Home News and Features Act 127’s School Tax Impacts Appear To Be Greater Than Expected

Act 127’s School Tax Impacts Appear To Be Greater Than Expected

Main Street Middle School. File photo.
A 2022 education finance law — Act 127 — that takes effect with next year’s school year budgets is putting near-term pressure on the Education Fund and is also sparking longer term concerns in school districts that are “disadvantaged” by the law, including the Montpelier Roxbury Public School (MRPS) district, about whether they should significantly cut their budgets over the next few years or swallow enormous residential school tax rate increases in fiscal year 2030, on top of the big rate increases projected for next year.

The education finance system has changed many times over the decades, but Act 127 marks perhaps the greatest change since the passage of Act 60, a 1997 law passed to respond to a Vermont Supreme Court case declaring the prior school finance system unconstitutional. Act 60 revived the statewide property tax, expanded income-sensitivity tax relief, and included student “weights.”

Act 127 adjusts the pupil weights used in the state’s education finance calculation in a way that is designed to assist districts with high numbers of students in poverty or who are learning English, as well as rural districts and rural districts with small schools. It works to the disadvantage of more densely populated, higher-income districts such as Montpelier.

The impacts appear to be greater than some rough calculations about tax rate changes made at the time the law was passed in 2022. The estimates were based on 2020 budgets and suggested smaller tax rate increases than are now turning up as a result of the law, but a lot has changed since the pre-pandemic school budgets of 2020.

For the MRPS district, the Legislature’s 2022 estimates based on 2020 budgets showed tax rates increasing 11% at full implementation of Act 127. But budget figures from the MRPS district show the tax rate increase from this year’s rate to next year’s would be 41.9% if the law was fully implemented in the district next year, which it will not be. This huge increase does give a taste of what the residential school tax rate could be by fiscal year 2030, when a phase-in provision in Act 127 expires. 

The 5% Limiter

That phase-in provision protects districts like MRPS, limiting one-year increases in the equalized property tax rate to 5% a year for the next five years as long as a district does not increase its per-pupil spending more than 10% in one year.

The proposed MRPS budget would increase per-pupil spending by 9.45%, just below the 10% figure that would trigger state review, and means the equalized residential tax rate increase will be 5%, but that limit is applied before the state’s Common Level of Appraisal (CLA) adjustment. 

Like many other districts, the MRPS district is being hit by a huge CLA change prompted by the hot real estate market, pushing the actual proposed residential tax rate increase in Montpelier to an unprecedented 19.2% increase. Roxbury, with a smaller CLA adjustment, would see a 8.45% school tax increase. (We will have information about the CLA in the next issue).

Most households in Montpelier and Roxbury will receive income-based property tax credits that will protect them somewhat from the full impact of the proposed tax rate increase, but those credits vary according to household income and the value of a property, and the income-sensitized tax rate could itself rise a hefty 14.5% on average statewide, according to state estimates. Owners of nonresidential properties pay the same school tax rate statewide, a rate that is estimated by the state to increase 10% this year.

The 5% residential tax rate limit applies to all school districts in Vermont, regardless of whether they are advantaged or not by Act 127, and may be creating unexpected consequences as a result of the large increases in school budgets proposed across the state.

The majority of Vermont school districts appear likely to benefit from the 5% limiter, so the education fund will have to make up the difference between 5% and whatever these districts would be paying in tax rates if there was no limiter. That money will have to come from somewhere, potentially requiring the state to put more money into the Education Fund, pushing up rates in towns that have kept their tax rate increases below 5%, or both.

According to VTDigger, two leaders of the Legislature’s tax committee sent a Jan. 19 letter to school boards and superintendents warning of “unintended consequences” from Act 127 that could have districts trying to spend “free money.”

VTDigger’s Jan. 19 “Final Reading” email reported “lawmakers and the Scott administration fear school districts are packing extra spending into their budgets during a rare time when those increases won’t necessarily be directly felt by all of their taxpayers.”

The MRPS district is among the districts that would be paying higher tax rates without the limiter, but school officials say the big proposed district budget increase of $3.4 million, up 11.9% from this year, is the result of several new and challenging factors. The budget increase is much larger than recent budget increases, which have been in the $1 million to $1.2 million range, according to MRPS Superintendent Libby Bonesteel.

