I truly am not crying “wolf”, but many “believers” think I am. Three years ago eight school districts sued the Oklahoma Tax Commission and have conclusively proved that almost $23 million in motor vehicle taxes was wrongly paid to 146 school districts by shorting 271 school districts the same amount. Many overpaid and underpaid districts (“Believers”) wrongly believe the subsequent year adjustment in state aid corrected for this egregious error in payments. This post and others referenced will demonstrate to anyone interested that no correction occurred and that the court ordered correction being implemented will be short lived unless this obvious misunderstanding about the purpose and effect of the state aid formula is understood by the affected school districts and the State Department of Education. Please enjoy reading these simple lessons in thinking about the formula.
Understanding how this works is essential for the Tulsa Public Schools that lost $3.4 million due to the wrongful apportionment of motor vehicle collections (our tax dollars) by the Oklahoma Tax Commission and 270 other underpaid districts to fully recover their loss. That the Commission caused this loss is now a matter of settled law; you can read the Court of Civil Appeals decision here.
From March, 2016 through November, 2018, as a result of the legal proceedings initiated by eight school districts, including Mid-Del that lost over $2 million and Sand Springs, Muskogee and Ponca City that each lost over $460,000, ended with a successful conclusion, they and all other underpaid districts, including Bartlesville at $555,000, Okmulgee $333,000, Sapulpa $133,000, Pawhuska $216,000, Hominy $141,000, Catoosa $122,000 and Putnam City, Oklahoma City and Lawton that each lost over $1 million, will be paid back over the next year.
The $22.8 million lost by the 271 underpaid districts was wrongfully paid to 146 districts statewide including Jenks $813,000, Bixby $899,000, Union $1,450,000, Moore $1,695,000, Norman $1,155,000, and Mustang $1,540,000, each of whom asked the Oklahoma Supreme Court to stop the payments arguing, incredibly, that the 271 districts had already been made whole through the state aid formula. However, that districts not wanting to lose back money wrongfully paid to them might convince themselves no harm has occurred is not as incredible as many of the underpaid districts, believing that their losses were fully gained back through the formula. Using facts about the $3.4 million lost by Tulsa Public Schools, you tell me when they were made whole.
The court-ordered correction for TPS is $3,466,251; they received the first payment of $266,635 in February. The remaining twelve payments to be made will be made entirely in fiscal year 2020 from July, 2019 through June, 2020. Here is the Order for resuming payments.
The belief that the subsequent year adjustment in state aid offsets the prior year loss in a state dedicated revenue is simply wrong and is a misunderstanding that will prevent TPS and other districts from keeping the over $22 million in correcting payments being made to offset the wrongful apportionments by the Oklahoma Tax Commission. More importantly it is a misunderstanding that, as it has already, can lead to legislation that will wrongly harm school districts in the future. While some of the actual calculations involved are complicated, the underlying principles are not and involve no more than multiplying, adding, subtracting and basic first year Algebra, as you will see if you read to the end of this post.
The Full Story:
Here are TPS motor vehicle collections each year since FY 2014, and beginning with the OTC’s wrongful apportionments in FY2016 each is less than the year before meaning loss after loss after loss. It is true that those lower payments resulted in state aid adjustments the following year, but those are to give TPS the right revenue the following year for that year’s expenses at the same per weighted student rate as every other district. The state aid adjustments are not overpayments to compensate for the $3.5 million loss caused by the OTC.
FY2014 $20,260,574
FY2015 $20,256,034
FY2016 $17,258,996
FY2017 $15,382,504
FY2018 $15,245,255
Here are statements of relevant facts and questions about the TPS loss.
Motor vehicle collections are a “chargeable” in the Foundation part of the school aid formula.
The first calculation in the Foundation part of the formula is to multiply a district’s weighted student population times the foundation dollar amount (factor) that is the same for all districts. This is the way the formula equalizes funding among districts, by providing that all districts receive the same amount per weighted student.
For TPS in FY 2016 that amount was $107,172,708.
State foundation aid for TPS that year was determined by subtracting $69,500,543 in total estimated “chargeables” from the $107,172,708 Foundation amount, yielding the Foundation Aid amount TPS received of $37,672,165.
