Declining tax revenue straining school budgets

But the county’s board of supervisors is dealing with a budget shortfall this year -- and its elected representatives will have to make cuts, raise taxes, or somehow find more money to meet next year’s demands for K-12 education, which makes up nearly three-quarters of the county’s budget.

Like many other districts, Loudoun County relies heavily on property tax revenue to pay for its schools. The rise in home prices in the county in recent years has padded the coffers of the district, an outer suburb of Washington, D.C. -- a situation that has occurred in districts across the nation.

But the good times might be coming to an end. The recent downturn in the housing market could mean flat or lower assessments on existing properties -- and stagnant revenues for those districts that have been able to reap more money from rising property values.

The National Association of Realtors reported this month that the median price of a single-family house dropped 1.2 percent from a year earlier.

And more states and districts are looking to cap or restrict increases in property taxes, according to the National Conference of State Legislatures in Denver. Several states plan to consider property tax relief or tax reform measures in the upcoming legislative sessions, largely because of rapidly rising property values and tax burdens. Some of these measures will be tied closely to education funding, NCSL reports in its annual state budget update, released last month.

“There’s a lot of property tax relief going on,” said Bert Waisanen at NCSL. Two main trends focus on providing property tax relief to specific populations, such as senior citizens, and measures to reduce the reliance on the property tax as an income source, replacing it with sales, business income, or other taxes.

The property tax “has always been a tax that’s been very visible, and not very popular,” he said.

Some states -- particularly those facing school finance lawsuits -- are also looking at ways to restructure school funding to avoid property taxes, which can create disparate funding between property-rich and property-poor areas.

Last week, the New Jersey legislature began looking at several models to reduce property taxes across the state, which is considered to have some of the highest taxes in the country. The state is under court order to provide more funding to its poorest districts that have little property wealth.

Texas has also recently reworked its “Robin Hood” school-finance formula, which sent funds from wealthier districts to less-affluent schools, and will recoup some of the lost revenue through cigarette and other taxes. Next year, its legislature will consider several proposals to revise its property tax formula to raise more revenue, possibly from long-time homeowners whose property values have risen but have been exempt from large increases.

It’s impossible to see any national trends, because property taxes are so localized, and different areas have different means of assessment, Waisanen said. Generally, the areas that have seen the largest increase in property values -- large cities and coastal and resort areas -- have seen at least some increase in their tax revenues in recent years.

But some areas have lagged in accurately assessing property values. In Allegheny County, Pa., a group of homeowners is suing the county for its use of a “base-year” system, which assesses infrequently and currently uses 2002 home values.

The plaintiffs say this system ignores the realities of current market values, as homes in some neighborhoods have lost value while others have gone up in value. The ruling could have an impact on the whole state.

Areas that assess annually, including Virginia, will see the impacts of the market more quickly, Waisanen said.

In addition to an expected 3,000-student enrollment increase and plans to open four new schools next year, Loudoun County schools are facing increases in the costs of employee benefits.

They also must compete with neighboring districts to attract new teachers to an area with little affordable housing. Even though real estate prices have fallen, the price of a townhouse starts at about $300,000 in most neighborhoods.

“There’s no end in sight as far as our needs go,” said district spokesperson Wayde Byard. “Whether or not property values fall, our budget will be increasing.”

Over the next few months, Superintendent Edgar B. Hatrick will negotiate with county officials to hash out a plan to provide at least basic services to students. Hatrick has proposed a $712 million budget, up $106 million from 2006-07.

“It’s going to be a bloody battle,” said Keith Nusbaum, the assistant to Scott K. York, chair of the board of supervisors.

The county is constantly looking for ways to avoid the inevitable budget shortfalls, said Nusbaum. “What we’ve been doing the last eight or so years is raise taxes,” a politically unpopular move but the only way to patch the holes without cuts, he added. Under Virginia law, districts are not allowed to run deficits.

Much of the new revenue came from new construction in the fast-growing area, Nusbaum said. But while the county decreased its property tax rate, it was able to collect more from existing homeowners because of the increase in assessments.

In many parts of the country, districts do not have the option of raising taxes.

Several suburban districts in Illinois, one state that allows localities to impose tax caps, have been unable to take advantage of rising property values because their abilities to collect taxes were restricted.

Community Unit School District 300, which includes four counties in suburban Chicago, saw an immediate impact in 1997 when a tax cap went into effect. District officials there estimate that they lost more than $610,000 in property tax revenue the first year and a total of $18.2 million over the past nine years. The district’s current budget is $140 million.

Adding to the problem, the district’s percentage of state funding declined, in part because the tax base in the predominantly middle-to-upper-income communities was deemed to have enough wealth to help support the schools, said Cheryl Crates, the district’s chief financial officer.

When the tax cap was first enacted, “we cut everything that was known to man,” she said. Class sizes in the 18,000-student district swelled to as many as 40 students, and the district saw budget deficits up to $27 million.

In March, after a two-year campaign by the district and its supporters, voters agreed to a small property tax increase. Those additional funds will be used to lower class sizes and pay off the deficit, but long term, the prognosis is not good, Crates said.

Part of the problem, she said, is that the state budget has not kept up with its share of the pot. The Illinois budget taxes sales on goods, not services, an act that fiscal experts have warned is out of touch with the current economy.