Analyzing the Fiscal Impact of Question 2

With Question 2 to be decided by the voters of Massachusetts on November 8th, the City of Boston’s Administration and Finance team has been asked to analyze the impact of the question on the City’s finances and the Boston Public Schools. Massachusetts faces a pivotal decision regarding how public education will be delivered in the future, and we have examined the financial implications of the charter cap lift as outlined in the ballot question. In conducting this analysis we have identified several key conclusions:

Not all cap lift proposals are the same, and different proposals would have extremely different impacts on Boston’s finances. As compared to the several legislative proposals over the last few years, Question 2 would allow for exponentially faster entry of charter schools, which would rapidly accelerate the growth in Boston’s charter school assessment.

Even before a cap lift, Boston faces significant challenges based on today’s flawed charter school financing model which allows the state to under fund transition costs and drives up Boston’s per pupil assessment. These challenges would be exacerbated if the cap were lifted without a fix to the financing formula, as would be the case with Question 2.

Boston’s charter school assessment growth under Question 2 could be so considerable that, assuming the State’s transition support remained inadequate, cost and service reductions would be required at both Boston Public Schools and in other City departments.

Boston’s Education Funding Today

In order to understand the potential impact of the ballot initiative, it is necessary to understand five key elements of charter school funding today in Boston.

1. Boston receives three major sources of education aid from the Commonwealth: Special Education Circuit Breaker funding for high cost special education students; Charter School Reimbursement Aid to provide transition assistance to municipalities responding to pupil losses; and Chapter 70 Aid, the state’s largest aid item, and its general and primary contribution to public education. The Commonwealth’s Chapter 70 Education Aid to Boston has been stagnant. Boston’s Fiscal Year 2017 (FY17) Chapter 70 Aid is about the same as we received in FY08, while City of Boston funding for BPS and charter schools has grown by more than 40%, leaving the City, with its limited revenue raising ability, to fill the gap at the expense of other City programming. The funding added to Chapter 70 by the state in recent years has been less impactful for Boston than for many other communities because the formula does not work for Boston. The formula does not adequately recognize the expensive nature of the City’s student population, which speaks over 85 languages at home, and includes more than five times the number of special education students than the formula assumes. It also considers Boston “rich” due to its high property values and income, while failing to recognize that these characteristics do not directly contribute to municipal revenue, because Boston’s property tax is constrained by Proposition 2 ½ and the City does not realize any revenue directly from income generated in Boston. While charter enrollment does contribute to the City’s Chapter 70 calculation, the recent period of charter enrollment growth has generally not led to higher overall Chapter 70 funding from the state.

2. Boston will be assessed $157 million this year to pay for students in charter schools, and Boston Public Schools will spend an additional $13.5 million on charter school transportation. This assessment is deducted directly from the City’s budget. The assessment pays for about 10,000 students at over $15,500 per pupil to attend charter schools. Boston currently receives just $3,365 per pupil through Chapter 70, with the City making up the difference for both BPS and charter students. Boston’s assessment has increased over 130% since the 2010 Achievement Gap Legislation was enacted.

3. The statutory cap on the percentage of Boston’s net school spending that the state could require be sent to charter schools was doubled from 9% to 18% in 2010, with the cap incrementally increasing by 1% per year from 12% in FY11 until it reaches 18% in FY17. The legislation also required the state to reimburse cities and towns for a portion of their charter school assessments. The state has complied with the legislation’s allowance for increasing municipal spending on charter schools, but has not complied with the requirement that it partially reimburse communities according to its own statutory formula. Under existing law, the Commonwealth’s Board of Elementary and Secondary Education can approve charter school seats until Boston is projected to spend 18% of its net school spending on its charter school assessment. Based on seats the Board has already approved and additional seats available under this spending cap, Boston is projecting its assessment will grow by about $21 million (13%) in FY18. Because Boston is not yet near its 18% cap and spending at BPS has traditionally grown, we project that almost 4,000 (or 36% more) new charter school seats can be opened in Boston between FY18 and FY28 without any changes to the statutory cap.

