HB 350-PUBLIC SCHOOL FUNDING: LOCAL CONTRIBUTION  8:04:07 AM CHAIR SEATON announced that the first 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." 8:05:04 AM CHAIR SEATON, after first determining no one else wished to testify, closed public testimony on HB 350. 8:05:38 AM CHAIR SEATON refreshed members on the purpose of HB 350. This bill would address the local contribution to the "basic need component," which is funded under the foundation formula for school funding. Under the bill, the amount of the "basic need component" does not change, but the amount of state and local effort will change. He stated that the bill effectively would provide differential tax relief to various school districts across the state. Thus, funds are removed from the school education fund and used for differential tax relief for municipalities. The goal of HB 350 is to apply an even method of taxation, one that is proportionally fair and economically sustainable by setting a uniform mill rate at the lowest current rate. The result will be that a municipality will not have to pay more than its current local tax mill rate. He paraphrased from a portion of the sponsor statement, which read as follows [original punctuation provided]: Legislation enacted in 2001 changed the funding formula to require that only half of the increased current year's property value over the base year's value be counted. However it added this to a fixed year (FY 99) to determine the property value for the purposes of calculating required local effort for education. Use of a fixed base year instead of the previous year to calculate full and true value and local effort contribution has lead to a growing disparity between districts. HB 350 will address this problem by requiring the local contribution of a city or borough school district to be derived from a uniform rate of a 2.7 mill tax levy on the full and true value of the taxable property in the district as of January 1 of the second preceding fiscal year plus 50% of the increase in value to the following year. Under the current formula, areas with growing populations are given an ever greater tax break than stable areas. Districts containing older communities are therefore required to pay higher taxes than expanding districts. HB 350 will apply an even method of taxation, one that is proportionally fair and economically sustainable. It has set a uniform mill rate at the lowest current rate so no municipality will have to pay more than its current local tax mill rate CHAIR SEATON referred to a chart in members' packets, stating that currently the state transfers $77 million a year out of available money for education to municipalities as tax relief. This does not change the districts' funding, but funds are transferred differentially to districts. The continuously mounting increase in education costs will result in limiting the base student allocation (BSA) increases. Most school districts support "fixing" this system before it consumes a major portion of the state's education funds. 8:09:27 AM REPRESENTATIVE KELLER pointed out that the "differential tax relief" has been perceived as an unfair allocation to districts but was intended to provide additional funds to school districts that are growing in size. He referred to a graph in members' packets titled "Percent Change is Assessed Valuation of Taxable Property in the Mat-Su Borough." He explained that the costs increase with additional students in the Mat-Su Borough. He agreed that "something may need to be fixed" but the problem is not an "across the board" difference in taxes needed from the local communities. The tax burden on landowners is "out of sight." To address this issue, the state provided general fund (GF) dollars to local districts that are increasing in size. He said he will oppose the bill since he does not agree with the approach taken in HB 350 to address the problem. 8:11:05 AM REPRESENTATIVE P. WILSON pointed out that school bonds are being voted down. She remarked that many students are using temporary school facilities yet the communities have voted down school bonds for new schools. 8:11:45 AM REPRESENTATIVE KELLER requested further information on whether the Matanuska-Susitna Borough School District has not approved school bonds. REPRESENTATIVE P. WILSON related it has done so in the past, but she was unsure what has currently happened. REPRESENTATIVE KELLER maintained that his district faces challenges, noting it is not just the lack of facilities since expanding at the rate it has costs money for teachers and to provide start up costs for schools. 8:12:34 AM CHAIR SEATON stated HB 350 was constructed to accommodate the growth in the various communities. This bill would not directly affect the mill rate that is assessed on each home or business. This bill does not create a direct tax. Additionally, communities also have the option to find other funding sources for education. Some districts, such as the Kenai Peninsula Borough, have adopted a sales tax dedicated to education. This bill provides a method of calculation based on valuation, he stated. 8:13:55 AM REPRESENTATIVE MUNOZ referred to the handout in members' packets titled "Mill Equivalent Change"and noted that the City of Juneau has participated at 4 mills. She asked for the effect of HB 350, and if it would lower the mill rate to 2.7 mills. CHAIR SEATON agreed it would lower the mill rate. He explained it would treat all districts across the state at the same mill rate. He referenced a table in members' packets titled "Mill Equivalent Change" to indicate the mill differences. He further explained that if a community grew substantially since 1999, that the millage rate would be at a much less valuation. He referred to Craig, which is still paying 4 mills on its valuation, whereas Saint Marys increased its tax base and is paying 2.7 mills. He interpreted that communities that are not growing will contribute a higher portion of the basic need. He pointed out the impact on several districts, including his district, the Kenai Peninsula Borough, which is set at 3 mills. 