Beware the Phantom (Revenue)

If you think Halloween is spooky, consider what Ohioans will face on November 7th--a slew of new school levy and tax issues at the polls.

The Ohio Secretary of State's office has certified 145 levy issues statewide (see here) this coming election day. School districts deem their passage essential to maintaining current operating expenditures, including those for academic and extracurricular programs. Yet voters are skeptical of recurring pleas for more money. Just this past August, 22 of 31 school funding referendums (71 percent) failed to pass muster with voters.

Who can blame their skepticism? On average, districts request a new levy every four years. But few truly understand where the dollars go, as Ohio's education funding system is a patchwork of complex formulas and weighting calculations that only Dr. Frankenstein could love. There's one thing all voters should know, however: school levy votes, though at times a necessity, are too often an exercise in diminishing returns--except where state coffers are concerned.

In simplified terms, school district funds can be arranged into three stacks: federal dollars, state per-pupil allotments, and local tax dollars. When Ohioans pass a school levy, most believe that the increased funding will be dollars added to the local stack--above and beyond the more-or-less fixed values of the state and federal stacks.

In fact, voters are often replenishing a shrinking stack of state funds. That's because Ohio law prevents property tax revenues generated by voted levies from increasing with inflation-so even though property values in a district may go up, the amount districts can collect does not. At the same time, the state determines its funding allotments to districts according to the value of a district's tax base (i.e., property values). Thus a double standard emerges. School districts cannot take advantage of rising property values to earn more revenue; yet the state uses the same rising values to determine how much less it should provide school districts.

Enter phantom revenue. It's the difference between what the state funding formula calculates as a district's local revenue and what the district actually generates in local tax dollars. While phantom revenue exists only on paper, it directly reduces the amount of state per-pupil funding districts receive. As local property values increase, the state contributes less to district budgets, and local taxpayers' dollars must make up the difference--mitigating over time the effect of any new levies.

Fast-growing districts, mostly suburban, are hit hardest by phantom revenue. Centerville City Schools, a school district outside Dayton, saw its state funding per-pupil (after state calculations) decline from $1,540 in 2003-04 to $1,485 in 2005-06--despite the fact that the overall base amount of state per-pupil funding rose from $4,949 to $5,283 over the three year period. (Ohio's major urban areas--where most charter school operate--such as Dayton, Cincinnati and Cleveland have experienced far less growth in property values and thus are less susceptible to the phenomenon.)

Phantom revenue also makes it harder to hold districts accountable for their finances--by making it appear that well-managed districts are poorly run while providing those lacking sound financial practices an excuse to seek more taxpayer dollars on a circadian like regularity.

Eliminating phantom revenue is no simple matter. House Bill 920, which prohibited tax revenue increases associated with home values, has been in place since 1975--and its provisions became part of the Ohio Constitution in 1990. Few legislators will find support from their constituents to make it easier for school districts to raise their property taxes without their approval via the ballot box.

This leaves voters in a quandary. Should they vote for school levy issues to bolster district finances (which may or may not be well-managed) knowing that future levies will be needed to offset phantom revenue? Or do they deny school districts additional funding and wait for widespread fiscal crisis to jump-start sensible education funding reform--though perhaps at the expense of district students?

Sadly, neither gubernatorial candidate has offered a practicable solution to Ohio's botched education funding system, phantom revenue included. This election season, Ohioans will have to go it alone. But beware the phantom. This one is real and has its eye on your wallet.

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