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TESTIMONY of the NYS Association of Small City School Districts for the NYS Commission on Real Property Tax Reform April 23, 2008 Presented by: Robert E. Biggerstaff, Esq., Executive Director and General Counsel On behalf of the New York State Association of Small City School Districts and the quarter of a million children and 1.5 million residents it serves, I welcome the opportunity to appear before the Commission and to submit testimony.[1] To give the Commission some background on our districts let me briefly digress. The fifty-seven small city school districts are located in all the cities of the state excepting the so-called big five cities, and are governed by New York Education Law, Articles 51 and 53. They are either co-terminus with or inclusive of cities in the State that have populations of fewer than 125,000 (see, N.Y. Education Law §2601). They serve two thirds of the city children located outside New York City. The State Education Department has characterized many small city districts as high need/low resource districts, i.e., districts with high poverty and a low combined wealth ratio. They have higher percentages of poor and minority students than their non-city counterparts; higher percentages of children with special educational needs, higher percentages of children on the free and reduced price lunch program; and higher percentages of dropouts and children at risk. They are more than twice as likely as the average district to suffer defeated school budgets. Small city districts are fiscally independent of the city in which they are located (Chapter 762 of the Laws of 1950). The financial base of these districts is provided primarily by a combination of local revenues from real property and non-property taxes, state aid and federal aid. Small city districts tax at rates which are significantly higher than the average district but their spending per pupil is significantly below the state average. According to the latest Chapter 655 report data, the average school district in New York taxes at $17.85 per $1,000 of full value. Small city school districts tax at $20.31 or 13.8% higher than average. This is so despite the fact that small city schools spend 10.1% less per pupil and have 12.6% lower income. The State has a Constitutional obligation (Article XI, §1) to insure that every child has a meaningful opportunity to receive a sound basic education. The Campaign for Fiscal Equity decision by the Court of Appeals in 2003 made it clear that this obligation was not being met in New York City. It is also now conceded by most that that obligation is not being met in many districts outside New York City. From 1995 to 2003 the Association participated in the CFE case as Amicus Curiae to insure that the remedy crafted by the Court for New York City would be made applicable to the rest of the state as well. The Association also participated in that lawsuit because it believed that the failure of the State to fund a sound basic education in poor districts was the single most important reason why school taxes in small city districts and in other poor districts have become so burdensome. The issues under consideration by the Commission are, therefore, of paramount interest and concern to our districts. I. Are Property Taxes Too High? The working premise of the Commission is that the overall level of taxation and the taxation of real property in New York State are much too high, that excessive taxation works extreme hardship on homeowners, particularly those elderly living on fixed incomes, and on the business community, thereby discouraging growth of the state’s economy, and that a cap is necessary. We ask the Commission to examine that premise, rather than accepting it without rigorous scrutiny. For many years statements such as this have been made without anything other than the most superficial factual support. As with any such premise, acceptance of the premise often dictates the conclusion, i.e. that a tax cap is necessary. The Commission should not merely proceed with developing cap recommendations without insuring that its work will have a sturdy foundation based upon sound logic and research. The first task then is to ask the following questions: Ask “too high in comparison to what?” The Commission proposes comparing New York to five supposedly similar states, California, Massachusetts, New Jersey, Illinois and Connecticut. These states are clearly not all comparable to New York in several significant respects. Only California and Illinois are comparable on a per capita income wealth basis. Both are about $62,000 per capita in annual income while the other three are 25% higher than that. Moreover, 58% of New York elementary and secondary students attend urban schools, while the other states have many more of their students in suburban and rural schools. This is an important distinction. Cities and other urbanized regions commonly experience much higher levels of taxation than do suburban and rural areas. The greater level of public services provided in urban areas contributes to what is known as municipal overburden. It is meaningless therefore to compare New York to states which are more rural or suburban in character. Ask “too high based on what measurements?” Ask whether property taxes are too high when measured as a percentage of full value or when measured against income. This is an important distinction, particularly in those regions of the state where very large segments of the tax base are owned by wealthy non-resident taxpayers. Ask “too high in all or only in some taxing jurisdictions of the state?” Ask whether property taxes are too high in all regions of the state, in cities as well as in suburban and rural areas, and in all communities whether poor or wealthy. In Exhibits A, B, C and D the Small City School Districts Association has prepared information on each full K-12 school system in the state and organized this information by geographic region and by Need/Resource Code. The geographic regions are those that the State Education Department developed to reflect the regional costs differences that are now used in the State aid formula. The Need/Resource Code is a system devised by the Department to group schools according to the degree of student need and the availability of local resources to meet these needs. Codes 1, 2, Codes 3 and 4 are all districts in which the student needs are high, but the local resources are relatively low. Code 1 is New York City, code 2 is Buffalo, Rochester, Syracuse and Yonkers, code 3 represents the high need urban and suburban schools, and code four is high need rural schools. Code 5 is average need schools, and code 6 is low need schools.