8:16:36 AM REPRESENTATIVE MUNOZ asked for clarification on whether communities have a choice. CHAIR SEATON answered no. He elaborated that the basic need for education is calculated in the foundation formula. The original calculation for local contribution was calculated at 4 mills times the assessed valuation. In 2000, the statute was changed. Initially, that legislation had a "rolling look back" but the bill was amended to establish a "given year" to use as the inception year. He offered his belief that since the change happened late in the session an unintended consequence happened. This bill is to ensure adequate state funding for education. REPRESENTATIVE KELLER noted that if the committee takes the position that this should be equitable across the state, has the impact for unincorporated boroughs shall be considered. He also asked if the bill should contain a requirement for local payment since the legislature acts as the school board for unincorporated boroughs. 8:19:22 AM REPRESENTATIVE EDGMON stated that the overall costs are affected by how schools are constructed and heated, such as whether diesel fuel is used to heat the school versus natural gas. He offered to provide the "numbers" for his district. CHAIR SEATON asked members to focus on the specific issue the bill addresses. REPRESENTATIVE KELLER commented that the struggle is with the growth or the differential costs for operation and not the diesel costs. 8:20:34 AM CHAIR SEATON asked the department to explain how the local contribution occurs in the unorganized boroughs. 8:21:11 AM EDDY JEANS, Director, School Finance and Facilities Section, Department of Education and Early Development (EED), explained that the Regional Education Attendance Areas (REAAs) do not have a required local contribution based on property values. The REAAs' local contribution is through the form of the "impact aid contribution." Thus, the impact aid is in lieu of property taxes paid by the federal government for people who reside on federal lands that are not subject to taxes. He offered that he would consider the impact aid as the local contribution for the REAAs. He pointed out that some REAA's have more federal land than others and those with a smaller or larger tax base contribute more or less, accordingly. He noted some municipalities have a larger tax base than others, and are required to contribute more to support education. Those municipalities with a smaller tax base would also contribute less. The change that is before the committee today is to achieve uniformity on the mill levy in the required local effort. As Chair Seaton noted, the basic education foundation formula calculates the basic need, which is the adjusted ADM multiplied by the base student allocation (BSA). Once the basic need is established, "we determine who is going to pay." Three components are considered: required local contribution, impact aid, and state aid. The required local contribution ranges from 2.7 mills to 4 mills on real and personal property values, using the schedule previously referred to by Chair Seaton. This bill would level the required local contribution from the current mill rate to 2.7 mills across the board. It does not increase the amount of funding for the foundation formula program but it simply shifts it from who is paying, local versus state. CHAIR SEATON asked for clarification on the statement that the amount of funding to a school district would not change. MR, JEANS responded that he is referring to the amount of funding to a school district via the funding formula. 8:23:48 AM REPRESENTATIVE P. WILSON related her understanding that the impact aid from the REAAs would not be affected. MR. JEANS responded that the REAAs are required to contribute 90 percent of the impact aid that they receive. 8:24:17 AM REPRESENTATIVE KELLER asked whether the committee has used a property valuation to assess how the impact aid compares to the 2.7 mill rate under consideration. MR. JEANS answered that property values do not exist in the unorganized areas. He offered that the closest comparison would be the per pupil valuation on the impact aid compared to local effort. He recalled comparisons that showed a number of REAAs at the top of the scale that contribute more money on a per student basis, through impact aid, than many municipalities. He noted some REAAs at the bottom of the scale are not contributing much since not many people live on federal lands. The range varies considerably, he stated. REPRESENTATIVE KELLER stated that if the committee's goal is statewide uniformity the committee will need to broaden its scope. 8:25:29 AM REPRESENTATIVE MUNOZ asked whether the impact aid is based on economic activity on federal lands. MR. JEANS answered no, that it is based on the land being non- taxable land. 8:25:46 AM CHAIR SEATON asked if the people living on federal, non-taxable land are not taxed by the state. MR. JEANS related that the impact aid is for lands that have been moved from state tax rolls due to some type of federal intervention. Thus, lands conveyed under the Alaska Native Claims Settlement Act (ANCSA) are non-taxable lands until developed and the people living on those lands generate federal impact aid. Additionally, people living on military bases are not taxed and also generate federal impact aid. 8:26:57 AM REPRESENTATIVE MUNOZ moved to report HB 350 out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE KELLER objected. 8:27:34 AM A roll call vote was taken. Representatives Seaton, Munoz, Gardner, Buch, Edgmon, and Wilson voted in favor of HB 350. Representative Keller voted against it. Therefore, HB 350 was reported out of the House Education Standing Committee by a vote of 6-1. 8:28:27 AM