C.S.H.B. 1 78(4)    BILL ANALYSIS

C.S.H.B. 1
By: Grusendorf
Public School Finance, Select
Committee Report (Substituted)

BACKGROUND AND PURPOSE 

Since its very first Constitution, Texas has made the education of every
child its primary goal.  This state has not wavered from that commitment.
Today, Texas is facing a crisis in providing funding for the public
education system. Property taxes are too high, schools do not have the
flexibility to raise additional revenue to meet the rising costs of
educating our children, and our current system of finance is being
challenged in our courts. It is necessary to overhaul the public education
funding system to stabilize and improve the way we fund public education
in Texas.  
          
Whenever the funding of our public schools is addressed, it is important
to keep our children's education at the forefront of the discussion. For
this reason, it is essential to address and encourage student achievement
and progress. Introducing an incentive program and focusing on other
education reforms are necessary pieces to solve the larger puzzle of
school finance. 

The purpose of this bill is to promote educational excellence and overhaul
the way by which the state funds its public schools.. 

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly
granted to the Commissioner of Education in SECTION 1A.01, SECTION 1A.09,
SECTION 1E.01, SECTION 1F.20, SECTION 2A.02, SECTION 2A.03, SECTION 2B.01,
SECTION 2B.02, SECTION 2D.07, SECTION 2D.09, and SECTION 2E.04; to the
Commissioner of Higher Education in SECTION 2B.02;  to the State Board of
Education in 2D.02; to the Comptroller of Public Accounts in SECTION
6B.01; to the Legislative Budget Board in SECTION 1A.01; and to the Texas
Lottery Commission in SECTION 9.05, SECTION 9.33, SECTION  9.41, and
SECTION 9.42 of this bill. 

ANALYSIS

C.S.H.B. 1 provides a sufficient level of funding to meet the state's
educational goals, increases funding to every school district by at least
2 percent, replaces the "Robin Hood" system with one less reliant on
recapture, establishes a uniform local property tax rate of $1.05 per $100
of valuation, rewards excellence in teaching and student performance,
improves governance of public education, enhances accountability,
abolishes the franchise tax, governs the use of video lottery terminals at
limited locations in this state, and provides new revenue to achieve the
state's goals.   

Public School Finance

C.S.H.B. 1 establishes a foundation tier to provide a sufficient level of
funding to meet the state's educational goals.  Each school district is
entitled to an accreditation allotment consisting of $4,459 for each
student in average daily attendance (ADA) enrolled below the ninth grade
and $5,459 for each student in ADA enrolled in the ninth grade or above.
In addition to the accreditation allotment, school districts are entitled
to receive special student allotments, including: 

_ A minimum of $300 per student in ADA for special education, with access
to additional funds for high cost special education students or students
requiring intensive services; 
_ A minimum of $665 per eligible student in ADA to serve students at risk
of dropping out of school and to compensate for traditional
underestimation of poverty in high school; 
_ A minimum of $450 per student in ADA enrolled in a bilingual education
or special language program; and 
_ A minimum of $178 per credit hour per student in ADA in an approved
career and technology education program. 
 _ Allotments in the foundation tier shall be adjusted to account for
differences in districts' resource costs based on various factors beyond
their control, such as district size and sparsity, inflation, and
geographic variations in the cost of hiring highly qualified teachers.
The legislature may provide an additional allotment by appropriation.   

School districts are entitled to receive allotments ($250 per student in
ADA for the first year and $250 per additional student in ADA for the
second year) for operational expenses associated with new instructional
facilities.  The Commissioner of Education (commissioner) may award grants
to school districts with high transportation costs per student. 

The accreditation, special student, and new instructional facility
allotments constitute "tier one" allotments.  Each school district's
responsibility to fund tier one is determined by multiplying the taxable
value of property in the school district by $1.05 per $100 of valuation.
The bill adjusts for rapid declines in taxable value and provides other
transitional aid to maintain state and local revenue to districts.  The
bill guarantees each district a minimum funding increase of 2 percent. 

C.S.H.B. 1 establishes an enrichment tier to provide school districts the
opportunity to supplement their basic programs at a level of their
choosing.  The enrichment tax rate may not exceed $0.10 per $100 of
valuation.  No school district may impose an enrichment tax earlier than
the 2006 tax year. The maximum enrichment tax rate for that tax year is
$0.02 per $100 of valuation, and it may be increased by no more than $0.02
per $100 per tax year.  The bill provides a formula to guarantee an amount
of state funding (guaranteed yield) for each cent of local enrichment tax
effort. 

