Treasurer's Article on the Ohio School Funding System

Last month, I wrote about the 2017 property reappraisal in Licking County and its potential impact on taxpayers and, to a lesser extent, its impact on the Granville Exempted Village School District (GEVSD). In that article, I discussed that the anticipated overall valuation increase on residential taxpayers approaching 16 percent would yield an increase in revenue to the district of under 1.6 percent. This restriction on growth in property tax revenue to GEVSD leads to “levy cycles” that cause the district to return to the ballot for additional taxes to keep up with inflationary increases. This is an intentional aspect of the overall school funding system in Ohio—it is part of the system design.

Funding for schools in Ohio is intended as a “partnership” between the state and the local taxpayers. How the overall funding for an individual district is split between these two partners is primarily driven by the district’s capacity to raise revenue locally. Those with a higher capacity (wealthier districts on a per pupil basis), are expected to generate more revenues through local taxes than poorer districts. On a per pupil basis, GEVSD is among the wealthiest fifth of districts in the state. This is reflected in the percentages of operating revenue that come from local taxpayers relative to the state.

Figures for the current school year shows that real estate taxes, plus state reimbursed property tax rollbacks, which are directly tied to real estate taxes, account for 70 percent of the operating resources for the district. State aid, which is the second largest source of funds, accounts for less than a quarter of all revenue the district receives for general operations.

Aid from the state is expected to remain fairly static. By the 2022-23 school year, under the current school funding formula, state aid to GEVSD is expected to be about 2.8 percent higher than it was eight years earlier in the 2014/2015 school year, an average annual rate of growth of about one-third of one percent. With such a minimal increase in aid from the state, the district must look to its residents for additional operating revenue.

Other than by passing a new levy, there are two ways the district can get revenue growth from real estate taxes. Once every three years the district can get an increase in revenue due to Licking County’s reappraisal or triennial update (a reappraisal is occurring in 2017 for taxes paid during 2018). The district realizes full revenue growth on valuation changes for about 10 percent of its property taxes collected. For the other 90 percent of taxes, the tax rates are reduced to offset any impact on revenues for the district from the valuation increases due to the reappraisal. Following the 2017 reappraisal, the allowable growth is expected to raise property tax receipts for the district operating budget by 1.75-2 percent. The next potential increase will not occur again until the triennial update in 2020, for tax payments in 2021.

The second way GEVSD can gain new money is through construction, such as the building of a new home or a new business in the district. At current levels of building, new construction is adding between 1 and 1.5 percent of revenue to the district annually.

All together, the main sources of revenue provide the district with average annual growth of less than two percent. However, expenses for providing primary and secondary educational services grow at a faster annual average rate than two percent.

There are three main drivers of costs for the district-employee wages and salaries, health insurance costs, and state mandated spending (a significant portion of purchased services). In each of these areas the district has faced upward pressure on spending.

GEVSD has several challenges in its overall wage and salary spending. Over the last three years, enrollment in grades K-6 has increased over 7 percent, which has led to some staffing increases in those grades. Enrollment in grades 7-12 has remained virtually flat. Secondly, as teachers have left the district for retirement or other reasons, the cost of replacing them has grown. In recent years there has been a 25 percent decrease in graduates from Ohio’s university teaching programs. This has led to the district hiring more experienced teachers to ensure the quality of instruction that we expect and demand. Finally, the district is constantly at risk of losing teachers to Franklin County districts with higher pay scales than we have. Over the past five years, the district has lost one or two teachers a year to these districts. GEVSD needs to remain competitive by providing raises to our teachers so that wages don’t fall even further behind the Franklin County districts.

Health care expenditures in the district, as they have nationally, have soared over the last few years. In the 2013-14 school year, the district paid $3.23 million in insurance premiums. Even after several benefit design changes, spending in the 2016-17 school year increased to $4.52 million, a 40 percent increase over three years. Working with our employees, the district is taking steps to control health insurance costs. Beginning January 1, 2018, all employees will be switching from a traditional Preferred Provider Organization (PPO) plan to a High Deductible Health Care Plan combined with Health Savings Accounts. This has been a standard practice in the private sector, but is considered “leading edge” for schools. The district expects this change, along with additional district/staff cost sharing provisions going forward, to bring more stability to district health care spending while at the same time allowing our employees to reap the benefits of building up HSAs.

State mandated spending is primarily for Granville resident students who are attending school outside the district, either for special needs, open enrolling to another public school, or attending a community school, including on-line schools. During the 2014-15 school year, GEVSD spent about $985,000 on these mandated services. Just two years later, during the 2016-17 school year, the costs had escalated to over $1.4 million, an increase of 44 percent.

The combination of restricted revenue growth and higher cost pressures create “levy cycles” for districts like Granville. When a new levy is passed, new revenues initially outpace expenditure growth, allowing districts to operate in the black and build cash balances. Eventually, with costs rising at faster rates than revenues, districts begin spending more than they are taking in, draining the cash balances. Once cash balances become low, the district must either seek additional revenues to keep up with escalating costs or reduce spending by restricting the educational options and opportunities that are available to students. For Granville, the crossing point for revenues and expenditures occurred in the 2016-17 school year, as spending outpaced revenues by about $650,000. Without a new levy, expenditures will continue to exceed revenues, pulling cash balances toward zero over the next couple years.

If you have any questions or comments, please do not hesitate to contact me at msobul@granvilleschools.org or 740-587-8116. You can also review the district’s forecast and other financial documents by clicking or tapping here.

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