Public School Funding

HB 920: Understanding School Funding

No matter where you live in Ohio, regardless of whether or not you have children or whether or not they attend public schools, you will be asked to vote periodically on a local school levy. You might as well understand why.

House Bill 920, the Ohio law that outlines how public schools are funded, is complex and confusing. But it has a huge impact on all of us.

H.B. 920 was passed in 1976, during a period of unprecedented inflation. Home values were soaring every year, sometimes by double-digit percentages, and property taxes were growing at the same alarming rate. The State Legislature attempted to lessen the burden on homeowners by freezing the dollar amount paid to school districts and libraries at the 1976 level. Not at the rate or percentage, but at the actual dollar amount.

To better understand the ramifications, let’s break this down with numbers.

Imagine you own a $100,000 house and pay 2% to your local and county government and an additional 2% to your public schools in taxes each year. After three years, the value of your house is reevaluated and determined to be $120,000. The money that goes to your city and county automatically rises to $2,400 from the original $2,000 because the rate stays the same.

However, the money that goes to your public schools stays at $2,000 because the county auditor comes in and readjusts your effective tax rate from 2% down to 1.7%, as prescribed by H.B. 920.

Now imagine that this goes on for 10 or 20 years. After a while, your house has increased in value up to $250,000 and your local government now receives $5,000 in taxes annually. Because your rate stays the same, cities and counties are able to go years, decades even, without asking for a tax increase.

But your school taxes have stayed at $2,000, now just eight-tenths of one percent (0.08%) of the value of your home.

Meanwhile, everything from teacher salaries to textbooks to gas for school buses has gone up in cost over that twenty-year period, but schools are not receiving a single dollar more in tax revenue. And no matter how conservative or efficient districts are with taxpayer money, they simply cannot keep up with those day-to-day cost increases without asking for additional revenue from a levy.

“We, as a school district, cannot raise any more money if we don't add more millage to our tax burden. The dollar amount will always remain the same. Period.”

Jayne Geneva, Attorney, School Funding Activist, & Cleveland Heights Resident

Geneva reiterated that repeat school levies are not a sign of inefficiency, waste or lax oversight on the part of districts. They are a direct result of state law.

Public School Funding Primer

In each Ohio K-12 school district the public schools must place a ballot issue before the voters every several years to support public school education. Ohio citizens need to understand why these levy issues are repeatedly on the ballot. They also need to understand that the districts are not being spendthrifts nor are they necessarily wasting money. The Ohio state laws require these repeated ballot issues to fund public education.

Ohio public schools are primarily funded in three ways:

1) Federal government monies allocated to the state systems are usually on a grant or mandated system. Cleveland Heights-University Heights (CH-UH) schools receive 1% of their budget from the federal government. Some federal money from grants, etc. are not noted in the general fund. Monies such as the Race to the Top money that the district participates in are incentivized programs.

2) The State of Ohio contributes money based on the State Foundation Formula which provides Basic Aid to districts, taking into account the ability each district has to raise local taxes plus the per student minimum amount the state determines is necessary to provide an adequate education. Lower wealth district should receive more assistance than those with higher property wealth. CH-UH gets 19% of its budget from the state of Ohio. In return, the state requires its public schools to meet certain mandates. Many of these mandates are unfunded e.g. the Ohio Teacher Evaluation Program and the Third Grade Reading Guarantee.

The specific state formula is very complicated and often changes, especially in recent years. The Ohio Supreme Court found the funding system of Ohio’s public schools unconstitutional in 1997 and the legislature has not given it the “complete systematic overhaul” required by the Court since that finding.

3) Local Support is provided mostly by school districts using property taxes to support their schools although a few have also included local income taxes in their funding mix. The CH-UH district uses only property taxes. The real property tax is one levied on land and buildings located within the school district (not the city limits). Owners of the land—businesses, public utilities, and private individuals—are taxed on the value of the real property. The county auditor appraises real property every six years. Every third year an “update” is performed on the value. The appraisal is the auditor’s value of the property, but the taxes are based on the assessed value. The assessed value in Ohio is 35% of the appraised value.

