Education Funding Crisis in the Suburbs: The Impact of the 2007-09 Recession Recovery Policies and the New York State Tax Levy Cap on School District Financial Planning Practices By John J. Galligan, Ed.D., and Anthony Annunziato, Ed.D. Abstract This article examines the impact of the fiscal re- with a 2% Tax Levy Cap, school districts are hard pressed covery policies stemming from the 2007-09 economic re- to continue maintaining current educational services with cession and the implementation of the 2011 New York State increasingly limited revenue sources. Particular challenges Property Tax Levy Cap on the budgets of school districts that threaten the fiscal health of school districts include (1) located within a Long Island, New York suburban town- the recovery efforts resulting from the 2008 global economic ship. The research basis of this paper is based on two collapse, followed by short-term federal stimulus funds; studies conducted by the New York State Council of School (2) policymakers’ responses to balance the budget and Superintendents and the New York State Council of School contain the growth of school revenues including the pass- Business Officials and data collected from the Office of the ing of a property Tax Levy Cap, (3) the Gap Elimination Ad- New York State Comptroller and the New York State Educa- justment; and (4) a limit on the growth of state school aid. tion Department. Each of these events has impacted the actual and pro- jected sources of funding for schools (New York State As- The quantitative budget data utilized for this study sociation of School Business Officials, 2014). was collected from the Office of the New York State Comp- troller and the New York State Department of Education Purpose of the Study and categorized three years prior to the enactment of the Property Tax Levy Cap (2008-09 to 2010-11) and three years The purpose of this study was to determine the after its enactment (2011-12 to 2013-14). This data en- impact of 2007-09 economic recession and the New compasses the timeframe of the 2007-09 Great Reces- York State Property Tax Levy Cap on the budgets of sub- sion government recovery policies and, the Gap Elimina- urban school districts on Long Island regarding changes tion Adjustment and the 2011 Enactment of the N.Y.S. Prop- in total expenditures, state aid, district employee ben- erty Tax Levy Cap. efit (healthcare) contribution expenditures, per pupil ex- penditures, fund balances, instructional expenditures, The recommendations of this study are separated TRS contributions, tax increases, and pupil population. into three parts, including the (1) the use of financial fore- A quantitative analysis of school district budgets be- casting, strategic planning and fiscal tolerance assess- tween 2008-2009 to 2013-2014 was categorized. Data S ment, (2) the recommendation for an adjustment to the regarding school district budgets was collected from prin New York State Tax Levy Cap modeled after other states, to the Office of the New York State Comptroller and New 2g, provide districts with the ability to address mandated cost York State Education Department. 01 7 drivers in fiscally difficult times and (3) recommendations J for further research. Literature Review o u rn a Introduction Prior to industrialization, property taxes were con- l fo sidered an accurate assessment of the wealth of people r Le a Traditionally school districts have shouldered the living in the United States. This method of taxation was gen- de burden of funding programs relying on local property tax erally perceived as desirable due to its operation as a di- rsh ip revenues and the willingness of local voters to approve rect tax, ease of collectability, local control, impossibility to a n capital bond issues for additional funding. Considering avoid, and ability to provide direct linkage between wealth d In monetary demands of state and federal mandates, increas- and property value. Based on the ability-to-pay principle, stru ing healthcare contributions as a result of the Affordable the property tax at the local level was utilized to fund schools ctio Healthcare Act, and increased mandated Teacher Retire- and operate other services of city, town, and local govern- n ment System (TRS) pension contribution costs coupled ments (Brimley, Verstegen, & Garfield, 2012). 