Monday, October 03, 2005

Back to School Monday

Lesson 3: House Bill 920 and Phantom Revenue.

OK class, I know you had last week off, so you need to settle down and get to work. Since it’s been a couple of weeks, you may need to go back and look at your notes from the last couple classes. We will be using some of the vocabulary words from those lessons.

Today we are going to consider the first of a number of quirks, odd features and outright booby traps that riddle Ohio's education funding system: House Bill 920.

HB 920, now enshrined in the State Constitution as Art, VII § 2a(C)(2), holds the dollar amount raised by a levy on each piece of property constant, regardless of appreciation of the property. Under current law, the county auditor reappraises real property every three years. Then, based on that reappraisal, the auditor calculates the millage on the new value that would raise the same dollar amount . The auditor then imposes the new adjusted millage on that property, keeping the revenue raised constant.

Let’s try a simplified example. Assume:

Year 1
Taxable value = $100,000
Levy = 10 mills
Tax revenue= $1000

Year 3. The property is reappraised.

Taxable value = $110,000
Tax revenue must = $1000
Adjusted millage =9.1 mills

Got it?

The General Assembly passed HB 920(the name has stuck, probably because it flows better than Art, VII § 2a(C)(2))in 1976, around the time of the infamous Proposition 13 tax revolt in California. At that time, inflation was running in double digits and real estate prices were escalating rapidly. People of limited means or fixed incomes found themselves unable to keep their homes as property taxes ratcheted up. The measure’s champion, by the way, was the Cuyahoga County Auditor, George Voinovich.

A couple other things. 920 only applies to outside mills, not inside mills, so property taxes will creep up slowly based on the inside mills. Also, 920 applies to increases in value due to appreciation only. If the property value increases due to new improvements, that added revenue is fair game.

So HB 920 freezes the revenue raised from property taxes which, we learned last time, are the chief source of local revenue. If costs are rising -- and we will see in later lessons that costs are rising a lot -- the 920 freeze is going to cause some discomfort.

But that’s not all it does. Recall the state funding formula from Lesson 1: State Aid = Foundation Amount x CODBF x ADM - (Tax Base x 23 mills).

So here’s the thing. That tax base variable is current valuation. So as the value of the tax base increases, the local share chargeoff also increases. The State reduces local aid after every reappraisal, but because of 920, the money raised is constant. This is what we call phantom revenue.

One mantra folks from the right use when discussing school funding is the need for schools to be run more like businesses. Anyone know of a successful business whose business plan includes an automatic drop in revenues every three years? Me neither.

Next week: History of DeRolf, Part 1

The text of HB 920 can be found here.
An old WVIZ story on 920 recounts the history, as well as the arguments pro and con.