Explainer: In search for fairness, Vermont’s school funding calculations tax the brain

By Shawn Cunningham
©The Chester Telegraph – 2014

Whether you live in a Victorian on The Green, an old farmhouse up a dirt road or a yurt off the grid in the hills, you have one thing in common – property taxes. The largest portion of that annual payment is the education tax. It’s also the least understood. With this  explainer, the Telegraph hopes to make this topic more understandable.

The calculation that leads to the education tax for each town is complicated and involves terms that seem simple but are actually not. An example is “education spending.” which seems like it should include pretty much everything we spend on education. But that’s not the case. At the end of this article is a definitions list for you to reference whenever you see a term underlined.

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ith the signing of Act 60 in 1997, Vermont went from raising education funds via local taxes to a statewide system of taxes. The idea – which was a response to a Vermont Supreme Court decision – was to equalize the funding among towns that had widely different values in their grand lists. Before this, the court noted that students in a town with high property values could benefit from a higher level of education funding than students from a town with lower property values. Since then, the state wide education tax system has seen several adjustments including Act 68 and Act 130.

Today, most of the money for primary and secondary education comes through the Vermont Education Fund and more than two-thirds of $1.5 billion fund come through the state-wide property tax.

It breaks down like this for FY 2015:

1. $489.2 million: 35 percent of sales and use taxes plus General Fund Transfer plus 100 percent of State Lottery proceeds plus other sources.
2. $595.2 million: Non-residential property taxes.
3. $421.7 million: Residential property tax.

While education taxes are collected by each town, the rates are set by the State of Vermont using a system that is meant to fund schools equitably and keep school budgets under control by setting higher tax rates on districts that approve spending that is in excess of a base spending amount established by the state.

The base spending amount is a number that’s set in statute by Vermont’s legislature. This year, the base spending amount is $9,285 per pupil. This is more or less a fiction, since the average school in Vermont spends about $14,000 per student each year, but the base is the starting point for comparison of school spending.

The state then uses a computer and a complex algorithm involving the total of the state’s grand lists, the homestead declarations made and other factors to set base tax rates for residential and non-residential properties. These rates represent the amount of tax needed to get to the base spending of $9,285.

The state then uses a computer and a complex algorithm involving the total of the state’s grand lists, the homestead declarations made and other factors to set base tax rates for residential and non-residential properties. These rates represent the amount of tax needed to get to the base spending of $9,285. This year, it’s 98 cents for homesteads and $1.515 for non-residential properties (such as second homes and businesses.) Both rates are per $100 of assessed value.

Next, the state takes the amount budgeted by the school (see education spending) and divides it by the number of equalized pupils in that district. This weighted per-pupil spending is always more than the state’s base amount.

It is the percentage that goes above the base that is important because that percentage is multiplied by the base homestead tax rate to get the equalized tax rate.  In other words if a school district spends 25 percent more than that $9,285 base spending amount, the equalized homestead tax rate is 25 percent more than the base rate of 98 cents. In this example, that would be $1.225 per $100 of assessed value.

Property assessments play a role

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o far, that’s pretty straightforward, but there’s another factor that can make a huge difference in what you actually pay in taxes.

The state studies property sales in each town, comparing the sales to the assessments of properties sold. The difference between the fair market value of properties (as demonstrated by sales) and the assessment is expressed in a number called the Common Level of Appraisal. To get to the final stage – the actual tax rate you pay — the equalized tax rate is divided by the CLA.

And it can have a profound effect. Take the example where the equalized tax rate is $1.225. If the town’s assessments are higher than market value by 10 percent, the CLA is 1.1. Divide $1.225 by a CLA of 1.1 and your residential tax rate drops to $1.113. If the same town was assessed at 90 percent of market value the CLA would be .90 and the resulting tax rate would be $1.36.

In effect, the state is making up for a town’s assessments that it deems too low based upon market value.

What does this mean for a town like Chester and how does it compare to other places?