The $69,500,543 in estimated chargeables that year included $20,256,034 in motor vehicle collections which was the actual amount received by TPS in FY 2015 and, under the state aid formula law, is the amount to be used in calculating state aid for the following year.
Motor vehicle collections, therefore, affect the amount of Foundation Program income school districts receive in two ways. As one of the “state dedicated” revenues included as a chargeable in the equalization formula it is one of the revenue sources the legislature expects will help school districts receive the same amount overall per weighted student as other districts receive in each current year. Also, in calculating the amount of state aid, actual motor vehicle collections from the previous year are used to estimate how much a district will receive from that source. An estimate is needed simply because the state aid amount is calculated early in the fiscal year and before all chargeable revenues have been received.
Very simply stated, for TPS in FY 2016 to receive the $107,172,708 Foundation amount it likely budgeted to expend that year, $37,672,165 was to come from state aid, $20,256,034 from motor vehicle collections and $49,244,509 from its other chargeables. The state aid was received and the other chargeables performed a little better than expected, but motor vehicle collections were $17,258,996—almost $3 million less than expected. That loss had to be made up somewhere and essentially was a hit to the TPS general fund balance at the end of the year, meaning its ending balance was $3 million lower than it would have been if the $20,256,034 estimate had been realized.
Believers may argue at this point that the chargeables are not guaranteed and sometimes you just have to live with what is received. That is true and, based on the OTC’s recalculations ordered by the district court, $742,035 of the $3 million loss was due to the decline overall of motor vehicle collections and a change in state law, but $2,255,003 of it was fully the result of the OTC wrongly sending TPS money to other districts.
Now is when Believers ought to explain and show when that $2.255 million was restored to the general fund balance. Likely this will be their response. The next year, FY2017, TPS now has a new and lower chargeable amount for motor vehicle collections that results, dollar for dollar, in increased state aid which in turn offsets that FY2016 loss. That is just wrong and faulty reasoning and here’s why.
We’ll repeat the steps above only now for FY 2017, so the recalculated Foundation amount is $105,489,719. State foundation aid for TPS that year is determined by subtracting $68,408,583 in total estimated “chargeables” from the $105,489,719 Foundation amount, yielding the Foundation Aid amount TPS received of $ 37,081,136.
The $68,408,583 in estimated chargeables that year included the $17,258,996 in motor vehicle collections which was the actual amount received by TPS in FY2016 as you learned above and again, under the state aid formula law, is the amount to be used in calculating state aid for the following year. So absolutely more state aid is calculated if only $17 million is subtracted rather than $20 million, but this formula calculation is still only designed to give TPS the same amount per weighted student (the $105,489,719 which is TPS weighted student count multiplied by the Foundation factor) as is to be given to all districts in FY2017, including those that were overpaid motor vehicle collections in FY2016 by the OTC.
Very simply stated again, TPS in FY2017 likely budgeted to expend the $105,489,719 that year of which $37, 081,136 was to come from state aid, $17,258,996 from motor vehicle collections and $51,149,587 from its other chargeables. The state aid was received and the other chargeables performed slightly better than expected, but motor vehicle collections were $15,382,504—almost $1.9 million less than expected. Again TPS did not collect, through state aid and chargeables, the Foundation program amount predicted by the state aid formula. Not only was there no extra funding through state aid or any other formula source to correct the $3 million hit its general fund balance took in FY2016, it has lost almost $2 million more. It is a silly distortion of both the purpose and the mathematical effect of using the prior year actual amount to calculate state aid to believe that the subsequent year’s adjustment corrects for the prior year’s loss. I would love to rent a building from a Believer because if I underpaid my rent in March, paying only $400 when the rent is $500, my Believer landlord would believe I’ve made up for that $100 underpayment by just paying him the correct monthly amount $500 for April. If you underpay me, I’m not made whole until you overpay me—it’s just that simple.
FY 2016 and 2017 were the only full fiscal years impacted by the OTC’s wrongful apportionments. Using the recalculations ordered by the court it is a fact that TPS motor vehicle collections fell short of the amounts charged in the formula by $4,873,530 meaning its Foundation program income was much lower than that intended by the state aid formula. $3,212,189 of that was due to the OTC’s wrongful apportionments and was redirected to the 146 overpaid districts statewide. The difference was a result of statewide under collections and the amended law. The court-ordered correction for TPS is $3,466,251 because the wrongful apportionments continued into FY2018 for two months before the law was changed again. TPS received no overpayment recovery in FY2018 either; its revenue from motor vehicle collections was down again and therefore likely received less in Foundation Program revenues per weighted student than did the several Tulsa County districts that had been overpaid by the Tax Commission.