Mills

Real property rates are computed in mills. Each mill equals $1.00 for every $1,000 of value that the property is assessed for each year. So a house worth $100,000 would bring in $35 of tax revenue for each mill.

Inside Mills and Outside Mills

Inside mills: The Ohio Constitution allows 10 mills of unvoted taxes to be levied by each political subdivision and the resulting taxes are divided among the cities, counties, other local governments and public schools in that subdivision.

Outside Mills: All other mills are voted by the public and these are called “outside mills”.

The 12.5% rollback is now called the Non business Credit. A 10% discount was given to all property owners and an additional 2.5% discount was given to residential property tax payers under the old law. These discounts were reimbursed to the school districts by the state so that the school districts were not losing dollars. Under the new law enacted in 2013 these rollbacks no longer apply to new or renewal levies.

The Homestead Exemption is now called the Owner Occupancy Credit. This discount ($8.75 per mill of tax exemption) was given to seniors over 65 years of age regardless of income. Since the 2013 law, the exemption now will only be granted to new applicants with an income figure of $30,000 or less or those with a permanent disability.

HB 920

In 1976, when inflation was very high, the Ohio legislature enacted HB 920 governing the property taxes going to school districts. The bill froze the dollar amount districts could receive at the dollar amount voted when the levy was passed. So as inflation increased the costs of expenses to school districts, the schools’ income was kept at the frozen amount. Other government entities did not fall under this rubric. The effect of this bill has been that school districts--just to keep up with inflation--have had to go on the ballot repeatedly to increase their income. As property values rise with reappraisals, the dollar amount paid to schools remains the same. The inflexibility of this system means that unless and until additional millage is voted the schools must operate at the same income level regardless of cost increases to the district (e.g. supplies, textbooks, utilities, health care, personnel). Likewise, as property values decrease, the dollar amount received by the districts remains constant. The amount received at the frozen level is called the effective millage rate. The inside millage rate is not affected by HB 920, so this very tiny amount of tax may rise with inflation. The CH-UH effective millage rate is 71.2 though the voted millage is 139.2. The effect of HB 920 is that Ohioans have faced more school tax levies than residents of any other state and will continue to do so, as long as there is no growing income stream for the public school districts.

Other forms of income

A few other forms of income bring in small amounts of funds.

There may be emergency levies and other forms of levies passed. Districts have resorted to incremental levies, replacement levies, and emergency levies in an attempt to balance their budgets.

The Lottery, often touted as providing funds for education, only brings in about $50 per student to a district per year. The rest of lottery profits are diverted to replace monies originally slated for education in the general fund.

Some grants may bring in dollars for specific purposes.

Infrequently there are bequests or donations to the district.

Capital Funds

Bond issues are often passed to provide monies for capital improvements. Capital improvement monies are separate from operating funds and the two forms of financing may not be co-mingled. The CH-UH district used to have a capital improvement levy on the ballot every 2-3 years as well as an operating levy on the ballot every 3 years. Finally the cost in human effort as well as dollars to run so many levies resulted in the district establishing a capital improvement fund that is on-going to cover relatively minor expenses as roof repairs, driveway potholes, etc.

CH-UH recently passed the bond issue to remodel the high school and the middles schools because these expenditures were much larger than the small capital improvement fund could cover.

What factors differentiate school districts?

There are many differences among the 612 districts in Ohio and each may impact the funding of a district differently. A few are described below.

1) If a district has a lot of commerce or business property, the cost to residents may be reduced as these commercial ventures help pay the costs of education. CH-UH does not have large industrial parks and commercial ventures; property taxes are primarily paid by residents.

2) Various factors based on the school population may result in additional funding to the district. Small amounts of money are available to a district based on disadvantaged pupils, number of free lunches, etc. The state does provide some extra money dependent on the numbers in special populations recognizing in a small way the additional costs of educating these students.

