News Analysis: Bottom falls out of state education fund, massive tax increases loom

By Shawn Cunningham
© 2020 Telegraph Publishing LLC

School district boards across the state will have some urgent thinking to do as the depth of the education funding crisis they face begins to be expressed in dollars of shortfall and cents in tax increases in the near future.

At its meeting on April 16, members of the Green Mountain Unified School District board called for a meeting to look at what can be done to maintain learning and minimize the pain. One member asked Superintendent Meg Powden what has been done to shut down spending in the light of her characterization of the situation as “dire.” Powden told the board that she and her team would continue talking about it.

The Two Rivers Supervisory Union polled board members to establish a date for a meeting in the first week of May but members asked board chair Joe Fromberger for a meeting to be held sooner and last week Zoom meetings were scheduled for for Tuesday April 28 and Tuesday May 5.

It is uncertain what school boards will be able to do – just as it is for state and local governments that have a part to play in this. But here is what they face.

With loss of some taxes, state ed fund falling

Vermont’s education fund entered 2020 in relatively good shape, according to an “education fund outlook” prepared by the Vermont legislature’s Joint Fiscal Office. In January, the fund had a $36.4 million “stabilization reserve” and a $12.9 million surplus.

The source of the education fund – which pays for elementary and secondary schooling – is roughly two thirds from property taxes and one third consumption taxes. These include sales and use taxes, meals and rooms taxes and lottery proceeds. There are also a couple of other sources of “small money” that contribute to the education fund, which totals more than $1.7 billion.

But the arrival of the coronavirus and the shutdowns in response to it have dramatically reduced the consumption taxes. And the businesses that collect the taxes that are still being generated in April and May have an extension to June 25 to remit, just five days before the end of the fiscal year for schools. It’s unclear how many will have the money to pay.

There are also a number of towns that have quarterly tax schedules and some of those still owe tax payments,  which for this period are estimated by the Joint Fiscal Office to be as much as $132 million.  And it remains  uncertain how much of those will be collected in full with large numbers of taxpayers under the financial strain of unemployment.

JFO fiscal analyst Mark Perrault told a joint meeting of the Senate Finance and Education committees on April 16 that the shortfall for this school year could be in the range of $39.5 million, which the state treasury could cover in the near term but which the Education Fund would need to pay back in the future.

And 2021 looks even worse

The 2021 fiscal year, which begins on July 1, is shaping up to be a much larger problem.

The JFO is predicting that losses in the fund’s revenue will be greater in fiscal year 2021, but the situation is so unstable that it’s hard to know by how much and, according to a draft brief, “it is not clear given current uncertainties when reliable revenue estimates will be available for FY21.”

Without a handle on the shortfall, it is problematic for the legislature to set the numbers that go into coming up with a tax rate. During the joint committees’ Zoom meeting, Sen. Christopher Pearson of Chittenden County called setting the “yield” under the circumstances “untenable.” The legislature uses the “yield” each year in the complex business of setting property tax rates.

For the sake of giving the committees an order of magnitude of the problem, Perrault used a shortfall of $186 million, which would have to be replaced. If the shortfall was replaced through property taxes and 1 cent on the tax rate is equal to $8.5 million in spending, the tax rate would need to rise by roughly 21 cents to cover the shortfall. Add that to the 5-cent hike already recommended to the legislature and taxpayers are looking at an increase along the lines of 26 cents.

For a property assessed at $150,000, that would be an increase of $390. Of course, Vermont provides “income sensitivity” that allows people a break on their property taxes according to their income. The problem is that the reduction in the taxes is based on a previous year rather than on the year in which the taxpayer suffered a loss of income. The income sensitivity for the upcoming tax year will be based on the taxpayer’s income in 2019.

Education Secretary Dan French told the committees that there would also have to be money for “a whole other level of services we haven’t embarked upon.” He was referring to “compensatory services” to help special education students catch up from distance learning as well as social and emotional supports for dealing with the aftermath of the pandemic.

On top of all of this, voters around the state have approved all but a handful of their school budgets and those plans represent an increase of nearly $74 million in new spending.

Shortfalls in property tax collection will put local municipalities in a bind.  Towns are the state’s agent for collecting education property taxes and, when taxes are delinquent, the town must make up the difference. This is often done through borrowing, but the Vermont League of Cities and Towns is suggesting the state do the borrowing needed to cover delinquencies and cushion the towns from having to come up with large amounts of late taxes.

“Someone’s going to have to do some borrowing to fill the hole,” said French at the joint committee session. “We can envision … the state doing some borrowing, districts doing some borrowing and local municipalities doing some short term borrowing  to fulfill their obligations to cover education payments.”

And while there is federal stabilization aid coming, it won’t do anything directly for the education fund since it is paid to the AOE which is responsible for portioning it out to the supervisory unions which give it to the school districts. Vermont will receive $31.15 million and the AOE may keep up to 10 percent of that money. At the governor’s press conference on Friday, French said that the agency had not decided how much it would keep although he is looking some of it for dealing with social and emotional needs of students in the future.

What’s a school board to do?

Shool board members often say they have very little impact on what gets spent on education since most of the expense is salary and that benefits under collective bargaining agreements and other costs – like special education – are highly prescribed in how they are delivered.

Still, local boards do have planning and spending authority and they negotiate the contracts for teachers and support staff and time seems to be of the essence in finding any savings in the year ending June 30 or in the following year.

“Budgets do not have to be spent,” Perrault told a webinar sponsored by the Vermont Superintendents Association. “Budgets are your plan for the year. It’s possible to adjust spending through the year and the one opportunity – and it’s a very narrow one – is that most teachers contracts have not been finalized at this point.”

At Gov. Phil Scott’s April 22 press conference, French said the AOE does not have any guidelines on handling such negotiations. “Generally we avoid getting involved in labor issues like collective bargaining situations,” said French.

French also said that the agency hopes to put out budget guidance to distribute to school districts on FY21 issues “early in the process, when the fiscal year begins, as opposed to waiting for the fall to do that.”

One question that boards will face is whether, in an emergency situation, a district can under-spend their budgets and take that surplus into the following year to reduce taxes on the residents of its constituent towns or whether such savings could be clawed back by the education fund? This will be familiar to GMUSD board members who, after negotiating savings in health benefits that created a $93,000 surplus found that the state demanded that money back.

There are a lot of moving parts in this situation and compared to all the other players, individual school boards and supervisory unions have limited muscle in the legislature. So when Sen. Mark MacDonald of Williamstown says, in the April 16 committee meeting that they need to “look at school districts and squeeze them,” board members will need to be especially attentive.