January 26 -
Issue #3
Governor
Proposes FY11 State Budget; Proposes Cost Shifts to Education Fund
Last Tuesday,
Governor Douglas proposed his state budget for fiscal year 2011 in a speech to
the General Assembly and in accompanying documents. Relying primarily on budget cuts and cost
shifts, Douglas’s proposes to close the projected deficit of $153 million. Several of the provisions entail a cost shift
from the state budget to the Education Fund.
Douglas also proposed several changes to the state’s education finance system
designed to contain costs and generate additional property tax revenue.
The
Governor’s budget includes $53 million in human services cuts, and presumes $38
million in additional savings across state government as envisioned by the Challenges for Change report.[1]
Douglas’s budget cuts capital gains taxes by almost $10 million, but, on
balance, revenues would increase $25 million through cuts to affordable housing
agencies and increased fees, among other changes.
The following
is an analysis of property tax implications and a description of all the
education-related provisions in the Governor’s budget proposal.
Cost
Shifts, Income Sensitivity and Property Taxes
As he has in
prior years, Governor Douglas asserts that the significant cost shifts he
proposes for the Education Fund (specifically teacher pension costs from the
General Fund to the Education Fund) should not be viewed as property tax
increases because, in his view, regular education spending should be reduced to
offset the shifts. In his speech, he
anticipated criticism on this point, and preemptively responded by saying:
Those who attempt to parse my
proposals to justify a claim of a tax increase should be reminded that by
advocating for the status quo they are, in fact, supporting a $59 million property
tax increase. That is a burden Vermonters simply cannot afford.[2]
However, our analysis shows that
projected education property tax increases in fiscal year 2011, caused
primarily by cost shifts to the Education Fund, total $33.8 million, a bit more
than half what the Governor is forecasting. The $26 million balance
of the property tax “increase” is an increase in income sensitivity deductions.
The Governor’s
administration budget summary explains the effect of income sensitivity:
“Basically, income sensitivity transfers the burden of property tax from
eligible beneficiaries to property tax payers who are not eligible…”[3] Increased income sensitivity does not increase property taxes owed in the
aggregate.
Furthermore, the projected $33.8
million property tax increase can be directly attributed to cost shifts to the Education
Fund approved in the last year. In fiscal year 2011 alone, the Governor proposes
the following provisions.
$18.4 million: Proposal to reduce General Fund support
for the Education Fund;
$10.4 million: Proposal to partially shift
teachers’ retirement costs from the General Fund to the Education Fund;
$6.9 million: Proposal to retain school-based
Medicaid reimbursements in the General Fund and not transfer to the Education
Fund, notwithstanding 16 V.S.A. 2959a(g);
$3 million: Proposal to pay for the Community
High School of Vermont (i.e., the corrections system school) with Education
Fund monies in lieu of General Fund support.[4]
The fact is
that restrained budgets in the current and upcoming fiscal years in conjunction
with federal ARRA funding for school districts directly halted school-based
property tax increases. The Governor has
decried high property taxes since his first year in office, yet he continues to
call for large shifts of annual expenses onto the very same tax.
Small
Schools Grants Phase Out
Governor
Douglas’s budget includes a phase out of the Small Schools Grants over the next
two years. His fiscal year 2011 budget
proposal reduces the grants allocation by approximately 50 percent from its
statutory amount.
See Appendix
A for a map of districts that received Small Schools Grants in fiscal year
2010.
Student
Enrollment Decline Cushion Phase Out
Over the next
three years, Governor Douglas proposes to phase out the provision of law that
limits property tax spikes for municipalities with rapidly declining student
populations. Because education spending per pupil is a critical determinant of education
property tax rates, state policy protects taxpayers from onerous rate hikes resulting
from precipitously declining school enrollments in a single year. Instead the tax increase is phased in over
several years.
Douglas
describes this program as a “’phantom student’ subsidy… [that] pays school
districts for non-existent students…”[5]
The law was
implemented as a provision of Act 60 as a part of the framework for the
statewide education property tax. Since
then, public school enrollments have decreased more than ten percent, and the
effect of the cushion may be greater than originally envisioned. As a matter of public policy, it may be time
to revisit the parameters of the law. Nevertheless,
the effects of phasing it out entirely on school districts with declining
enrollments should be carefully studied.
See Appendix
B for a map of municipalities that had property tax increases mitigated by
“hold harmless” in fiscal year 2009 and 2010.
Student-Teacher
Ratio Adjustment
The Governor
recommends implementing a 13:1 statewide student-teacher ratio over the next
four years. He does not describe any
process in detail to achieve this result, but states that he will, “work with
the Legislature to develop the most appropriate mechanism to accomplish the
goal and achieve the savings.” Douglas
did suggest that limiting the number of replacements hired for retiring
teachers could be the crux of the mechanism.
