Sigourney FY2012 Budget Presentation
As the Sigourney Community School District prepares for the upcoming budget process, I feel it is important to share these articles in order to explain key issues in the budget process, along with fund definitions and the purpose for those funds.
Property taxes matter
Local property taxes account for one-third of total funds going into schools and represent over half of the overall state property tax funds levied. The state school funding formula largely determines school property tax rates and therefore, the amount each district receives in state aid.
People often ask, "Why don't we just remove property taxes from the formula entirely?" There are several reasons why this isn’t a wise move.
· It would take away roughly $1.1 billion dollars statewide, leaving lawmakers to decide whether to raise the state sales tax or income taxes to make up that difference.
· Property taxes also add stability to the funding of schools. For example, if we operated solely under the sales tax, the amount available for school funding would surely fluctuate depending on consumer spending.
· Just as many people found out during the 1990s, too much reliance on a single funding source invites large swings in funding, which isn’t good for an entity unable to layoff teaching staff during the year. Diversification is a prudent investing strategy that applies to schools as well.
Considering the aforementioned reasons and the present political climate, removing property taxes from the school finance formula seems unlikely.
No public official, whether our local school board and administration, or the city and county officials, takes the impact of raising property taxes lightly. In fact, in most cases, public officials exhaust all other options before asking property taxpayers for more funds. However, when the General Assembly cuts short our state aid (as they have done twice in the last year and half) and we experience additional, unforeseen expenses like increased fuel and energy prices, we really have no alternative except to raise local property taxes. Plus, we are prohibited from terminating teachers’ mid-year to cut costs. Cutting field trips and similar expenditure reductions could help, but frankly the scale of dollars is so high there's not enough money in these kinds of activities to make a huge difference. No one likes property taxes, but for the time being at least, they are an essential part of efficiently funding our schools.
Once all 359 districts establish their budgets based on the combination of state aid and local property taxes they receive, there are still many restrictions on where and how that funding can be spent.
Funding Sources have Restrictions on Their Use (Dillon's rule)
One of the most difficult and confusing elements of school funding is how Iowa law restricts the way K-12 public schools can use various funding sources. Simply put, if we have a shortage in one area of the budget we cannot use other funds available to the district to offset such a shortage unless specifically allowed by law.
According to the Iowa School Foundation Formula, the largest funding source for schools comes from state and local property taxes. Revenues received under the formula are part of a school district's General Fund, which covers most of our expenditures for faculty and staff salaries. We also have dedicated funding streams for facilities, like the Physical Plant and Equipment Levy, which can only be spent on buildings, grounds and certain equipment. People often refer to the General Fund side of the budget as the "breathing" part of the budget, while the other side is often referred to as the "bricks and mortar" side. Depending on each district’s economic and demographic situation, some have issues with the staff side of the budget while others have more pressures on facilities. However, due to the organization of revenues, excess money from the general fund cannot be used to solve shortages on the facilities side or vice versa. As a result, you sometimes end up with districts that have adequate facilities funds but have to lay off staff.
The State partially funds and equalizes the General Fund to promote equity among students and taxpayers in the state, but does not do the same under the facilities side of the budget. If the legislature ever did allow such unequalized funding sources to be used under the General Fund side of the budget, some districts could potentially receive much more revenue per child, violating the general principle of equity. For example, our instruction expenditures are equalized, but the funds we levy locally for buildings are not. Except for the local option sales tax which we’ll discuss in a moment, the tax capacity of the district largely limits the amount of funds for building expenditures. If a neighboring district has twice the capacity for the same number of children, they can either build twice as much building for the same property tax rate, or they could have the same building for half the property tax rate. If our neighbor has half of our capacity, the situation is exactly reversed.
The one area where some state equalization of capacity is occurring is in the local option sales tax, which is relatively new. Currently all 99 Iowa counties have this tax, which is a one-cent local option sales tax dedicated primarily to school buildings, equipment and property tax relief. It has proven to be a popular alternative to property taxes to fix our buildings. However, the legislature has begun equalizing sales tax revenues among districts because of the wide disparity in monies spent in each district. When the legislature passed the sales tax pool for schools, the difference was approximately $100 per pupil in the lowest district to over $1,000 in the highest district. The legislature then appropriated $10 million annually. Now, as local school districts vote to renew their first 10 years of local option tax, if they are over the state average, they will provide those dollars to the pool to help bring up other districts. In the Sigourney Community School District we are grateful to our voters for approving the local option sales tax and have been using the money to improve our facilities and for property tax relief.