3) Mobility of families has been shown to result in a disruption of education from one district to another, creating learning problems for the children. The more transient the population, the more difficult it is for students to reap the benefits of a coordinated curriculum. Districts spend additional dollars to help students get in step with the curriculum.

4) The state requires districts to bus all pupils, whether attending the public schools or private schools within the same parameters. State law requires all students in grades K-8 who live two miles or more from their schools to be bused. If a district, such as CH-UH busses its own students living outside 1.5 miles, then it must bus all students living outside 1.5 miles to their respective schools. About half of the students CH-UH buses are non-public school students.

5) Many additional education choices in a district also impact funding. The state of Ohio pays $1,800 for each school-aged student living within the district. The state collects, however, $5,900 from the district for each student attending private school. Although the district still must provide transportation and learning assessments for these private school students, the state requires the district to pay an additional $4,100 per non-public school student. In a district such as CH-UH with numerous private and religious schools, these additional dollars drain the budget.

6) The district’s resident’s desires for the education of their children may also impact the curriculum and therefore the costs. Services expected by the communities vary with the population and may go beyond the minimum required by the state.

7) The market place the district is in also impacts costs. For instance, the cost of doing business is lower in some southern counties than it is in Northeast Ohio. Attracting and keeping good personnel means necessarily keeping up with neighboring communities’ pay scales. (All public school teachers must be certified in their teaching area.) The cost of doing business is also impacted by the differing costs of utilities, transportation, and other services.

8) Tax abatements given in some districts are more numerous than others. If the cities provide property tax abatements for businesses and industries, then the school district is the party forfeiting most of the money for the abated period of time.

9) The rate of a district’s ability to collect the real property taxes owed is often affected by the larger economy, but to some extent its population. Most districts saw a decline in the collection rate over the last several years. The county auditor keeps track of collection rates and predicts what a district’s rate will be for the coming fiscal year.

These basics of funding public schools partially explain the differences in costs to various districts and the complicated system of funding the state of Ohio uses. The laws as they exist require that schools have a balanced budget AND that they meet particular mandates. The result is that levies appear on the ballot periodically to enable districts to maintain the curriculum and programs they have developed. Although this funding mechanism has been declared unconstitutional, it is the flawed system under which all districts must function until the legislature sees fit to create a fairer and more equitable system of funding—completely overhauling the current one as stated by the Supreme Court of Ohio.

History of Ohio Public School Funding

By Jayne Geneva, Chair, Lay Finance Committee (May 17, 2016)

Public school funding in Ohio is financed from three main sources:

A small amount comes from the federal government;
The state gives each school district some money, and
The largest share comes from local sources in every district.

The most complicated is the state share. Primary and secondary education is one of the largest expenditures in the Ohio state legislative budget. A complex primer on the system of funding of Ohio’s Public Education system would take too long but an overview of the public school funding scenario is necessary for understanding the continuing levy demands Ohio school boards must make on their residents.

Property Tax, 1825

When Ohio became a state in 1803 the settlers did not have an education system. Parents paid for their children to attend the few schools that existed. The settlers realized that an educational system would have a civilizing effect on the territory. In 1822, Caleb Atwater was successful in convincing the governor and legislature that a commission should be formed to study the creation of a state educational system to further the value of common schools for Ohio’s future education of its citizens.

The committee’s proposal was opposed by the legislature, but popular pressure from the citizens forced the legislature to reconsider the importance of educated citizens to the growth of the state. In 1825, the Ohio government created a common system of schools and financed public education in Ohio with a half-mill property tax.

Currently, about 2/3 of all property taxes levied in the state go to fund education. The remainder of property tax money is divided among local governments.

