I had an opportunity to testify to the Senate Finance Committee on Wednesday regarding this year's historic property tax increase. Even though it may not have been new material for the Committee, I thought it was important to cover the basics on what is contributing to the surge in property taxes this year. This is not a new problem, schools have increased spending $900,000,000 over the past decade and are projected to spend up to another $240M this year. We have the second highest cost per student in the country, and lowest student/teacher ratios by a mile. Our problem is spending.

National average student/teacher ratio is 15, Vermont's is 10.8

To be sure, there are other factors contributing to why this year taxpayers are staring down the barrel of a particularly egregious increase. These factors include the impacts of Act 127 (one of which the Legislature fixed), reductions in federal funds (which schools shouldn't have been using for ongoing funding anyway), and smaller increases in consumption taxes than in previous years (covered up higher spending).

Perhaps more significant are underlying incentives built into the education financing system. We have a framework where spending decisions are made locally but taxing decisions are made at the state level, this inherently creates a lack of transparency and accountability. It allows school districts to point to the finger at the Legislature when tax rates go up, and for legislators to point the finger at school districts for spending increases. Both are right, and the resulting system has no cost-containment.

As I told the Committee, it is important to realize that we have an over-resourced system. There may be pockets where districts may not have enough staff, or enough of the right types of staff, but we already have the smallest class sizes in the country and are paying dearly for it. That might be justifiable if we had to-tier educational outcomes, but we have fallen to the middle of the pack. We too much staffing in our schools and that is the purview of our school boards. They will need to make cuts, but for the past two decades that have generally avoided doing so (likely because it's easier to blame legislative policy than it is to take ownership over spending increases). One thing we have seen all to clearly in this budgeting cycle is that if there is "free money" on the table, schools will take it. This was the whole reason for the Act 127 "fix" in H.850.

I told the Committee that if they were going to really address the larger problem, they would need to look here.

I also reviewed what had been tried already, including consolidation, new revenues (outside of property taxes), block grant funding (for specific categories of education spending), and excess spending penalties to control costs.

Some of these methods have been more effective than others. Excess spending thresholds certainly seemed to be effective as school boards actively tried to avoid them. You could still spend above the threshold, but it would count as 1.5X on your tax rate. Methods like consolidation are questionable. There has been little demonstrated savings from Act 46 and even among the education community there is skepticism about whether there were any measurable impacts from the legislation at all. 

The last two concepts that have already been tried are block grants, which the state moved towards several years ago for special education funding. They made this move as a cost-containment mechanism because schools seemed to be over-identifying special needs students. This might be true in other areas as well, particularly for types of students that contribute heavily to weighting factors. Another area where block grants may be warranted are for state-mandated program (school meals, PCB testing/remediation, and water quality come to mind). Finally, external revenues have always been part of the Education Fund, but a few years ago the state moved towards setting a fixed percentage of consumption taxes that are dedicated towards education. This was a good move in most respects because it fixed a number of the factors that determine property taxes and thus resulted in a more transparent system. However, I told the Committee that they need to be careful with new revenues. It is tempting to simply spin up a new tax in an attempt to buy down a 20% increase in property taxes, but there are two reasons why they should be hesitant. The first is that nearly all the tax options readily available to them (and would make a  meaningful dent in the $200M+ in new spending) are largely regressive taxes, hitting low- and middle-income Vermonters in a disproportionate manner. The property tax structure is actually somewhat progressive thanks to income sensitivity. Simply shifting the tax burden somewhere else may actually increase the pain felt by the working class. The second reason why the Legislature should be hesitant to buy down property taxes is that the local property tax rate is the ONLY mechanism keeping spending in check. Every time they add new revenues to the Education Fund it artificially reduces local property taxes, diluting this accountability mechanism. While external revenues may help limit the impact of property taxes this year (if the right revenue source is used), it will only contribute to the longer term problem - spending.

So, what are new things the Legislature should consider? First and foremost, examine all the incentives in the current education financing system. I am thinking something along the lines of the Blue Ribbon Commissions that included both subject matter experts and outsiders that brought perspective to the issue. It is very easy to get lost in the weeds of our education funding system and fresh perspectives are needed. These could even come from neighboring states who might be willing to lend a helping hand. The overall goal here is to understand what other mis-aligned incentives we might have in the system and to increase transparency and accountability. Further, I think we should strive to provide voters with as much useful information as possible on their school ballots. The information voters currently receive makes it difficult to understand how local spending decisions drive the tax rate. We need to make this connection as clear as possible.

Another idea is to set statewide staffing targets with carrots and sticks to get districts to comply. Moving towards an average class size of around (where we used to be and Massachusetts currently is) should maintain our education quality while meaningfully reducing spending. To be honest, school districts should have been doing this already through attrition, but given the property tax crises this year it will likely lead to layoffs that were not strategically planned. That is unfortunate for all involved, but leads to the second consideration here. Reductions in Force should be performance-based so that we are not laying off our most experienced and/or high-performing teachers. Doing so risks further degrading the quality of our public education.

Finally, revisiting a concept we put forward in 2014 around Supervisory Union (SU) consolidation may be worth taking a fresh look at. Vermont has 62 SU's, which is the equivalent of Chicago having over 400. We had recommended consolidating these around technical education centers to create better alignment with post-secondary education, increase tax bases, and gain more economies of scale. If we push the local tax base up to this level as well, it would help to stabilize tax rates in small towns that are highly impacted by changing student populations.

There are a number of other things that the Legislature might consider for cost-containment, one of the most promising would be block grants to cover unfunded mandates. A common chart of accounts, which was attempted and scrapped over the past several years, would also create more measurable spending data for state policy makers to leverage. This is a bit of a blind spot currently. To go along with this, regular audits of this accounting system should be required to ensure that school districts are being accurate in their reporting (particularly for areas that impact state funding). Because we have a pooled funding system, this is essential. If one district is drawing down more funds than it should, it is depriving every other district in the state of those funds.

Although this was not the purview of the Finance Committee, I also believe we need a stronger system for holding school districts accountable for their student outcomes. Some districts are outright failing their students without repercussions. This particular area is not a spending issue, it's an accountability issue, and we should look at how we can build the right set of incentives to generate a high-quality and affordable education system.