4. In FY17, Boston’s charter assessment is projected to grow by $14 million while the state’s reimbursement is projected to decline by $2 million. This year, Boston will lose $19 million in revenue it is owed due to the underfunding of the charter school reimbursement line item. Although state reimbursement is enshrined in statute, the state’s appropriation is essentially optional, while the City’s assessment for charter students is mandatory. Over the past three years, the Commonwealth has not approached full funding to cities and towns (and district students) for transition costs, leading to an aggregate $48 million in lost revenue for Boston. These 3 years have been a dramatic break from past practice, as this local aid line item had generally previously been fully funded. The transition funding formula was created to account for the difficulty of immediately achieving savings when students leave district schools to attend charter schools. For example, if a school plans for a 25 student class and 5 of those students instead leave for a charter school, the school cannot close that class for the other 20 students that continue to attend BPS, and the cost structure of the classroom remains relatively fixed. Boston has been paying these transition costs, but it has not been compensated by the Commonwealth according to its own formula. Thus, this is $19 million dollars that could have been invested this year in BPS students or other services that Boston residents desire.

5. Flaws in the charter assessment formula effectively impose a tax on the City, paid through its charter assessment. The state formula that determines Boston’s charter assessment is based on how much we spend in support of education, both at Boston Public Schools and charter schools. This correlation is rational, but the specific calculation is flawed. The City is currently experiencing two distinct ways in which the formula inappropriately triggers additional required spending on charter schools:

• First, BPS serves a greater percentage of high-need special education students (for instance, an aggregated 2.5% of BPS students are blind, deaf, or autistic versus 0.9% of students in Boston-based charter schools) and English Language Students (30% of BPS students versus 13% of the students in Boston-based charter schools). Higher investments made to meet student need in BPS results in increased charter funding, even though charters serve fewer high-need students than BPS does.
• Second, under the formula, the amount of charter school reimbursement that the Commonwealth provides to Boston is deducted from the City’s school spending total when determining the per pupil rate. Boston’s charter assessment is initially calculated assuming the Commonwealth will meet its obligation to fully fund charter reimbursement. When the reimbursement is underfunded, the formula only deducts the reimbursement paid to Boston, not the reimbursement owed to Boston. This results in a higher charter assessment, effectively double penalizing the City for State underfunding.

Ultimately, because Boston spends more in support of education than is required by State Law, the formula requires Boston to pay a 27% premium (about $30 million) on its charter school tuition assessment.

Boston’s Charter School Assessment Growth Would Accelerate and Soon Exceed State Education Aid

In examining the fiscal impact of Question 2, we examined three different scenarios: charter school growth under the existing 18% cap; a moderate charter school cap lift proposed by Mayor Walsh in 2015; and Question 2. For each of these, we projected the impact out to FY28 (10 years after FY18, when Question 2 would begin to impact cities and towns).

Without a cap lift, we project that nearly 4,000 more Boston students will enroll in charter schools between FY18 and FY28, an increase of over 36%. This includes students filling seats that the State’s Board of Elementary and Secondary Education has already approved and seats that we project will become available as Boston’s education spending grows, creating more room for new seats under the existing 18% cap.

As compared to previous cap lifts and several recent legislative cap lift proposals, Question 2 would more quickly allow charter schools to enter the system, which would accelerate the growth in Boston’s charter school assessment. For comparison purposes, Mayor Walsh’s 2015 proposal paired a moderate increase in the charter school cap with financing fixes. The Mayor’s proposals would have increased the cap on Boston’s charter school spending to 23% over ten years, which we project would add over 7,000 more charter school students between FY18 and FY28. The proposal would have also committed the Commonwealth to supporting additional charter school seats by providing three years of transition funding and all facilities funding directly to charter schools as they expand. This proposal would have replaced the current reimbursement model, which is subject to appropriation, and removed municipal risk for transition funding costs.

Question 2 would in practice nullify community caps and create a nominal statewide cap of an additional 12 schools a year or 1% of the state’s student age population (an additional 9,500 seats per year). Although the ballot question would technically authorize the state to add a number of charters nearly equal to the number of current Boston Public Schools, we have modeled a conservative scenario under Question 2, in which three additional schools with 795 students each were opened in Boston each year. This is equal to 25% of the Question 2 cap, which is consistent with Boston’s current share of the statewide charter school population. If Boston added three schools per year, Boston could see an additional 20,000 charter school students added between FY18 and FY28. Because Question 2 creates a statewide cap, any Boston enrollment under the Question 2 cap (line shown below) is possible. In 10 years, the swift growth of the cap could essentially allow for Boston’s entire school district to attend charter schools.

