School Corporations Get a Short-Term Reprieve on School Bus Funding

Protected Taxes and School Transportation

In January, I wrote Circuit Breakers, Protected Taxes, and Idled School Buses, about the Indiana statute that required schools who have lost revenue from the circuit breakers (including the 1%-2%-3% tax caps in the Indiana Constitution) to prioritize debt funds over  any other fund when applying the losses from the circuit breakers. This is due to what in the statute are called protected taxes.

The legislation underlying protected taxes measn that school corporations facing circuit breaker losses had to first fully fund debt funds, even beyond the amount needed to make required debt service payments, which typically meant that capital projects and transportation funds had to bear the full brunt of the circuit breaker losses. This has even led to some school corporations considering ending school bus service entirely.

HEA 1062 Gives a Temporary Reprieve

This week, however, the Indiana General Assembly passed, and the Governor signed, House Enrolled Act 1062, giving school corporations hit heavily by circuit breakers a three-year reprieve. HEA 1062 allows school corporations that are experiencing at least a 10% hit to their transportation funds due to circuit breaker losses to apply circuit breaker losses proportionally to all funds, rather than funding debt service first, for the years 2014, 2015, and 2016.

Rearranging the Deck Chairs?

Welcome as this statute is, it is only a short-term fix for what will be an ever-growing crisis for school corporations around the state. All this action does is give school corporations a little flexibility in how they arrange the deck chairs on the Titanic. In 2013 (the latest year for which the numbers have been determined), the circuit breakers sucked $245M of funding out of our school systems, a number that will undoubtedly increase in years to come, and is nearly impossible to reverse, given the fact that the 1%-2%-3% circuit breakers have been enshrined in the Indiana Constitution.

Just for an illustration of the harm that the circuit breakers are doing to our schools, I pulled together some of the higher circuit breaker cuts for various school corporations around the state (for 2013).  I also included their 2014 amounts budgeted for transportation for comparison.

2013 School Circuit Breaker Losses
2013 School Circuit Breaker Losses

We are fortunate in Monroe County that, due to our relatively low property taxes and high assessed values, our school corporations have been relatively insulated from the effects of the tax caps.  Just for comparison, here are the same numbers for our two Monroe County school corporations:

2013 MC Circuit Breaker Losses
2013 Monroe County Schools Circuit Breaker Losses

However, we can’t assume that we will always be insulated from this erosion of revenue. The 2014 circuit breaker numbers will be released shortly, and we will be able to assess the impacts on all local units of government.

Note: the sources for these numbers were:

Circuit Breakers, Protected Taxes, and Idled School Buses

Very interesting article in the Indiana Business journal this week about the negative impact of recent changes in Indiana property tax legislation on schools:

A little background first: Indiana school corporations are funded through several different property tax levies, none of which are (with a few exceptions) interchangeable. Ever since the property tax circuit breakers (AKA “1%-2%-3% property tax caps”) were put in place, these levies have been divided into two categories: exempt and non-exempt. Exempt levies are those that are are outside of the circuit breaker (i.e., not subject to the circuit breaker tax caps), and consist of operating levies and debt service levies passed by referendum.  Non-exempt levies are all of the rest: debt service, pension debt, capital projects, transportation, and school bus replacement levies.

When all combined levies for a particular taxpayer exceed the circuit breaker limits (1% for homestead owners, 2% for multi-family residential and agricultural, and 3% for business), the overage must be cut from the levies of all of the taxing units that contributed to the combined levies (i.e. county, city, township, school corporation, public library, etc.).  Until 2012, taxing units had some flexibility as to which levies they applied the circuit breaker losses to. For schools, this meant that they could spread the circuit breaker losses among their various funds. Note that all debt payments still had to be made first before funds were allocated anywhere else — but the school corporation still had the flexibility to spread the circuit breaker cuts among all of the levies as long as the debt payments were made according to the terms of the bonds.

Legislation in 2012 created a new category of property tax levy: protected. Debt service and pension debt levies (both of which are non-exempt, meaning that they are subject to the circuit breaker caps) are now considered protected, meaning that these levies must be fully funded before any circuit breaker cuts are applied.  This greatly reduces the flexibility that school corporations have had in spreading the circuit breaker losses among their various levies to minimize the disruption to operations of the schools. Further, this legislation doesn’t actually accomplish anything — schools were already required to prioritize debt payment before anything else — it simply makes school corporations overfund debt service levies at the expense of non-protect levies: capital projects, transportation, and school bus replacement.

This article describes the impact of this change on a number of Indiana school corporations, who now have to face the very real possibility of reducing or eliminating school bus service, or deferring critical maintenance on school properties in order to fully fund debt service levies even beyond what is actually necessary to make debt payments.

There is some hope that the General Assembly might address this issue of protected taxes during the 2014 session; several bills have been filed in both the House and Senate to address this issue. However, these school districts mentioned in the article are merely fighting for the ability to mitigate the impact of these state-mandated cuts to their budget. The bigger story is the impact of the circuit breaker itself on school budgets. Despite all of the rhetoric about the criticality of education to the economy of Indiana, no legislators seem to be interested in making a serious attempt to roll back these property tax caps that have devastated many of our schools in Indiana.