Plain talk on Colorado's budget: General Fund goes back to school

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It still feels like summer, but most of Colorado's kids are already back at school. General Fund is back at school, too, and working harder than ever just to make the grade.

In previous emails we talked about how General Fund is struggling to keep his obligations to college students, Medicaid patients and other Coloradans while revenues are slipping. And we've discussed how he may have to take on more responsibility for roads and bridges.

But of all the things we ask General Fund to pay for, the most important is educating our kids. And there, too, we've made his job much harder than it should be.

About 800,000 kids attend Colorado's more than 1,700 public schools, and the cost of running those schools is shared by the state and local school districts. But two constitutional amendments voters adopted have made it impossible for local revenues to keep pace, meaning that over the years the state has had to shoulder more of the burden. In fact, from 1989 to today, the share of total education funding paid by local school districts has dropped from 57 percent to 37 percent, and the DU Center for Colorado's Economic Future projects it will drop below 30 percent by 2025. This has big implications for General Fund.

The historic shift toward state funding for local schools is a direct result of the interaction of two constitutional amendments passed by voters – the Gallagher Amendment in 1982 and the Taxpayer's Bill of Rights (TABOR) in 1992. The purpose of the Gallagher Amendment was to shield homeowners from big increases in property taxes, while the purpose of TABOR was to place strict limits on government revenues and require voter approval of all tax increases.

Each amendment may have seemed like a good idea at the time, but the interaction between them seriously eroded property tax revenues – the source of local funding for schools.

Some quick math is needed to show how this happened. Property taxes are determined by multiplying the actual value of a home or business by two factors – the assessment rate and the mill levy. The assessment rate is the percentage of the actual value that is subject to taxation. The mill levy is the rate at which that assessed value is taxed (a "mill" is one-one thousandths, so one mill generates $1 in revenues for every $1,000 in taxable property value).

Before these amendments, school districts could adjust these factors to maintain adequate revenues. But Gallagher forced the assessment rate for residential properties to continually decline.

Why? Because it guaranteed the overall share of statewide property taxes paid by homeowners would remain at roughly 45 percent of the total, with business property owners paying the other 55 percent. But in the three decades since it passed, the total value of residential property in Colorado grew three times faster than the total value of commercial property. So the assessment rate for residential properties had to be cut repeatedly to maintain the 45-55 overall split required by Gallagher (the commercial rate remained the same). In 1984 the residential assessment rate was 21 percent. A decade later it was 12.9 percent. Today it is 7.96 percent.

Meanwhile, TABOR forced the mill levies of local districts to continually TABORdecline as well. Why? Because whenever a district's revenues increased faster than the revenue limit (student enrollment plus inflation), the district had to lower its tax rate. In 1994 the average rate among school districts in Colorado was 38 mills. By 2010 the average rate was just under 20 mills. (To see what happened in your own school district, go to this interactive site created by the DU Center for Colorado's Economic Future: http://www.du.edu/economicfuture/mill_levies.html.)

So assessment rates and mill levies both declined. And when you multiply a smaller number by a smaller number, you get ... a smaller number. As the example here illustrates, a home worth $100,000 in 1994 generated $490.20 in property tax revenues for the average school district. By 2010, a home worth $100,000 generated $159.20 – a cut of almost 68 percent. In 2010, it took a home worth $307,915 to generate the same amount of property tax revenues that a home worth $100,000 generated just 16 years earlier.

That's why property tax revenues dropped and why local districts can't contribute as much as they used to. Many believed the state had a moral obligation to backfill for that lost revenue, and in 2000 the Amendment 23voters turned that moral obligation in to a constitutional obligation called Amendment 23. It required per-pupil funding for K-12 education to increase by inflation plus 1 percent each year through FY 2010-11, and by inflation each year thereafter.

But even with Amendment 23, Colorado's schools have not caught up. And they won't until one of two things happens. Either we find a way for local districts to contribute a larger share, or we find more money for General Fund to spend on schools – by cutting other programs or raising new state revenues.

Meanwhile, funding for our kids' education falls further behind the rest of the nation. So what's a General Fund to do? In some areas, like highways, he may be able to get away with deferring expenditures for a year or two. But kids are only kids for a very short time. Deferring their education is not an option.

Join the conversation. We want to hear your 2 cents' worth.

What is the right balance between state funding and local funding
for schools?

If the state pays a larger share, should it have more
of a right to tell local school districts what to do?

If local property taxes aren't doing the job, what other options
are there for increasing the local contribution to schools?

Email PlainTalk@BellPolicy.org and let us know how you answer these questions.

Note: This is the seventh in a series of emails addressing budget and fiscal issues in Colorado. It builds on the information in our In Plain Talk video and tool kit. Learn more and get involved by visiting our In Plain Talk video page or by "joining up" at www.boomorbustcolorado.com.