STEP 1

Explore Finance Concepts Unique to Schools, including Funding Sources, Fund Balance, and Recapture

School Finance 101

On this page, community members can learn the basics of school finance in Texas. Included is an overview of how districts are funded and where the money goes; definitions of key concepts and common acronyms; and frequently asked questions.

REVENUES

Public schools in the state of Texas are funded from three main sources: local school district property taxes, state funds, and federal funds, with the majority of funding coming from local property taxes collected by school districts and state funds.

The Basic Allotment (BA) is set by the Texas legislature, guaranteeing every school district a certain amount of funding for each student based on their Average Daily Attendance (ADA). The BA is currently set at $6,160 per student, with additional funding based on district and student characteristics. The district’s Tier 1 Entitlement is determined by this Basic Allotment and the characteristics of students in the district.

The Tier 1 Entitlement is covered by a sharing of the state with the local district. The state covers a specific portion from the Available School Fund and then local tax collections are applied to determine whether or not the state contributes additional funds.

• Example 1: If the district’s local tax collections cover the Tier 1 Entitlement, then only Available School Funds are distributed.

• Example 2: If the district’s local tax collections do not fully cover the Tier 1 Entitlement, state funds are received to make up the difference in addition to the Available School Funds.

• Example 3: If the district’s local tax collections cover the Tier 1 Entitlement to the extent that no additional state aid (above Available School Funds) is needed to cover the total cost, then the district is required to send the tax collections exceeding the Tier 1 Entitlement back to the state through the mechanism known as recapture.

This creates a relationship between local and state funds where when local tax collections increase, state funds to a school district decrease.

Local

Local tax dollars make up the majority of the district’s revenue sources. The school district’s board of trustees sets the local property tax rate each year while the county appraisal district determines the market value of property within the county or district.

In an area like Lovejoy ISD where home values are rapidly increasing, even when the tax rate stays the same or is lowered, homeowners will likely see an increase in the total amount of taxes owed due to the higher property values. HB3 requires a lowering of the M&O tax rate in an effort to offset the impact of rising property values; however, the lowered M&O tax rate does not fully accomplish this objective.

State

The amount of state revenue earned each year is determined by the Tier 1 Entitlement calculation and in Tier 2 by the guaranteed yields on the golden and copper penny portions of the tax rate.

When local property tax collections do not fully fund the Tier 1 entitlement, state revenues are earned. When local property tax collections result in more revenues than are necessary to cover the Tier 1 Entitlement, the district sends those excess tax collections to the state through a mechanism called recapture.

In Tier 2, if the golden pennies and copper pennies do not produce the required revenue per student, then additional state revenues are earned. There is no recapture on the tax collections generated by the golden penny portion of the tax rate; however, the copper penny revenue is subject to recapture.

As local tax collections increase, state funds to a school district decrease.

Federal

Federal funding for Texas school districts varies from district to district based on various federal grants and formulas. For the operations of Lovejoy ISD, federal funds in the General Fund equate to less than 1 percent of total revenues and are generated from indirect costs charged to the federal grants and programs related to special education services.

Most federal revenues received by a school district are accounted for in Special Revenue Fund groups and not the General Fund.

*Updated 9/5/2022

Funding Buckets

School budgets and tax rates are made up of two parts: Maintenance and Operation (M&O) and Interest and Sinking (I&S). The money generated from each part can only be used for specific types of expenses.

RECAPTURE

Recapture is the state’s mechanism for making sure that a district with high property values does not have more funding than districts without those high values.

The state provides more funding to school districts with lower local property tax revenues; less state funding to districts with a strong source of local property tax revenues; and requires districts with the highest local property wealth per student to give some of their local tax revenue back to the state. This latter option is referred to as recapture payments, also known as Robin Hood payments.

The money sent back to the state through recapture comes from money generated from the M&O portion of the tax rate that generates more revenue than that needed to fund the Tier 1 Entitlement or excess revenues generated on copper pennies above the yield.

When a school district’s property values have reached a point where they begin to send money back to the state through recapture, state law requires an Attendance Credit Election – also known as a Chapter 49 Election – for voters to approve the process by which the school district makes these mandatory recapture payments.  Lovejoy ISD voters passed an Attendance Credit Election in 1994.

EXPENDITURES

Lovejoy ISD's budget is represented below as a visual breakdown the Educational Dollar. A large portion of each dollar is spent in the classroom on instructional costs.

Of Lovejoy's $41,400,000 budget, payroll and employee benefits cost roughly $34,400,000 and account for 83.25% of the budget. This is a large share of the district's operating budget – the funds accessed by the M&O portion of the tax rate. Other expenditures include utilities, contracted services, student educational resources, classroom supplies and equipment, professional development and audit services.

The district's payroll budget includes employer contributions towards employee benefits, as well as  compensation for all ≈ 520 employees of the district. 