The bill increases by $500, to $1000, the health insurance pass-through to
full-time classroom teachers, librarians, nurses, and counselors, with a
90-day waiting period for new hires. 

With respect to facilities, the bill prohibits districts from using the
school facilities allotment to construct, acquire, or improve stadiums or
other facilities predominantly used for extracurricular activities.  The
commissioner shall establish a "best practices" program and recognize
school districts which achieve cost-effectiveness in construction and
long-term maintenance of facilities. 

Reforms and Incentives

C.S.H.B. 1 provides several reforms and incentives to improve academic
achievements.  The commissioner shall provide grants to school districts
which develop local incentive programs, the primary criteria of which
shall be measures of incremental growth in students' achievement.  In
general, these grants will be used to provide awards of at least $2,500 to
as many as 15 percent of a school district's employees.  The bill
establishes minimum criteria for local incentive programs. 

The bill requires each school district to create a mentor program for
teachers and provides stipends of $1,500 for each teacher mentored, up to
two per mentor per year.  The bill requires the commissioner to develop a
"premium teacher" program to provide awards of $4,000 to classroom
teachers who add value to student achievement in low-performing and
certain other campuses. 

The bill awards school campuses an additional $1,000 for each student who
completes the Advanced High School Program, an additional $1000 for each
at-risk student who completes the curriculum requirement, $100 for each
student who achieves "commended performance," and $100 for each student
who successfully performs on an Algebra I assessment.  These awards are
doubled if the individual achieving these successes is deemed at risk of
dropping out of school.  These funds may be used only for academic
enhancement purposes; they may not be used for athletics or to replace
funds already in a campus or district's budget. 

C.S.H.B. 1 eliminates the exit-level TAKS tests and replaces them with
end-of-course assessments. Students must satisfactorily perform on
end-of-course assessments for English, history, mathematics, and science
to be eligible to receive a high school diploma.  The bill also allows
students to meet the exit-test standard with high scores on AP or IB exams
and, for mobile students who enter after the start of the 10th grade, by
high scores on the SAT II or ACT exams. 

 By 2006, the Texas Education Agency shall develop computer-based
assessments, require school districts to administer computer-based
assessments to the extent practicable, and develop computeradaptive
diagnostic assessment instruments.  In addition, the bill requires all
students in grades 8, 10, and 12 enrolled in the recommended or advanced
high school program to take nationally recognized assessments of college
readiness (such as the SAT II or ACT exams).  The commissioner is required
to develop a system of tracking individual students' performance on these
assessment instruments from year to year.  The bill also creates new
procedures for monitoring bilingual student performance and ensuring that
bilingual students continue to progress academically. 

The commissioner is required to ensure that the Public Education
Information Management System (PEIMS) links student performance to other
data for purposes of efficient and effective allocation of school
resources.  All districts will be required to use PEIMS and a new student
tracking system to facilitate the electronic transfer of students' records
and improve monitoring of students' progress toward graduation.  In
addition, all districts will be required to adhere to a uniform accounting
system for required data.  Districts will also be required to report
noninstructional expenses in PEIMS. The commissioner and the Commissioner
of Higher Education may establish up to three centers for education
research.   

The bill requires four-year terms for all trustees of independent school
districts and requires them to be elected on the uniform election date in
November.  The bill eliminates the election of the vice chair and
secretary by the members of the State Board of Education and instead
requires the chair, with the advice and consent of the Governor, to
appoint those officials. 

The bill also contains a limitation that the commissioner shall adopt
rules under the Education Code only if the duty requires an action to be
taken by rule.  The commissioner is also required to set up a system for
comments on the actions the commissioner or the Texas Education Agency
proposes to take in performing a duty that does not require the adoption
of rules.  The commissioner may also accept gifts and grants for the
benefit of public education.   

Taxes

C.S.H.B. 1 establishes a uniform local property tax rate of $1.05 per $100
of valuation.  The bill limits to 5 percent the annual increase of the
appraised value of qualifying residential real property and specifies the
circumstances under which this limitation expires on a particular piece of
property. The bill also allows a local option tax rate of $0.10 per $100
of valuation for local enrichment.    

