Committees

Funding for Success Committee

June 28, 2004 Minutes

In attendance were Chairman Matt Filipic, Vice Chairman Dick Maxwell, Eric Burkland, Paolo DeMaria, Russ Harris, Representative Bill Hartnett, Representative Jim Hoops, Senator Jeff Jacobson, Senator C.J. Prentiss, Scott Williams and Susan Zelman,   Other Task Force members in attendance were Task Force Chairman William W. Wilkins, Vice Chairman Jim Hyre, John Brandt, David Locke, Barbara Shaner, Jim Mahoney, Fred Church, and Dan Navin.

Mr. Filipic called the meeting to order at approximately 10:05 a.m.

Presentations:

• Preliminary Recommendations of the Revenue and Taxation Committee (PDF*, 22 KB)

The meeting began with the "Presentation to the Funding for Success Committee: Preliminary Recommendations of the Revenue and Taxation Committee."  Mr. Dan Navin, Vice Chairman of the Revenue and Taxation Committee, provided a preliminary report to the committee.

Preliminary Recommendations of the Revenue and Taxation Committee

Mr. Navin introduced Mr. Mike Sobul and Mr. Fred Church from the Ohio Department of Taxation, who assisted him with the presentation.  Mr. Navin reviewed the six issues covered by the Revenue and Taxation Committee:

• The role of the property tax in school funding
• The complexity of the current system
• The balance between state and local shares
• Predictability and reliability
• Phantom revenue
• Competitiveness

Mr. Navin noted that a special focus of the Revenue and Taxation Committee has been on phantom revenue, which causes school districts to return too frequently to the voters for additional resources.  Addressing this issue became the overarching goal of the Revenue and Taxation Committee.

The committee considered, but ultimately rejected, a plan that would provide 100% funding of base costs through a statewide property tax.  The statewide property tax approach was rejected for several reasons:

• There was general opposition to the idea of a statewide property tax;
• Even with the statewide collection of 20 mills, there was a large budget hole and  no consensus on the committee as to the best approach to filling this hole;
• One option considered was to fill the revenue gap with a 76-mill state-collected tangible property tax, which was rejected because its effects would be too distorting;
• Another option considered was to acknowledge the gap but not recommend how to fill it, but this option was deemed incomplete and unacceptable;

The committee considered and rejected numerous plans.  The committee's preliminary recommendation is to allow each local school district to have a 22-mill growing levy on real property.  This proposal would necessitate a constitutional amendment.  The growth in the levy would be restricted annually on a statewide basis.  This 22-mill levy would be in place of 22 current effective mills (including emergency millage).  Mr. DeMaria asked what was meant by a statewide limit on real growth.  Mr. Navin explained that the legislature would set the growth limit statewide and local property taxes would only grow by that percentage statewide.

If 22 mills are not in effect for a given school district, but an income tax is, the 22 mills would replace all effective millage plus .25 percent of the income tax.  If 22 mills are not currently in effect and there is no income tax, all effective millage would be replaced and the rate would increase to 22 mills.

Senator Jacobson asked if the move to 22 mills would interfere with the ability of other units of local government to access inside millage.  Mr. Sobul said that he did not think that would be a problem.  Senator Jacobson also asked what the impact is of moving from 23 to 22 mills.  Does this not help wealthy school districts disproportionately?  How much additional state aid would this change require?  Mr. Church said that the increase in state aid as a result of this change would be about $200 million, but other changes offset this increase.

Mr. Church noted that the growth on the 22 mills would be restricted.  Senator Jacobson asked if moving from 20 to 22 mills increases tax burdens for those districts that are already at the 20-mill floor.  Mr. Sobul noted that 230 of the 355 districts that are at the 20-mill floor (two-thirds of the 20-mill floor school districts) also have emergency levies or school district income taxes.  It would increase the tax burdens for those school districts that do not have either of these types of levies.

Mr. Navin noted that the Revenue and Taxation Committee's preliminary recommendations call for the charge-off on real property to be 22 mills to match the 22 growing mills.  If the inside levy tax rate (22 mills) is reduced to restrict growth in future years, the charge-off rate should be reduced so it moves in tandem with the inside millage rate.