In short, when it comes to school spending, districts must look at every potential expenditure and determine not only if they have the money, but whether state law allows a particular fund to cover the expense. This standard, often referred to as Dillon's Rule, says school districts are only allow to do what is specifically outlined by state law. This differs from cities and counties, which operate under “Home Rule,” which allows them to do anything not specifically prohibited by state law. Schools have less latitude than cities and counties in complying with the Code of Iowa, and in turn, how they spend their money.
School Finance – Fund Definition and Purpose
General Fund:
How are school districts funded? School funding comes primarily from two sources: the state’s general fund and local property taxes. Other sources are federal aid, income tax surcharges (called “surtaxes”) and grants from federal, state, or non-governmental organizations.
How are school district budgets calculated? A school’s general fund is driven by its certified enrollment (the number of students counted in school on October 1st) multiplied by a set per-pupil cost ($5,341 this year). The amount of state aid is set by the Legislature, and it’s called the “allowable growth” rate. Lawmakers have set a 4 percent allowable growth rate for 2008 – 2009, which means the per pupil cost would increase 4 percent to $5,555 per student. Additional funds are given to schools for students who are in certain programs like special education and those learning English. Likewise, home-schooled students taking some classes at a public school get a lower per-student cost because the cost of educating them is less.
Budget Guarantee:
What is it? This allows a district to use property taxes to cover losses in state revenue caused by declining enrollments. That’s because it isn’t easy for schools to cut a budget if enrollment losses usually are scattered throughout schools and grade levels. School districts once were able to levy for the difference in their previous year’s budget and the new one. Started in the year 2004 – 2005, that “make-up” amount declines to 90 percent of that difference. It will keep dropping by 10 percent in each of the following years until it is completely phased out by 2014.
Revenue Source: Property taxes.
What it can be used for?
Anything that can be purchased from the general fund.
Funds In A School Budget:
General Fund
Revenue sources: State aid, property taxes, income surtax, federal funds, and other monies such as interest. The state limits this fund to a certain dollar amount, based on enrollment and per-pupil costs, so a school cannot just keep raising the property tax levy to hire more teachers.
What it can be used for: Employee salaries, benefits, services, supplies, equipment, utilities, vehicles such as buses, maintenance of buses.
What it cannot be used for: Capital improvements.
Physical Plant and Equipment Levy (PPEL)
Revenue source: Local property tax, up to $1.67 per $1,000 in assessed valuation. A school board can approve a 33-cent levy, but voters must approve the rest.
What it can be used for: Improving properties and buildings, new construction, purchase of buses, or other vehicles, building repairs and remodeling.
Activity Fund
Revenue source: Student fees, gate admissions, and fund-raisers.
What it can be used for: Student-related activities such as athletics, band, and other extracurricular activities.
School Nutrition Fund:
Revenue source: Money from school lunches, breakfasts, and a la carte sales; federal and state subsidies.
What it can be used for: Food service related costs, including the purchase of food and equipment, food service employees and benefits.
Management Fund
Revenue source: Local property tax. A school board sets it, as needed, based on anticipated costs. There is no ceiling to the levy, but it cannot be used on anything besides specified purposes.
What it’s used for: Pay district unemployment charges, property and liability insurance, judgments against a district, early-retirement incentives.
Debt Service Fund
Revenue source: Local property tax, including tax increment financing districts. School boards set the rate as needed to make payments on bonds or loans. The ceiling is $4.05 per $1,000 in assessed valuation.
What it’s used for: Paying off bonds, that is, long-term debt (principle and interest).
Instructional Support Levy
Revenue source: Local property taxes, state aid and income surtax for up to 10 percent of a district’s general program costs (the number of students multiplied by the cost per pupil).
What it’s used for: Anything that the district can pay for out of the general fund such as instructional supplies, textbooks, technology purchases, teacher salaries and benefits, training for employees.
Cash Reserve Levy
Revenue source: Local property taxes. A school board sets the levy rate each year. There is no ceiling to the levy, but the reserves can only be used for specified purposes.
What it’s used for: Reserves are used to cover cash flow shortages, state funding cuts and other approved deficits.
School Infrastructure Local Option (SILO) Sales Tax
Revenue source: 1 percent sales tax (or one-half of 1 percent) in counties where voters have approved its collection. All 99 Iowa counties now collect this tax.
What it’s used for: Anything that can be bought from the physical plant and equipment levy (see above); paying off bonds, school construction projects, repair or remodeling of schools, stadiums, gymnasiums, field houses, bus garages; property tax relief.
