HB 350-PUBLIC SCHOOL FUNDING: LOCAL CONTRIBUTION  9:10:11 AM CHAIR SEATON announced that the next order of business would be HOUSE BILL NO. 350, "An Act relating to the local contribution to public school funding; and providing for an effective date." 9:11:08 AM KATY KOESTER, Staff, Representative Paul Seaton, Alaska State Legislature, presented HB 350, explaining that it will change the required local effort, which is the minimal amount that municipalities are mandated, through statute, to allocate for education, and is determined by assessing the taxable real and personal property of a district. Directing attention to the committee packet, and the charts labeled "History of How Required Local Effort Works" and "How Required Local Effort Works Under HB 350," Figures 1 and 2 respectively, she provided an illustrated, theoretical example of local effort, using Craig and the Kenai Peninsula Borough (KPB). 9:12:30 AM CHAIR SEATON asked if the examples use actual mill rates. MS. KOESTER explained that the idea is to illustrate how actual mill rates would be effected by HB 350. She offered the disclaimer that the examples are for illustrative purposes only and do not reflect actual shifts in property values or current mill rates. 9:14:13 AM REPRESENTATIVE MUNOZ noted 4 mills as the minimum required local contribution, and asked about the allowed maximum contribution. MS. KOESTER said that would constitute funding to the cap, and deferred to the Department of Education and Early Development (EED). 9:15:24 AM MS. KOESTER addressed Figure 1, comparing the computation of local effort based on two homes, one located in Craig and one in KPB, equally valued at $100,000. Local effort was determined in 1990, by applying the 4 mill rate to the two year previous assessment. In this case, $100,000 for both homes held a 1988 value of $100,000, resulting in a local contribution requirement of $400 in both communities. For 2001, the example indicates no change in Craig, but since 1988 the KPB did experienced growth and the home value increased to $200,000. Thus, applying the 4 mill rate, based on the prior two year assessment, the contribution level remains at $400 in Craig, but increases to $800 in KPB. The legislature realized the disparity that communities were experiencing, based on growth versus non-growth areas, and passed SB 174, in 2001, to freeze the assessed values at the 1999 level, for local effort computation purposes. The new formula uses the 1999 assessment as a base, plus any value increase over two years, at the 50 percent level. Execution of the new formula finds the KPB example home, valued in 1999 at $200,000. By using a two year assessment look-back factor of 50 percent, $50,000, and applying the 4 mill rate, the resulting local effort contribution is $1,000; equating to a 3.3 mill rate. Without the SB 174 formula, the local effort contribution would have been $1,200. The actual mill rate in areas experiencing growth since 1999 is steadily decreasing, and will continue on this path, as property values increase. The committee is attempting to determine if this is fair to all areas of the state. 9:19:30 AM MS. KOESTER turned to Figure 2, and explained how HB 350 changes the computation of local effort to bring equality to the same scenario. The bill sets a uniform mill rate of 2.7, applies a temporary tax break in areas experiencing growth, and uses a shorter look-back. The new formula uses the value difference between the two year and one year look-back assessment. The home values for 2008 are $100,000 in Craig $300,000 in KPB. In 2009, the Craig home remains valued at $100,000, but, due to municipal growth, the KPB home is $320.00. With the passage of HB 350, the 2010 local effort for the Craig property, with no growth to track, would be valued at 2.7 mills, or $270.00. However, the KPB home shows an increase between the two and one year look-back assessment values. Calculation begins with the $300,000 base, add the $10,000 for the 50 percent value increase differential, and applying the 2.7 mill rate, for a local effort contribution result of $837.00. The HB 350 formula provides an equal contribution for all municipalities with a built in temporary break for areas experiencing grown. 9:22:02 AM REPRESENTATIVE MUNOZ asked what the loss of revenue would be, if the bill were implemented. MS. KOESTER directed attention to the fiscal note, and said the state picks-up the difference in the mill rates. The department has supplied a chart in the fiscal note to indicate the increased state aid of $19 million. REPRESENTATIVE MUNOZ asked what affect lowering the required local effort would have on the ability of communities to contribute beyond the minimal amount; would the percentage decrease. MS. KOESTER deferred to EED. 9:23:50 AM REPRESENTATIVE GARDNER asked how the 2.7 mill rate was derived. MS. KOESTER said 2.7 is the lowest mill rate being applied in any district, and implementing it prevents any municipality suffering the hardship of having a sudden rate increase. 