Idaho School Funding Changes

Fiscal Consequences and Effects of a New Paradigm

Alan S. Dornfest, AAS

August 26, 2013

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Changing Pattern of Idaho Property Tax Use

Chart Title

Highway 6.4%$ 91.7 Million

School 29.4%$ 421.1 Million

City 27.1%$ 388.6 Million

County 26.6%$ 381.0 Million

Other 10.5%$ 150.7 Million

Calendar Year 2012

Chart Title

Other 8%$93.4 Million

County 23%$281.1 Million

Highway 5%$65.2 Million

School 43%$529.7 Million

City 22%$270.0 Million

Calendar Year 2005

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The Big Change! – Fiscal Year 2007

• One day special session – August 25, 2006– Called by Governor Risch, the former lieutenant

governor who was serving out a seven month term of office resulting from the appointment of the previous governor as Secretary of the Interior. Gov. Risch was not running for Governor in the Fall and would have no chance to present plan to any general legislative session.

– Unique in that no other special session considered tax issues (and special sessions rare in Idaho).

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Components of the Change• Eliminated 0.3% general school property tax ($253 million or

19% of total property tax after adjusting for five school districts continuing to levy)

• Increased sales tax from 5% to 6% (eff. October 1, 2006)– $210 million per year predicted

– $140 million during first fiscal year given Oct. 1 effective date

• Appropriated $251 million from state general fund for property tax replacement

• Appropriated $100 million for budget stabilization fund

• $75 million in replacement monies for earlier (1995) elimination of ¼ of general levy rolled into overall state appropriation

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Background and Perspective• All property taxes are levied for local governments in Idaho – state precluded

from levying by statute once sales tax enacted in 1965.• Pressure to reduce school property taxes dates to at least late 1970s. • In Fiscal Year (FY) 1980, school districts received:

– State sales tax for replacement of property tax on business inventory eliminated in 1971• $12.6 million directly to school districts• $2.4 million to County School Fund

– $6.0 million in property tax levied under the “county school fund” – $61.5 million in general school district property taxes (note: “general” used to

denote maintenance and operation funds, which are used for various purposes, including salaries and general school operations, but not building repairs, new buildings, and special programs)

• After FY 80, County School Fund and direct shares of sales tax eliminated.

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Post 1980 Period• Remaining state and local funds equalized

– Formula took into account numbers of students in each school district

– Formula subtracted property tax (locally raised) component in determining state share – used uniform rate applied to prior year’s taxable value beginning in 1993

• FY 96 – ¼ school general levy removed

– Initiative of new governor– State replaced using property value formula allowing for

equalization– Intended to begin phase out of school property tax– Insufficient state funds to achieve goal for several years– Grows from $40 until capped at $75 million in FY 2005.

Would have been over $97 million in FY 2007.Dornfest

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And, by the way, were Property Taxes High in Idaho?

• In Fiscal Year 2006 (predating education funding change):– Average overall property tax rate = 1.387% of

value• Effective rate on homes much less given 50% up to

$50,000 exemption on primary residence Basis for

MeasurementIdaho

National Rank

Idaho Compared

to U.S. average

Idaho Rank in 11 Western

States

Idaho compared to Western states

median

Per Capita 38 -29.6% 9 -15.9%

Tax compared to total personal income

31 -12.9% 5 +0.9%

Based on Census data as reported in author’s tax burden study – available at www.tax.idaho.gov

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What about each major tax in 2005?

Estimates for families of three in Boise, ID, compared to average of largest U.S. cities in each state and the District of ColumbiaBased on data from Tax Rates and Tax Burdens in the District of Columbia – A Nationwide Comparison. 2005 edition; Issued August, 2006Dornfest

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School Funding Equalization Prior to 2006 Changes

• Taxable value equalized to market value to account for assessment discrepancies

• State and local funds to schools (sum of following):– State appropriation (general)– State appropriation for 1996 replacement of ¼ of school general

property tax --$75 million– Local property tax – 0.003 X equalized market value statewide

• Total amount of state plus property tax shares divided up on per pupil basis– Property rich districts – more from property tax; less from state– Property poor districts – less from property tax; more from stateDornfest

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Example of Equalization System in Place in FY 1999

• State determined adjusted market value for prior year – Adjusted to reflect market value net of exemptions (eg:

homeowner’s exemption) or statutory constraints (ie: farm and timber valuation)

– Adjusted to reflect market value as indicated by annual ratio study – this accounted for assessment practice variations

• Value multiplied by uniform rate (0.004)– Total for all school districts added to state appropriation to

establish amount to be equalized by dividing by number of students in each school district• Individual school district share of state portion determined by

subtracting that school district’s amount to be raised by local property tax.

