HB920 Explained

Ohio's school funding approach splits the responsibility for funding public schools between the state government and the local school district. Some argue that the Ohio Constitution requires the state government to provide sufficient funding such that every school school district can deliver a "thorough and efficient education" without the need for local funds.

This was the basis of the Derolph vs State of Ohio lawsuit which resulted in the Ohio Supreme Court declaring Ohio's school funding system to be unconstitutional. By the way, the Supreme Court never said that property taxes were unconstitutional. Their problem wasn't with property taxes, but rather that the state portion of the funding was inadequate for the districts with low property values, necessitating unreasonably high local property taxes to adequately fund their schools.

It's also worth mentioning that the DeRolph decision is now moot, as the funding scheme it addressed has been replaced twice, first by Gov. Strickland's Evidence Based Model, and then by the approach introduced by Gov. Kasich. The current scheme is constitutional by default until a new lawsuit is filed and the courts rule otherwise. Apparently no one feels it is worth going through that exercise again.

Constitutionality is not the subject of this article. Rather I want to explain how property taxes are calculated, and in particular to address what happens when the County Auditor reassesses property values every three years.

You may have heard "HB920" mentioned, especially when there is a levy on the ballot. HB920 was enacted by the General Assembly in 1976. It was designed to protect homeowners from being "taxed out of their homes" as a result of rapidly rising property values, and it does so by keeping property taxes constant while property values rise. The Bill was championed by George Voinovich when he was the County Auditor of Cuyahoga County, and the neighborhood called "The Flats" was being regentrified.

Some folks will lament that HB920 "prevents property tax collections from rising automatically with inflation," as though that is a bad thing. As I've written for many years, I think this is a good thing, as it forces school leaders to go before the taxpayers when there is a desire to increase spending. I think that level of accountability is very healthy.

This is a much misunderstood law, and I didn't really understand its nuances until recently, when I attended a session taught by Michael Sobul, a former official of the Ohio Dept of Taxation, and current Treasurer of the Granville School district. The process is actually simpler than I thought. Here goes:

Let's get started by imagining a school district in which there is only one piece of real estate, a home with a market value of $100,000. That homeowner has voted to allow 2 mills of taxes to be levied to fund the school district. "Mills" are tax lingo, and simply means 0.1%. So a 2 mill tax rate is the same as 0.2%. One would think this means that a 2 mill (or 0.2%) tax on a $100,000 property would yield an tax bill of $200.

But at some point in the past, Ohio's lawmakers decided to adjust the taxable value of real estate by setting the "assessed value" of property to 35% of the market value. I imagine this came to be at some time when the General Assembly decided to reduce property taxes across the board. As a result, under current law this 2 mill levy would apply to $35,000 not $100,000, and the tax bill would be $70.00 per year.

	Home #1
Market Value	$100,000
Reduction	35%
Assessed Value	$35,000
Levy #1	2 mills
Annual Tax	$70.00

Then another home is built in the school district - this one valued at $200,000. The same reduction to 35% of market value is applied, yielding a tax of $140.00.

	Home #1	Home #2
Market Value	$100,000	$200,000
Reduction	35%	35%
Assessed Value	$35,000	$70,000
Levy #1	2 mills	2 mills
Annual Tax	$70.00	$140.00

Note that the total tax collected by this levy is $210.00.  As long as these are the only two properties in the school district, this $210.00/yr is all that Levy #1 is allowed to collect, regardless of changes to the market value of the properties over time.

Every three years, the County Auditor may reassess the market value of properties. Let's say that after such a reassessment, the value of Home #1 increases by 1% to $101,000, and the value of Home #2 increases 10% to $220,000:

	Home #1	Home #2
Market Value	$101,000	$220,000
Reduction	35%	35%
Assessed Value	$35,350	$77,000
Levy #1 Full Rate	$70.70	$154.00	$224.70
Levy #1 Limit			$210.00
Reduction Factor			.934579
New Tax	$66.07	$143.93	$210.00
Change	-5.6%	+2.8%

As required by HB920, the total amount collected by Levy #1 remains $210/year, but the amount of tax paid on each home has changed. Added to the calculation is the "Reduction Factor," which is simply the amount of tax collected at the original valuations divided by the amount of tax that would be collected at the full rate with the new valuations. In this case, it's $210.00 divided by $224.70, yielding a Reduction Factor of .934579.

This reduction factor is applied to the tax calculated at the new values, which restores the total tax collected to the original amount, but doesn't necessarily cause the tax collected on each individual parcel to remain the same. Notice what happened in the example above: Even though both homes increased in value, the tax due on Home #1 has decreased, while the tax on Home #2 has increased. That might not seem fair, but it's the way things work.

