Proposal to Fully Adjust Chapter 70 Foundation Aid for Inflation

This proposal calls for fully adjusting Chapter 70 school aid for recent and future inflation. Chapter 70 includes a 4.5-percent upper limit or cap on the Foundation inflation index used to calculate school aid. This cap, applied in Fiscal Years 2023 and 2024, carries forward to reduce preliminary foundation budgets by 6 percent for fiscal year 2025. It threatens to underfund future school aid as well. This cap is a flaw in the formula that presents a serious ongoing impediment to meeting the needs of schools following the recent period of high inflation and will continue to restrict aid for years to follow until corrected.

Proposal

We propose to adjust the foundation budget calculations to fully account for inflation in Chapter 70 aid in fiscal year 2025 and future years.

Specifically, we propose: In General Laws Chapter 70 section 2 (a) replace the definition of the Foundation Inflation Index with:

“Foundation Inflation Index,” For fiscal years 2024 and earlier, the lesser of: (i) the ratio of the value of the implicit price deflator for state and local government purchases in the third quarter of the prior fiscal year to its value in the third quarter of the fiscal year 2 years prior; and (ii) 1.045.

For fiscal year 2025, the ratio of the value of the implicit price deflator for state and local government purchases in the third quarter of 2023 to its value in the third quarter of 2020, divided by the product of the Foundation inflation indexes applied in FY 2023 and FY 2024.

For subsequent fiscal years, the ratio of the value of the implicit price deflator for state and local government purchases in the third quarter of the prior year to its value in the third quarter 2 years prior.

Intent and Calculations

Our intent is to replace the fiscal year 2025 preliminary Foundation inflation index of 1.0135 with an index that fully accounts for inflation from the time of the implementation of the Student Opportunity Act.

The proposed Foundation index for fiscal year 2025 is 1.0734 based on our calculations using quarter-3 U.S. Department of Commerce Bureau of Economic Analysis figures for the implicit price deflator for GDP. For fiscal year 2025 using BEA price deflators, the Foundation inflation index would be 1.0734 = (127.71/108.95)/(1.045*1.045). This change would provide a one-time adjustment in fiscal year 2025 to bring that year’s Chapter 70 aid into line with recent inflation and would eliminate the cap on inflation adjustments for future years.

Table 1 provides data used in the calculation and shows the foundation inflation index results. The righthand column shows that, cumulatively in the period of the Student Opportunity Act, the index allowed under current law accounts for inflation of only 10.68 percent; the actual inflation in that period was 17.22 percent. The last row of the table shows that the proposed applicable indexes produce the same compound adjustment for inflation for FY 2025 that would have been in place if the Foundation inflation index had not been capped and fully represented inflation in fiscal years 2023 and 2024.

Table 1

Bureau of Economic Analysis Implicit Price Deflator, State and Local government and Chapter 70 Foundation inflation index, allowed and proposed

 2020 deflator2021 deflator/ FY 2023 index2022 deflator/ FY 2024 index2023 deflator/ FY 2025 indexCumulative compound % change from 2020
BEA deflator Quarter 3108.95116.66126.01127.7117.22%
% change from prior 3rd quarter 7.08%8.01%1.35%17.22%
Index allowed by current law 1.0451.0451.013510.68%
Index with proposed fix 1.0451.0451.073417.22%

Does not seek to recapture lost aid for fiscal years 2023 and 2024

This proposal does not attempt to recapture Chapter 70 aid that was curtailed due to the inflation caps applied in FY 2023 and 2024. If funds are available, districts could greatly benefit from an appropriation of funds to compensate for the inflation cap applied in those periods. However, it is much more important that we get Chapter 70 back on track, so that aid allotments for fiscal year 2025 and future periods fully reflect the rise in cost that has occurred over the period of the Student Opportunity Act. Figure 1 below shows that this proposal would bring the foundation budget for fiscal year 2025 into line with what it would be if fully adjusted for inflation, but it would not for adjust aid lost  to school districts due to the capped inflation adjustment for past fiscal years 2023 and 2024.

Full adjustment for inflation is needed this year

This year school districts are facing rising contract costs, continued recovery from COVID learning loss, and the end of federal ESSER funding. To avoid reducing services districts need the state to step forward to fully fund the Student Opportunity Act with full adjustment for recent inflation.

Figure 1

Cost estimates

We are seeking cost estimates for this proposal from the Department of Elementary and Secondary Education. This proposal would require recomputing FY 2025 Preliminary Chapter 70 Aid announced by DESE on January 24, 2024. We defer to DESE for these calculations. However, without the benefit of DESE methodology, our very rough “back-of-the-envelope” preliminary estimate of the cost to implement this proposal is on the order of $550 million in additional Chapter 70 aid statewide for fiscal year 2025.