9:24:46 AM CHAIR SEATON confirmed that the Mat-Su, St. Maries, and Hoonah districts are taxed at the 2.7 rate. He stated his belief that the bill incorporates a means for the committee to bring a level of fairness to the situation. The 50 percent look-back is included, because with growth comes the need for further infrastructure, and communities need funds to compensate expansion. He opined that problems stem from the static 1999 baseline, causing some communities to always have a higher mill rate than others, and speculated that a law suit may be forthcoming if some action is not taken by the legislature. 9:27:39 AM REPRESENTATIVE KELLER reflected on the communities he represents, the typical demographic profile, and the lack of control that residents have over rapidly changing property values. He asked if there is precedent for a unified mill rate. REPRESENTATIVE BUCH reported varying mill rates exist within the municipality of Anchorage, depending on the availability of services, such as fire and rescue. CHAIR SEATON pointed out that the bill responds to the question of whether the state is requiring the local effort of some communities to be a higher percentage of the assessed evaluation than others. He opined that, there are real equity problems as assessments rise in some areas, and not others. 9:30:44 AM REPRESENTATIVE P. WILSON noted that as people migrate to an area, infrastructure needs are increased. She said it is one thing to have taxes reflect the services provided, however the schools are required to provide the same education to everyone. According to the current formula, it is more difficult on the areas that aren't growing than it is on the areas that are experiencing growth. She opined, that the [SB 174] formula does not appear to be fair. 9:32:53 AM CHAIR SEATON clarified that the assessment has nothing to do with the direct tax a homeowner on their house. It is a tax contribution provided by the borough as a whole, calculated on the property assessments of the area. The vehicle by which the borough derives the funds is variable, and may include taxes on sales, property, or other means. 9:34:13 AM REPRESENTATIVE KELLER said the bill ultimately reduces the local contribution burden, and increases the load on the state general fund. A property tax in general is an unfortunate method of paying for schools, he opined, as it tends to penalize, and inhibit, owners from property improvement. CHAIR SEATON explained that by continuing to use the base year of 1999, more of a load will be placed on the state, and the general fund contribution will become more disproportionate over time, effectively reducing the actual value of the 4 mill percentage. REPRESENTATIVE KELLER requested a long range projection graph to better understand the presumptions, of how HB 350 will ultimately effect local effort and state contributions. 9:38:03 AM REPRESENTATIVE EDGMON indicated his interest to receive further information regarding all "the moving pieces that fit into required local contribution, above and beyond just the mill rate itself." 9:41:47 AM EDDY JEANS, Director, School Finance and Facilities Section, Department of Education and Early Development (EED), directed attention to the committee packet, and referred to the EED chart titled Mill Equivalent Change. He pointed out the column labeled [Projected] FY 11, which lists the district mill rates, and said 2.7 is the lowest mill equivalent on the full and true value of a community, for that year. No district would experience an increased contribution under HB 350. He referred to Representative Munoz's previous question regarding the meaning of local required effort, and said it relates to the basic need aspect of the foundation formula. Basic need is the entitlement allowed under the formula, and once calculated a determination is made for the derivation of the funds utilizing three sources of revenue. The required local contribution is combined with federal impact aid, and any remaining entitlement is made up from state funds. He said: This particular piece of legislation impacts that piece within basic need: who pays. It doesn't impact the amount of additional local contribution above basic need. The additional local contribution is the equivalent of 23 percent of basic need in the current year. ... The required local effort is based on mill equivalents, applied to the full and true value, as set by the state assessor for all municipalities around the state. MR. JEANS explained that full and true value is established by assessing all real and personal taxable properties in a community, including boats, cars, stores, and construction companies. Certain communities may allow exemptions, at the local level. For instance, Juneau does not tax boats, however, the value of the boats in Juneau would be included in the full value established by the state assessor, as part of the uniform application for all communities. Referring again to the Mill Equivalent Change chart, he indicated that in the first year of the implementation of SB 174 nearly every district contributed