West Lafayette School Board: Local Government Finance and Policy Options

Budgets

One of the reasons I am asking folks to vote for me as a candidate in this West Lafayette School Board race is that I have some experience with local government finance. A school board’s policy options are tied to its funding options. This stuff is opaque (to put it charitably) and it takes awhile to get up to speed. Understanding the twists and turns of the state’s regulations on local government finance ends up being important not just because it helps you understand what the board can and can’t do, but also because it helps you explain the board’s choices to constituents who might otherwise find the school’s choices arbitrary or wrongheaded.

A subject that often seems to come up when money is tight has to do with funding building projects. It’s pretty common to see a citizen who doesn’t really understand the process (or a disingenuous anti-education legislator who probably does) respond to calls for increased funding for teacher pay by grousing about how schools are wasting money on “cathedrals.” (My first exposure to this argument was about twenty years ago when I lived in White County – someone was complaining about a new baseball field when the subject of having to let an assistant band director go was being discussed.) On the surface, it’s a pretty common sense argument. Don’t spend the money on “x.” Spend it on “y.”

The reason that argument falls apart has to do with state law. The tax rate that supports capital construction projects (i.e. buildings) is distinct from the funding sources for teacher pay and other operating expenses. This is further complicated by the maximum levy imposed by the State and the fact that local units of government have their tax rates tied together, in a sense, through the state imposed tax caps. More on that below, but the upshot is that reducing your tax rate for capital projects doesn’t mean that you’ll have lower taxes or more flexibility to spend money on non-capital expenses. It might just mean that another unit of local government gets more money from its tax rate.

(And, by the way, a quick note to acknowledge that just because I have a fair amount of background in this area, doesn’t mean my knowledge is anything like perfect. There are probably mistakes in this post. But my experience is usually good enough to allow me to separate the real issues from the non-issues. And I know when to go lean on people with expertise in the area: we’re fortunate enough to have Everybody’s Favorite Economist ™ in the district, a long-time CFO working for the corporation, outside contractors like Baker Tilly, or in my County work, our County Auditor.)

Looking at my 2019 tax statement for illustration, the tax rate attributable to the West Lafayette Community School Corporation was $1.2762 per $100 of assessed valuation. In 2019, the certified rate attributable to debt service was 0.5375, the rate attributable to operations was $0.3687, and the rate attributable to the referendum was 0.37. Add those all up, and you get the $1.2762 on my tax statement. That debt service amount crept up a little between 2015 and 2016 (from 0.5322 up to the 0.5375 where it’s been since) but it’s held pretty steady at around that rate as far back as I can see. That $0.5375 rate seems to generate in the neighborhood of $5 million per year. The rate has held steady despite the additional debt the school corporation* bonded for to fund the new construction at West Lafayette Intermediate School, improvements at Cumberland, and additions to the Jr./Sr. High School.

(*Technically the bonds were issued to the West Lafayette School Building Corporation. This is not some sort of arcane end-run around local government finance rules. This is routine practice for units of local government using bonds guaranteed by property taxes to fund capital improvements. In the case of schools, the procedures are set forth in IC 20-47-3. In the case of other units of local government, the procedures are set forth in IC 36-1-10. I believe there is some artifice here, but it’s not local or recent. It’s a legal fiction of long-standing (since the 1920s), used nationwide. With respect to Indiana, my understanding is that the State was scarred by its experience with the Indiana Mammoth Internal Improvement Act of 1836. The State defaulted on bonds related to those internal improvements in a big way, leading to adoption of Article 10, section 5, of Indiana’s 1851 Constitution which has a general prohibition on the State (and by extension political subdivisions of the State) incurring debt. However, as it turns out, it’s not terribly practical to fund long-term assets with cash on the barrel head, so these building corporations were devised as a way to create a bit of legal separation between the government and debt while still providing bond holders the security they need to lend money.)

So, back to our hypothetical citizen or legislator criticizing spending on facilities (and forgetting for the moment that adequate facilities are important to education).

Why not spend the debt service money on teachers instead of buildings?

The General Assembly says we can’t. IC 20-40-9-6 lists the uses of the debt service fund, and paying school operating expenses aren’t on the list.

If you spend less on debt service, won’t that let you lower the debt service tax rate and increase the operations tax rate?