Instruction and Related Services and Student Support Services account for 78% of the payroll budget as depicted below.

FUND BALANCE

A fund balance is like a savings account or emergency account that includes money that school districts do not allocate in budgets and hold in reserve. Fund balance is generated when annual revenues exceed actual operating costs. These funds are used to manage fluctuations in cash flow and to cover unforeseen expenses. Districts with a healthy fund balance also typically earn a higher credit rating because they are viewed as financially sound. 

Having sufficient fund balance is especially important in Lovejoy ISD given the fluctuation of cash receipts due to timing of tax collections and our heavy reliance on local tax collections for funding the District. When the school year begins, Lovejoy must be able to fund operations until local property taxes are collected, typically between December and April. 

The amount of money in a school district’s fund balance fluctuates throughout the year, but 90 days of cash on hand is often used as a minimum standard.  In November 2021, Lovejoy ISD was down to less than 20 days and put steps in place to determine when it may be necessary to secure a loan to make payroll payments.

VOTER-APPROVED

TAX RATE ELECTION or VATRE

State law requires that school districts seek voter approval to raise their M&O tax rate above a rate set by state law.

The Lovejoy ISD Board of Trustees adopted a tax rate that is greater than the calculated rate set by law, which triggered an election called a Voter-Approval Tax Rate Election (VATRE), which is held on the uniform election date (November 8, 2022).

If the voters do not approve the measure, then the M&O tax rate reverts to the maximum rate allowed under state law.

For additional information on the VATRE Election details, please visit Step 3 - VATRE Details (Coming Soon).

ACRONYMS & DEFINITIONS

Available School Fund (ASF)

All Texas school districts are entitled, under the Texas Constitution, to receive a designated amount from the state of Texas' Permanent School Fund. ASF distributions go toward a district's Tier 1 Entitlement and are based on the district’s prior year average daily attendance (ADA).

Average Daily Attendance (ADA)

Average Daily Attendance (ADA) is the number of students in average daily attendance or the sum of attendance for each day of the minimum number of days of instruction.

Basic Allotment (BA)

The Basic Allotment (BA) is set by the Texas legislature, guaranteeing every school district a certain amount of funding for each student based on the Average Daily Attendance (ADA). The BA is currently set at $6,160, with additional funding depending on district and student characteristics.

Copper Pennies

A portion of the tax rate that brings in revenue above the Tier 1 Entitlement and can generate additional state aid but is subject to Recapture. Current estimates for 2022 project 69 percent of this revenue would stay in Lovejoy ISD and 31 percent would be sent back to the state as recapture.

Expenditures

Expenses or spending within a governmental entity – like a school district – are referred to as expenditures. Expenditures represent the spending of money.

Fund Balance

A fund balance is like a savings account or emergency account that includes money that school districts do not allocate in budgets and hold in reserve. Fund balance is generated when annual revenues exceed actual operating costs. These funds are used to manage fluctuations in cash flow and to cover unforeseen expenses.

Golden Pennies

A portion of the tax rate that brings in revenue above the Tier 1 Entitlement and is not subject to Recapture, meaning 100 percent of the revenue generated from this part of the tax rate stays in the district. They are referred to as “golden” because of their high value to a school district and because State aid can be generated to fully fund the calculated entitlement.

Hold Harmless

The Basic Allotment (BA) is set by the Texas legislature, guaranteeing every school district a certain amount of funding for each student based on the Average Daily Attendance (ADA). Based on this formula, the number of students in average daily attendance is directly connected to the amount of revenue a school receives.

House Bill 3 (HB3)

House Bill 3 is a bill passed by the 2019 Texas Legislature.

Interest and Sinking (I&S)

The Interest and Sinking (I&S) part of the tax rate. Dollars from this portion of the rate can only be used to pay down existing debt. These tax collections cannot be used for operations, such as increasing teacher salaries or to build facilities.

Maintenance and Operations (M&O)

The Maintenance and Operations (M&O) part of the tax rate. Dollars from this portion of the rate are used toward expenses like payroll, utilities, supplies and transportation.

Revenues

The income of a governmental entity – like a school district – received from taxation and other local, state and federal sources. Revenues are used to finance the services provided to its citizens.

Voter-Approval Tax Rate Election (VATRE)

Voter-Approval Tax Rate Election (VATRE): State law requires that school districts seek voter approval to raise their M&O tax rate above a prescribed amount.

If the board adopts a tax rate that’s greater than the calculated rate set by law, that triggers an election called a Voter-Approval Tax Rate Election, which is held on a uniform election date (November). If the voters do not approve, then it reverts the M&O rate to the maximum allowed under state law.

Weighted Average Daily Attendance (WADA)

Weighted Average Daily Attendance (WADA) is an adjusted student count taking into account student and district characteristics by which students in certain programs are “weighted” to generate additional funds.

FREQUENTLY ASKED QUESTIONS