either 4 or 3.9 mills. He recalled that the intent of SB 174 was to provide municipalities, which were experiencing quick economic growth, a tax break; the compounding factor was not intended. Directing attention to the chart titled "State Cost," he pointed out that in FY 02, the basic need contribution by the state was $3.6 million; a figure which might otherwise have come from municipalities. Since the establishment of a base year, and the inclusion of only 50 percent of the annual growth in communities from 1999 forward, the effects of SB 174 on state contributions to basic need, become apparent, and he read the chart yearly totals, in millions: FY 03 - $9; FY 04 - $12.5; and FY 05 - 18.8. He said: When I realized what was happening ..., I brought this to the Legislature's attention, because I didn't think that was the intent of the legislation. But as you can see the numbers start building pretty quick, and I would say there was a sense of reluctance to remove this state support out of the foundation program. MR. JEANS, directing attention to HB 350, said the bill retains the concept of providing municipalities a one year break. Turning to the fiscal note, page 2, he explained the effect of dropping all areas to a 2.7 mill rate, a cost to the state of $18.7 million. The 50 percent one year look-back would also cost the state $2.5 million. Subsequent years will realize similar numbers, but the break is rolled forward each year into the new base. 9:49:49 AM CHAIR SEATON clarified: You count 50 percent of that increase for one year, but then the next year you pickup that other 50 percent, so then you're back to looking at that year as being the base year of 100 percent of the assessed evaluation, times the 2.7 [mill rate]. MR. JEANS concurred. 9:50:26 AM REPRESENTATIVE KELLER asked what happens if there is a decline in values. MR. JEANS said the full 2.7 mills would be required. He pointed out that, as indicated on the chart, some communities have not seen growth since 2002, but are still paying 4 mills. 9:51:30 AM CHAIR SEATON directed attention back to the fiscal note, and said there would be an initial $21 million dollar base hit, of which $18 million will occur, because the 50 percent factor is being counted for the previous year only, and does not include all the years back to 1999. MR. JEANS agreed, and added that the look-back to 1999 is being deleted, and the calibration is based on 2.7 mills. 9:52:17 AM REPRESENTATIVE P. WILSON inquired whether the fiscal note, for HB 350, includes the previously compounded figures. MR. JEANS answered that HB 350, and the fiscal note, eliminate the compounding factor, and 1999 base year. Communities will realize the benefit of the 50 percent reduction for one year. 9:53:03 AM REPRESENTATIVE P. WILSON acknowledged that the state will continue to pay more, and more, under SB 174, and asked if the chart shows the savings the state will realize by enacting HB 350. MR. JEANS said it is not shown in the fiscal note. He pointed out how the multi-year analysis assumptions from 3-4 years ago did not prove to be accurate. A new model could be built, which may not prove to predict the economy with any more assuredness. The charts provided in the packet, and the fiscal note, provide a mechanism to calculate the amounts, and indicate the fiscal responsibilities for each portion of the state funding formula. 9:55:11 AM REPRESENTATIVE P. WILSON cautioned that when the bill is referred to the finance committee there may need to be a means to further illustrate the point. MR. JEANS replied that the best example is the state cost sheet, which indicates that from FY 02-11, the state will have picked up $77 million in local contribution for municipalities because of SB 174. Comparing FY 10-11, the increase is only $4 million, but from FY 08-09, the increase is $16 million. He stressed that it is not possible to predict as accurately as it is to illustrate what has occurred. 9:57:02 AM REPRESENTATIVE MUNOZ noted that many communities fund beyond the minimum contribution, to the cap, and asked about the effects of HB 350 on these areas. MR. JEANS pointed out that the districts benefiting, from the 2.7 mill, and HB 350 enactment, are reflected in the fiscal note; listed by community. The education basic need burden is being shifted from the local effort to the state, because "somebody has to pay." However, the required local effort is outside of the basic funding formula, a number that doesn't change. Thus, municipalities will still be able to contribute additional local revenue, above the basic foundation formula. CHAIR SEATON interjected that federal regulations impose limitations which restrict local contribution, as a means for avoiding "rich districts." Additionally, he pointed out that situations in districts are subject to change, and economic growth, or student growth, remains subjective, and he requested that the department submit further information, regarding changing school needs, to the committee. 9:59:08 AM CHAIR SEATON announced that HB 350 would be held over.