9 In the post-industrial era, a majority of states have work force; second, 9 percent of superintendents reported attempted to address disparities between personal in- that within two years their districts would not be able to come and property tax burden by providing property tax ensure that their financial obligations would ever be paid; relief for certain groups of taxpayers as the tax is based on and third, superintendents reported that pension costs and the value of the property and not on the ability of the taxpay- health care alone rose 2.5 percent for the 2011 and 2012 ers’ individual economic welfare. Consequently, if the tax school year necessitating the reliance on reserves to cover burden falls in greater percentage on the middle and lower the costs (NYSCOSS, 2012). class, then the tax is considered regressive and perceived as unfair. Since the 1970’s, states such as California, In January of 2014, The New York State Associa- Massachusetts, Illinois, Colorado, and New Jersey, have tion of Business Officials released a follow up study to their implemented Tax Expenditure Limitations (Property Tax 2012 analysis titled, The Road Ahead: School District Insol- Levy Caps) to ease the regressive burden of property taxes vency, which examined the professional staffing losses and so people with low incomes do not exceed a stated per- fund balances maintained by 671 New York State school centage of their income, regardless of the value of their districts. The original study concluded that high need school property. As of 2007, thirty four states utilize variations of districts in rural, urban, and suburban communities were circuit breaker programs and over forty states utilize the exhausting their fund balance at an alarming rate, repre- homestead exemption (Brimley, et al. 2012). senting the cumulative impact of the 2007-09 Recession and state efforts to contain school expenditures (NYSASBO, The Financial Challenges Facing New York State School 2014). The findings of this study concluded, first, that 261 Districts school districts exhibited signs of fiscal insolvency through a reduction in Unassigned Fund Balance (savings) from In June of 2011 the New York State Property Tax school year 2010-11 to 2012-13, 544 school districts Levy Cap was signed into law by Governor Andrew Cuomo. showed signs of educational insolvency as a result of re- According to the New York Department of Taxation, the law duced professional staff, and 206 school districts showed was established to limit local governments to overall growth signs of both fiscal and educational insolvency; second, in the property tax levy to the lesser of 2 percent or the rate districts were balancing their budgets at the cost of educa- of inflation. Local town and county governments are per- tional programs, as evidenced by cuts in professional staff. mitted to exceed their tax levy cap by overriding the law School districts had reduced staff 10 percent over the previ- locally with a 60% supermajority of elected representa- ous five years as pupil enrollment had declined only 3 per- tives, and school districts can only override or “pierce the cent; and third, approximately 40 percent of school districts cap” with a supermajority of voters. The tax levy cap ap- depleted their fund balance (NYSABO, 2014). plies to all independent school districts and all local gov- ernments outside of the cities of New York, Buffalo, Roch- In 2014, The New York State Association of School ester, Syracuse, and Yonkers. This law applies broadly to Business Officials released results of a survey of its mem- property taxes that support all local governments, includ- bers regarding the status of their fund balances titled, ing special districts that are independently governed, as School districts exhausting their fund balances. This new well as special districts that are established, governed survey was prompted by a previous report issued jointly and administered by another municipality (NYS Depart- with the New York State School Boards Association that ment of Taxation and Finance, 2012). reported 99 percent of school districts tapped their fund balances to plug holes in their budgets, due to limitations In the wake of the 2007-09 recession and recovery, in state aid and the property tax levy cap. Officials from 250 both the New York State Council of School Superintendents out of 697 school districts in New York State responded (NYSCOSS) and the New York State Association of School and revealed the following; (1) 81% of respondents re- n oitc Business Officials (NYSASBO) conducted studies of the plied that they would exhaust or spend down their fund urts impending impact of the tax levy cap. The superintendents balances within five years if limitations on state aid and nI d and business officials surveyed predicted a fiscally grim the tax levy cap remained