Teacher raises and all-day pre-K: Here's what's in the Texas Legislature's landmark school finance bill

After weeks of tough negotiations, lawmakers have come up with a final deal on how to increase public education funding and cut school district taxes — and it includes a compromise on raises for full-time teachers, nurses, counselors and librarians.

House Bill 3, a copy of which was obtained by The Texas Tribune after it began circulating in the Capitol on Thursday, includes money for free, full-day pre-K for eligible 4-year-old students; creates a more complex method of funding the cost of educating low-income students; pays school districts that want to offer merit pay programs for teachers; and creates a permanent state fund to lower school district tax rates.

Lawmakers received a state analysis of how the school districts they represent would fare in 2020 and 2021 under this bill, when the final report was officially distributed Friday evening.

Both chambers are expected to take a vote on the negotiated version this weekend. Once lawmakers approve it, the bill can be sent to Gov. Greg Abbott to become law.

The basic rundown

Before final negotiations, the House's version of HB 3 cost $9.4 billion, and the Senate's cost a whopping $14.8 billion, according to Texas Education Agency calculations. The final cost is around $11.6 billion, according to the official cost analysis of the bill, released Friday evening.

The House wanted to raise the base funding per student from $5,140 to $6,030, while the Senate wanted to raise it to $5,880. They decided on an even higher number of $6,160.

Both chambers had previously agreed to spend $6.3 billion on public education, including salary increases for teachers, and $2.7 billion for property tax cuts. This final bill appears to include about $6.5 billion for public education, including extra raises and benefits for school employees, and $5.1 billion for tax cuts.

Lawmakers estimated the negotiated version of the bill would lower tax rates by an average of 8 cents per $100 valuation in 2020 and 13 cents in 2021. That would mean a tax cut of $200 for the owner of a $250,000 home in 2020 and $325 in 2021. Legislators also said it would increase the state's share of public education funding to 45% from 38%. They said it would lower school districts’ cumulative recapture payments, which wealthier districts pay to subsidize poorer districts, by $3.6 billion over two years.

A compromise on teacher pay

The compromise on raises mandates that a portion of the additional per-student funding school districts receive be spent on raises and benefits for teachers, librarians, nurses and counselors, with a smaller amount designated for raises as administrators see fit. Districts are encouraged to prioritize raises and benefits for teachers with more than five years of experience.

Districts will have a lot of flexibility on how exactly to distribute the extra compensation, among those four positions and among other school employees — making it difficult to calculate the exact statewide average raise.

School districts have had a difficult time making budgetary decisions this spring without knowing whether they will be required to give their teachers, or all their employees, a specific salary increase or how to assess the financial impact of a new set of school finance formulas.

Lt. Gov. Dan Patrick, a Republican, began the session pushing $5,000 permanent raises for all full-time teachers, an idea that had not been included in the recommendations from a state-sponsored school finance panel. For a few months at the beginning of the session, the Senate moved quickly on that proposal and stalled on rolling out any other specifics on how to improve public education.

The House, on the other hand, quickly rolled out a comprehensive school finance plan following many of the school finance panel's recommendations. Republican House Speaker Dennis Bonnen made his opposition to Patrick's across-the-board raises clear, saying he would prefer to give school districts flexibility on how to spend additional money. That proposal would have required school districts to use a percentage of their per-pupil funding increase on across-the-board raises for all school employees and another part for raises as administrators see fit — closer to the negotiated version.

The bill also, controversially, includes money for districts that want to start merit pay programs, giving bonuses of between $3,000 and $12,000 to their higher-rated teachers. It also provides money for high-needs and rural school districts that need help to incentivize teachers to work there. It does not require districts to use the state standardized test to determine which teachers get bonuses.

And the bill includes a few requirements to create advisory committees that will study how the state is funding special education and low-income students.

Property tax system changes

In the negotiation, lawmakers also decided to drastically change the formulas that determine how local and state funding is allocated to school districts — taking heavily from the Senate's school finance proposal.

The House had proposed a decrease in school district tax rates by 4 cents per $100 valuation statewide, as well as a mechanism to further decrease higher tax rates. State Sen. Larry Taylor, R-Friendswood, unveiled a version of HB 3 near the end of April — relatively late in the legislative process — that included billions of dollars to lower rates by about 15 cents per $100 valuation, more than either chamber had budgeted.

The negotiated bill lowers tax rates statewide by 7 cents per $100 valuation, with the potential to go lower in future years. That's a $175 annual cut for the owner of a $250,000 home, not counting other mechanisms in the bill to lower tax rates further.

According to lawmakers, HB 3 includes about $5.1 billion for school district tax cuts — again, more than the initial budget proposal of $2.7 billion. Some of the additional money comes from a new fund established to pay for those cuts. The state comptroller is required to deposit some money from the Available School Fund, which provides funding for schools derived from state-owned land and fuel taxes, and some money from an online sales tax into the new fund.

It is not immediately clear exactly what other sources of money contribute to cuts this biennium or how lawmakers expect to pay for tax cuts in the future. The bill requires the state’s nonpartisan budget board to study potential sources of money for future school district tax cuts and their anticipated impacts on taxpayers, schools and the state.

Current-year values

The bill includes a controversial provision to use property values from the current year to calculate how much state and local funding school districts receive. Today's school finance system uses property values from the previous year to calculate funding. Though a very technical change, it will have a significant impact on the way the state determines public education funding.

Many superintendents have lobbied against it, arguing that using property values from the previous year allows the state to certify those numbers and gives school districts more predictability in their budgets. The bill creates a "hold harmless" grant to make sure school districts don't lose money from this switch in the first few years.

But the switch also saves the state money since it would decrease state funding to school districts compared with current law. That would help the state be able to afford the increase in the base funding per student.

Abbott's 2.5% plan

Starting in 2021, the state would limit the growth in school districts' property tax revenue, an idea pitched by Abbott at the start of the session. School districts with property values growing 2.5% or more would have their tax rates automatically decreased to keep their tax revenue growth in line. The state would be required to reimburse school districts for any additional money they are entitled to.

Many school finance and tax experts pushed back, arguing the impact would be unequal across the state. Austin ISD, where values are growing quickly, would get to lower its tax rate significantly and decrease its contribution to recapture, or "Robin Hood," through which wealthier districts subsidize poorer ones. Boles ISD, the poorest district in Texas with stagnant property values, would not get to significantly lower its tax rate through this provision.

To avoid allowing drastic differences in tax rates, HB 3 also includes language that would not allow fast-growing school districts to lower their tax rates more than 10% below the highest tax rate.

The result of this change would mean each school district has a different maximum tax rate, as opposed to now, when most districts cannot raise tax rates above $1.17 per $100 valuation.