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ments in their state school aid formulas in the 1977-78 school year. In addition, Utah has requested an evaluation as to whether the state would be eligible to take into consideration 874 payments if such a provision were included in their Minimum School Finance act.

I am also aware South Carolina has recently enacted school finance legislation which will count 874 payments as a local resource beginning next year.

Now I would like to turn to the provisions of the final regulations published on March 22, 1977. These regulations provide that two qualifying standards be met by a state before it is eligible to apply the provisions of Section 5(d)(2) of the Act to its state equalization program. These standards consist of a "general qualifying" standard and "disparity" standard. Additionally, a "wealth neutrality" standard was published in proposed form, for the second time, on March 22, 1977. When this standard becomes effective, it will serve as an alternative to the "disparity" standard. The final regulation for this "wealth neutrality" standard is now in the USOE clearance process. These standards have been developed in light of the legislative history of Section 5(d) of the Act which indicates that the Commissioner should promulgate regulations which afford only a limited and carefully constructed exception to the prohibition rule.

The general qualifying standard requires that a state school aid program must:

be authorized by state law for the year of determination. That is, that the program has not been determined to be in violation of the law by a final court order; and,

be a shared cost type program where the relative financial resources available to local educational agencies are taken into account in the apportionment of state equalization aid.

States such as California and Connecticut which are under final court orders regarding their school finance programs would not meet this test until the courts' requirements are satisfied. Additionally, states such as North Carolina, which do not have shared cost equalization programs, would not meet this initial test.

The disparity standard requires that a state must demonstrate an expenditure or revenue disparity on a per pupil basis of no more than 25 percent when the 95th and 5th percentile districts in that state are compared. In calculating the disparity, the revenues or expenditures which an LEA receives from state sources designated for special cost differentials are first excluded.

Also excluded are local contributions to equalized shared costs for special cost differentials. These special cost differentials may be based on types of students, demographic, or other socioeconomic conditions the state considers in its financing program, except those used to maintain prior expenditure levels. Thus, funds for transportation, special education, and others in which the state recognizes cost differences by reimbursing a district for part or all of the costs of the program would be subtracted. Also deleted are Federal funds, other than non-accountable items such as Federal Forest Reserve Funds and Impact Aid funds not taken into account by a state. However, if a state has been counting P.L. 81-874 payments as a local resource, then these funds will be included in the calculation

to the extent that they do not exceed the proportion allowed under the Act.

A disparity standard was chosen because it is a method of evaluating school finance programs in terms of equalization that has been used by both the courts and authorities in the field of school finance, and because it is believed that the phrase "equalize expenditures" focuses upon the relative availability of funds to local educational agencies for educating the children within their school systems. This standard is designed to measure equity through uniformity of resources.

The wealth neutrality standard which we are proposing is designed to measure equity in terms of uniformity of wealth with which to provide resources. This standard is based on the wellresearched principle that differences in local expenditures for education are significantly related to differences in local wealth, and that differences in student needs and local choice may require significantly different expenditures.

We feel that a test of the degree to which a state has removed local taxable wealth advantages or disadvantages is a fair and appropriate alternative to a disparity test. The wealth neutrality standard is calculated by determining the percentage that wealth neutral revenues is of total state and local revenues for current operation. We have proposed to establish the percentage at 85 percent. While the Commissioner will initiate determination proceedings after July 1, 1977, we do not intend to issue a final determination regarding any state's eligibility under Section 5(d)(2) while the alternative test is pending promulgation as a final regulation. We will not, however, indefinitely delay the issuance of final determintaions if there is an extended delay in the promulgation of the amendments. In any case, final determintaions will be issued for the 1977-78 school year in time for proper administration of the provision.

The regulations contain an exception clause which provides that state programs which do not meet either the disparity or wealth neutrality standards may still be considered for the exemption if certain conditions are met. Before a state can be considered under the exception provision it must demonstrate that because of exceptional circumstances within the state both the disparity and wealth neutrality standards would apply unfairly in that state.

