been reduced by $68 million to $351 million.

94-584 O 77 - 3

ENCLOSURE

ENCLOSURE

Reduction in Impact Aid
Resulting From Application of

Various Eligibility and Payment Alternatives

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