Senator Jacobson noted that keeping the two in tandem benefits wealthier school districts disproportionately.  What would this do over time to the state share?  Would wealthier school districts' state shares increase at the expense of less-wealthy school districts?  Mr. Church answered that the state and local shares should remain the same if the increase in basic aid per pupil is the same as the restricted increase applied to local property taxes.  He noted that it is a policy recommendation for Funding for Success to make regarding the increase in basic aid per pupil.

The charge-off rate for the tangible property tax should increase to the lesser of 40 mills or all current-expense tangible property taxes.  Senator Jacobson asked if Department of Taxation staff had modeled the overall impact of the charge-off changes.  Do the changes benefit wealthier districts disproportionately?

Mr. Church responded that a net $325 million is freed up (a $525 million reduction in needed state aid as a result of the increase from 23 to 40 mills for the tangible property tax charge-off, less the $200 million increase in state aid resulting from reducing the real property charge-off from 23 to 22 mills.)  Senator Jacobson asked whether school districts that are wealthy in tangible property tax would lose more than those that are not. Mr. Church affirmed that they would.

Mr. Navin noted that increasing the tangible property charge-off from 23 to 40 mills allows more state equalization and offsets the reduction of the real property charge-off to 22 mills.  As the inventory tax is phased out and local telephone property taxes are reduced, the 40-mill charge-off provides more protection to schools for the cost of the reductions.  Senator Jacobson asked why this is true.  Mr. Sobul replied that as the valuation of a school district is reduced the state aid goes up as the charge-off amount decreases.  Currently, school districts would be held harmless for the first 23 mills of losses from valuation declines.  Under the proposal, school districts would be held harmless for the first 40 mills of losses.

Mr. Navin added that the assessment rate on machinery and equipment would be cut from 25 % to 12.5%.  To pay for the cost of doing this, the 10% rollback on business real property would be eliminated.  In addition to this change, the Department of Taxation should work together with the business community to develop mutually acceptable definitions of patterns, jigs, dies, and drawings to ease litigation and make the tax more stable.

The rationale for the tangible property tax change is that real property rates in Ohio are generally in line with other states, while tangible property tax rates are relatively high.

The Revenue and Taxation Committee also recommends that low-income property tax relief be expanded.  This would help offset some of the effects of potential increases in property taxes on lower-income homeowners.

As noted earlier, this proposal would require a constitutional amendment.  The exchange of 22 current mills for a new growing levy cannot be done under Ohio's Constitution because it would not be consistent with Article XII Section 2a.  To smooth the effects of the rollback of the inside millage rate among taxpayers, Mr. Navin stated that the Revenue and Taxation Committee recommends going to a five-year reappraisal system with annual updates and a re-ordering of the counties undergoing reappraisal.  Senator Jacobson asked about the impact of the change in the reappraisal cycle.  He noted that this proposal involves tax increases every year for payers of real property taxes.  Senator Jacobson stated that property tax payers would pay twice as much on the valuation increases under this proposal as they do under the current system.

Mr. Church noted that with annual updates there are also annual limits on growth.  There is an increase but it is not double the amount collected under the current system.  Senator Jacobson observed that this change benefits wealthy school districts disproportionately.  Mr. Sobul responded that, since the reduction is done on a statewide average basis, wealthy school districts might see a reduction in taxes.

Senator Jacobson asked how far the rates would be rolled back.  Is there a limit?  Mr. Sobul responded that there is no lower limit. Senator Jacobson asked whether the rate could be reduced below 20 mills.  Mr. Sobul replied that it could.  Mr. Harris interjected that other states have been conducting annual updates for a long time.  Ohio would not be a leader in doing this.

Mr. Maxwell observed that our current system shifts tax burden among taxpayers in counties going through reappraisal.  Even though overall tax revenues for a taxing jurisdiction do not increase, areas within the jurisdiction that have experienced greater-than-average increases in property values see increases in their property taxes.  Those that experience below-average increases in property values may see declines in their property taxes.

