This Was Predictable

It should come as no surprise that school districts all around the state are facing budget cuts. Des Moines cut $14 million from its budget during this school year and continues to have discussions about future budget limitations. Dubuque recently announced the closure of one of it's elementary schools and is poised to make even more budget cuts. Cedar Rapids is planning a $12 million reduction; and in our own backyard, Waterloo has announced a $10 million cut. 

As some of the largest school districts in the state located in metropolitan media markets, it is not surprising these are top of fold stories. For the most part, these budget cuts are due to enrollment decreases caused by private school vouchers. Now, I'll concede the point that school districts must staff their programs to match enrollment patterns. But as I have argued multiple times, it is never an equivalent tradeoff. In other words, a 20 student drop in student enrollment may well suggest the elimination of a teaching position, but that 20 student drop didn't occur in just one grade level. The by-product will be larger class sizes, the dilution of support staff to work with those students, and the elimination of programs. 

While the largest school districts in the state grapple with the implementation of what can only be described as austere budget cuts, smaller rural school districts have had to contend with decreasing enrollment for years. In our own conference, 10 out of the 14 districts represented had a decrease in enrollment averaging 17.04 students from last year to this year, and it isn't a 1 year anomaly. This is a pattern. If it were a 'one off' perhaps a more nuanced strategy of budget reduction could be implemented. But when you are shedding 20+ students a year it becomes a much more serious issue. It simply becomes unsustainable. That is what happened in the Orient-Macksburg Community School District. Located in southwest Iowa, the residents there voted to dissolve at the end of the current school year. 

Implementing a strategy that reduces expenditures in light of a decrease in enrollment is as obvious as the sun coming up tomorrow (as painful as it may be). Public school funding in Iowa is tied directly to enrollment, so the fewer students that are enrolled means less revenue. The remedy is to cut the budget. Granted, saying it and doing it are two completely different things. These decisions and discussions become quite emotional, particularly when a favorite teacher loses their job or a popular program is eliminated. 

But decreasing enrollment isn't the only reason why school districts are cutting budgets right now. Truth be told, the fact that annual growth in per pupil cost (aka SSA) isn't keeping up with inflation is another reason. And with the rate being set artificially low year after year, it only exacerbates the issue. When you compound decreasing enrollment on top of low supplemental state aid, well the outcome is quite predictable, and exponentially more challenging. 

Think about this. Currently, the general assembly is locked in a stalemate between the House and Senate about how much to increase the state cost per pupil for the next school year. Set aside the fact that the legislatively mandated deadline for doing so has long since passed, and that there is no mechanism or penalty for this abdication of responsibility. The Senate insists the rate should increase by 2%. The House insists 2.25%. Either way you slice it, this is below the the current CPI rate, or 'cost of living adjustment'. Both legislative chambers argue this is what the state can afford. Considering they blew an enormous hole in the budget when all the private school students were added to the state cost per pupil calculations-its no wonder. Furthermore, the states latest revenue estimations suggest a $1.2 billion decrease in revenue between FY 24 and FY 26. Yes, this was not only predictable: it was forewarned.

Frankly, I think 2% is the best we can hope for.

Consider a scenario where enrollment is exactly the same from one year to the next. That amount of budget growth (2%) doesn't even keep up with inflation, which means the only remedy is to cut expenditures. In Hudson's case, [if we had] flat enrollment this would equate to an increase of $127,723. To put that in perspective, our general fund expenditures next year are expected to top $12.5 million. That won't cover the fixed costs needed to manage the budget, let alone grow programs. Luckily, Hudson has growing enrollment so we are in a much better position than most. 

The point is this: a school district's enrollment grows or they will have to cut their budget. 

Understanding Your Property Tax Statement

If you haven't already, in the next couple of days you'll receive a notice of proposed property tax in the mail from Black Hawk County. The purpose of this notice is to provide transparency to property owners as it relates to your property tax bill. Prior to enactment of this law, the requirement was simply to publish the rate per thousand with the notice of proposed budget. The trouble with that practice was, without providing any context the rate [alone] is virtually meaningless. This notice is meant to provide that context. But it doesn't quite close the loop because it a bit confusing and a little misleading. 

First, it's important to understand the question we are trying to answer. I think its pretty simple. As a property tax payer, I want to know if my taxes are going up or down; and why. The problem with the way we used to do it is that when it came time to pay property taxes, our only reference point was the rate. If the rate went down or stayed the same, our working presumption was that our taxes would either be the same as the previous year or go down. Except they usually don't. When the tax bill came we were surprised (and not very happy) to learn that it was in fact higher than it was the previous year. So you might call the taxing authority and ask why (in this case, perhaps a Superintendent of Schools, County Board of Supervisors, or City Manager). The answer that you probably would get was less than satisfying: "Our rate is the same as it was one year ago". That answer is disingenuous at best. At worst, it's misleading because it fails to properly provide the context as to how property tax is calculated. 

