Edgewater Again

Mayor Soglin’s inclusion in his capital budget of only $3 million in city financing for the proposed Edgewater renovation project has restored to the front pages that messy dispute over public financing and the uses and abuses of tax-incremental financing (TIF).

I have previously written about the Edgewater project at length.  I tried to explain why I thought the city’s investment didn’t make much sense, even accepting all the city’s assumptions and projections.

 This time around I’d like to address three points. 

First, last Sunday’s editorial in the State Journal contained a passage about the effect of TIF districts on the school district’s revenues that would benefit from some explanation (i.e., it’s mostly wrong).

Second, whatever happens with Edgewater, it won’t have any impact on the school district’s revenues for quite a while. 

 Third, even when that revenue impact is felt, it won’t affect the school district’s revenue limits, which determine how much the district can spend.  It’s that spending limit that determines how much we have to cut at budget time. 

 The Fact-Deficient State Journal Editorial              

 Last Sunday’s editorial in the State Journal about the Edgewater project included the following paragraph:

Contrary to some recent reports, TIF is revenue neutral for school districts. School finances are “held harmless” by TIF projects, as the school aid formula is adjusted to account for the TIF district. So TIF dollars do not take money away from public schools.

 At times in the past this statement may have been more-or-less accurate.  Today, not so much.

For many years, the state school funding formula has been based on an “equalization” model.  The idea has been to use state aid to make up for differences in the total property values of school districts. 

Under a pure equalization formula, if both School District A and School District B spent a total of $10 million annually on their schools, residents in the respective school districts would pay the same in property taxes if they owned property of equal value, regardless of the difference in total property value between the two districts.

In this ideal state, removing property from the tax rolls and placing it in a tax-incremental district (TID) for a period of years would not have an impact on the amount of property taxes residents would pay for schools, because state aid would automatically increase according to the equalization formula.  I assume that this is what the author of the State Journal editorial had in mind.

But we’re far from that ideal state today.  First, there is not nearly enough state aid to go around to even out all these differences.  Second, since 1993 the state’s school funding formula has not been a pure “equalization” model but has instead included a provision that punishes school districts that spend more than 90% of the state average per-student, as Madison does. 

Third, for the last several years, the operation of the state funding formula has generated a level of state aid for Madison that is less than the minimum that a school district is entitled to receive based on its prior year’s funding.  Under state law, a school district must receive in annual state aid an amount equal to at least to 85% of what it received the preceding year.  The recently-enacted budget bill increases that minimum to 90% for this year only. 

For the last few years, Madison has benefitted from this mandatory minimum provision. Our state aid has gone down each year, but not as much as it would have under the state funding formula, had this safety net not been in place. 

The upshot of this is that a reduction in the city’s property values any time recently would not have generated an actual increase in the state aid the school district would have received.  Even with a non-trivial increase in the formula-derived amount of state aid, the formula still would have provided Madison with less than 85% of the prior year’s funding.  The 85% rule would still have been applicable. 

As a practical matter, this means that removing additional property from the Madison tax rolls to include in a TID would have had no effect on the amount of state aid that we’ve actually received for the last few years.

 Plugging In the Actual Numbers: Twenty-five Cents on the Dollar  

Let’s take our situation last year (2010-2011) as an example.  We established a mill rate of 11.06.  This meant that each million dollars in property value in Madison generated $11,060 in property taxes for the school district. 

On the other hand, as the State Journal editorial notes, the equalization formula has the effect of reducing state aid to Madison when the city’s total property value increases.  For 2010-2011, the school funding formula tells us that each additional million dollars in property value in Madison would reduce our state equalization aid by $2,709.  Or, looked at the other way, if we re-jiggered the state funding formula by removing a million dollars of property value for Madison, the formula would have spit out an additional $2,709 in state aid.  (For true school finance geeks, the 2010-2011 “tertiary required rate” for the Madison school district (line G13 on the DPI general aid worksheet) was 0.00270865.) 

So, in theory, increased state aid would offset the loss of tax revenue to the school district attributable to the increment of enhanced property value locked up in a TID, but only to the tune of about 25 cents on the dollar.

However, for 2010-2011, the state equalization aid formula for Madison generated a total amount in aid that was well short of the minimum amount that Madison could receive based on the 85% rule.  In fact, the state had to kick in about an extra $9 million to get the formula-derived amount up to the 85% minimum. 

So, realistically, neither an increase nor a decrease in property value in Madison would have resulted in a change in the amount of state equalization aid the district received.  We were already receiving the statutory minimum and it would have required a huge decrease in property values (measured in the billions of dollars) for the formula to yield an amount in state aid above the 85% threshold.

The Edgewater proposal calls for the hotel and some surrounding property to be rolled into an existing tax incremental financing district, TID 32, which currently includes the massive and successful University Square redevelopment project on University Avenue.  According to materials the city provided to the school district last September, as of January 1, 2010, the incremental property value in TID 32 was already about $106 million. 

Had this value been restored to the tax rolls for the 2010-2011 school year, the school district would have received an additional $1,170,000 in property tax revenue (setting aside any revenue limit complications).  Theoretically, we would have lost about $290,000 in state equalization aid had we not already been at the minimum amount.  The restoration of this increment to the property rolls would have resulted in a net benefit for the school district of at least $880,000.

So, contrary to the State Journal editorial, the school district has a real financial stake in the establishment and maintenance of TIF districts.  (This does not mean, by the way, that TIF districts are inherently bad for the school district.  For reasons I described in my earlier Edgewater blog post, the establishment of a new TIF district is generally a positive development, but issues can arise when existing TIDs are amended.)   