Sales and Use Tax, 1934

Having educated citizens of the state has remained an important tenant of Ohioans throughout the state’s history. But in 1934, following the Depression, residents were often not able to pay their property taxes. The state instituted a State Sales Tax of 3% on certain goods in order to help pay for education. This tax has changed at least 25 times over the years, expanding and contracting the goods and services to which it applies. Even the rate has risen and fallen. But one major change over the years is that the money collected is no longer used for the sole purpose of education as the tax was originally designed.

Ohio Lottery, 1975

Attempting to minimize the direct tax burden on its citizens, the legislature created another money-raising system in 1975: the Ohio Lottery. Under the Ohio Constitution, the lottery’s “net proceeds…are paid into a fund of the state treasury that shall consist solely of such proceeds and shall be used solely for the support of elementary, secondary, vocational, and special education programs.”

In the 41 years of the lottery’s existence, over $20 billion dollars has been recorded in profits. What has happened to this money? Have the schools seen a great increase in their funding? No. Because, although the profits have gone into the state education budget, they have only replaced dollars that were then removed from the education budget and placed into the state general fund. Thus, dollars in, dollars out; it is a wash for Ohio’s 612 school districts.

Additionally, the Columbus Dispatch reported that although more lottery money is going to education, education’s percentage of total lottery cash has steadily declined, from 40 percent the first year to 29.8 percent in 2013.

The legislature then expanded this form of money-raising to include racinos and lottery machines during the 2008 and 2009 property value decline. But no increase in funding accrued to the school districts.

Then in 2009 the state expanded the use of lottery profits to also include casinos. Again the prospect of funding education was a selling point in this ballot issue. The scheme has not been particularly helpful to schools, however, as they collect about $50 per student from these businesses.

House Bill 920, 1976

In 1976, due to other economic pressures, education funding took another hit. The House Bill 920 statute froze property taxes at the amount they were assessed in the original year of assessment. So even if a piece of property rose in value—with inflation—the tax levied remained at the original lower rate. Property taxes did not increase with the increase in value of the property. The dollar amount a levy raises is frozen at the initial dollar amount over time.

This law is one of the major reasons that school districts are forced to put levies on the ballot periodically. There is no built-in inflation factor for running school districts. Cities and counties, on the other hand, are usually run on income taxes which rise with inflation.

These taxing and funding policies in Ohio have had the effect of making Ohioans face more school tax levies than any other state: 5,946 from 2001-2015! The CH-UH District has voted 139 mills, but we can only collect taxes of 71.2 mills—the effective millage rate—due to HB 920.

Rollbacks

Since 1971 the taxpayer has not paid all of the taxes charged for residential and agricultural real estate taxes. A discount of 10% was given to all properties and an additional 2.5% discount was given to residential property tax payers. These discounts were called “rollbacks.” The state provided money to pay for these taxpayer rollback amounts to the school districts. In addition another discount was granted to seniors over 65 regardless of income under the homestead exemption of $8.75 per mill of tax. Unfortunately, the state has eliminated the 10% and 2.5% rollbacks for new and renewal levies as of 2013. The homestead exemption now will only be granted to new applicants with an income figure of $30,000 or less.

The picture gets more and more bleak for public education...more and more of the dollars that the state used to provide to districts now must come directly out of local citizens’ pockets as the state revises the funding rules for public education and reduces the amount it will put in its budget to educate Ohioans.

Tangible Personal Property Tax (TPP)

Taxes based on general business, telephone and telecommunications, and railroad properties were also to be used to benefit public education in Ohio. But in the push to help the economy of the state and add jobs and create more businesses, the legislature began to subtly change these tax policies in the 90s.

In 2005, under HB66 these taxes were to be eliminated over several years. At that end there would be no general tangible values left in the property tax base of school districts. The law provided, however, a “hold harmless” period—a phasing out-- during which time the districts would receive what they would have received had the taxes remained in place. That hold harmless period ended in 2013. A Commercial Activity Tax (CAT) was enacted in the restructuring which was to fund the replacement payments indefinitely, but these were vetoed by Governor Kasich.

