How Should We Fund Our Schools?

When I have the opportunity to speak to groups around our community, it's not uncommon for someone to make a comment about the 'unconstitutionality of property taxes.' It happened again when I spoke at a PTO meeting last month.

Short response: Property taxes are not unconstitutional, nor did the Ohio Supreme Court ever say that property taxes cannot be used as one of the sources of funding for public schools. What they said was that the State of Ohio was failing to provide adequate state funding to the public schools, leading to an over-reliance on local property taxes, which in turn causes the poorer school districts in our state to be underfunded.

Long version: Read it here.

Besides, that set of opinions by the Ohio Supreme Court, collectively called "The DeRolph Case," is now moot, as the funding system in question when that case was heard was replaced first by the Evidence Based Model during the Strickland administration, and then by a temporary funding mechanism enacted in the first Kasich budget. We don't know if the Strickland EBM was constitutional, or whether the system Kasich will propose will be either - neither has been litigated in any court.

But one point made by the Court during the DeRolph case still holds true: property taxes are by far the most stable form of funding for schools.

Here's a concrete example of that. The Columbus Dispatch today ran a story about the downsizing of a pharmacy operation which is housed in the large industrial park west of I-270 at Roberts Rd. This company currently employs about 270 people at this location, but that will be cut to around 70.

Let's assume that the 26 pharmacists being laid off are paid $75,000/yr, and the other 174 average around $35,000/yr. That puts the total annual payroll somewhere around $8 million. This facility is in the City of Columbus, so at their 2.5% income tax rate, these workers paid $200,000 of city income tax every year.

That's gone. The City of Columbus will receive $200,000 less in income each year, and it will be gone the instant this company executes its layoffs.

However, this building will still be standing. The company occupies a portion of a facility that in total generates $239,673/yr in school property taxes, and its owners will have to continue paying that tax even if the structure stands empty. As a fellow commercial real estate investor, I feel their pain. As a School Board member, I'm thankful we aren't taking a revenue hit like the city.

This phenomenon is the reason most state and local governments have struggled in the past 5-6 years, but public school districts have generally been okay. Many local school districts - especially the suburban districts like ours - are funded mostly by their very own stable base of property taxes rather than much more volatile income taxes, which is what funds the cities and the State government (and the Federal government for that matter).

According to the Cupp Report, published annually by the Ohio Department of Education, our district gets 34% of our funding from the State of Ohio (cell BE232). That's typical for the central Ohio suburban districts:

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Statewide, the average district gets 48% of its funding from the State, but this varies from 14% (New Albany) to 76% (Huntington Local Schools, Ross County).

But that's not all of the story. As I reported the School Funding article back in January, our State funding for the school district as a fraction of the aggregate State income taxes paid by our residents is only 41%:

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So if we could keep 100% of the State income taxes we pay and use it to operate our own school district, we wouldn't need any State funding.

But that's not how the system is set up. Instead, the more affluent communities - and ours is considered one of those - fund essentially 100% of the cost of their own school district, plus foot the bill for a couple of smaller, poorer school districts as well. By the way, I don't have a problem with that, although this is still not my preferred system for operating schools for the benefit of the public.

Given a choice between property taxes and income taxes, I still believe property taxes are a better source of funding for our schools. Property taxes are more stable, plus Ohio's property tax laws prevent our property taxes from increasing (or decreasing) with changes in real estate values. That means that a school district must make its case directly to the voters when it wants more property tax revenue, and I think that's a good thing.

But as a retired person with an income which has eroded significantly in this economic downturn, I wouldn't mind if our school district explored an 'earned income tax' as a means for raising new revenue, when that time comes. An earned income tax would shift the tax burden from those of us who are retired and with limited ability to generate new income to those still working (hope I'm scoring some points for transparency even if you don't agree with me!).

By the way, this is the exact dialog taking place in regard to what steps should be taken to make the State Teachers Retirement System solvent again. Should retirees accept cuts, or should working teachers pay more? It's going to take some of both. Retired teachers and activists Kathie Bracy and John Curry have a great deal to say on this subject.

While property taxes are indeed the most stable form of funding for our schools, it is a mechanism which is largely disconnected from the economic health of a community at any give time. When a community is rapidly growing, as did Hilliard from 1980 until 2000, the additional residential property tax collected on new homes doesn't increase as rapidly as enrollment, which is one of the key drivers of operating cost (the other being compensation & benefits).

Most folks are surprised to learn that the incremental property tax revenue generated by the typical new house doesn't come close to funding the cost of the average 0.8 school age kids who come with it. It's actually less than half. When much of the new family housing is apartments - which generate much less property tax revenue per unit than a house - this situation is exacerbated.

This makes it critical that commercial development happen at a similar pace, in order to share some of the cost burden of new students - which was not the case in our community during the last boom (note than the City of Columbus brought MUCH more commercial development to our school district during that period than the City of Hilliard, despite claims to the contrary).

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The consequence is that those already living in our school district had to raise their taxes to subsidize the cost all the new folks moving in, which is one of the reasons I've long campaigned to have the law changed so school districts could levy Impact Fees, as can cities.

And when the economy falters, property taxes become an increasing burden on the people of the community, many of whom experience a period of very slight income growth, if not unemployment.

This is when friction develops between the voters and public sector employees. It becomes pretty tough to vote for a levy to raise one's property taxes significantly (our last 5.9 mill levy increased our school property taxes 11.8%) when that money seems to be going to support a compensation and retirement structure for teachers, administrators and staff which seems pretty sweet in times like these. Of course, we've forgotten when things were reversed, and folks in the private sector were seeing their 401(k)s exploding in value while public sector workers were left behind.

However we fund our schools, local or statewide, property taxes or income taxes, we need to figure out a way to match spending to economic conditions. With approaching 90% of our spending going to compensation and benefits, this is the same thing as saying school employee comp/benefits needs to be structured to track community income much more closely, up in good times and down in bad.

I won't pretend that this conversation will be easy. But, after we get everyone - community and teachers alike - on the same page as to the economic reality of our situation, we need to have it nonetheless.