The Timing of the Edgewater Impact:  Check Back in Six Years

It turns out that this discussion is somewhat academic in the context of the Edgewater dispute.  TID 32 will not close soon under any scenario.  In its current configuration, TID 32 is projected to close in 2017.  If the TID is amended to add the hotel, it is likely to close in 2021.  

Whatever happens with Edgewater won’t have an impact on school district tax revenues for at least six years.  What the state’s school funding formula will look like then, or how much overall state aid will then be available to be divvied up among the state’s 400+ school districts, is anyone’s guess.    

Edgewater or No, the Spending Cuts Will Be Just as Deep

Resolution of the Edgewater funding issue also will not have any impact on the school district’s spending limits, even in 2017 and subsequent years. 

I recently wrote about the challenges the Madison Prep charter school proposal poses to the school district’s budgeting process.  Our overall spending is capped by state law – this is misleadingly referred to as our revenue limit.  If we are up against our revenue limit, then any dollars the school district sends to the Urban League to fund Madison Prep will have to be offset by reductions elsewhere in the budget.  Some would come from savings the district would realize as a result of having fewer students in our other schools.  But the District would still have to find lots of savings elsewhere, which is likely to result in reductions to services for our other students.

Like any discussion of spending cuts, this analysis is unaffected by a decision to amend TID 32 to include Edgewater, or to decline to make the amendment. That decision affects the total property value in the school district and so has an impact on how much individual property owners must kick in to pay whatever our total tax levy is.  But it does not affect the tax levy itself. 

Simplifying somewhat, the combination of our tax levy plus the state and federal aid we receive cannot exceed our state-imposed revenue limit.  The capacity to spread the tax burden around more broadly as a result of increased property values in the city will not increase the amount of the tax levy we can impose, and so the total amount the school district can spend.   

If the state revenue cap requires the school district to slash its annual budget in upcoming years, as has been the general practice since 1993, nothing that happens with Edgewater or any other TIF district can reduce the amount of the required cuts by one penny.

So, to sum up: the State Journal editorial is mostly wrong in its description of the effect of TIF districts on the amount of property taxes available to the schools.  What happens with Edgewater will affect school district revenues, but not for several years.  That eventual impact will be reflected in the mill rate, and so the amount of taxes paid by individual property owners.  It won’t have any direct effect on how much the school district can spend, or, looked at another way, how much the school district will have to slash from its annual budgets to stay within the state-imposed revenue limit.

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5 Responses to Edgewater Again

  1. Laura Chern says:

    I know this is off topic but does pertain to school funding; can you explain the memo from Eric Kass telling the board that you have $18 million in unused tax levy? I think that because the referendum passed, people might be surprized to learn that you could raise revenue without a referendum. Here is the memo: https://boeweb.madison.k12.wi.us/files/boe/Appx%203-11_2.pdf
    Thanks,
    Laura

    • Laura –
      Last year, for various reasons mostly having to do with the size of the tax levy, the Board chose to spend about $10 million less than was authorized under the revenue limit. (I believe I read somewhere that about 25% of the school districts in the state “under-levied” in this way.) There was uncertainty about whether the District would be able to carry this under-levy authority forward, but the issue was resolved in the budget bill in favor of the carry-forward. For this year’s budget, the Board has voted to use about $1.8 million of this authority, which at the time we voted was expected to bring our tax levy up to the same level as we imposed last year. This leaves us with about $8.2 million in additional spending authority that the Board could use in this or subsequent years, depending upon our willingness to raise the tax levy a corresponding amount.

      • Laura Chern says:

        Thanks Ed,
        So if I understand this correctly, you could raise tax levy by 8.2 million going forward without a referendum. I understand why the board might be reluctant to do that (tax and spend liberal that I am I would support raising the levy). Is there a point at which you can’t carry this over?
        Laura

        Laura — As far as I know, the under-levy authority does not have an expiration date. So I don’t believe that there is a point after which we can’t carry the spending authority over.

        Ed

  2. Mad4Madison says:

    Ed –

    Thanks again for the details – at least for those of us who like the details. I did have to break out pen and paper to follow, but I believe I see where you and your numbers are coming from. I also know this content is a bit tough to cover in a 200 word editorial.

    But I do have a question related to “slashing” the annual budget of MMSD. Can you provide some data that shows the total spend for MMSD is less today than in years past? Basically, I am curious as to whether or not the total budgets for the last 10 years shows a downward trend. Or is it simply a case of slashing planned increases?

    • Mad4 –
      You raise a good point. When I talk about slashing the budget, I’m generally not talking about reducing school spending below the level of the prior year. Instead, we generally need to find cuts because our overall costs increase year-to-year more than our revenue authority does. The situation was a little different last year, when we did not spend as much as we could have because to do so would have led to what the Board considered an unacceptably high increase in the tax levy. We had to raise the tax levy to make up our loss (actual, not simply projected) in state equalization aid and didn’t want to raise it too much more if we didn’t have to. Even with our unspent authority, we spent a lot of time last year considering cuts in different areas and to different programs. Since we had extra spending authority this year, as in the past two, as a result of our 2008 referendum and benefited from a budget perspective as a result of cutting the take-home pay of our teachers, we got by this year without significant cuts. Even with our under-levy carry-forward, I expect we’ll have potential cuts on the agenda at budget time next year.

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