Mr. Filipic observed that moving to annual reappraisals would increase taxes, but there are other components of the recommendations that impact total tax liabilities.  He asked what the net impact is of the Revenue and Taxation Committee's total package of recommendations.  Mr. Church replied that the current system requires school districts to impose levies that are larger than necessary in the early years due to the H.B. 920 tax reduction factors. School districts build up reserves in the early years of levies, which are reduced over a period of years as cost increases reduce the real value of the levy.  Annual reappraisals could change this policy.

Senator Jacobson asked if this change in the reduction of the charge-off benefits wealthy school districts disproportionately.  He noted that the problem with any attempts to address phantom revenue benefit wealthier school districts disproportionately because they have the highest property valuation increases.

Senator Prentiss agreed with Senator Jacobson and asked what could be done to address this problem.  Mr. Church replied that the Revenue and Taxation Committee deliberately sought a solution that balanced the interests of the districts and the taxpayers.  The limit on growth of the 22 mills could be done on a district-by-district basis, but that violates the principles of equal yield for equal effort and simplicity.  There is no magic bullet here.  This is a compromise that will not satisfy everybody.

Senator Prentiss expressed concern that this change helps those who already have resources to the detriment of less-wealthy school districts.

Mr. Filipic noted that there is a range of problems that we are attempting to address.  Many school districts have additional millage to fund things beyond the basics funded through the foundation formula.  The change proposed by the Revenue and Taxation Committee is an answer to that problem, but it is disequalizing because it assists wealthier districts more.  If this proposal assists wealthier districts more, then the Funding for Success Committee needs to focus its attention on districts that are not wealthy.  Different elements of the recommendations could help different districts.

Senator Jacobson stated that it is all right to help both.  However, dollars spent on the wealthier districts are not then available to assist less-wealthy school districts.  He does not disagree with the goal, but does not believe that the first priority of state resources should be used to fund phantom revenue.

Mr. Church responded that some of the $325 million reduction in needed state aid resulting from the increase to 40 mills of the tangible property tax charge-off could be redirected toward the poorer school districts.  Also, the charge-off could be less for poorer school districts.  He believes that this is a flaw that can be corrected.  Senator Jacobson agreed.

Mr. Harris said that there are not many wealthy school districts.  The committee needs to look at the overall benefit of the changes.  When the changes are simulated, the committee should understand the impact on equity of any proposed changes.

Senator Jacobson is looking at more of a continuum – school districts that are relatively wealthy – not just the wealthiest school districts.  He added that the problem with phantom revenue in general is that in fixing it we may hurt the equity of the system.  We need to look at the fairness of the system overall – fairness among districts and fairness between the state and the local school districts.  He is looking forward to more discussion of this issue.

Mr. Maxwell observed that growth in property taxes is local money.  What impacts state aid is what is done with the charge-off and how we deal with growth over the cap.  He noted that he does not have the answer to the problem.

Mr. Church noted that in the hypothetical case where there were only two districts in the state, rather than 612, one could more clearly see the differential impact of the rollback in the real property tax and the reduction in the charge-off.  If there is one wealthier, faster-growing district and one poorer, slower-growing district, then a statewide reduction in millage that averages the two growth rates will benefit the taxpayers in the slower-growing district more.  Taxpayers in the faster-growing district will have to pay relatively more in local property taxes.  In this sense, local taxpayers have to bear a significant portion of the phantom revenue solution in the wealthier districts, even though the reduction in the charge-off also directs some additional state aid to the wealthier districts.

Unresolved Issues

Mr. Navin noted that the issues raised by Senator Jacobson and others increased the Revenue and Taxation Committee's list of unresolved issues.  He then listed the five unresolved issues the Revenue and Taxation Committee already had on its agenda, of which the first two are tied to the work of the Funding for Success Committee:

• Paying for supplemental costs;
• The form of the inside millage growth restriction and what index to use;
• The structure of the tangible property tax hold harmless;
• The details of the homestead exemption expansion; and
• What Parity Aid should look like under a new school funding system.

Senator Jacobson noted that paying for supplemental costs is an ongoing problem.

One key question relative to restricting property tax growth is which inflation index should be used.  There are significant differences among the various indicators, so the cost differences can be substantial.  The hold harmless, homestead exemption and Parity Aid issues are expected to be resolved at the Revenue and Taxation Committee's July 8^th meeting.