The higher MRPS budget pressures this year stem from inflation, an 8% increase in teacher salaries under an existing contract, a 16.4% increase in health care costs, and the end of federal COVID-related ESSER funding, which the district used to hire new staff members. The district now has to pay for the new staff members it retains. 

These pressures are not limited to the MRPS district. In its annual Dec. 1 school property tax forecast, the state tax department predicted year-over-year education spending statewide could increase 12%, and residential property tax bills will increase by an average of 18.5% next year.

Weighting Changes

Vermont’s education funding system used pupil weights before Act 127, but the new law made significant changes. When all else is equal, the more weight applied to a district’s pupil count, the lower its corresponding homestead property tax rate, according to a document prepared by the Legislature’s Joint Fiscal Office.

Pupil weights adjust the tax capacity of a school district so the more weighted pupils a district has, the more funding it can receive from the Education Fund at the same tax rate. The MRPS district fares more poorly compared with other districts when the new weights are applied than under the old system.

The weights — meant to reflect the potentially higher costs of educating certain students — now add extra weight of 0.36 for middle school students and 0.39 for high school students. Students from an economically deprived background are given an additional extra weight of 1.03, and students who are English learners get an extra weight of 2.49.

That means a district will get credit for an elementary school child who is an English learner from an economically disadvantaged background that is 3.52 higher than that of a middle-class student who speaks English, but the Legislature apparently determined that this is how much more it costs to educate such a student. This change benefits the Burlington and Winooski districts the most.

Act 127 adds new weights for rural districts and small schools. Extra weight applies for students in districts with fewer than 100 persons per square mile and for schools in rural towns with less than 55 persons per square mile and less than 249 pupils per school. The weights vary depending on density and school size.

The MRPS district includes a potentially rural town (Roxbury) with a small school, but the district gets no rural or small school weights because the total population and total district square miles are considered together in calculating rural district assistance, eligibility for which is required to get small school assistance.

Montpelier Roxbury Public Schools Superintendent Bonesteel has said she was surprised that MRPS did not qualify for a small school weighting credit, even though the district has a small school in Roxbury, but the Legislature made no exception for the unique situation of the MRPS district. Overall, the impact of Act 127 is much greater than she expected when the law was being debated in the Legislature, Bonesteel said.

Looking To The Future

The tax rate increases projected at that time of the law’s passage were lower than is turning out to be the case, but the 11% increase estimated at that time for the MRPS district was not insubstantial. However, it was not much of a concern for city or school officials at the time, according to Washington County Senator Andrew Perchlik (D/P), who served on the Senate Education Committee that helped craft the bill. 

Perchlik told The Bridge in June 2022, shortly after the bill passed, that during the legislative session he showed projected rate changes to Bonesteel, and to the Montpelier City Council, and was surprised that he received no negative feedback on the rate changes, despite what projected increases could mean for local taxpayers. 

Perchlik noted then that the bill hits higher-income districts harder. “That is where the evidence led us,” he said. “Higher income students don’t cost as much to educate.” He said he and other legislators hope that school districts being helped by the new pupil weighting system will increase spending, but that is up to each district and its voters. 

It remains to be seen whether districts such as MRPS that will be hit with higher tax rates will trim spending. If they do not cut, and the benefitted districts increase their budgets, the result could be higher overall education spending in Vermont and potentially higher taxes overall. If districts like MRPS do cut significantly, education quality in those districts could decline.

The MRPS district will face some tough choices in coming years. If the budget keeps rising higher than would be covered by a 5% tax rate increase, the district could be hit by an enormous tax increase in fiscal year 2030, after the 5% limiter goes away. “We will need to be very careful between now and fiscal year 2030,” Bonesteel said in November.

With the way Act 127 implementation is playing out, there is also a risk that the Legislature will adjust the 5% limiter by increasing it or cutting it off sooner than planned, which would mean tax rates in the MRPS district and many other school districts could jump even higher sooner than expected, unless the Legislature chooses to adjust the pupil weights again.