The overall effect of this tax restructuring is that school districts first had their TTP tax amount reduced; second they now have a smaller tax base from which to generate future revenues; and third, the state general revenue stream for school districts was also reduced.

The Formula

Thus far, we have only talked about tax monies that were originally intended by the people of Ohio to go to education which largely have been distributed elsewhere. But, of course that is only part of the funding story.

The education money given to districts under the state formula itself is broadly supposed to take into account the characteristics of the district, including the capacity of the district to pay. And the formula is the basis for the state’s funding mechanism to local schools, although it is too complex to decipher here. The base of the formula relies on real estate property taxes just as we saw in 1825, but with many layers of financial configurations on top. The Constitution provides that only 10 mills (known as inside mills) can be non-voted mills and these are to be divided among schools, counties, special districts, and cities. The remaining millage (outside mills—any millage over the first 10 mills) must be taxes voted by the residents. In our school district, these mills also cover the CH-UH Library.

Because of the many types of property in Ohio (agricultural, commercial, industrial, and residential), and the fact that the Ohio Department of Education uses one formula for all students, several court cases have been brought over the years maintaining a new system of financing public education must be created in Ohio.

In 1997, the Ohio Supreme Court declared Ohio’s system of funding public education based on property taxes was unconstitutional, but the Court also said that the legislature would have to create a more equitable system. That new system has not been established to this date.

Thus, the fact that we live in a residential community with little commercial and industrial property means our home taxes are what must pay for our education of our young people. We do not have heavy trucks ruining our streets all the time, our air is not smoggy and we are not choking on factory waste spewing out of smokestacks. We have chosen to live in a peaceful residential place, and our residential property taxes are how we pay for our educational system according to current state law.

State Expenses/Unfunded Mandates

Additional state laws have affected school districts’ funding as well. The legislature provided for tax abatements to real properties within school districts. In some places, the school districts have input on these abatements to their funding sources, in others they do not.

Tax increment financing, another economic engine used by the state, allows new commercial development to use their taxable real estate monies to fund site improvements. The effect is to reduce school monies to increase the flow of monies for economic development.

Also under state law, we, as a public institution, must admit ALL students between the ages of 6 and 18 who are considered residents in our district. We may not pick and choose; we educate all of them. Particular state mandates apply to students under various categories and not all of the costs of these are funded.

We are required by state law to bus any students in grades K-8 who live 2 miles or more from their schools, whether or not they attend our public institutions. In CH-UH we bus about as many private school students as we do public school students.

There are other mandates of the state, of course, and most do not come with dollars attached. State mandates such as the Third Grade Reading Guarantee, the Ohio Teacher Evaluation Program, and the College Credit Plan are a few. These unfunded mandates must all be provided with local dollars.

Although the inflationary costs of education increase, the education funding is fixed and inflexible. Many costs are out of the control of the local school boards:

consumer goods
utilities
legal requirements
unfunded mandates
expanded services wanted by the communities.

Education is a personnel intensive business—people teach our young citizens. We are not dealing with machines and widgets.

In Ohio, the funding for education is lower today than it was in 2008. In part, the decline in real property values is to blame for this situation, but each year we read about Ohio monies intended for public school education being diverted to charter and private school programs. In our district this amounts to millions of dollars.

Also another point to clarify: Operating funds are used to educate students. Tax monies collected for capital improvements, may only be used for capital expenditures. Those monies may not be used for operating the district. Money to run the district is voted as operating levy money.

In sum, our property taxes pay to educate our young citizens under the structure of finance established by the state whereby each community gets a say in how strong it wants its educational system to be. Historically each district must repeatedly go to its residents (usually about every 3 years) to reaffirm how important education is to the district. The levies enable the district to maintain its system, since there is no automatic inflationary increase. Yet inflation raises the costs of utilities, supplies, and labor.

Given the numerous studies conducted nationally as well as regionally, we know that education plays a strong part in lifting our economy and without valued education we will falter.

Education leads to jobs which lead to a strong community.