FINANCE - Glossary of Terms

Any study of school finance can be confusing because of the enormous number of technical terms used in describing the process. The following is a glossary of those terms most often used.

Assessed valuation - The percentage of valuation that is subject to taxation. For example, Class I and Class II property are assessed at 35%, personal tangible at 25% and public utility property at either 25% or 88%, depending on the type of utility. 

Average daily attendance (ADA) - Student membership calculated based on a district's average attendance, as opposed to the number of students enrolled in the ADM.

Average daily membership (ADM) - Number of students enrolled in a school district who are either in attendance or have an excused absence the first full week in October.

Base formula amount - Dollar figure assigned by the General Assembly that represents what the state believes it costs to adequately educate one child with no special needs for one year. (Also known as the "per-pupil allotment," "foundation figure" or "state aid figure.") For FY02 the base formula amount is $4,814. The base-formula amount of FY03 is unclear, pending the resolution of the DeRolph lawsuit. 

Biennium - Any two-year period, used mostly in school funding to refer to the two fiscal years that make up each state budget.

Bond levy - Property tax levies used to provide the local revenue for construction purposes. Proceeds from the levy are used to pay the principal and interest on construction bonds. Offered for a specified amount and a specified period of time.

Categorical expenditures - Categorical expenditures refer to expenditures required by school districts beyond the base formula amount. Examples of categorical expenditures include special education, vocational education, gifted education, DPIA and transportation. 

Chargeoff - Millage rate established by the General Assembly that, when multiplied times a district's recognized valuation, provides the local contribution to the foundation formula. It is currently set at 23 mills. The term is sometimes used interchangeably to describe both the millage set by the legislature and the entire local contribution.

Chargeoff phantom revenue - Term used to describe failure of the state foundation formula to recognize that some districts have effective millage rates below the 23-mill chargeoff, leading to less local funding than is assumed in the formula.

Continuing levy - Levy proposed millage rate or school district income tax that is assessed indefinitely, unless the tax is revoked by the voters or the school board instructs the county auditor not to assess it. 

Cost of doing business factor (CDBF) - Multiplier determined by the state that increases the formula for districts that are in an area with a high cost of living. HB 94 reduced the maximum CDBF in FY02 to 7.5% from the FY01 maximum of 13.8%. Prior to HB 94, the CDBF had been slated to increase to a maximum of 18% in FY04.

Country financing district levy - Limited or continuing levy proposed by county ESC for support of a specific program (such as special education) or purpose. If approved, the tax is levied on all participating districts.

Dual-purpose levy - Single ballot issue for both a permanent improvement levy or a bond issue combined with an operating levy. It may be continuing or limited. The ballot issue must state how much of the levy will be used for each purpose. A permanent improvement operating levy may be either a property tax or a school district income tax, but a bond/operating levy must be a property tax.

Effective mills - The actual rate of taxation realized when the tax reduction factor reduces the taxes charged by a voted levy. It equals the taxes charged divided by the taxable value of the class of property against which they apply.

Emergency levy - Limited levy proposed up to five years for a specific dollar amount. The millage rate required to produce the dollar amount changes on all types of property if property values change. Emergency levies may be renewed for the dollar amount originally requested.

Excess Cost Aid - Aid that school districts receive when the local share of the model formula of special education, vocational education and transportation exceeds the allowable total of 3 mills multiplied by the district's valuation. This form of aid is slated to take effect in FY03.

Exempt property - Real property not subject to taxation. Typically, exempt property is owned by federal, state or local branches of government, and religious or educational institutions.

Fiscal year (FY) - Annual period used for government accounting purposes. Begins July 1 and ends June 30 of the next year. Named for the calendar year in which it ends (i.e. FY02 begins July 1, 2001, and ends June 30,2002.

Floor - Rate below which voted mills will not be reduced under the property tax reduction factor. Established by the General Assembly. Currently set at 20 mills.

Formula ADM (average daily membership) - Adjustment to ADM used in school foundation formula representing students in first to 12th grades, one -half of the students in kindergarten and one-fourth of the students in the district attending a JVS. Basic ADM is calculated on a three-year average, so districts with declining ADM get the average rather than the current ADM.

Foundation Formula - Method of funding schools through a combination of state and local aid. Based on the ability of school districts to raise tax revenues as well as the state-determined minimum amount necessary per student to provide an adequate education.

Gap aid - HB 94 replaced the chargeoff supplement with gap aid. Like the chargeoff supplement, the purpose of gap aid is to alleviate the chargeoff phantom revenue phenomenon that occurs when a district has less effective millage than the stat uses as its chargeoff millage Because HB 94 presumes that a school district can contribute up to, but no more than 3 mills toward categorical funds, gap aid expands the coverage of the former chargeoff supplement from a maximum of 3 mills to a maximum of 6 mills.

Guarantee - Alternative calculation of state funding that insulates school districts from the effects of dramatic changes in school funding factors, such as property valuation or ADM. Guarantees are also often politically necessary when changes in state policy have disproportionate effects on different types of school districts.

Homestead property - Property where the owner occupies the property as a residence Such property qualifies for the additional 2.5% rollback. This term should not be confused with the homestead exemption that provides specific property tax relief to low-income elderly or disabled homeowners.

Incremental property tax level - Limited levy, with a maximum of 10 years, that imposes additional millage, or a dollar amount or percentage increase, on a regular schedule throughout the life of the levy. Increments are imposed as the full voted millage, not as effective millage, giving a limited amount of growth in the levy. Up to five changes may be proposed during the life of the levy. 

