There is a fundamental inequity in the way Minnesota Schools fund their building debt. The inequity was minimized by a debt equity equalization formula last revised in 2001.The state aid determined by this formula helped districts with a low ANTC/Pupil (amount of tax capacity of tax capacity (about 1% of taxable real estate property wealth) per pupil unit). The purpose was to provide for a more level playing field between districts of varying property tax base to pay for facilities. It never even remotely eliminated the disparity in local effort per facility built, but it helped.
Each district's bonded debt entirely belongs to its residents (unless you are one of a few districts approved for a special type of loan for called a Maximum Effort Capital Loan-another issue). Annual payments (bond redemption) in property poor districts however on this debt are paid by a combination of local levy and state aid. The debt equalization formula is used to calculate the local share (levy), which should be an amount roughly equal to what one would pay in a district with a more average amount of tax capacity per student. The state picks up the rest, which is the debt equalization aid.
This is an extremely complicated, abstract concept that is best illuminated with some examples. Comparing actual districts is difficult because of differing ANTC/Pupil Unit and differing debt service loads. I made up 3 fictional Minnesota school districts to help:
Gopher Valley has been busy having large families at the expense of having fancy real estate. Maybe it was due to demographics, or geography, or community values, or tradition, whatever. Their ANTC/pupil (pupil unit) in 2001 is $1775, which was at about the 5th percentile of all Minnesota school districts at the time. They are paying for an existing school building debt at the annual rate of $1000/pupil, which is around average for all schools that have some to pay. This makes the tax load here $220/100k of value on homes and businesses of just to make the bond payments on their average school, probably a decade or two old. Smaller communities in Minnesota with new schools (less than 5 yrs old) likely had significantly higher annual payments in the $2000/pupil range. This would be in the upper 5% school payment/pupil range. Raising the debt to $2000/kid/year would make the tax rates $310/100k.
Middle Prairie fares a little better in this weird math of dividing real estate by children. Their ANTC/pupil unit is at $3550, which just happens to be about average for all the state in 2001.Here a $1000/kid/year building debt payment makes the taxes $220/100k. $2000/kid puts it at $305/100k.
Bald Eagle Heights is proud of its new monster mall and exclusive neighborhoods sporting rows of McMansions. 1.6 kids per home is the rule here, and the ANTC/pupil unit for 2001 rises to $7100.00,putting them at the 95th percentile. $1000/kid here only cost $105/100k with $2000/kid raised it up to $220/100k.
Everybody got along fine, even though local effort per building dollar raised wasn’t equal, it seemed fair and nobody complained. Gopher Valley residents paid a little more than Middle Prairie. They in turn paid a little more than Bald Eagle Heights residents, but it worked out.
Unfortunately the formula was written into law using real estate values as they existed in 2001,unadjusted since then with no provision for inflation.
Real estate values have dramatically increased statewide since. In districts with higher tax capacity per student that is not a problem. A doubling of property values there just causes tax rates (we used to call them mil rates) to be cut in half, meaning a stable level of taxation (in real dollars per property) to pay building debt.
Not so in districts that depend on the debt equalization formula. Here rising real estate values caused the local share of debt repayment to rise dramatically. Local property tax rates did not drop as in wealthier places. This caused the actual debt service dollars paid on real estate in many of these districts to double or more. Let’s look at the year 2006 which still leaves a year or 2 of runaway values off the table.
Now in Gopher Valley ANTC/kid went up to $3200.Remember real estate has skyrocketed everywhere. The homeowner who had a $100,000 home in 2001 now needs to pay real estate taxes on the same home based on a valuation of over $160,000. Debt Service taxes on this home are at $400 for the $1000/pupil debt and $690 for the $2000/pupil debt load. This is serious money. It is oppressive to pay for existing debt. It will be nearly impossible to ever pass a new bond issue to build anything new since this will simply cost too much.
Middle Prairie now has $6400 in ANTC/kid. $1000/pupil/yr debt service tax rates are $250 on that same inflated home value as Gopher Valley. $2000/kid/year goes to $490. New building plans here are much in doubt.
Living large in Bald Eagle Heights, the ANTC/pupil has risen to $12,800. Tax rates on $1000/pupil/year haven’t gone up a bit at $110. $2000/pupil/year payments also holding steady at $220 on the same dollar value home as the above two communities. A new school here, even a fancy one with all the frills will still be affordable, nothing but the best for their kids.
The state share in paying for school facilities is dropping like a rock. The debt equalization program is essentially gone; along with it go equitable tax rates and facilities. It is a nightmare for many Minnesota taxpayers and their public schools.
To add insult too injury there is an unfortunate indirect result of this problem. In Minnesota you need to pass an operating levy to access a necessary amount of OPERATING money. In places like Gopher Prairie, especially if they built new schools, the beleaguered local taxpayers are seriously tapped out. They just can’t pay any more.
Our hometown Upsala (district # 487) fits in this category. It is a community of 400 residents with a new K-12 school that serves about 400 kids. The states failure to keep the debt equalization formula up to date costs our taxpayers an additional $250,000/yr and rising. Residents of Upsala have always strongly supported their school but have twice voted down operating levies that would have cost them $100,000 but brought in $270,000.So just our small community we have:
-$250,000 extra tax outflow
+$100,000 not spent, referendum failed
-$270,000 not received by failed referendum
-$420,000 in extra tax payments and lost income to the school net cash flow lost by the community EACH AND EVERY YEAR!
Now education suffers here due to deep budget cuts necessitated by lack of an operating levy. We are threatened by a vicious cycle: less income > budget cuts > loss of students due too program cuts(open enrollment) > loss of income due to enrollment reduction > ...
Also the cycle:
higher taxes > less referendum revenue > program cuts > loss of students > higher ANTC/kid (less kids to divide by) > higher taxes > ...
People in poorer districts are paying too much property tax but they don't know why. It is too complicated to understand it much less articulate (witness the above two pages...).
Spend some time talking to residents in these towns, all they can tell you is that their taxes are nuts.
Minnesota school districts have different calculations for their K12 Debt Levy. Too many variables,it's a multi step math problem using numbers too big for the typical calculator and it's not realistic to try do do visualization on these. They are like snowflakes,no two are the same. What I have done is to break things down to the point where we can look at the Debt Service/Pupil Unit(how much their building bond payments are per pupil unit(appx 1.155 actual student)) and their Adjusted Net Tax Capacity/Pupil Unit (Approximately 1% of the total actual property value per pupil unit) and show taxes on a home that started at $100,000 in 2001 and inflated gradually over the decade. One graph can show the effect on many different communities.
- Communities with $1000/PU Debt Service (about average)
- Communities with $2000/PU Debt Service (about the top)
- Situation for Upsala along with what we would pay if our ANTC/PU were Average or high
These are for homes that STARTED at $100,000 in 2001 and appreciated toward 200,000.
People need to understand that their property tax has 3 main componants
1.City(or Township)
2.County
3. School
What I deal with in EVERYTHING I present is the Debt Service portion of the School componant but that is a BIG Deal in places like Upsala.
The 2 lines need to add up to around $850-$900,000 a year as that is our annual payment.( (400 students*1.115to get pupil units) * $1900 DS/PU) equals $877,800, you can see how things tie together... Same information in pie chart form