Tax Rates and SSA: Part 2

Last week, we ended with a bit of a teaser. What will our budget look like in five years assuming a supplemental state aid growth factor of 2.5%? To remind you, we predict enrollment growth and property valuations to grow at 2.5%. We also expect miscellaneous income growth to fall to 1% due to our inability to serve open enrollment students. That, because increases in residential enrollment growth means there simply isn't room. Finally, we are predicting expenditure growth to drop to 4% per annum following fiscal year 2026.

Budget Forecast at 2.5%

Assuming those variables, the table above is what we can expect our budget forecast to look like. The top line measures the unspent balance. As I have reminded you time and again, in my opinion, the most important metric of school district financial health is the unspent balance. You will note in this example, that regardless of a low supplemental state aid (2.5% in this example), this metric remains healthy. 

However, look at the second line in the table. This is the predicted tax rate based on the variables that are described above. This tax rate has a direct relationship to the bottom line of the table. The solvency ratio is a measurement of how much cash the district has on hand. The low end of what is considered the target range would be 5%. Our property tax rates have been set at a range that ensures our solvency remains in the safe range, albeit the low end of that range. Now, you may be wondering how it is that our solvency ratio went from 17.4% in fiscal year 2024 to a predicted 5.2% in fiscal year 2026. I'll go even further. In fiscal year 2019, our solvency ratio was 25.15%!

So then, what's going on? The answer is quite simple: rapid enrollment growth. And let me be very clear; I am not talking about open enrollment. Remember, open enrollment comes with the cash tuition paid during the year. Residential enrollment is one year in arrears. When that enrollment count hits on October 1, any student that wasn't on that residential count from the prior October 1 count isn't funded in that current year. While we are able to capture the spending authority for that growth in enrollment, the cash doesn't come until the next year. That means we are funding residential enrollment growth with our reserves (and to some extent open enrollment tuition). Because the growth is so rapid, we are expending our cash faster than it can be replenished. Furthermore, there is a provision in Iowa Code that forbids school districts from growing their reserves if the solvency ratio is greater than 20%. The last time we were below that threshold was 2015. It wasn't until enrollment really began to take off that the ratio dropped below 20%.

There is one final caveat that is not depicted in the table above that also impacts property tax rates. The management fund. No, this is not the fund to pay for management expenses. The primary purpose of this fund is to pay for post employment retirement benefits and property and casualty insurance. In recent years, the deductibles for catastrophic losses for district property has increased to 1%. This may not seem like a lot, but considering the value of property in our district, we need to have enough in the fund to cover that deductible, which could easily top $500,000. We have made provisions in our forecast to maintain this balance.  

In last week's column, when discussing this idea of supplemental state aid (SSA), I argued the point that the rate should be set both timely and adequately. I also suggested that the adequacy of that rate is in the 'eye of the beholder'. It depends largely on the context of each local school district and the dynamics that are at play there. However, each year advocacy groups such as the School Administrators of Iowa (SAI), the Iowa Association of School Boards (IASB), and the Iowa State Education Association (ISEA) all publish a range of numbers. Those numbers may range from a low of 3% all the way to 6%! So what is the number for Hudson? Well, if we are looking purely within the context of the property tax rate, 4% would seem to be a great starting point in offering property tax relief for our residents. The table below illustrates the impact a 4% SSA rate would have on our budget forecast.

Budget Forecast at 4%

The only variable that changed between this table and the one at the top of the column is the rate of SSA growth per annum. All other variables: enrollment, property valuation, miscellaneous income, and expenditure growth are exactly the same. What I have done in this example however, is reduce the property tax rate so as to maintain that floor target solvency ratio of 5%. The result is a difference in property tax rate of $2.99! You should also note the difference in unspent balance-it is staggering. This is under that same spending plan, roughly 4% per annum. Granted, we were spending under our annual spending authority by roughly 1%, but in this example, by fiscal year 2030 we would be underspending our annual revenue by almost 6%. Think of all the programs and support mechanisms for our students that could be implemented with a 4% SSA rate!

Unfortunately because of such historically low SSA over the last decade, we have been conditioned to believe that a 2.5% growth rate is good enough. Even more unfortunate, last week we learned that 2.0% was proposed. I haven't even shared with you the impact that 2.0% SSA has for just one single year. With all other factors remaining constant, our solvency ratio will drop to 3.2% in fiscal year 2030. Math is math. The reality though, is that 4% used to be the norm. When I began the superintendency, it was 4%. 2015, the year right outside the decade I illustrated for you last week: 4%. 

In the final analysis, I do not believe we will even get close to 4%. The fact is, I am planning for the 2.0% scenario. Truth be told, we have some issues in the state budget. We'll dive into that next week.