Based on a level of student growth associated with 3 new schools per year, with grade levels rolled out over time, and a consistent tuition rate increase based on a five year average, Boston could be paying $26,000 per pupil, or an $800 million assessment by FY28. To put that number in context, while today charter schools are 5% of Boston’s budget, Charter Schools could comprise almost 20% of Boston’s Budget in FY28. Under this scenario, charter schools would likely become the City’s 2nd largest expenditure by 2024. Unlike other major expenditures, such as BPS, the police and fire departments, pensions, and debt service, charter school costs would be dictated by decisions made by a state agency, and the City would have no ability to manage these costs.

As explained above, because Boston spends significantly more in support of education than it is required to by the State, it pays a 27% premium (about $30 million) on its charter school tuition through a component of the formula referred to as “above foundation spending.” Functionally, this means that if Boston increases its funding for Boston Public Schools, its Charter School per pupil tuition rate will rise, regardless of whether or not the BPS increase is caused by a factor relevant to charter schools. Even if BPS’s budget is flat while more students attend charter schools, Boston’s per pupil charter school tuition rate will rise due to this formula.

Charter School Funding Flaws could be Exacerbated

As discussed, Boston has experienced three flaws in the current charter school funding model that have increased costs and led to lost revenue. Without reform, these flaws would be exacerbated, leading to a very challenging financial situation for the City of Boston and Boston Public Schools.

1. Boston Losing Revenue Due to Underfunding of Charter School Transition Formula

The underfunding of charter school transition costs by the Commonwealth has led to $48 million in lost revenue for Boston over three years. In FY17, the charter school reimbursement formula calls on the state to provide a projected $136.4 million in funding to municipalities. A statewide appropriation of $80.5 million was provided, similar to the level of funding for the last several years. As assessments grow and the appropriation does not keep pace, communities receive smaller and smaller reimbursement percentages, as the appropriation is prorated. The state’s appropriation is projected to fund just 45% of the owed tuition reimbursement, which was 100% funded as recently as FY14.

If the state continues to fund the statewide reimbursement at $80.5 million a year, Boston will experience growing revenue losses. Under the Question 2 scenario described above, Boston could be losing over $180 million per year by FY28.

2. Boston’s Assessment is Higher Due to Underfunding of Transition Costs

Due to another issue with the current formula, Boston is spending more on its Charter School Assessment in FY17 than it would have if the charter school reimbursement were fully funded. The charter assessment directly penalizes communities that have had their charter reimbursement appropriations underfunded. The charter school tuition rate is based on the City’s Net School Spending (NSS), which takes into account spending on BPS and Charter Schools, and deducts the Charter School Reimbursement provided by the State. When the State underfunds Boston’s reimbursement, Boston’s calculated NSS is higher than it otherwise would be, driving up Boston’s charter school tuition rate. In FY17, Boston’s assessment is $2.4 million higher than it otherwise would have been if the State had fully funded the charter school reimbursement. As the projected unfunded obligation to Boston grows under Question 2, this extra increment on the assessment would also increase.

3. Boston Public Schools is Disadvantaged in the Formula Because They Serve a Higher Need Population

Boston’s charter school per pupil assessment rate is based on Boston’s spending in support of education, which is largely reflective of the population served by BPS. BPS educates a student body with a greater rate of high-need and high-cost students compared to Boston charter schools. While some charter schools have brought their overall enrollment of students on Individualized Education Plans closer to BPS levels, there remains a wide and consistent gap when it comes to the highest-need, highest-cost students. As compared to students in general education, BPS spends significantly more on high need students through: specialized schools such as the William McKinley School, Horace Mann School for the Deaf, and Carter Development Center; out-of-district placements; and substantially separate classrooms. As referenced above, BPS educates blind, deaf, and autistic students at nearly three times the rate that charter schools in Boston do. Yet, when the “above foundation spending rate” is calculated, it does not recognize the higher proportion of high cost students that Boston Public Schools serves, and the calculation of charter tuition rates includes spending predicated on the higher-cost BPS population rather than solely on the characteristics of charter school students.

This could be exacerbated with growth in charter school seats under Question 2. If the overall student mix for charter schools remained similar during expansion, the percentage of remaining BPS students with high needs and high costs would grow.

