Property Tax Cap’s Impact on Long-Term Budgeting Facing New York School Districts

By Christopher A. Andreucci

A recent report from Moody’s suggests that trouble may be brewing for school district finances.  Increasing demand for services, together with the rising costs necessary to provide such services, may force school districts to tap reserve funds rather than seek out other revenue growth measures, such as property tax increases over and above the property tax cap.  While this may provide a short-term solution, ultimately such actions push budget gaps into future years, thereby exacerbating the problem.  This will be something to watch for sure over the next few budget cycles.

The 2012-2013 school year is the first under New York’s property tax cap.  School districts were forced to either stay within the 2% cap (plus exemptions) or obtain a supermajority vote (60 percent) from district voters approving a tax levy exceeding the cap.  The other twist this year is that while in the past if school district budgets failed, a school had the option of either submitting a revised budget to its voters for approval, or adopt a contingency budget that capped the increase in the tax levy to the lesser of 4 percent or 120 percent of the 12-month consumer price index.  In the event that the district opted for a revote, and such revote failed, it was forced to adopt a contingency budget subject to the limitations described above.  Under the property tax cap, a district may still opt for a revote, but if it does resort to a contingency budget that budget must be equal to or less than the prior year’s levy.  Thus, any revote that fails causes the district to forgo increases in its tax levy allowable under the cap.  Certainly this will impact board discussions as to what course to follow in establishing a budget that did not obtain the necessary approval from voters the first time it is presented.

As a result of these changes, for the 2012-2013 school year 92 percent of school districts sought approval for budgets that fell within the property tax cap, and of those districts, 96 percent gained voter approval.  For the 53 districts seeking overrides, voters approved only 66 percent of those budgets.  Due to the change in the law forcing districts to forgo any tax increases if it opts to adopt a contingency budget, something it would have to do upon failure of a revote, all but three of these districts submitted budgets for a revote that fell within the tax cap.  The revotes were yesterday, June 19, and early indications suggest that many, if not all passed, but we will monitor the results and publish additional posts as more concrete information becomes available.

One may think that this is a positive development for both school districts and the taxpayers of New York.  However, before any final conclusion can be reached, we must look deeper into how school district budgets were balanced.  According to Moody’s a modest increase in state aid allowed school districts to reduce fund balance appropriations by slightly less than 1 percent from the prior year.  This suggests that fund balances will provide a short-term solution to districts attempting to manage budget growth under the new property tax cap.  But, once these fund balances are exhausted, districts will be faced with budget gaps that are exponentially larger than, after taking into account any state aid, can only be filled with revenue growth allowed under the cap, thereby putting the district at the mercy of the voters.  Time will tell if such a process is the most efficient and effective means to support  an infrastructure necessary to maintain the high quality public K-12 educational institutions we enjoy in New York.