The latest
available figures indicate Vermont has a student-teacher ratio of 10.8:1. Student-teacher ratio is a distinct figure
from class size because the definitions of teachers include specialized
instructors and other educators in public schools who are not regular classroom
teachers.
Teachers’
Retirement System Cost Shifted
Douglas
proposes two major changes to the teachers’ retirement system: (1) shift the entire
funding source for the employer share from the General Fund to the Education
Fund with a four-year phase-in, and (2) accept the recommendations of the retirement
commission report that states, among other recommendations, that employees
should pay a significantly increased share of their salary into the pension
fund.
In his fiscal
year 2011 budget, the Governor proposes that the Education Fund pay $10.4
million of the teachers’ retirement cost in the first year of the four-year
phase-in. The remaining balance, $51.7
million, would be paid by the General Fund this year.
Arguably, the
most significant recommendation of the retirement commission’s report is that
actuarial recommendations for the employer
share of pension costs should be split between employers and employees at an
approximate 55 percent state and 45 percent employee sharing ratio. This will markedly increase employee
contributions, from 3.4 percent of salary in prior years to greater than a 5
percent contribution in fiscal year 2011.
The state’s share would remain in the 7.5 percent range of salary that
it paid in fiscal year 2010.
See page four
of our first Education
Legislative Report of 2010 for
full details on the retirement commission’s recommendations.
State
Aid for School Construction Shifted to Education Fund
State school
construction aid has never previously been paid from the Education Fund. The Governor proposes to retire existing
state aid for school construction by paying the nearly $40 million balance in
$5 million increments each of the next eight years out of the Education Fund. The Governor is not proposing to lift the
moratorium on new state aid for school construction.
Teachers’
Health Insurance Co-pay Mandated at 20 Percent
The
percentage split of health insurance premiums between school districts and
teachers is currently determined locally as part of the collective bargaining
process. Teachers pay anywhere from zero
to 30 percent of the premium depending on their negotiated contract. The Governor proposes to mandate that all new
agreements between districts and teachers require a 20-percent employee
share. The Governor’s analysis indicates
this will save taxpayers $15 million over the next three years.
Tiered
Income Sensitivity; Sensitivity to be Limited to $400,000 of Housesite Value
The income
sensitivity program, as discussed above, shifts some property tax burden from
eligible taxpayers to those who are ineligible.
Taxpayers with household incomes less than $90,000 are eligible to pay
property taxes on their housesite (i.e., house and two acres) entirely based on
income, not property value. The amount
eligible taxpayers pay is 1.8 percent of household income multiplied by a local
school spending adjustment.
The Governor
proposes to increase the base percentage to 2.25 percent for households with
income between $60,000 and $75,000, and to again to 3.5 percent for households
with incomes between $75,000 and $90,000.
Douglas also
proposes to limit the income sensitivity program to the first $400,000 of
housesite value. Regardless of income,
residents would not be income sensitized for the value of their housesite above
the first $400,000.
We will
continue to monitor the development of legislation resulting from the
Governor’s budget proposal, and report on developments in future Education Legislative Reports.
New Bills
Introduced
The following
education-related bills have been introduced by one or more members of the
Legislature from January 14th through January 22nd. To read any bill’s full text or see its
current status in the legislative process, go to http://www.leg.state.vt.us/database/status/status.cfm.
H.522 AN ACT RELATING TO EMPLOYMENT DECISIONS
BASED ON CREDIT INFORMATION
Introduced
by Representatives Wizowaty, Ancel, Clarkson, Davis, Fisher, Lorber, Masland,
Mook, Poirier, Ram and Webb of Shelburne
Statement of
purpose: This bill proposes to generally prohibit employers from making
employment decisions based on an applicant’s credit report.
H.556 AN ACT RELATING TO THE REPEAL OF
SMALL SCHOOL FUNDING
Introduced
by Representative Wilson of Manchester
Statement of
purpose: This bill proposes to repeal funding support for small schools (i.e.,
the Small Schools Grants).
H.557 AN ACT RELATING TO INCOME
SENSITIVITY ADJUSTMENT CAP
Introduced
by Representative Wilson of Manchester
Statement
of purpose: This bill proposes to cap the income sensitivity adjustment at
$5,000.00.
H.561 AN ACT RELATING TO THE
REAFFIRMATION OF THE USE OF AUSTRALIAN BALLOTS FOR APPROVAL OF SCHOOL DISTRICT
BUDGETS
Introduced
by Representatives Sharpe of Bristol and Fisher of Lincoln
Statement of
purpose: This bill proposes to reaffirm by the voters of a municipality the use
of Australian ballots every five years for approval of the school district
budget.
H.563 AN ACT RELATING TO RESCISSION OF
VOTES TAKEN BY AUSTRALIAN BALLOT
Introduced
by Representatives Stevens, Jerman, Macaig and Martin
Statement
of purpose: This bill proposes to remove the ability for the voters of a
municipality to rescind a vote taken by Australian ballot.
END
Appendix A
Appendix B