Not All School Taxes are Too High Eighty three percent of the 105 low need school districts in the state are clustered on Long Island (49) and the lower Hudson (38). They have the lowest school tax rates in the state by far and also the highest incomes in the state by far. Even when the income/student is adjusted downward for regional costs, the lower Hudson ($281,433) and NYC/Long-Island ($217,211) are about double the average district across the state ($118,624). Yet the average district’s tax rate in the lower Hudson is $15.63 per $1,000 and only $13.96 in NYC/Long Island. The high need districts in these same regions by contrast, pay much higher tax rates from much lower incomes. In the tight market for rental property in this area, renters cannot avoid paying these taxes any more than owners, yet owners get STAR exemptions and rebates, while renters pay higher rents. There are nine high need districts on Long Island. Their average tax rate is $22.59 per $1,000 – almost double the $13.96 rate of the low need districts. Yet the income level in the high need districts is about one-third that of the low need districts ($73,821 compared to $217,211). Let us assume that a family in the low need district owns a home valued at $600,000. In the same area are three families living in homes valued at $200,000 each in a high needs community. At these tax rates, the wealthier community demands 3.9% of the resident’s income, while the poorer community demands 6.0% of the residents’ incomes—a 50% difference. For owners, this burden is alleviated by STAR, while for renters and businesses, it is not. This creates a perverse incentive for businesses to locate in wealthy areas when those jobs are desperately needed in poorer areas. Moreover, the statistics used to measure Long Island as highly taxed add in the school taxes of non-residents but leave them out of income. This is an outright deception. We should not be surprised that the low need community is willingly spending far more on its schools ($15,546/pupil), since it can do so with a much lighter tax burden. That means it provides more services and pays higher salaries. School districts with very high property values tend to be the least efficient. That drives up the cost levels for the poorer, high need district in the competition for teachers. Note also that the aid formula put in place by the Legislature specifies a target funding level based upon student need, regional cost and sparsity. The low need community on Long Island already spends 86.6% more than the adequacy level with 90% of its students passing, while the higher taxed community only spends 8.5% more than the minimum with only 62% of its students passing. In the lower Hudson, the low need community spends double the adequacy level at a $15.63 tax effort with 91% of its students passing while the high need districts spend slightly less than the adequacy level on an $18.06 tax rate with only 63% of the students passing. These stark contrasts appear within the same geography, often only a few miles apart. What is the point? The point is that any tax cap scheme that is not carefully crafted only perpetuates the gross and glaring inequities that have kept this state in court for decades. The point is also that “high school taxes” are not uniformly high. Much of the priciest property in the state is taxed at levels that are much, much lower that those borne by small business and homeowners. The table of school districts (Exhibit B) lists 20 low need/wealthy school districts on Long Island taxing 309 square miles of prime real estate at an average tax rate of only $9.03 per $1,000. If there were a county-wide school tax in Suffolk County, thousands of highly taxed residents in that county would get substantial school tax relief without a dime coming from the rest of the state.
The Commission cannot assess the wisdom of placing a cap on school taxes without also understanding the fairness of school taxes and what it means to fund a sound public school system in which local officials are encouraged to make prudent decisions. However, under the present system, the lowest taxed property in the state receives High Tax Aid this year. This defies logic. Conclusion: The problem with real property taxes in New York is not that they are too high, but that they are high in the wrong places and for the wrong people. II. Are Educational Costs and Expenditures Rising Too Fast? It is vital that the Commission look carefully at what assumptions it makes with regard to educational costs and expenses. Certainly it can be said that costs have grown in schools at a rate in excess of the Consumer Price Index used by the State Education Department in recent years. Certainly it can be said that those cost increases can to an extent be controlled more effectively. Certainly it can be said that some districts expend much more on a per pupil basis than others. Before drawing any conclusions, however, the Commission should ask the following question: Ask “is the SED Consumer Price Index an appropriate measure for educational costs?” Schools are subject to increases in fixed costs over which they have little or no control. The impact of unfunded mandates, the Triborough decision, inefficiencies of scale and the increases in retirement, health insurance and utility costs present yearly challenges to districts which have limited ways to respond, i.e. cutting programs and staff or raising taxes. (See Exhibit E which shows the actual cost increases facing districts over the past five years, which increases are well in excess of the CPI.) For example, for the districts which have responded to our survey thus far, over the past five years TRS costs have increased by 15.6%, health insurance costs by 8% and utility costs by 5.9%. An arbitrary cap, unrelated to the real cost of doing business, would have a devastating impact on our students’ lives. III. What Drives Increases in School Taxes? Shrinkage of enrollment or lack of growth in tax base As the Commission is aware, the interaction between State education aid and tax levies/tax rates must be understood. Some poor urban districts are experiencing decreased enrollments without also experiencing a proportionate decrease in costs. This loss of enrollment is not compensated for under Foundation Aid and can result in double digit tax rate increases (See Exhibit F). In addition, most urban districts have only limited open space in