The consequence can be exactly that which was pointed out recently by my neighbor, Mike Harrold: the tax burden shifts disproportionately to neighborhoods where home values are rising the most. Kind of a double whammy.

Now let's say that a new 5.0 mill levy is passed by the voters:

	Home #1	Home #2
Market Value	$101,000	$220,000
Reduction	35%	35%
Assessed Value	$35,350	$77,000
Levy #1 Tax	$66.07	$143.91	$210.00
Levy #2 mills	5.0	5.0
Levy #2 Tax	$176.75	$385.00	$561.75
Total Tax	$242.82	$528.93	$771.75

There is no reduction factor applied to the new tax - it is charged against the Assessed Value at the full rate, and will remain so until there is another reassessment of property values.

Let's say that a third home is built in the school district, and that this home has a market value of $150,000:

	Home #1	Home #2	Home #3
Market Value	$101,000	$220,000	$150,000
Reduction	35%	35%	35%
Assessed Value	$35,350	$77,000	$52,500
Full Rate mills	7.0	7.0	7.0
Full Rate Tax	$247.45	$539.00	$367.50
Limit	$242.82	$528.93
Reduction Factor	0.981308	0.981308	0.981308
Adjusted Tax	$242.82	$528.93	$360.63	$1,132.38

As you see, it's not true that "Once a levy passes, it never generates more money," which is something which has often been claimed by levy campaign committees in past years. New properties do generate additional revenue, at the same effective tax rate as all the other properties in the school district. It may not be enough to fund the cost of the additional students which come with new homes, but that's a different story.

The last example I'll present shows what happens when property values decline, a scenario not considered by the authors of HB920 back in 1976, but one which we now know can happen:

	Home #1	Home #2	Home #3
Mkt Value Chg	-2.0%	-4.5%	none
Market Value	$103,000	$210,000	$150,000
Reduction	35%	35%	35%
Assessed Value	$36,050	$73,500	$52,500
Full Rate mills	7.0	7.0	7.0
Full Rate Tax	$252.35	$514.50	$367.50	$1,134.35
Limit	$242.82	$528.93	$360.63	$1,132.38
Reduction Factor				0.998264
Adjusted Tax	$251.91	$513.61	$366.86	$1,132.38
% Adjustment	+3.7%	-2.9%	+1.3%

So one powerful consequence of HB920 is that it protects the taxing entity - in this case the school district - when property values go down. In other words, just as taxes don't rise as property values increase, neither do property taxes decrease - in aggregate - when property values decline. I think a lot of people were surprised by this when the housing bubble popped a couple of years ago.

This is also why school districts didn't get nailed in the same way as did other governments when incomes fell off in the Great Recession. Granted, when the state budget took the hit from falling income tax revenue, that directly led to a decrease in the aggregate funding from the state to education. However, the impact was not equal across all school districts. The more affluent districts - and we're seen to be one of those - had larger reductions, implemented primarily via an acceleration of the phase-out of reimbursement of Personal Property Tax income.

As tax revenues have recovered for the state government, some of the reductions to us have been restored, which is the primary reason why we can say that another levy should not be needed before 2015.

It was looking pretty bleak there for a while, to the point that I was fairly confident that we couldn't make it to even 2014, our commitment when we put the last levy on the ballot, without some painful cuts to programming and services, achieved in the only way we can - to reduce personnel expenditures. This is the reason I voted twice to not accept the Five Year Forecast from our Treasurer.

Things obviously look better now, allowing us to negotiate a reasonable deal with the teachers and still not need to put a levy on the ballot until 2015.

I believe we need to use this period of relative calm to spend some time thinking strategically about the future of our school district:

• Can we maintain the richness of offerings at our high schools and keep the rate of expense growth such that it can be funded with reasonable levies at reasonable intervals?
• What things should we consider in regard to the health care coverage for our employees that changes the trajectory of these costs?  If Obamacare survives, we're going to run right into the Cadillac Tax unless we make some significant changes to our plan design. Paying this tax makes no sense at all.
• Is it time to look at income taxes as a component of our funding strategy?  How about an Earned Income Only Tax?  As I've disclosed before, an Earned Income Tax is particularly attractive to retired folks like me, but it narrows the tax base, leaving out not only retirees but also the corporations, who pay only property taxes. In other words, it transfers more of the incremental funding burden to folks still working, who also tend to be the folks with kids in school.

As always, my mission is to educate the voters of our community so that we can have an informed dialog about these matters. I hope you will participate.