Mr. Maxwell brought up the concept of a circuit breaker, which he understands has been rejected.  Mr. Sobul responded that a circuit breaker would cause large numbers of senior citizens who do not currently need to file income taxes to do so.  Senator Prentiss suggested that perhaps there could be two circuit breaker programs.

Senator Jacobson noted that other people's taxes would have to go up to pay for these additional tax reductions.  Senator Prentiss asked if we could increase the income tax.

Mr. Maxwell asked what would happen if it were left as a homestead exemption for all low-income individuals.  Mr. Sobul responded that Ohio's Constitution allows the homestead exemption only for senior citizens and those with disabilities.

Mr. Maxwell likes the concept of Parity Aid as it currently exists in the formula.  It has done much to assist low-wealth school districts.  Parity Aid could be used to offset the disequalizing effects of reducing the real-property charge-off over time.

Mr. Harris asked what happened to the idea of a Michigan-style approach where the status quo is not an option.  Mr. Navin replied that this option is still being considered.

Senator Prentiss asked if the Revenue and Taxation Committee has an alternate proposal that could be used to give voters a choice.  Mr. Navin responded that this question will be discussed in more depth at the Revenue and Taxation Committee's July 8^th meeting.

DPIA Funding Presentation

Ms. Kelly Weir went through a presentation on how DPIA funding would have been allocated if the new poverty indicator recommended by the Legislative Office of Education Oversight (LOEO) had been used in FY 2004.  She estimated that the overall statewide allocation would have been about $100 million more if the LOEO poverty indicator had been used.  She noted that the Department of Education had projected a $76 million increase in the allocation back in November 2003.  Ms. Weir indicated that this is most likely due to there now being more students in the system which would cause allocations for All Day Kindergarten and Class Size Reduction to increase.

She focused the committee members' attention to the chart that illustrates the allocation of DPIA funds by type of school district.  The large urban school districts receive about 76% of total DPIA funding currently, which is based on using Ohio Works First (OWF) as the poverty indicator.  If the new LOEO poverty indicator had been used, the large urban districts would have received 59% of the DPIA funding.  Since total DPIA funding would have been larger statewide, such districts would have received an increase in absolute dollars.

Senator Prentiss asked how many economically disadvantaged children there are in each of the eight types of school districts.  Ms. Weir provided the numbers of total children in each group and the numbers of economically disadvantaged children in each of the eight groups.

Ms. Weir noted that, in aggregate, all school districts receive more DPIA funds using the new poverty indicator developed by the Legislative Office of Education Oversight (LOEO), but the share of the large urban districts declines.  The funds are shifted to the other types of school districts.

Ms. Weir then went through the law related to DPIA.  All-day kindergarten is the top priority, but there is some flexibility in how the DPIA funds may be used.  Ninety-one school districts have a DPIA index of greater than one, which qualifies them for all-day kindergarten funding.

Senator Prentiss noted that concentration of need may not necessarily be reflected by the concentration of poverty.  For example, some rural districts have high concentrations of poverty but have a 98% graduation rate.  She also said that current statute concerning how DPIA funding is to be used is too loose.  She opined that the law needs to be absolutely clear regarding how these dollars should be used.

Ms. Weir described briefly how DPIA funds are used currently.  Mr. DeMaria would like to see school districts' funding levels sorted according to poverty levels.  He would like to see the school districts arrayed by bands of poverty.  Senator Jacobson described his proposal for allocating poverty funds.  He believes that levels of inputs could vary depending on levels of poverty.

Senator Prentiss would like for staff to adjust the threshold of DPIA indices for each DPIA program to retain the current proportional distributions among types of school districts.

Mr. Filipic noted that staff would be putting together more specific recommendations before the next committee meeting.  He would like to hold the next committee meeting at the end of July or in early August.  Senator Prentiss would like to have the opportunity to have input on the staff's draft prior to the committee meeting.  Dr. Zelman also wants staff to circulate drafts to committee members before the meeting.  She wants focus groups and polling as the other commissions did.  Senator Jacobson noted that this committee is different from the others in that this group is about dollars.

Mr. Filipic adjourned the meeting at 1:15 p.m.

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• Building a Better School Funding System
  (PDF*, 1 MB)