Local property taxes account for one-third of the total funds going into districts’ programs and represent about 40% of the overall state property tax funds levied. As discussed in prior articles, 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 $1.31 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 school districts. 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 adjust to midyear revenue changes. Diversification is a prudent investing strategy that applies to schools as well.
Considering the aforementioned reasons and the present revenue and political climate, removing property taxes from the school finance formula seems unlikely.
No public official, whether our local school board members and administrators or the city and county officials, takes the impact of raising property taxes lightly. 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 five years) and we experience additional, unforeseen expenses such as increased fuel and energy prices, we really have no alternative except to raise local property taxes or reduce expenditures. Seventy-five to 85 percent of school district budgets are comprised of salary and benefit costs, which doesn’t leave much discretionary spending to cut. No one likes property taxes, but they are an essential part of efficient funding of our schools. Fortunately, in both Alta and Aurelia, local school property taxes are projected to decrease for FY 2015.
Once all 351 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.
One of the most difficult and confusing elements of school funding is how Iowa law restricts the ways 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, such as 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 face pressures from the staff side of the budget while others have more pressures on facilities. However, due to the restrictions on revenue uses, excess money from the general fund cannot be used to solve shortages on the facilities side or vice versa.
Instruction expenditures (general fund) are equalized, but the funds we levy locally are not. The physical plant and equipment levy and debt service are valuation dependent and the revenue received varies considerably among districts. However the statewide school infrastructure sales and service tax (better known as the state penny sales tax), provides “equal” funding for school infrastructure needs and/or district property tax relief. The tax capacity of the district and the one penny revenue largely limits the amount of funds for building expenditures.
The state penny sales tax, which replaces the one-cent local option sales tax and is dedicated primarily to school buildings, equipment and property tax relief. It has proven to be a popular alternative to property taxes to renovate and build buildings. Now, with the passage of the state penny for school infrastructure, starting with FY 2014 each school district receives the same amount per pupil.
In short, when it comes to school spending, districts must look at all potential expenditures 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 allowed 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.