• 0.001 of this to be provided by state as property tax replacementDornfest

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Total of State and Local Funds - FY 1999

Property Tax: $ Millions General M&O -------- 197.5Overrides -------------- 52.2Bonds ------------------ 60.9Plant Facility ---------- 26.1Other ------------------- 9.9Subtotal ---------------- 346.6 : 29%

State Appropriation $ MillionsGeneral Account --------- 741.7

Property Tax Replace. --- 54.7

Other Accounts ----------- 54.0

Subtotal -------------------- 850.4 : 71%

State and Local Total: $1,197.0 MillionEqualized portion of property tax: $164.1 Million

(Excess property taxes for Boise School District not equalized – operates under charter)

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FY 1999 Equalization (continued)• State Share: $850.4 million• Local Equalized Property Taxes: $164.1 million

Total: $1,014.5 million• 12,600 support units (1 unit = about 20 students)• $1,014.5 / 12,600 = $80,516 per unit (~$4,000 per

student) Example Property Rich School District

Property Poor School District

Adjusted value 1,000,000,000 250,000,000

Property Tax 3,000,000 750,000

Support units 100 100

State $ per unit 50,516 73,016

Local property tax per unit

30,000 7,500

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Uniform Property Tax Rates?(adding to the confusion)

School District

2004 Taxable Value ($ Millions)

Property Tax Budget

Calculated using 0.3% rate ($1000s)

2005 Taxable

Value ($ Millions)

Levy rate needed to

fulfill calculated

property tax budget

A 500 1,500 600 0.250%

B 500 1,500 500 0.300%

C 500 1,500 400 0.375%

School general levy rates were uniform only with respect to prior year’s adjusted values – these differed from current year’s taxable values, which were not adjusted using ratio studies and reflected a different year’s assessments.

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Struggling Against Rapidly Rising Property Values – FY 2001 - 2006

• Idaho assesses property at current market value annually – Homes and farmland sheltered somewhat through 50% up to

$50,000 homeowner’s exemption and partial exemption for farmland (similar to use value)

• FY 2001 – 2006– Property values grow rapidly

• 7.4% per year 1996 – 2006

• 7.7% per year 2001 - 2006

– School taxes increase accordingly using the rate based levy system (with a one year lag).

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Growth in Idaho Taxable Values

Funding change implemented

Rate of value growth topped out at 13.4% per year from 06 – 09!

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Without the Change, School Property Tax would have Grown Dramatically after 2006, then lost some of the

growth

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Oddities of 2006 “Elimination” of School General Property Tax

• Boise School District – Operates under pre-statehood charter that limits

enforcement of legislated constraints on property tax powers

– Still levies property tax of $53.7 million (FY 2012), but lowered amount levied to participate in state appropriation

• Four “Property Rich” School Districts– Generated more money from property tax than state per

pupil formula would replace– Retained authority for “budget stabilization fund”– Continue to levy about $35 million per year for general

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Initial Property Tax Effects

• Reduced school property taxes - represented 19% of total property taxes in 2006 (FY 2007)

• Overall property taxes decreased 11.4% from prior year– Reflects increases in other taxing districts and increases in

unaffected school funds

• Change coupled with increase in homeowner’s exemption maximum from $50,000 to $75,000 (and tied to Housing Price Index) – so most homeowners saw more significant decreases, although only partially due to school funding changes

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Effects of School Funding Changes

• Schools retained authority for voter approved “supplemental” levies (and other voter approved and misc. levies)

• State appropriations increased for two years, then decreased significantly

• Supplemental levies increased significantly to fill gaps resulting from lower state appropriations– Because of dependence on voter approval and

independence from state funding share, per pupil funding uniformity has been reduced

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Major Components of Idaho School Property Taxes

Fiscal Year General M&O ($ Millions)

Supplemental ($ Millions)

Bonds – Annual Repayment ($ Millions)

Plant Facilities Funds ($ Millions)

2002 183.4 59.7 76.1 33.6

2003 189.9 62.2 81.2 36.5

2004 204.8 66.2 89.1 34.8

2005 216.0 67.9 93.4 36.8

2006 230.4 76.7 98.4 38.4

2007 253.5* 78.7 117.0 28.0

2008 283.8* 101.0 125.9 36.3

2009 335.9* 108.1 123.3 55.4

2010 353.1* 114.0 119.4 50.1

2011 333.0* 136.3 114.0 31.6

2012 297.8* 139.6 111.0 39.4

2013 281.4* 169.0 112.3 42.7

2014 273.8* 167.6** Not yet available Not yet available

*Hypothetical amounts shown beginning in FY 07 based on no change in prior system of school property tax.**Estimated based on elections through May, 2013 – addl elections in August will determine final amounts

Note: All General School Property Tax Amounts have been adjusted downward for amounts continuing to be levied by five school districts.

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The Most Significant Change – School Supplemental Levies

• Voter approved for 1 – 2 years (may be longer for charter school districts and permanent for some school districts)

FY 14 est.

The rate of increase in $ raised by supplemental levies goes from 32% over the five years before the change in FY07 to 114.7% in the six years following the change in school funding (through FY 2013).Dornfest

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Where did the Additional Sales Tax Beginning in October, 2006 go?