Currently, Green Mountain Union High Schools spends $13,590.50 per equalized pupil or about $438.50 less than the state average. Chester-Andover Elementary spends $13,665.53 ($363.47 below the state average). Although the Chester schools are below the state spending average, combine all education spending in Chester and it is 145.6 percent over that arbitrary base spending amount of $9,285. This results in an equalized tax rate of $1.427, but because Chester’s  assessments are greater than market value (102.69 percent), Chester’s tax rate drops to $1.3898. (Chester Ed Tax Calculation)

Compare this to the City of Burlington (Burlington Ed Tax Calc) where they spend a similar amount ($13,662.30 per student) and have a similar equalized tax rate of $1.442. In Burlington though, properties are assessed at 88.15 percent of market value and the formula boosts the final tax rate to $1.6358 per  $100. (Here’s a link to all the state education spending figures for every town in Vermont.)

Chester’s most recent reappraisal was near the height of the real estate bubble and so its CLA has been keeping tax rates low. As the market catches up with recession losses, that advantage is going away. Last year, Chester’s CLA was 1.0643. This year it has dropped to 1.0269.

This is complicated stuff with a lots of possible permutations. In the past couple of years, Chester’s CLA has dropped, approaching fair market value. If real estate sales pick up and outstrip assessments, school taxes will go up.

This is complicated stuff with a lots of possible permutations. In the past couple of years, Chester’s CLA has dropped, approaching fair market value. If real estate sales pick up and outstrip assessments, school taxes will go up.

In a healthy economy, with more jobs and fewer families getting 3SquaresVT assistance, the number of equalized students can go down and taxes can go up. Likewise, if overall student population drops, the ratio of per pupil spending goes up and so do taxes. If the student population rises, per pupil spending goes down and so do taxes. Because of weighting, a big bump in pre-school population would lower the count of equalized pupils for a few years, but then it would go back the other way when they reached elementary, then shift further in taxpayers’ favor when students reach high school. But when that bump graduates, look for a tax increase.

What is obvious is that controlling school spending – which Chester’s schools have done pretty well – is not enough to keep tax rates in check. The only other way to control taxes is through understanding the process and challenging the legislature and state agencies to improve the system and make it more understandable and transparent. One area to look at is the burden that smaller communities face in spending to maintain their infrastructure and the effect that has on per pupil spending when student populations fluctuate.

Definitions

Base Spending Amount – An imaginary number that Vermont’s Legislature sets as a starting point for calculating state-wide education taxes. It represents “education spending per equalized pupil.” This year it is $9,285 compared to the average “education spending” of $14,029 per pupil statewide.

Base Tax Rate – Using this rate (generated using a complex algorithm) to tax all the property in Vermont, you would arrive at the base spending amount (see above) of $9,285 per pupil for every pupil in the state. This base rate gets multiplied up to represent local spending.

CLA – Common Level of Appraisal allows for an adjustment to the appraised value of properties based on a study of property sales. The idea is to smooth out the differences in appraisals from town to town and between reappraisals. A CLA of “1” means that the properties in town are appraised exactly at fair market value. A CLA that’s less than 1 – say .90, means that the town’s appraisal is only 90 percent of the fair market value while a CLA of 1.1 means the town’s appraisal is above fair market value. The CLA is divided into the equalized tax rate to get the final tax rate. The higher the CLA, the lower the tax rate. Generally, if a town’s CLA is below .80 or above 1.20, the state will require a reappraisal.

Education Spending – This is the budget adopted by the local board (plus any deficits carried over from the previous year) minus any money the school district gets from grants for specific programs, tuition for out of area students and interest income. Specific program grants include special education and transportation among others.

Equalized Pupil – This calculation takes into account the challenges (i.e. the extra expense incurred) to educating certain populations. This is weighted toward secondary students, students coming from an economically deprived household (qualifying for 3SquaresVt assistance) and those for whom English is a second language.

The weighting looks like this. A pre-k student counts for .46, an elementary student counts for 1 and a secondary student 1.13. A student who is learning English as a second language adds .20 to the weighting while an economically deprived student adds 25 percent (through a complicated formula.)

Non-Residential Property Tax – Taxes levied on properties that are not principal places of residence or are used for business. This includes second and vacation homes as well as businesses.

Residential Property Tax — Taxes levied on principal residences and subject to income sensitivity that limits the payment of education tax to a percentage of income.