in place; (2) 31% of respondents na outcome with regard to the impact of the tax levy cap on the replied they would exhaust their fund balances within the pi h ability to generate revenue sufficient to maintain school dis- next 18 months, and; (3) 56% of districts reported that at s re trict solvency and address impending cost drivers such as least 10% of their 2012-2013 operating budget consisted d ae rising mandated pension and healthcare contributions. of monies from their fund balance (NYSASBO, 2014). L ro f la A report by the New York State Council of School Research Methodology n ruo Superintendents in November of 2012, Can’t get there from J71 hreesrpeo: nAs essu rovfe syu opne risnctheonodle nfitssc awl hmo atottoekrs p, aprrto ivni dtehde csaunrvdeidy impact ofA t hqeu aonf ttithaet ivfies csatul dreyc wovaesr yc hpoosliecnie tso sintevmesmtiignagt efr tohme 0 ,g2 regarding the impact of the restraints of the tax levy cap and the 2007-09 recession and the implementation of the 2011 nirp the effects on school district finances. The respondents New York State Property Tax Levy Cap on the budgets of S indicated that between 2011-2012 and 2012-13 districts school districts located with-in a Long Island, New York would have to eliminate an average of 9 percent of their total suburban township. 10 Instrumentation and Procedure as pupil population is a factor in the amount of state aid received by each district. To accumulate the quantitative data for this study, school budget data from the Office of the New York State Research Question Used to Guide this Study: Comptroller and the New York State Education Department were analyzed and organized into tables comprising the To what extent have school district total expendi- quantitative changes in key categories related to student tures, school district employee benefit contribution expen- population, school district expenditures, reserves and rev- ditures, per pupil expenditures, instructional expenditures, enue with regard to school district budgets between the TRS contributions, district reserves, property tax revenue, 2008-09 and 2013-14 school years. Utilizing the Open New York State aid revenue, federal aid revenue, and pupil Data link on the Open Book New York Local Government population changed from 2008-2009 to 2013-2014? page on the Office of the New York State Comptrollers website, the researcher retrieved and analyzed revenues The data from the twelve school districts located and expenditure reports as well as balance sheets from within this Long Island township was analyzed and catego- all school districts located within this Long Island town- rized into school district expenditures, reserves and rev- ship between 2008 and 2014. The expenditure categories enue representing six years, from 2008-09 to 2013-14. examined were: total expenditures, district employee ben- efit (healthcare) contribution expenditures, per pupil expen- Findings ditures, instructional expenditures, and Teacher Retirement System (TRS) contributions. The district reserve catego- The findings of this study confirmed the findings of ries analyzed for this study were total fund balance and the New York State Council of School Superintendents unassigned fund balances. The revenue categories ex- (NYSCOSS) and the New York State Association of School amined were total state aid and property tax revenue. The Business Officials NYSASBO studies conducted between student populations of these districts were also analyzed, 2010 and 2014. The superintendents and business officials Table 1 Long Island Town - School District Key Expenditure Increases from 2008 to 2014 District Total Per-Pupil Instructional Benefit Contributions TRS Contributions Expenditures Expenditure Expenditures 2008-2014 2008-2014 2008-2014 2008-2013* 2008-2014 District A $13,980,478 $ 3,387 $9,922,147 $4,991,467 $ 8,899,369 District B $14,230,349 $ 4,419 $5,851,723 $2,635,770 $ 5,933,859 District C $51,338,282 $ 1,039 $24,539,923 $10,477,933 $ 7,589,785 District D $38,528,246 $ 2,231 $18,893,868 $6,267,452 $ 7,689,367 District E $23,906,872 $ 4,479 $10,773,035 $4,689,195 $ 9,832,485 District F $9,540,490 $ 5,388 $7,223,907 $3,909,217 $ 5,971,428 District G $619,187 $ 27,388 $422,544 $117,851 - $211,357 Sp rin g District H $11,109,881 $ 3,847 $7,090,051 $3,354,957 $ 4,387,550 20, 1 7 District I $11,402,139 $ 4,977 $4,460,557 $2,613,036 $ 4,288,383 J o u rn District J $14,467,866 $ 2,213 $14,673,689 $7,264,733 $ 2,831,258 al fo r L e District K $14,521,707 $ 6,182 $6,357,442 $2,421,492 $ 3,703,116 a d e rs District L $13,490,013 $ 3,914 $8,211,382 $4,158,220 $ 6,131,906 hip a n d Average 18,094,626 $ 5,788 9,868,356 $4,408,444 $5,587,262 In s tru Note. This data was retrieved from the Office of the New York State Comptroller’s website at ctio http://www.osc.state.ny.us/ from Open Data link on the Open Book New York Local Government page. n *2014 Per Pupil Expenditures were not available at the time the data were collected. 