Appropriations stayed up due to stabilization fund

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Changing State Appropriations Compared to Changing Actual or Hypothetical Property Tax

Fiscal Year State appropriation (distribution) ($ Millions)

Amount of Change from prior year’s distribution ($ Millions)

General M&O ($ Millions)

Amount of Change from prior year’s general M&O including hypothetical amounts ($ Millions)

2003 920.0 NA 189.9 NA

2004 943.0 23.0 204.8 14.9

2005 964.7 21.7 216.0 11.2

2006 995.3 30.6 230.4 14.4

2007 1291.6 296.3 253.5* 23.1

2008 1367.4 75.8 283.8* 30.3

2009 1333.4 -34.0 335.9* 52.1

2010 1148.6 -184.8 353.1* 17.2

2011 1214.3 65.7 333.0* -20.1

2012 1223.6 9.3 297.8* -35.2

2013 1279.8 56.2 281.4* -16.4

2014 1308.4 28.6 273.8* - 7.6

* Hypothetical amounts shown beginning in FY 07 based on no change in prior system of school property tax.

Property tax effects lag economic effects

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Economic Recovery

• Idaho state tax collections and miscellaneous revenue in FY 2013– Exceeded January 2013 revenue projection by 3.5%– Increased Year to Year since FY 2011:

Fiscal Year Increase in Million $ from prior year

Increase in % from prior year

Increase in % in state school appropriation from prior year

2011 179.0 7.9% 5.7%

2012 143.2 5.9% 0.8%

2013 162.6 6.3% 4.6%

2014 unknown unknown 2.2%

State funding for schools lagged overall growth in state revenue

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One School District’s Story • Nampa School District– Nampa is 2nd largest Idaho City (2012 pop. Est

83,930)– 3rd largest school district (2012-13 enrollment

15,135)

The Idaho Statesman, May 25, 2013

Revenue $68.8 Million

Expenditure $66.1 Million

Despite Supplemental Voter Approved Levies:

FY 2009: $1.50 millionFY 2010: $1.50 millionFY 2011: $1.63 millionFY 2012: $1.63 millionFY 2013: $1.60 million

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General Pattern Over Time

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Cumulative Changes in Funding Options Compared

It appears schools would have been ahead with previous property tax system, but not without some increase in voter approved supplementals – may have been less palatable

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What have total property taxes done since FY 2007 (through FY 2013)?

• Overall property taxes grew 4.6% per year after falling 11.4% in the year the school funding change occurred– FY 07 – 09: +9.5% per year– FY 09 – 12: +1.6% per year– FY 12 – 13: +3.8%– FY 02 – 06: +6.9% per year

• Total now stands at $1,433.6 million– Was $1,239.1 in FY 06 (prior to the change)– Was $1,097.7 in FY 07 (the first year of the change)

Note: Property tax growth capped at 3% per year (except for voter approved levies), plus allowance for new construction – dropped sharply after FY09, but has now leveled.

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Calendar Year

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School general fund levies not included

Calendar Year

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And What Happened to Idaho’s Property Tax Burden after the change in School Funding?

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Idaho Property Taxper $1,000 Personal Income

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

20

25

30

3534

32

2525 25

292928 28

29 29 2929 2929

30

31

30

31

2526

2425

27

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Chart Title

Calendar Year

FY 10 National ranking 38th based on income

26.4% below U.S. average10th lowest of 11 Western states

31st prior to change

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FY 10 National ranking 41st per capita41.7% below U.S. average9th lowest of 11 Western states

38th prior to change

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Public Perspective:What do people think of Education Funding in Idaho?

Survey in Late 2010 and early 2011

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What do People Think of Local Government in Idaho?

Boise State University Public Policy Center 20th Public Policy Survey – November 2010 – January 2011

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And, What do They Think of Property Tax?

2009 Public Policy Survey conducted by Public Policy Center at Boise State University – Property tax rated least fair since 2001, although negative opinions less pronounced in 2007. Payroll tax added to survey in 2004 – may mean that longer term percentage comparisons not as valid.

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And What About School Performance?

From National Assessment of Educational Progress (NAEP) – Idaho NAEP Notes Volume 2011 Number 2(ISAT is the Idaho Standards Achievement Test)

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Performance (continued)

From National Assessment of Educational Progress (NAEP) – Idaho NAEP Notes Volume 2011 Number 2Dornfest

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Conclusions• School general property taxes under the pre-2006 system

would not have decreased as much as overall funding did in the absence of the general property tax component

• Despite economic recovery, state general fund revenue gains have outstripped school funding increases– Schools have commandeered small shares of state revenue increases

– Schools have increasingly viewed state appropriations as inadequate and have filled gaps through record levels of voter-approved supplemental levies

– There is increased funding disparity between rich and poor school districts due to local selection of voter-approved amounts

• Overall performance indicators reviewed appear unaffectedDornfest