Robert J. Madonia is an adjunct professor at St. Xavier University in Chicago. He served 34 years in public education as a building administrator and school superintendent and currently is president of RJM Consulting Services, Inc.
Perception is reality for many people. When they see the value of their home drastically declining, they expect their taxes to also decline. When this does not occur, it can cause anxiety, anger and a mistrust of the taxing bodies.
Because public schools typically have one of the highest tax rates in the community, these negative feelings are often focused on the local district. The loss of goodwill over finances can negate anything else positive that the district is doing and can quickly erode public confidence in district leadership.
Helping property owners understand school finance and property taxes can help change public perception. And there are proven strategies for doing this. But before districts can begin to change perceptions or create positive public relations, a quick review of the relationship between school finance and property taxes may be in order.
A good source for this information is available from the book, Essentials of Illinois School Finance: A Guide to Techniques, Issues and Resources, written by James B. Fritts. This book, now in its fifth edition and available from IASB, offers a thorough overview of the property tax cycle.
It begins with the assessment process, which Fritts acknowledges is “unpopular, difficult and somewhat subjective.” He explains the different components of assessments, including residential, business, farmland and mineral, and the review, appeals and equalization processes.
He also explains the levy and extension process; how boards go about planning and adopting the tax levy, and how the county clerk handles the levy extension, collection and distribution of property tax revenue.
Understanding these processes can help districts explain the effects of decreasing property values on school finances and individual taxpayers. So how does a district effectively communicate that information to its constituents in a positive way?
A good public relations plan is not a one-time event; it is ongoing. Boards need to convey vital financial messages regularly in order to build community trust. The realities of school finance on the district and property owners are equally important parts of those messages.
Board members don’t want or need surprises when it comes to district finances, and neither do homeowners, business owners, farmers and other entities providing the local revenue.
While districts can’t predict or control every aspect of local, state or national financial conditions, they can keep informed and proactive on property tax matters, enrollment projections, state funding, and other factors that affect school finances. And they can and should share this information with the community.
As conditions change and adjustments are required, both the district and taxpayers should be equally aware of the choices facing the district, their cost and consequences.
Support for fiscal management practice requires an accurate reflection of the fiscal management attitude and values of the community.
What information does the public need to continue its support? Here are my suggestions of the basic financial information the district needs to effectively communicate:
Conveying this information can be made through a number of venues. These can include district newsletters and websites, community forums, board meetings, advisory groups, press conferences and interviews.
Encourage parents and district constituents to submit their finance questions so that they can be answered in a subsequent issue of a newsletter or on the website. Meet with the community, either at a district facility or in another convenient location, and discuss district financial goals. Set aside time at each board meeting to discuss one or more aspects of the budget or district finances. Make certain that the media personnel who cover your board meetings have a good understanding of school finance by having them talk with administrators before or after the meeting to get an explanation of the financial issues the board is considering.
If your district public relations plan does not include a thorough and regular explanation of school finances and property taxes, you need to encourage it. Remember, there are three kinds of districts:
If your district isn’t the first type of district, get out in front of and communicate with your community. You may not be able to control all of the factors in the financial picture, but you can focus it and share it.
Effects of decreasing property values
by James B. Fritts
Many areas of Illinois are experiencing a downturn in residential property sales and values, and in the valuation of some types of non-residential property. Property value trends during the recent recession have not been uniform throughout the state. Therefore, school officials need to research local trends to determine their impact on revenues from property taxes and state aid.
The effect of a downturn on school tax bases will depend on the length and scope of the decline as well as local market conditions. According to one assessor, a true sales slump would need to last for three years or more to cause significant reductions in assessed values. This is because sales data for the previous three years are used to reassess property in general reassessment years and multi-year averages are also used for computing equalization factors.
For example, assessments for tax year 2010 will reflect market values for 2007-2009. Therefore, years of strong and rising property values will continue to affect assessments until the three-year average includes only years of steady or declining values. The effect of a subsequent upturn would be similarly dampened and deferred.
Tax revenues are a function of the tax base, the levy and applicable fund rate limits. A decrease in the tax base may, but will not necessarily, lead to a decrease in tax revenue. In a non-tax-capped district, the future revenue impact of a decline in the tax base will depend on the amount of subsequent levies for each fund, and whether a given fund rate is at its maximum level.
When an operating fund tax rate is fixed, property tax revenues adjust as the equalized assessed valuation varies. Therefore, if a fund is already at its maximum rate, a decrease in the tax base will result in a proportionate decrease in revenue to that fund. But if a fund is not at its maximum rate, a constant or increased levy will produce revenue up to the levy amount or until the rate limit is reached, whichever is lower.
Therefore, boards may wish to increase levies for funds that have not reached their maximum rates to mitigate losses in other funds. Each fund needs to be evaluated for its need for additional revenue, with special attention to the Tort Liability Fund.
In a tax-capped county, the provisions of the Property Tax Extension Limitation Law (PTELL) control the total extension and “limiting tax rate” for all operating funds. Any increase in property tax revenues is limited to the CPI adjustment, plus an adjustment for new property.
The total limiting rate is a function of the previous year’s extension times the CPI adjustment, divided by the current year’s EAV, after subtracting the EAV of new property. The limiting tax rate therefore adjusts according to changes in the equalized assessed valuation. A decrease in the current year EAV will cause the limiting rate to increase. When the higher rate is applied to the lower EAV, the result will be a total amount of tax revenue equal to that of the previous year. (Rounding of the tax rate may result in a slight variation.)
In addition, the district will gain tax revenue attributable to any new construction and the CPI. The school board must, of course, levy a sufficient amount to capture the available revenue, and distribute that levy among the funds according to need so that each fund stays within its legal rate limit. Individual operating fund rates are subject only to the state limit for each fund, not to any previous voter-established limits.
Editor’s note
James B. Fritts is the author of Essentials of Illinois School Finance: A Guide to Techniques, Issues and Resources, now in its fifth edition. This article is an excerpt from the chapter on the property tax cycle and has been adapted for use here. Copies of the book are available for purchase at http://iasb.com/shop/.