No. The two aren’t really tied together under state law. Lowering the debt service rate won’t increase the amount available for the operations fund. That amount is capped by something called the maximum levy and generally that amount will increase each year based on the assessed value growth quotient —  which is a multiplier calculated using the non-farm personal income growth for the previous six years. The growth quotient for 2021, based on the average income growth from 2013 to 2019, is 4.2%. For what it’s worth, due to COVID, there is a good chance that there will be some low or even negative personal income growth years baked into that formula for years to come, reducing the growth quotient and limiting the maximum levy for the operations fund.

If you spend less on debt service, won’t that at least reduce our overall taxes?

Probably not. In many cases, the effect will be to send more money to the City of West Lafayette or the County. Property taxes in Indiana are capped at 1% for residential property, 2% for rental and agricultural property, and 3% for commercial property. Any given parcel has taxes from a number of local units stacked on top of each other. Using the 2019 tax statement again for reference, the total tax rate on the property was $2.7603 for every $100 of assessed valuation. As I mentioned, $1.2762 of this was attributable to the school. The City, the County, the township and the library all added their rates on top of that. It’s not as easy as just multiplying that tax rate times assessed valuation because there are things like homestead deductions and the fact that the referendum tax rate doesn’t fall under the cap, but generally, that tax rate is going to take you over the tax cap for a lot of properties in the West Lafayette school district. When that happens, the taxpayer gets a “circuit breaker credit” which is deducted from all of the local units tax revenue.  If WLCSC reduces its debt service tax rate, the total amount of the circuit breaker credit is reduced, generally to the benefit of the other taxing units. In other words, if the School reduces its debt service tax rate, the County and the City have a smaller amount of their tax revenue reduced by circuit breaker credits. So, the taxpayer pays the same amount of tax on the property, the school doesn’t have the money to use on capital projects, and the City and the County get a bigger piece of the pie.

Is the referendum tax rate used on debt service?

No. Legally, it can be (because referendum money is legally allowed to be used for any purpose on which the school can otherwise spend money), but for the West Lafayette schools, referendum money is not used for debt service. It’s used to supplement the education and operations funds. For 2020, there was a filing with the Department of Local Government Finance that created the impression that maybe the referendum money was being used for debt service. (In fact, the form showed $4.5 million used for debt service). But, this appears to be from some kind of glitch caused by how the school’s software communicated with the State’s Gateway software for financial filings. If you look at the same report for the debt service fund,  it shows $6.5 million on debt service and lease rentals (these “leases” are from the building corporations we discussed above.) The school corporation simply isn’t spending $11 million per year on capital expenses.

If you look at the 2019 report for debt service it’s similar to the 2020 debt service report. Meanwhile, in 2019, the referendum fund shows nothing for debt or leases. Our bonds and leases for building construction are being paid from the debt service fund which, as we discussed above, can’t be used for non-capital expenses like paying teachers.

Was there some shuffling of referendum money between the education fund and the operations fund?

All right. Our hypothetical citizen or legislator isn’t asking this, but I wanted to mention that the General Assembly passed legislation saying that 85% of State money has to remain in the education fund with not more than 15% going to the operations fund. The education fund is to be spent on student instruction and learning (e.g. teachers). The operations fund is for non-instructional operating costs of a school (e.g. human resources, utilities, food service, and other non-classroom expenditures.) The referendum fund money can be used to supplement either or both of these. It used to be that the referendum money was allocated among both instructional and non-instructional uses so that the school could keep track of what would likely have to disappear if the referendum money ever dries up. Due to the State’s 85% rule, the school shifted more of its referendum money to operations so that less State money counted as operations. The substance didn’t change, but the school had to do a bit of rearranging to comply with statutory requirements.

So, the take away is that: a) debt service tax rate money can’t be used for teachers; b) our debt service tax rate is the same now as it was before the new construction; c) forgoing new construction would not have given us any flexibility to raise other money for teachers; d) forgoing new construction would not have reduced the tax bill for most residents; and e) referendum money was not used on the new buildings.

Anybody who has made it this far, thank you! This stuff is about as exciting as watching paint dry. My main point is that it’s useful for a school board member to have familiarity with this type of thing so that he or she can walk a constituent (or legislator!) through the issues and hopefully be able to identify which complaints are well-founded versus those that are based on a misconception. Then, hopefully, folks can focus their attention on the former without wasting too much time on the latter.

I believe my background will allow me to get up to speed as a school board member more quickly and be a productive part of the board. So, in conclusion, Vote Masson!

Doug Masson

Doug Masson

Father. Husband. Hoosier. Lawyer. Candidate.

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