Since the summer of 2013, CRC has been following the implementation of Michigan’s new school district dissolution policy.  On November 4, voters in the dissolved Buena Vista School District rejected the renewal of a tax dedicated to pay off the district’s accumulated deficit.  Failure to get voter authorization to levy the tax raises the question of who will pay to eliminate the district’s deficit.  Also, this vote reveals some of the unintended consequences inherent in the district dissolution policy

Repurposing the 18-mill School Operating Tax

The state adopted a new law (Public Act 96) in the summer of 2013 to allow for the dissolution of school districts that are not deemed “financially viable.”  Almost immediately after its enactment, state officials determined that the factors were met for dissolution and steps were taken to dissolve Buena Vista School District (Saginaw County) and Inkster Public Schools (Wayne County), the two districts that precipitated the development of Public Act 96.  The districts ceased educating students at the end of the 2012-13 school year and their students were assigned to neighboring school districts effective with the 2013-14 school year.

Due to years of overspending, Buena Vista School District had amassed a $4 million accumulated operating deficit by the end of 2012-13.  In addition, the district had outstanding long-term debt totaling $2.6 million backed by a dedicated tax.

The new law requires a dissolved school district to continue to exist solely for the purposes of satisfying its debts, including any accumulated deficit.  A dissolved district continues levying all authorized taxes until its debts are settled.  Most importantly, in order to enable a district to eliminate its operating deficit without a direct state bailout, the law effectively repurposes a school operating tax for deficit reduction.

By law, the 18-mill school operating tax on non-homestead property is used to finance the local portion of a school district’s per-pupil foundation allowance.  Because a dissolved district no longer educates students, it does not receive the state foundation allowance funding that accompanies each student.  This makes the 18-mill tax proceeds available for debt repayment.  However, if, as was the case for Buena Vista School District, authorization to levy the 18-mill tax expires before the debt is fully repaid, voter approval is necessary to continue levying the tax.

State Plan Hits a Snag

The expiration of authority to levy the 18-mill operating millage created a snag in the state’s use of the school district dissolution law.  Voter authorization to levy school operating taxes is provided for a set number of years.  At the completion of that term, school districts must seek voter approval to continue levying a school operating tax.  Experience has shown that requests for voter approval for these taxes have been somewhat perfunctory since passage of Proposal A of 1994 because primary residences (people’s homes) are usually exempt from the tax.

Buena Vista School District levied the 18-mill tax in 2013 and 2014, generating about $1.5 million annually, and directed the proceeds to deficit reduction.  According to the state’s original plan, these revenues should have been sufficient to eliminate the district’s deficit by the end of 2014, when authorization to levy the tax was scheduled to expire.  However, the district’s 2012-13 audit, released in early 2014, revealed that at least a portion of the 2015 tax levy would be needed to eliminate the deficit as the final deficit figure was larger than originally estimated.

The state’s plan to pay off the Buena Vista School District’s debts hit a snag with the November 2014 general election.  At the election, voters were asked to renew the authorization to levy the tax for another three years to pay off the district’s deficit.  It was estimated that the district would eliminate the tax with the 2015 levy and likely at a rate below the full 18 mills.  Voters rejected the tax renewal question.

It is of little surprise that Buena Vista’s tax renewal question was not approved.  First, the tax is generally not well understood by voters because most people don’t pay it.  The tax is levied on business and second home properties, while most homeowners are not subject to it.  Second, voters were asked to approve a school operating tax for district that no longer is educating students.  While the district exists on paper, it was dissolved over a year ago and its former schools remain vacant and unused.  Finally, the request for voter approval for a longer duration than was previously stated as necessary to retire the debt may have bred distrust in this tax question.

What Happens Next?

Regardless of the reasons behind recent voter behavior, the November election result raises the question:  Now what?  The district, which exists only on paper, has no funds to liquidate the remainder of its deficit, estimated at $800,000.

There appears to be three possible paths forward at this time, each with its own set of considerations.  First, the district could take another shot at gaining voter approval for the 18-mill tax.  This would likely have to take place in early 2015, as the millage has traditionally appeared on the summer tax bill.  This response would require the Saginaw Intermediate School District to shoulder the costs of running the millage election, including any voter education efforts involved.  Passage of the millage request the second time is not be guaranteed, although other districts have successfully gained approval of the tax after an initial defeat.

A second course of action would be for state policymakers to provide a direct appropriation for the express purpose of satisfying the remainder of Buena Vista’s deficit.  The state has already provided $5 million to assist with the dissolution of this district and Inkster Public Schools, so a similar response would not be precedent-setting.  Like the earlier appropriations, this response would result in other school districts bearing the costs, as there would be fewer state resources to distribute to schools.

Finally, the state could pursue a judgment levy to raise the needed funds.  As opposed to the state appropriation approach, this would localize the cost of debt repayment by forcing taxpayers in Buena Vista School District to share in the burden of resolving the remainder of the district’s deficit.  Whereas the 18-mill tax is levied only on non-homestead property, a judgment levy is spread across the entire tax roll.  In CRC’s assessment, a number of factors suggest that this is the least attractive option.

Unintended Consequences

In previous writings, CRC highlighted some of the unintended consequences arising from the state’s school district dissolution policy.  Others have surfaced based on the Buena Vista experience.  Of immediate concern is the fact that the new law does not contemplate what happens if a situation like the one in Buena Vista School District arises.  There is no “Plan B” should the 18-mill tax not be available for debt repayment.  This creates uncertainty for many entities that are potentially impacted, including taxpayers, state officials, intermediate school district administrators, and local assessors.

The inequitable treatment of taxpayers has arisen as another consequence.  With the expiration of the 18-mill tax in Buena Vista School District, district taxpayers (primarily business) are going to enjoy a tax advantage over their competitors in other parts of the state.  Under the new dissolution law, the tax base in a dissolved district is not transferred to a receiving district until all the debts are repaid.  This means that business property will not be subject to the taxes levied in a nearby district (i.e., where the 18-mill tax is levied) until the Buena Vista deficit is eliminated.

Finally, the experience in Buena Vista School District reveals the problems with ad-hoc policy responses.   The new state law allowing for school district dissolutions was initiated as a policy response to address severe fiscal stress in a limited number of cases because policymakers believed that the state’s primary, long-standing tool (i.e., the emergency manager law) was not a workable solution.  In enacting this “made-to-order” policy, however, lawmakers bypassed the deliberative processes outlined in the state’s emergency manager law in favor of one that promised a more speedy and expeditious resolution to school financial problems.  Based on what has happened in Buena Vista School District, a speedy and clean resolution is not guaranteed under the new policy.

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