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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 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.

WHIEN WE ALL PRUPOGING

Finally, the wealth neutrality standard is designed to measure equity in terms of uniformity of wealth with which to provide resources. This standard is based on the well-researched 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, indefinately delay the issuance of final determinations if there is an extended delay in the promulgation of the amendments. In any case final determinations 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. EMPHASIBE 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 occurrance.

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 will 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.

PANEL OF DR. THOMAS L. JOHNS, SPECIALIST, SCHOOL FINANCE, BUREAU OF ELEMENTARY AND SECONDARY EDUCATION, U. S. OFFICE OF EDUCATION, ACCOMPANIED BY WILLIAM STORMER, DIVISION OF SCHOOL ASSISTANCE IN FEDERALLY-AFFECTED AREAS, U. S. OFFICE OF EDUCATION; HARRY WUGALTER, SECRETARY FOR EDUCATIONAL FINANCE AND CULTURAL AFFAIRS, STATE OF NEW MEXICO, REPRESENTING EDUCATION COMMISSION OF THE STATES NATIONAL GOVERNORS' CONFERENCE, NATIONAL CONFERENCE OF STATE LEGISLATURES; DR. H. DAVID FISH, PRESIDENT, IMPACTED AREA SCHOOLS; WALLACE ODOM, ASSISTANT SUPERINTENDENT, ESCAMBIA COUNTY SCHOOL BOARD, PENSACOLA, FLORIDA AND MR. BERNELL WRIGLEY, SUPERINTENDENT OF SCHOOLS, DAVIS COUNTY SCHOOL DISTRICT, FARMINGTON, UTAH

Dr. JOHNS. Mr. Chairman, I am pleased to appear before this subcommittee to discuss the plans and activities for the implementation of the equalization provision of Public Law 81-874. In order to place the equalization provision in the correct perspective, it is useful that a brief background statement be provided.

During the 1960s a number of states added provisions to their school finance laws which counted impact aid receipts as a local resource for purposes of calculating state school aid entitlements to local educational agencies. These provisions acted to reduce state aid payments. The states enacting them defended this practice on the ground that impact aid funds were provided as a payment from the Federal government, "in lieu of local taxes." Therefore, these payments could be counted as local wealth. Court actions were

initiated to test the legality of such state withholding action. In the case of Sheperd v. Godwin a Federal District Court held that the state withholding action in the state of Virginia violated the Supremacy Clause of the Constitution. Then in 1968 P.L. 81-874 was amended to prohibit the payment of any regular impact aid funds to any school district located within a state which took these Federal payments into consideration and adjusted state aid payments accordingly.

In 1974 the Impact Aid law was again amended to create a limited exception to the prohibition provision for those states which had enacted school finance laws designed to "equalize expenditures."

While the reasons given for the enactment of the exception amendment varied, the essential rationale was that Impact Aid payments to local educational agencies in states with highly equalizing finance programs constituted an unfair windfall to agencies in which the state has already made possible an adequate and equitable financial base. The Section 5(d)(2) exception provision allows states with highly equalizing programs to incorporate P.L. 81-874 funds into their school finance equalization system.

However, neither the prohibition provision, Sec. 5(d)(1) of P.L. 81874, nor the exception provision, Sec. 5(d)(2) of P.L. 81-874, has been applied to date for several reasons.

The Congress, in 1973, adopted an amendment waiving the prohibition provision for fiscal year 1974. This waiver was enacted after the U. S. Office of Education had taken steps to terminate P.L. 81874 payments to Kansas and North Dakota because they had enacted school finance laws which violated the prohibition provision of the 1968 amendments. The 1973 amendment subsequently was applied also to New Mexico and Maine. The controversial nature of the exception provision regulations led to unusual delays in achieving their publication and is another reason for not having implemented it.

After consultation with state and local educational agencies, proposed rules and regulations were published June 25, 1976, and these were republished as final regulations March 22, 1977. A major amending provision to the final regulations, which has been twice published in proposed form, still has not been published as a final rule. Because of the delay in promulgating final regulations for the exception provision, Congress adopted an amendment in 1976 which in effect again suspended the operation of the prohibition provision until July 1, 1977 for states with apparently non-conforming laws; or if final regulations had not been promulgated by this date, until such regulations were promulgated.

Since final regulations have been promulgated, we are required by law to initite the application of both the prohibition and exception provisions on July 1, 1977. To date we have notified five states that we intend to commence determination proceedings after July 1, 1977. Of the five states, Alaska requested the Commissioner to initiate determination proceedings. In the case of New Mexico, Kansas, North Dakota, and Maine, the Commissioner decided to initiate determination proceedings after recurring information indicated that these states intend to take account of P.L. 81-874 pay

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