The formula for calculating property tax is really quite simple: Taxes Levied = Value x Rate (T=VxR). Rate is the only variable that is controlled by the taxing authority. Value on the other hand is not, and quite frankly is a bit more complicated to understand. That is because value is determined by the county assessor and subject to the 'rollback'. So for starters, if your property assessment is $100,000 in year one, is it assessed at $100,000 in year two? If the answer is no, and with all other variables remaining equal your property taxes will rise. The other consideration is the rollback. Simply stated, a rollback does just that. It rolls back the percentage of your property assessment that you actually are responsible to pay taxes on, which is known as the taxable value. Last year, your assessed value was rolled back to 46.34%. So on that $100,000 house, your property tax bill was calculated on $46,343. This year, your assessed value is rolled back to 47.43% in taxable value. On that $100,000 property, your property tax bill is now calculated on $47,432. This means that even if the rate is identical from one year to the next, your property tax bill will increase. It will compound even more if the assessed value of your property increases. Kind of like a 'double whammy'. In this example, you can see how the rollback alone impacts your property tax bill- independent of rate and property value: 

What the legislature is trying to do with the property tax payer statement is to help you understand what is going on in this formula, and see what your property tax bill is going to look like compared to the previous year. Valiant effort for sure. But no doubt confusing and somewhat misleading. Let's take a look. To begin, if you haven't seen the notice yet you can download a copy of it from our school website. You can go to the 'About Us' page and find it as item #3 under the 'Basic Financial Data' submenu. Or, click right here. For the purpose of this conversation, I want to focus your attention on the bottom third of the notice, which is captured here for your convenience. 

First, let's take a look at the top line of the graphic depicted above. The arrow to the left represents the property tax rate for the current school year. If you follow that column down vertically, you will see the property taxes that were levied for the current fiscal year assuming your property value was $100,000. On the right (see the top right arrow) is the proposed property tax rate for the next fiscal year. This is where the property tax statement gets confusing at best and misleading at worst. In the far right column, those two arrows seem to suggest that the property owner can expect to see a 12.81% and 14.22% property tax increase based on their property valuation and whether or not it is residential or commercial property. However, this instrument makes the huge leap that your property valuations have increased by 10% from one fiscal year to another. See the section circled to the left. Unless you have made some pretty substantial renovations to your property, that kind of increase seems unlikely.

So, what of the 'effective property tax rate'? Well, it's a meaningless measure that is set by Code, which is why I crossed it out in this example. This number is arrived at by taking the 2025 property taxes and dividing them by the 2026 valuations. Think about it this way. If you are a basketball player and took the number of field goals you made last year and divided it by the number of shots you made this year. While you can certainly calculate it, it's not an incredibly useful metric.

Now that you have a better idea of how your taxes are calculated, the operative question must be, why the change? Good question! If you refer to the graphic above, you'll notice a stated reason. The trouble is that the graphic above is limited to a 300 character maximum, so we can't provide a lot of detail. What is 'cash reserve levy' and why is it important? Well, specifically this refers to a financial metric known as the 'solvency ratio' and measures the percentage of reserve fund balance against the total revenue for a fiscal year. In recent years, our fund balance, and solvency ratio has been dropping. This is because of two primary reasons: enrollment growth and special education expenditures not funded by the state. It is important to be specific though when we talk about enrollment growth. The enrollment growth that is being referenced here is residential enrollment and NOT open enrollment. Students who attend Hudson under open enrollment are funded through 'on time' funding whereas residential enrollment gains are funded a year behind, thus the reason for the drop in fund balance. The mechanism with which to recover this fund balance is through the cash reserve levy. The target range for our solvency ratio then, is 5%. 

The other levy rate that may tend to fluctuate from one year to another is the management fund levy. You should notice that the amount of levy has decreased from $546,065 to $347,560 for next year. This is done primarily to offset the increase needed in the cash reserve levy, and to deliberately lower the carry forward balance in the management fund. Don't worry, there is an overarching strategy here as well. The management fund, you may recall from previous posts, is used primarily to fund retiree benefits and property/casualty insurance for the district. In recent years, deductibles for catastrophic property loss have increased substantially: to 1%. This may not seem like a lot, but with close to $50 million in assets, 1% is $500,000. The strategy here is to maintain a balance of $500,000 in the management fund after meeting our other fiscal obligations and encumbrances so as to cover the deductible in the event of a catastrophic loss. 

While not incredibly intuitive, the purpose behind these taxpayer statements is noble. It is also meant to provide accountability from the taxing authority. For too many years, the focus was rate driven where instead it should have been revenue focused. Most people probably aren't all that interested in what the rate is. You are not writing a check for the rate. However, you are interested in how much you are writing the check for; and deserve to know the reason why it is different from what it was the previous year.