The bill requires the purchaser of real property to file a sales price
disclosure report with the chief appraiser of the relevant appraisal
district, with limited exceptions, and makes this report confidential.
The unlawful disclosure of this report is a Class B misdemeanor. 

The bill permits a unit of local government to sell all or part of its tax
receivables (delinquent ad valorem taxes and any other charge or
assessment secured by a lien on real property).  Such sales may be
accomplished through competitive bidding or a negotiated sale.  The bill
establishes requirements for notification, terms and conditions of sale,
assignment, and related matters. 

C.S.H.B. 1 increases the state sales tax rate to 6.75 percent from 6.25
percent.  It applies the sales tax to billboard advertising service and
bottled water sold in containers with a volume of three gallons or less.
It deletes the sales tax exemptions for mixed beverages, newspapers,
newspaper subscriptions, newspaper inserts, and magazine subscriptions.
It deletes the limited sales tax exemption for Internet access fees.   

The bill increases the motor vehicle sales and use tax rate to 7.75
percent from 6.25 percent, and it increases the boat and motor sales and
use tax rate to 7.75 percent from 6.25 percent. 

C.S.H.B. 1 imposes an admissions tax of $1 per ticket to a professional
athletic or amusement event, a permanently sited theme park, and a live
performance.  Events sponsored, produced, or affiliated with educational
institutions and nonprofit entities are exempted.  Net revenue from the
admissions tax is dedicated to public education. 

 The bill increases the tax rate on cigarettes by 344 percent to $70.50
from $20.50 per thousand, making the tax $1.41 per pack.  The bill
increases the tax rate on cigars by 344 percent (The rates vary depending
on weight, terms of sale, and nontobacco content.). The bill increases the
tax rate for smokeless and other tobacco products to 40 percent from
35.213 percent of the list price. 

The bill extends collection of the Telecommunications Infrastructure Fund
assessment until 2007. It permits entities which have not previously
recovered the assessment from its customers to do so. 

C.S.H.B. 1 repeals the franchise tax and establishes a payroll tax on
employers.  The tax imposed is the lesser of 1.25 percent of the wages
paid to that employee during the calendar quarter or $125 ($500 per year)
for each employee.  Governmental entities and charitable organizations are
exempt from this tax.  Employers are prohibited from deducting the tax
from employees' wages, and doing so subjects an employer to criminal
(Class A misdemeanor) and civil penalties ($500 per violation). 

The bill permits the Comptroller to forfeit the right of a noncorporate
entity to transact business in this state for the same reasons, and using
the same procedures, as the Comptroller uses in relation to the forfeiture
of corporate privileges.  The bill contains provisions relating to effects
of forfeiture, exceptions, notice requirements, revival, judicial process,
and records of forfeiture. 
 
Video Lottery

C.S.H.B. 1 permits the Texas Lottery Commission (TLC) to implement and
operate a video lottery system and control the operation of video lottery
terminals (VLTs) at racetracks which held a parimutuel license on May 1,
2004, conducted at least 20 live racing days in 2003, and annually
conducts at least as many live racing days as it conducted during 2003.
The bill allows the operation of VLTs on certain tribal lands, subject to
an effective gaming agreement.  The bill establishes that the state owns
all lottery games, regardless of the owner of the VLTs, and provides that
TLC has exclusive authority to oversee video lottery games in Texas,
including the unilateral ability to disable VLTs remotely through a video
lottery central system linked to all VLTs.  

The state shall receive 60 percent of net income derived from VLT
operation at racetracks and up to 25 percent of net income derived from
VLT operation on tribal lands.  Two percent of funds the state receives
will be allocated to TLC to defray its expenses in administering video
lottery. Of the share retained by racetracks, 13.5 percent is allocated to
supplement purses and support breed registries for horses and greyhounds.
Applicants for registration or licensure must pay nonrefundable fees of
various amounts to TLC and fees of $25,000 per VLT.   