The Impact on Boston Finances would be Substantial

In reviewing this ballot initiative, we have determined that Question 2 would add significant mandatory costs to the City without providing any additional revenue. While budgets are developed, debated, and approved annually, it is difficult to envision a scenario in which Boston is able to deliver current levels of service at BPS or other City departments in the future with such a large proportion of its resources being shifted to charter schools. The ballot question, in effect, legally prioritizes new spending on charter schools above all City appropriations. It would represent a decision by the voters of Massachusetts to require the City of Boston to shift resources from other departments (e.g. Police, Fire, Parks, Public Works) to charter schools. The City would need to cut spending at BPS and other City departments to balance its budget, as its charter assessment would increase at a much faster rate than its overall revenue growth. The moderate scenario referenced above would result in an annual assessment growth rate (CAGR) of 16%, while City revenues grew at a rate of 3% over the last decade.

State aid is unlikely to play a substantial role in increasing the affordability of an increased assessment, absent major policy shifts. State aid has declined by 1% per year over the last decade. This trend is evidence that the City’s second largest revenue source is unlikely to keep pace with expected charter assessment growth. Additionally, the ballot makes no provision for additional revenue for cities and towns. Because the Chapter 70 formula inadequately accounts for the true costs of educating students in Boston, when Boston receives Chapter 70 aid increases, they are limited to “minimum aid” increases. This has averaged $34 per student annually over the last five years, an education aid increase of 1% per year. Putting that into context, Boston’s charter school assessment could grow to an estimated $800 million by FY28 under Question 2, nearly 4 times the City’s FY17 Chapter 70 (~$216 million) revenue, with no expectation that state education aid would increase substantially.

Assuming revenue growth consistent with recent trends for Boston, Boston’s charter school assessment would grow from about 5% of the total City budget today to almost 20% of Boston’s budget in FY28 under Question 2. This would leave substantially less revenue available to educate Boston Public School students. With less funding, BPS could be:

1. Serving a greater percentage of the highest need and most expensive students in Boston. As BPS serves a higher proportion of these students than charters, a cap lift would would likely increase per student costs for BPS, but not for charters;
2. Providing transportation at a greater cost to charter students, who live further away from their schools, as charter schools currently provide citywide enrollment. Without assuming any changes other than a shift in student ridership from BPS to charters, transportation costs could be ~$15M higher than they are today, reversing the district’s efforts to cut transportation costs;
3. Paying for transition costs at BPS as students go to charter schools without the promised support of the Commonwealth. Under Question 2, Boston could be losing over $180 million in state Charter School Reimbursement funding by FY28 without a change in the state’s appropriation.

To the extent that spending could be shifted from BPS to charter schools, the ability to shift costs in the district would likely significantly lag growth in the City’s charter assessment. Reduced expenses within the district would impact other district objectives, such as providing high quality schools in every neighborhood and pursuing the highest quality and most diverse workforce possible. Reductions in scale would likely also make non-mandatory programming less affordable. In addition to the strictly financial impact, charter expansion of this scale would likely require that the district look significantly different than it does today. For example, if 35% of students left — the moderate scenario in green in the graph above — the associated BPS enrollment decline would equate to an enrollment equal to ~45 fewer schools (i.e. 35% of total) than are currently in operation.

Since the charter assessment reduces the amount available to the City as a whole, and not just BPS, fewer dollars would also be available for City expenditures. In addition to being the primary source of revenue for BPS, the City’s General Fund also supports over 50 other departmental appropriations. These include departments such as 311, Capital Construction, Arts and Culture, Public Works, Transportation, Parks, Immigrant Advancement, Housing, Public Health, Fire, and Police. The amount available for spending overall, in all departments, would in effect be reduced by the amount the City is assessed for charter enrollment.

While Boston is consistently credited for its strong management by independent observers, such as credit rating agencies, it remains uniquely restricted among major U.S. cities. The City lacks the legal tools to raise significant additional revenue to support added costs, as much of the revenue associated with economic growth in Boston accrues to the coffers of the Commonwealth rather than to the City. Options for managing the realignment caused by implementation of Question 2 would largely be limited to service reductions, staffing cuts, deferral of infrastructure investments, and deviations from financial best practices.

David Sweeney is the Chief Financial Officer for the City of Boston. Katie Hammer, Budget Director for the City of Boston, contributed to this report.