Inside mills - Millage imposed by local governments without voter approval. Defined in the Ohio Constitution. Inside mills are not subject to the property tax reduction factor. Sometimes referred to as "unvoted mills."

Limited levy - Levy proposing a millage rate or school district income tax that is assessed for a specified period of time. A limited levy is eligible for renewal or replacement. 

Millage - Factor applied to the assessed, a.k.a., taxable valuation of real and personal tangible property to produce tax revenue. A mill is defined as one-tenth of a percent or one-tenth of a cent (0.1) in cash terms. 

Operating levy - Levy used primarily for district operating purposes. Ca be either continuing or limited. 

Outside mills - Millage approved by voters. Outside mills are subject to the property tax reduction factor. Sometimes referred to as "voted mills."

Parity aid - a new form of state aid created in HB 94, parity aid replaces power equalization aid (and arguably equity aid). Districts qualify for parity aid if they fall below the 80th percentile of all districts according to wealth. Unlike power equalization, parity aid does not require a matching contribution from the school district.

Permanent improvement levy - Limited or continuing levy used for maintenance and repair of school property, and, in some limited circumstances, for renovation and building projects. Can be a property tax or an income tax.

Property tax reduction factor - Sometimes referred to as the "HB 920" effect. An adjustment by which the taxes charged by voted mills on Class I and Class II real property are reduced to yield the same amount as those mills yielded in the preceding year, exclusive of new construction. The reduction factor does not apply to inside mills or to voted mills charged against general and public utility personal property. 

Property tax rollback - A percentage reduction in the taxes charged against all real property. The percentage equals 10% for all real property and an additional 2.5% for owner-occupied residential property. The state reimburses schools and other local governments for the full amount of the rollback. The rollback applies after the reduction in taxes charged against real property as determined by the tax reduction factor. 

Public utility property - Tangible personal property used in the operations of a public utility company. 

Qualifier - Minimum amount of millage required by state law for participation in the state foundation program. Currently set at 20 mills. 

Real property - Land and improvements to land such as structures or buildings. In Ohio, real property is divided into two classes: Class I (residential and agricultural property) and Class II (commercial, industrial and all other real property). 

Reappraisal - Appraisal by the county auditor of the value of real property for tax purposes. It occurs every sixth year. Three years after each reappraisal, the county auditor adjusts appraised values based on recent sales of property in that county. This adjustment is referred to as the triennial "update."

Reappraisal phantom revenue - Term used to describe the interaction between the state foundation formula and the tax reduction factor. The state formula works as though each increase in a school district's real property value results in more local revenue and reduces the district's state aid accordingly. The property tax reduction factor prevents most growth in valuation from yielding additional revenue. Thus, the "phantom" revenue refers to the money that the stat formula credits as local revenue, but that the tax reduction factor ensures the district will never collect in taxes.

Recognized valuation - Computation used to alleviate the reappraisal phantom revenue effects in the state foundation formula of an increase in a district's valuation due to an update or reappraisal. The recognized valuation adjustment adds, for foundation formula purposes only, one-third of a reappraisal increase to the district's valuation in the first year, two-thirds in the second year and the full increase in the third year. 

Renewal levy - Voter approval to extend the term of a limited levy when it expires. The renewal levy must state the same purpose as the original levy. The effective rate of the renewal begins from the point where the original levy ends. A renewal levy proposal can combine with a proposal to raise additional millage. 

Replacement levy - Like a renewal levy in that it seeks voter approval to extend the term of a limited levy when it expires. Replacement levies differ from renewal levies because the replacement begins with an effective rate equal to the original effective rate of the levy which it replaces. In this way, a replacement levy allows a district to obtain the benefit of growth in the real property tax since the approval of the replaced levy. Replacement levies cannot be used for an emergency levy and cannot be combined with other changes in millage in a single proposed levy.

School district income tax (SDIT) - Limited or continuing levy proposed as a percentage rate on the income of district residents as reported for state income tax purposes. SDIT can be proposed in combination with a reduction in property tax. Because the SDIT taxes income, not property, there is no reduction factor involved, allowing unlimited growth in the proceeds. School district income taxes apply only to personal income and do not apply to the net profits of corporations. 

School district purpose - Legally defined reason for seeking a levy. Currently includes: operating expenses; specific permanent improvements and/or class of improvements; general, ongoing improvements; recreational purposes; community centers; support for public libraries or community centers; and the purchase of educational technology. 

Tangible personal property - Machinery, equipment and inventory used by business in the manufacture and/or sale of their products that is subject to taxation under at property tax. This class of property is also referred to as business tangible property. The inventory portion of this tax will be eliminated by a 25-year phase-out scheduled to start in 2002. 

Unit funding - Method of funding programs for gifted and talented students, and preschool special education. Units must be in accordance with established guidelines and approved by the state. Funding is based on the state minimum salary schedule enacted by the legislature, a fringe benefit reimbursement of 1.15% times the state salary schedule and a supplemental unit allowance of a fixed amount per pupil.

Valuation of a school district - Taxable value of all Class I and II real property, general tangible personal property and public utility personal property in a district.

Valuation per pupil - Computation derived by dividing a district's ADM into the district's assessed valuation.

Weighted funding - Method of funding certain categorical programs. Under this approach, pupils with special needs count as some additional multiple of one in the computation of the cost of an adequate education. The weight assigned to each pupil with a special need corresponds to an estimate of the additional cost associated with providing pupils with that special need an adequate education. Starting in FY99, Ohio eliminated unit funding in favor of weighted funding for special education and vocational students.

- Making Sense out of School Finance by Warren Russell, William Driscoll and Howard Fleeter. Published by the OSBA. www.osba-ohio.org