Ag’s role in education funding questioned

Farm Forum

PIERRE – The statewide tax levies for general education would increase next year on commercial property and owner-occupied homes, but agricultural property would see its levy go down, under a key piece of school-funding legislation from the Daugaard administration.

The changes are intended to meet the state’s existing requirements that an equal base amount be provided per student attending South Dakota’s public K-12 schools, and the further requirement that agriculture property provide a set 18.45 percent of the taxes toward that base amount.

The governor has asked the Legislature to increase the amount of the per-student allocation by 3 percent to $4,625.65. That would be an increase of $134.73 over the current base. The formula is designed so that 53.8 percent comes from state aid and 46.2 percent from local taxes.

The proposed levies for 2014 also would need to generate enough money to cover an expected increase in enrollment statewide of about 1,600 students to about 129,800 statewide. Enrollment rose about 1,700 this year.

The key points of the formula have been in place since the mid-1990s as a way to equalize basic support per student, regardless of how much property value is within the school district a student attends.

David Owen, president for the South Dakota Chamber of Commerce and Industry, said it is “a brilliantly designed system.” He said windfalls are avoided and taxpayers aren’t overburdened. But the challenge in recent years, as agriculture property values have soared amid boom times for farming, is how to spread the levies among the three major categories of property.

“The business community is analyzing this,” Owen said in testimony on Feb. 13 during a hearing on the levies legislation by the Senate Appropriations Committee. “That work will continue. This bill has to go forward. The dialogue will continue.”

The agriculture levy is set to decline again in 2014 because the total amount of agricultural property value statewide is expected to increase again this year. The levy is applied to the value.

Constraining the role of agriculture property in school funding is the 18.45 percent cap that was put in place in 2009 as South Dakota switched from a market-based system, which used sales of comparable property, and began a production-based system for assessing agriculture land’s value.

At the time, legislators didn’t want agriculture property owners to pay less. What has happened since then is the floor has become an artificial ceiling. Further complicating matters is the phase-in of the full values under the productivity method. They won’t take full effect until 2019.

If the market system had remained in place, agriculture property’s total value would be more than double what it currently is, according to Sen. Al Novstrup, R-Aberdeen. He opposed the switch in assessment methods and continues to push for a return to the market system.

Under the productivity approach, there is about $23.5 billion of agriculture property value on which taxes are being levied. That is about 41 percent of the total value for agriculture property if every acre was brought up to 100 percent of its productivity value, according to Novstrup.

“There is approximately $40 billion out there that is being missed by the current system called productivity,” he said during the hearing on Feb. 13.

The opposite is turning true for owner-occupied homes and commercial property. Those levies would go up again in 2014 because of “anemic” growth in the total values for those two categories, according to Jim Terwilliger, the economist for the state Bureau of Finance and Management.

The legislation, Senate Bill 28, calls for the basic agriculture levy to decline from $2.322 per $1,000 of taxable value to $2.082 for the general-education taxes payable in 2014.

The levy for owner-occupied homes would rise to $4.279 from the current $4.029. The levy for commercial property would climb to $9.163 from the present $8.628.

The panel also took testimony on a proposal to provide more than the 3 percent increase per student.

That plan, Senate Bill 191, is sponsored by Sen. Larry Rhoden, R-Union Center. It has 29 other senators and 50 House members as co-sponsors. Together, they represent more than two-thirds of the 105 legislators.

Rhoden, the Legislature’s primary defender of the ag-productivity method, said he learned about patience as he listened to the testimony on the levies bill.

His goal is to increase the share of state aid per student. He wants to start putting more state funding into the system to compensate for the cuts made two years ago, when state government faced a budget deficit from the recession.

State aid was providing 56.7 percent of the per-student allocation before the cuts. Rhoden, seeking to soften the impact of the governor’s proposed 10 percent cut, won approval for legislation that essentially froze property tax levies for general education at their then-current rates.

The result was state aid’s share of the per-student allocation declined to its current 53.8 percent.

Whether there is money to start rebuilding the state’s share depends on the revenue estimate that will be made by the 18 legislators who serve on the Senate and House appropriations committees, followed by their decisions about how they want to spread around any extra money beyond the governor’s 3 percent.

Rhoden’s bill is supported by the Associated School Boards of South Dakota, the school administrators organization, and the South Dakota Education Association whose members are mostly teachers and staff.

State government essentially captured about $12 million to spend on other things annually as a result of the cut and the realignment of the ratio between state aid and property taxes, according to Rhoden.

Terwilliger, speaking for the Daugaard administration, opposed Rhoden’s plan.

“That’s water under the bridge,” Terwilliger said about the $12 million of “lost” state aid and the attempt now to start restoring it. “Where do we come up with that? It will put us in another structural deficit.”

Rhoden said he knows the entire amount can’t be restored in one year. “The policy discussion is, ‘What’s possible?’” he said. He added, “It was a temporary fix to an ongoing problem when we reduced state aid and froze property taxes.”