Education Spending (H.850) - Feb 12, 2024

On Monday afternoon, the Joint Fiscal Office (JFO) walked the House Appropriations Committee through a fiscal note of H.850, which would remove the 5% property tax cap in Act 127 and replace it with a step-down mechanism to phase in the property tax hit from 2025 over the next five years. They were unable to calculate the impact of repealing the previous transition mechanism because of its “complex and circular nature,” but the new mechanism will cost the Education Fund $30M in FY2025. JFO pointed out that the property taxes will need to absorb this cost unless another funding source can be found.

In addition to the transition mechanism, the bill also appropriates $500k from the General Fund to offset any election costs incurred by school districts needing to rewarn their budgets in light of these changes.

There was some confusion about how the mechanism would work, but Chairwoman Lanpher cut through the conversation, saying “we don’t have their budgets, we don’t have their CLAs, it’s a much more complicated…”

NOTE: She didn’t finish her thought, but she’s right. It’s more complicated than just the Act 127 transition.

Representative Dickinson questioned why they were doing this and wondered “what are we trying to get to here?”

Representative Beck explained that when JFO does their tax rate calculation all three tax groups (homestead, income, and non-homestead) all get pulled along with the same average bill change unless the Legislature chooses to do otherwise.

He argued that while the bill focused on homestead rates, “whatever tax bill change that causes, the income sensitivity people will get pulled along at the same percentage.” JFO agreed, stating that districts will be able to redo their budgets if the old rate cap was overly favorable to them, and they can opt for spending less. If enough districts do so, we could see lowered rates overall.

Representative Holcombe (former Secretary of Education) called the situation a “tragedy of the commons” and that is why she “is still nervous about this bill.” She argued that Act 127 “took an inflationary funding formula and made it hyper-inflationary in addition to the transition.” She wasn’t surprised at the outcome here because there was a similar transition formula for Act 46 that was subsequently removed for the same reason.

Holcombe wants to address the “fundamental inflationary and poorly targeted nature of the funding formula we now have in place… without rules in the Education Fund around how those dollars are used… this is a train without brakes.”

Representative Harrison added he has school districts who when to take out new bonds because the “state was paying for it.” He believes that “the cap had very much unintended consequences and needs to go… the further we remove voters from what they are actually voting on [the more it confuses voters]… our education finance system is difficult to understand.”

Holcombe added that there is a litany of ways the Legislature has created “unfunded” mandates” that have added to the distance Harrison is describing. She pointed to the $45M they used to buy down the tax rate last year, commenting that “every time you do that you create a predictable cliff for next year. We have created a crisis for school districts. I can come up with at least $100M in state programs that school boards did not get to vote on that we put into their budgets, and we are about to punish them for it… we are making assumptions that everybody padded their budget and I am not sure everybody did.”

Representative Dolan offered a short speech calling this “almost a Hail Mary effort” saying that “we need to commit that we need reform of what we are using the Education Fund for” (pointing to PCB testing as an example). The Education Committee was offering aspirational language to the bill to indicate this was the long-term plan. However, concerns persisted around the Agency of Education’s ability to provide leadership here.

The Committee voted 10-0-2 in favor of the bill.

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