Wednesday, February 15, 2017

How the Budget Guarantee Impacts Property Tax

Reader's note: This article originally appeared on April 1st, 2015 as a way to explain the relationship between low supplemental state aid and a mechanism known as the budget guarantee. It has been updated here as a companion to last week's article, 'Supplemental State Aid: The Die Has Been Cast' to illustrate the correlation between low supplemental state aid and how it negatively effects property tax. I share this updated version because as was the case in 2015, Hudson Schools will be impacted by the budget guarantee. As was my invitation in 2015, if you are reading a hard copy edition of this article in the Hudson Herald, I would invite you to please access it online at This will enable you to view the animated slides and deepen your understanding of the budget guarantee.

The budget guarantee is a mechanism in the Iowa school finance foundation formula that is designed to soften the blow of declining enrollment in schools. In school parlance, we refer to this as the 101% guarantee. As a practical matter, this means when supplemental state aid doesn't keep up with a decrease in enrollment, the school district is guaranteed an increase of at least 1% over the prior year's Regular Program District Cost without that guarantee. Let me explain further.

Regular Program District Cost is calculated by multiplying the number of certified students by the District Cost Per Pupil. In fiscal year 2017, we had 679 students on our certified enrollment count. Multiplying 679 X $6,766 tells us that the Regular Program District Cost for our current fiscal year is $4,595,467.

Because the legislature set supplemental state aid last week, we know the cost per pupil is set to rise by 1.11%. Therefore the cost per pupil next fiscal year in Hudson increases $73 to $6,839. But now, we have a certified enrollment number of 666. Multiplying 666 X $6,839 tells us that our Regular Program District Cost for the fiscal year that begins on July 1, 2017 (Fiscal Year 2018) is now $4,554,774.

Because our Regular Program District Cost for the new fiscal year is less than it was the prior fiscal year, we are on the budget guarantee. (click right arrow above)

The reason we call this the 101% guarantee is because of the math that is used to calculate the new figure. To get to this new number, we multiple the Regular Program District Cost from the previous fiscal year by 1.01: $4,595,467 X 1.01. This provides us with a new number that is know as the Regular Program District Cost with budget Guarantee or $4,641,423 (click right arrow above)

Now then, the question becomes how does this number impact property taxes? Well, if you look at the row above [where the arrow is pointed] titled 'Budget Guarantee', you will notice the number $86,648. (click right arrow above). The budget guarantee is funded solely through property taxes. We arrive at this number by subtracting the Regular Program District Cost without budget guarantee from the Regular Program District Cost with the budget guarantee: $4,641,423-$4,554,774=$86,648.

Last week you probably recall me stating that our actual budget growth for next year is expected to be around $45,390.73, or a .57% increase. We arrive at this number by simply subtracting last year's Regular Program District Cost with budget guarantee from this year's Regular Program District Cost with budget guarantee: $4,641,423-$4,595,467=$45,955.(click the right arrow above) Notice that we are currently not on the budget guarantee. Each year that a school district is on the budget guarantee, it is always calculated from the Regular Program District Cost without the budget guarantee from the prior fiscal year. As a result over time, school districts experience an erosion of funding as enrollment decreases.

You may also recall last week I shared that as supplemental state aid increases, tax rates decrease. This is because as supplemental state aid is added to the mix, the amount of property tax reliance falls. As you click the right arrow above, notice on the next slide that as the amount of state supplemental aid is increased, the budget guarantee amount decreases. As a result of that, the property tax decreases. It is not until the Supplemental State Aid is 4% the district is no longer on the budget guarantee, and thus citizens are subject to a greater property tax burden. 

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