which to permit expansion of the tax base from new investment in residential and industrial development. In comparison, most non-city districts have growing tax bases and experience growth in their levies without significant increases in tax rates. As a result, most urban districts experience much greater pressure on their increasingly limited tax bases. High percentages of tax exempt property City districts also have high percentages of tax-exempt property. As a result, their tax bases are often weak and experience only limited growth as compared to wealthier suburban or non-city districts. Failure of State Aid to keep abreast of real increases in educational costs Increases in costs not supported by State Aid directly result in tax levy increases. Moreover, for poor districts which are heavily State Aid dependent, any failure of State Aid to keep abreast of inflation has a multiple effect on tax rates. For example, in a district where two thirds of the budget is supported by State Aid, a shortfall of 2% in State Aid will have a 4% impact on the local tax rate. And while increases in State Aid over the last few years have been substantial, many poor districts, through quirks in the Foundation Aid formula receive only the ‘save harmless’ increase of 3%, well below the actual increase in their base costs. Failure to target State Aid increases to student need and district wealth For decades, political considerations, not educational needs, drove the distribution of education aid. For example, from 1996 to 2006, small city school districts, poorer than the state average by 20%, received less than average increases in State education aid (See Exhibit G). The shortfalls in aid wrought havoc on small city district programming and tax rates. Cumulatively, this shortfall caused the loss of many hundreds of millions of dollars in State aid and taxes in these districts soared in comparison to wealthier districts. Even under the new Foundation Aid formula, districts below a .65 combined wealth ratio still fail to receive recognition of the true low wealth in their communities. 2006-07cumulative analysis of state aid
The resulting disparity in school tax rates can be clearly demonstrated: in some wealthy districts tax rates are $9/$1000 of assessed value while in many small city districts rates are as high as $26/$1000. This gross disparity is a direct result of the decades’ long failure of traditional school aid formulas. This disparity effectively cripples the capacity of the poorer communities to meet the needs of their school children. In fact, we believe that the single most important cause of high tax rates in small city districts is the failure to target State Aid to the districts with the highest student need and lowest property wealth. IV. What can be done to slow the growth of school taxes and to make the property tax system fairer? a) Strengthen the targeting of State education aid increases to districts with the highest student need and lowest wealth. The failure to do this has been the most powerful driver of high school tax rates in low wealth/high need districts. b) Enact a local option allowing communities to covert to 50% reliance on income tax for support of schools. We believe that it is technically feasible to shift a portion of the current property tax levy to a surcharge on the computed state income tax for each school district, town or county. This would provide some relief to businesses and low-income seniors. It would increase the burden on higher income residents. Some communities with substantial vacation property, reservoirs or power plants now export a large share of their local costs to out-of-town taxpayers. Shifting some of this levy to a visible income-based school tax might make all residents more attentive to local costs. c) Target High Tax Aid only to those districts and taxpayers who are truly overburdened. d) Eliminate unfunded mandates. e) Facilitate district or tax base consolidation to eliminate the stranding of districts with the weakest tax bases. Shifting a portion of the school levy to a county-wide tax base distributed over student enrollment would also bring relief where there are large disparities in property wealth. V. Conclusion The education law already provides for voter approval and capping of the annual school budget. School budgets are the only governmental budgets subject to this kind of direct voter control. Section 2023 of the Education Law provides that if voters fail to approve the taxes necessary to support the proposed school budget, the district must adopt a contingency budget which cannot grow in amount in excess of the lesser of 4% or 120% of the CPI over the prior year. In recent years, 120% of the CPI has been in the 2 to 3% range. Poor districts such as small city districts are most likely to suffer budget defeats. A study and recent experience show that poor districts are two to two and one-half times as likely as the average district to lose a budget vote. Like most things in this world, the contingency budget provisions of the education law work most harshly on the poor. Often teachers and programs must be cut by poor districts on austerity. This harms these districts and their students immeasurably. Poor districts have the least cushion in their programming and multiple budget defeats always result in the loss of core programs and the best, most experienced teachers. Small city districts have already experienced the harsh effects of tax caps. Until 1985, these districts were subject to a constitutional cap on tax rates. This cap resulted in significant hardship and required the Legislature to appropriate additional funds on a year to year basis to many of the districts hitting their constitutional ceilings. It is evident from that experience that capping rates, taking control away from the local voter and forcing districts to live in an uncertain fiscal environment will have drastic consequences.[2] We support the Commission in its effort to control the growth of property taxes. Tax rates in many small city districts are already at levels which may be unsustainable. However, any proposal must be carefully nuanced to avoid unintended consequences. We look forward to working with the Commission as it develops its report and proposals.
EXHIBIT A NEED RESOURCES CHART- by region
EXHIBIT B NEED RESOURCES CHART-Long Island: High Need vs. Low Need
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