Nearly $3.5 million in a little over two years; those who deny this happened have succumbed to the silly and prevalent belief that the subsequent year adjustment in state aid mathematically offsets the prior year shortfall in a dedicated revenue source. They confuse a simple and obvious estimation or prediction process in the state aid formula that tries to get the current year’s total revenues equalized among districts with it being a remedial or corrective process. It is mathematically true that the next year’s adjustment in state aid will balance out the expected lower dedicated revenue and prevent further losses, but it does nothing retroactively to correct or offset the prior year loss. The only way that happens is for the district in the next year to over collect or be overpaid more than is estimated. And for TPS the facts show that has not happened (except for the February, 2019 court ordered payment).
I’ve been around educators enough and taught enough myself to recognize that people have different learning styles. So over the course of these three years I’ve penned other ways to understand what is happening. I’ve set up each of them as a separate post on this blog and will now provide the links. Here’s a version of how I first worked through the state aid dynamics to assure myself that the funds wrongfully withheld from Sand Springs where I was CFO were not coming back unless we took action—which our board and seven others had the courage to do. Tables Rock
Here is an actual mathematical proof of what I’ve been trying to describe. Eventually I’ll strive for more elegance, but the algebra teachers who may read this—and who should be consulted by Believers—will appreciate. Okie Masterminds
Here is my attempt at a parable, probably will come off pretty lame, but a colleague with a strong accounting background really likes it so enjoy. My Obsession
Paradise Lost shows the arguments made by several litigious overpaid districts (LODs) that believe the “formula makes you whole” fairy tale, with my critique of course.
Lastly I offer the Nuclear Option which ponders whether Believers would also have TPS ignore a loss of almost $30 million.
Each of these examples tell the same story as the actual numbers for TPS and the other 270 underpaid districts: that the subsequent year’s increase in state aid only works to get it right the second year and does nothing to correct the earlier year’s shortfall. Whether “real numbers” or hypothetical, the mechanics are the same. And they are the reverse for the 146 over paid districts—their windfalls, through no fault of their own, have funded increases in their fund balances and/or greater expenditures the last three years.
If you reach out to someone in leadership at an underpaid district and they assure you that their district has been made whole through the formula process, have them show why any of the examples are wrong, or better yet, have them show you in what year since FY 2016 their district has collected more motor vehicle or state aid revenue than was its fair share under the formula for that year. Using prior year actual collections in the formula calculation is simply the way the legislature has chosen to estimate what will be received that year. If actual collections deviate from the prior year, up or down, then those are one-time gains or losses that are not corrected by the formula the following year. Mathematically the only correction for a gain comes if there is a subsequent loss to the same revenue source, and the only correction for a loss is if there is a subsequent gain to the same revenue source. If you under pay me, I cannot be made whole until you over pay me.
TPS has not been made whole for the $3.466 million lost and neither have the other 270 underpaid districts. But it’s not too late for the “believers” to learn, to do better and to make a difference.
The misinformed failure of other underpaid districts to support in any way the efforts of the eight school districts that have won this almost $23 million recovery for the other 263 districts made their work even more difficult. It also contributed to the 2017 legislation that now stands in the way of complete recovery. But it is not too late. There is both an administrative and a legislative opportunity for underpaid districts to retain their $22.8 million recovery.
All districts that care about fairness can advocate that the State Department of Education not include the court-ordered correcting payments in the chargeable amount for the calculation of the next year’s state aid. Likewise they can aggressively support passage of House Bill 1991 in the 2020 legislative session. These actions do not involve litigation. They simply require that school leaders understand how the state aid formula works and how these actions will complete the correction of the almost $22.8 million in wrongful motor vehicle collections apportionments made by the Tax Commission.
As a taxpayer and citizen I cannot passively watch as school leaders wittingly or unwittingly ignore a financial distortion of this magnitude. Reach out to your board representative and tell them to care about the $22.8 million.
As always lunch is on me for the first to ID the photo location. �