Home News and Features School Budgets Soar; Act 127’s 5% Tax Cap Being Scrapped; CLA Adjustment May...

School Budgets Soar; Act 127’s 5% Tax Cap Being Scrapped; CLA Adjustment May Not Be The Issue

Photo by John Lazenby.
By Phil Dodd

Even as voters struggle to understand their school budgets and school tax rates predicted to soar next year, the legislature is contemplating last minute changes to Act 127 and school funding — including doing away with Act 127’s 5% equalized tax rate cap — which could significantly alter or worsen the actual tax impacts of proposed FY25 school budgets.

As a result of the expected changes, school boards may be given the option of revising their budgets and warning another district budget vote, according to Rep. Peter Conlon (D-Cornwall), chair of the House Education Committee. He told The Bridge that this year’s state funding problems stem in large part from the fact that school budgets are rising a combined $250 million, which he said equals about a 25-cent increase in the statewide school property tax.

On Friday, Feb. 2, Conlon and Rep. Emilie Kornheiser, D-Brattleboro, chair of the House Ways and Means Committee, met with school superintendents to share their intent to eliminate the capping mechanism for this year’s budget development cycle, although details have not been worked out.

That led Montpelier Roxbury Public School (MRPS) Superintendent Libby Bonesteel to send out an email Sunday morning, Feb. 4, alerting the community that the capping mechanism may be done away with and “replaced with something else — most likely less beneficial to tax rates in disadvantaged districts like ours.” She noted that central Vermont legislators have been asked to attend the 6:30 p.m. MRPS school board meeting on Wednesday, Feb. 7, and she invited the public to attend and comment.

Act 127 — a law passed in 2022 but taking effect in FY25 — and its 5% limiter, in conjunction with average budget increases of 14.4% statewide, have roiled the education finance system to the point that every district would be capped at 5% if the limiter was left in place, even districts that were expecting tax rate decreases because the new pupil weights were supposed to help them. 

The latest state estimates showed average school tax rates could increase 20.59%, up from an 18.5% estimate on Dec. 1, although most homeowners pay less than this full rate because of income-sensitized property tax credits that reduce taxes on part or all of a homestead’s value.

As of now, Montpelier residents who are not income-sensitized are facing a 19.2% tax rate increase because of rising costs at the local and state level, even with the 5% limitation on the equalized tax rate. It is not clear exactly how rates would be affected by elimination of the cap and possible revotes on budgets, but Conlon confirmed that in any case school tax rate increases next year will likely be “ugly.”

The legislature could also try to find additional state revenues to reduce the pressure on the property tax, but money is tight this year. The state is also under pressure to send money to flood-ravaged cities and towns, including Barre and Montpelier. And implementing new revenue sources takes time, Conlon said.

Conlon said the legislature may still find a way to phase in the impact of Act 127’s change in weights for the dozen or so districts that have the most to lose from the law. The Montpelier Roxbury Public School (MRPS) district is one of the ten school districts most disadvantaged by the new pupil weights, according to rough estimates prepared in 2022 when the law passed, so it is possible it could get some short-term relief from Act 127, although the long-term picture appears daunting for MRPS.

Applying the 5% tax rate limit to all districts, as Act 127 did, and not just those losing out as a result of the new weights, seems to make little sense today. Conlon said that when the legislation was being considered in 2022, school budgets were only going up 3% or 4% a year, so it was thought only districts disadvantaged by Act 127 would exceed 5%. Now budgets are going up 14.4% on average.

Common Level of Appraisal

The 5% limit applies before a Common Level of Appraisal (CLA) adjustment to reflect real estate price changes is applied. On paper, the CLA appears to significantly drive actual tax rates up in most districts this year. Many school superintendents and school board members complained to the Ways and Means Committee on Jan. 25 that the CLA is sharply increasing their tax rates.

However, Tax Department Senior Fiscal Analyst Jake Feldman told the committee the same day that the CLA never increases or decreases aggregate property taxes — it is just a way of making sure every town pays its fair share, since appraisal levels vary. The state measures appraisal levels by reviewing recent sales.

“CLAs are not the reason taxes are forecast to go up in FY25,” said Feldman, a member of the MRPS school board. “Taxes are forecast to go up because of unprecedented education spending and one-time funds used in FY24 and FY25 to artificially lower tax rates.” 

Normally, when the average statewide CLA goes down, the “yield” in the education finance system goes up, he said, and that is what happened the last two years. But this year, due to big budget increases and the impact of Act 127, the yield per pupil could drop from $15,443 in FY24 to as low as $7,103 in FY25, according to the Joint Fiscal Office.

Common Levels of Appraisals have been going down by about ten points a year on average the last couple years and this year, reflecting rising property values, but Vermonters did not experience 20% tax hikes until now. That’s because in normal times the system is self-balancing: CLAs go down, yields go up, equalized rates go down, and those are then adjusted by the CLAs to provide fairness among towns.

In other words, without the big reduction in the yield this year due to huge budget increases and pupil weight changes that increase the the number of weighted students, the CLA adjustments would have resulted in much smaller actual tax rate increases for FY25.

Spending Pressures

In addition to recovering from the loss of surplus funds that were used to reduce rates the last two years, the state as a whole is now facing significant new spending pressures. In the MRPS district, for example, the budget is going up $3.4 million, an 11.9% increase from this year, a much bigger increase than in recent years.

According to legislative testimony from school officials, spending pressures affecting districts across the state include inflation, a 16.4% increase in health care costs, higher collective bargaining settlements, the loss of federal pandemic-related ESSER money (which many districts used to hire staff they now are paying for themselves), special education cost increases, the new state child care tax, burgeoning mental health needs, deferred building maintenance, and a legislative decision to have the Education Fund pay for universal free lunches. 

Many districts felt they were going to be protected to a degree from the financial impact of these increased costs by the 5% rate increase limit in Act 127, and some purposely boosted their spending to take advantage of the limit in order to obtain what they thought was “free money.”

For example, Seven Days reported that Mount Mansfield Unified “added an extra $5.7 million to next year’s budget for improvements to its aging buildings, grounds and infrastructure — without having to hike taxes.”

“We believe it is very important for [Mount Mansfield] to optimize this limited and once-in-a-generation opportunity,” school board members wrote in a letter to the community, according to Seven Days.

Jim Murphy, MRPS board chair, told The Bridge the district did not pack any extra spending to its budget, and in fact had to make cuts to stay under an Act 127 provision that triggers state review if per-pupil spending rises 10% or more. 

The proposed MRPS budget includes a 9.45% increase in per-pupil spending.

Murphy is critical of Act 127. While not objecting to the concept of adjusting pupil weights, he said a better way to make the change would have been to have the weight changes phase in over three to five years. That would have given districts a chance to cut spending or slowly add to their property tax burden and would have put less pressure on the Education Fund, he said.

Another fault of the law is it doesn’t guarantee the weight changes result in more money going to students, Murphy said. By only focusing on tax capacity, districts that benefit from the weight changes can choose to lower their own tax burdens rather than spend more on their students, he said.

“It’s an amazingly poorly crafted law,” Murphy said.