Consideration under the latter clause is further conditioned upon the requirement that educational expenditures be more equalized within a state as a result of any offsetting of P.L. 81-874 payments. If a state can satisfy these initial conditions, then it can be considered in reference to specified evaluative criteria contained in the exception provision.

These criteria, while judgmental in nature, have been selected as reasonable parameters of a truly equalizing state aid program.

I emphasize this: Because of the difficulty of meeting the initial condition necessary for a state to avail itself of the tests set forth in this provision, it is our judgment that qualification under this provision will be an extremely rare occurrence.

In conclusion, we believe the standards just described are based on sound principles of measuring the extent to which a state has

provided equal resources to school districts or the extent to which a state has provided equal access to the wealth of the state as a whole to school districts within that state.

Finally, we have proposed that an exception be made in the situation where neither of the standards could be fairly applied to a state school financing program. Proper application of these standards will permit those communities which truly bear an additional tax burden caused by Federal activity to receive the benefits of payments under the Act and wil avoid interference with truly equalizing state school aid programs.

Mr. Chairman, this concludes my prepared statement. My colleagues and I will now be delighted to try to answer your questions. Mr. BLOUIN. The Chairman indicated we would go through all the testimony from all of the panelists and then proceed with the questions. All of you can feel free to summarize your statements. If you wish the entire statement will be inserted in the record. Mr. Harry Wugalter. Is that pronounced properly?


Mr. WUGALTER. I have a prepared statement and exhibits to submit for the record which I would like to submit at this time. [Mr. Wugalter read the following statement:]

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JUNE 29, 1977

Mr. Chairman:

I appreciate having an opportunity to appear before the Subcommittee today. I am Harry Wugalter, Secretary for Educational Finance and Cultural Affairs, State of New Mexico, and am here today representing the Education Commission of the States, of which our Governor, Jerry Apodaca, is the immediate past Chairman, and the National Governors' Conference, in which Governor Apodaca is a member of the Human Resources Committee. I also offer this statement on behalf of Senator Joseph C. Harder, Chairman of the Kansas Senate Education Committee and the National Conference of State Legislators. I have been concerned with this issue for a number of years because I had significant responsibility for the development of New Mexico's school finance reform program which was enacted in 1974. As a result of this legislation, New Mexico has a highly equalized state aid system with approximately eight-five percent of elementary and secondary expenditures coming from state aid. I should note that our state meets the tests which have been established by the Office of Education for recognizing impact aid payments as local resources. Thus, it is not a parochial concern which brings me here today; rather, we are concerned that the current federal posture on this issue is confusing for states trying to deal with the problem, unduly complex and not well focused on the point at issue. I should

also note that we have no basic quarrel with the statute as it is now written if properly applied and interpreted.

My testimony addresses the need for clarification of Congressional intent relative to Section 5(d) (2) of P.L. 81-874. This section of the Impact Aid program was modified by the Education Amendments of 1974 (P.L. 93-380) to state those circumstances under which states may recognize federal pyments to local education agencies under the impact aid program in determining states aid to such LEA's. I intend to inform the Subcommittee about the problems encountered in attempting to meet proposed regulations drawn and issued by the Office of Education. The Congress should include in the record a clear statement of legislative intent in order that our state and federal partnership operate effectively. The ECS and NCSL will be pleased to work with you on this issue.

The basic reason for the impact aid program is that local school districts that include federal installations do not receive property tax revenue from these tax exempt areas and thus have a limited tax base to support an adequate school program.

Most states provide aid to LEA's with some recognition of the LEA's capacity to raise revenues. States with highly equalizing school finance systems provide significant state aid which is allocated inversely to the financial capacities of LEA's relative to the programs they finance. impact aid funds may be compensated twice for its limited tax base -once by the federal government in recognition of the exclusions from

In such states an LEA which receives federal

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