implications of a potential recession on school financial
TRANSCRIPT
Implications of a Potential Recession on School Financial Planning
April 8, 2020
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FRAMEWORK
1. The social distancing practices enacted in the wake of COVID-19 are having an economic impact and schools should be preparing for a likely recession.
2. There is not yet enough economic data to predict the duration, magnitude and scope of a potential recession.
3. Not all recessions are the same, or would have the same impact on school revenue streams.
4. There will be a lag between when a recession affects the economy and when it affects school revenues.
Recession Framework
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FRAMEWORK
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US
A P
ers
on
al In
co
me (
Bil
lio
ns)
Impact of the 2008 Recession on U.S. Personal Income
Nationwide 3%
reduction in Total
Personal Income
Source: Bureau of Economic Analysis
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FRAMEWORK
Nationwide 6%
reduction in
Employment
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SCHOOL REVENUE IMPACTS
Tax Base (Assessed Value)
• Increased circuit breaker impacts
• Limited growth in operating referendum funds
• Less capacity if on a targeted debt rate strategy
Maximum Levy Growth Quotient
• Based on statewide personal income
• Long term (6 year) impact on future levies
• Strong AV growth may mitigate impacts
Tuition Support Revenue
• Two yearbudget cycle
• Dependent on state sales and income tax revenue, and legislative decisions
Note: In some counties, school corporations also receive a local income tax distribution, which could be impacted in the event of a recession.
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PROPERTY TAX TIMELINE
Jan 1, 2020 Jan 1, 2021 Jan 1, 2022 Jan 1, 2023
The economic activity over CY 2020 informs market value in use as of January 1, 2021
Assessment date for tax year 2021-2022
Property Tax Distributions in June
and December of 2022
Timing of Recessionary Impacts on Assessed Value
Note: Executive Order #20-005 waives late payment penalties on property tax payments due May 10, 2020 for 60 days for certain taxpayers
ASSESSSED VALUE IMPLICATIONS
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Indiana Net Assessed Value History
$304$317
$271 $271 $268 $270 $268 $272$283 $287 $294
$301$310
$0
$100
$200
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cert
ifie
d N
et
Ass
ess
ed
Valu
e i
n B
illio
ns
15% reduction with
introduction of
Supplemental
Homestead
Deduction
Less than 1%
growth between
2009 and 2014
Approx. 14%
growth between
2014 and 2019
Implications of Reduced AV Growth• Increased circuit breaker impact• Less growth in operating referendum fund• Less capacity with fixed rate strategies
Source: Certified Net Assessed Value
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PROPERTY TAX REVENUE IMPACT
Maximum Levy Growth Quotient
• The Growth Quotient determines the allowable rate of increase for certified controlled levies.
• The Growth Quotient is calculating using a six-year moving average of Indiana non-farm personal income.
• A one-year reduction in personal income has a six-year impact on property tax revenues.
• The 2008 recession resulted in a 2.5% reduction in statewide personal income between 2008 and 2009.
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PROPERTY TAX REVENUE IMPACT
Maximum Levy Growth Quotient Impact
3.0%2.8%
2.9% 2.9%2.7%
2.6%
3.5%
4.2%4.0%
3.8%3.9% 3.9%
3.7%3.6% 3.6%
2.6%2.7%
2.6%
3.8%4.0%
3.4% 3.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Ass
ess
ed
Valu
e G
row
th Q
uo
tien
t
Illustrative Recession Projection
Non-Recession Projection
Historical Growth Quotient
Impact of the 2008 recession
One year (2020) of recession impacts AVGQ for 6 years due to moving
average methodology
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TUITION SUPPORT IMPACT
State Tuition Support Funding
• State tuition support resources are derived from State income and sales tax revenues.
• State revenue shortfalls may impact the level of tuition support appropriations in the next biennial budget.
• Reduced tuition support growth may put pressure on the Operations fund transfer.
• A prolonged disruption may have implications for future enrollment levels.
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CONCLUSION
Implications for School Finance
• The revenue impact of a recession is not immediate, but schools should be preparing for reduced revenue growth beginning in the 2022 tax year.
• Long term cash flow projections should begin to account for reduced levy growth due to circuit breaker impact and a lower GrowthQuotient.
• Schools may need to enact cash flow strategies in the short term to build balances in order to mitigate recessionary impacts.
• Education Fund impacts should be considered, including contingencies for less growth in State tuition support funding, possible enrollment impacts, and decisions regarding operations fund transfers.
CONTACT
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Policy Analytics, LLC
115 W. Washington St., Ste 425
Indianapolis, IN 46204
317-860-0785