TLC has the authority to define hours of VLT operation, amounts players
may be charged to play, prizes and credits that may be awarded, the
maximum number of VLTs that may be operated at a particular facility, and
numerous other aspects of VLT operations.  The bill contains provisions
governing the requirements for and the process of licensure or
registration of VLT providers (manufacturers), video lottery retailers,
video lottery managers, and facility sites; the process for renewing,
suspending, or revoking a license; investigations; testing and approving
VLT equipment; the basic requirements of VLT equipment; accounting,
financial, and other reporting requirements; indemnification, insurance,
and bonding requirements; employees of video lottery retailers and
managers; hearings and due process; civil and criminal penalties for
violations; confidentiality of information; and other aspects of operation
and management of video lottery. 

The bill contains a model gaming agreement to be executed by the Governor
and the AlabamaCoushatta Indian tribe, the Kickapoo Traditional Tribe of
Texas, and Ysleta del Sur Pueblo Indian tribe.  The agreement stipulates
the terms and conditions under which these tribes may operate VLTs on
tribal lands.  The bill does not prohibit a federally recognized tribe
from requesting to negotiate a gaming agreement which differs from the
model agreement. 

The bill establishes criminal penalties for possession of gambling devices
other than authorized VLT machines.  The bill clarifies that a slot
machine is not a device or equipment used in connection with bingo when
authorized by law. 

 C.S.H.B. 1 authorizes TLC to begin implementing aspects of video lottery
operations prior to the date a constitutional amendment establishing video
lottery is submitted to the voters for approval. These activities include
expending funds, developing and approving forms, accepting applications,
preregistering VLT providers, testing equipment, and employing additional
employees as needed to ensure the state begins receiving revenue from
video lottery at the earliest possible date. 
 
EFFECTIVE DATE

Most provisions take effect January 1, 2005, but only if the
constitutional amendment proposed by H.J.R. 1, 78th Legislature, 4th
Called Session, 2004, is approved by the voters.  Sections 2B.05 and
10.01(b) take effect September 1, 2004.  Articles 1 and 2 take effect
September 1, 2005, except Section 1G.01(a) takes effect August 31, 2004,
and Part C of Article 2 takes effect January 1, 2005. Part D of Article 3
takes immediate effect if this Act receives a vote of two-thirds of all
members of each house or, otherwise, 91 days after the end of the 4th
Called Session, except Sections 3D.01, 3D.02, and 3D.03 take effect
January 1, 2005.  Article 7 takes effect on the date the previously
mentioned constitutional amendment becomes effective.  Sections 9.41 and
9.42 takes immediate effect if this Act receives a vote of two-thirds of
all members of each house or, otherwise, 91 days after the end of the 4th
Called Session. 

COMPARISON OF ORIGINAL TO SUBSTITUTE

The substitute replaces the original's changes to the existing school
finance formula and enrichment tax rate with an entirely new series of
allotments and formulas. The substitute adds language to set a uniform
local property tax rate of $1.05 per $100 of valuation.  The substitute
allows a local option tax rate of $0.10 per $100 of valuation. 
The substitute expands the original's provisions relating to educator
excellence, adds the premium teacher program and mentoring programs, adds
the student incentives program, deletes the original's incentive program
for principals, and deletes language in the original relating to a state
evaluation system. The substitute expands provisions relating to
end-of-course testing, adds provisions relating to computer-based
assessments, and adds provisions relating to PEIMS and tracking systems.
The substitute adds the accountability and governance provisions, as well
as provisions relating to enrichment, facilities funding, construction and
maintenance best practices, and uses of funds.  The substitute adds the
provision increasing the health insurance pass-through by $500. 
The substitute limits appraisal increases to 5 percent annually, not 3
percent as in the original. The substitute adds provisions authorizing the
sale of tax receivables and requiring the filing of a sales price
disclosure. 
The substitute adds provisions relating to sales tax exemptions, sales tax
rate, motor vehicle sales and use tax rate, boat and motor sales and use
tax rate, cigar and tobacco tax rates, admissions tax, payroll tax, and
TIF extension. The substitute adds the repeal of the franchise tax. The
substitute expands on the original's cigarette tax proposal and otherwise
deletes the original's tax proposals. 
The substitute expands the original's provisions relating to video
lottery, provides that TLC has exclusive authority to control video
lottery, specifies TLC's authority and responsibility for operational
aspects of the video lottery, increases the state's share to 60 percent
from 50 percent as in the original, adds the model gaming agreement, and
establishes criminal penalties for possession of gambling devices other
than authorized VLT machines.   
The substitute makes numerous other technical and conforming changes.