11 surveyed in those reports predicted a fiscally grim out- expenditure percentage prior to the implementation of the come with regard to the impact of the tax levy cap on tax levy cap. Due to the enactment of the GEA resulting the ability to generate revenue sufficient to maintain from New York State's budget deficit, the 2010-2011 school school district solvency and address impending cost year saw the greatest reduction of average school district drivers such as rising mandated pension and revenue. The enactment of the State Fiscal Stabilization healthcare contributions. Fund of the American Recovery and Reinvestment Act and the 2010 Education Jobs Act offset the State Aid revenue The findings of this research indicate that with shortfall between 2010 and 2012. regard to total expenditures, district employee benefit (healthcare) contribution expenditures, per pupil expen- To offset the cost drivers of the school districts, ditures, district reserves, instructional expenditures, lost state aid revenue from the implementation of the GEA, TRS contributions, and changes in tax revenue, school and in keeping property tax rates palatable to ensure the districts were faced with a variety of fiscal challenges passing of budgets, school districts within this Long Is- still resonating from the 2007- 2009 Recession. Ac- land, New York township followed these strategies, (1) cording to both Table 1 and Table 2, between 2008 and supplemented the lack of increased revenue by utilizing 2014, cost drivers such as district employee benefit con- district reserves, (2) reduced the rate of instructional tributions rose an average of $9,868,356 and TRS con- spending increases and, (3) reduced the rate of per pupil tributions rose an average of $4,408,444. From 2009- expenditure increases. 2011, three years prior to the implementation of the New York State Tax Levy Cap, the GEA was implemented caus- Conclusions ing a reduction in State Aid. The research from this study indicates that the According to Figure 1, school districts began re- implementation of the property tax levy cap, coupled with serving less of an increased percentage and reducing their the effects of the 2007-08 Recession has had and will Table 2 Long Island Town - 2008-2014 District Key Revenue, Population, and Reserves Changes Property Taxes State Aid Pupil Population District District Reserves 2008-2014 2008-2014 2008-2014 District A * 55% to 60% 32% to 26% Declined by 152 Decreased by $ 17,195,021 students District B 59% to 61% 29% to 23% Declined by 108 Increased by $2,035,504 students District C 19% to 24% 60% to 62% Increased by Increased by $6,609,037 1,581students District D 38% to 39% 50% to 48% Increased by 335 Increased by $26,005,178 students District E 50% to 60% 27% to 26% Declined by 611 Increased $5,615,476 students District F * 48% to 55% 37% to 32% Declined by 784 Decreased by $1,088,106 no students itc urts District G 89% to 92% 7% to 6% Increased by 5 Increased by $1,602,809 n students I d n a District H 72% to 74% 16% to 13% Declined by 164 Increased by $6,937,606 pi h students s red District I 52% to 61% 29% to 24% Declined by 395 Increased by $1,839,581 a e students L rof lan District J* 45% to 49% 42% to 38% Decslitnuedde nbtys 994 Decreased by $22,120,127 ru o J District K 53% to 59% 32% to 28% Declined by 312 Increased by $6,554,448 7 students 1 0 2 District L * 53% to 58% 32% to 27% Declined by 708 Decreased by $2,278,938 ,gn students irp S Note. This data was retrieved from the Office of the New York State Comptroller’s website at http://www.osc.state.ny.us/ from Open Data link on the Open Book New York Local Government page. * Districts mentioned in the 2014 NYSASBO Report. 12 12% Expenditures r10% a Ye 8% Reserves er 6% Revenue P e 4% g n 2% a h 0% C t -2% n ce -4% r e -6% P -8% School Year Figure 1: School District Budget Trends in the Long Island Town 2008-2009 to 2013-2014 continue to have economic consequences, necessitat- 2. Adjustment of the New York State Tax Levy Cap ing school districts to reduce levels of service. Employee Legislation salaries, healthcare benefits, pension costs and gov- ernment educational mandates have and will continue The residual effects of the Gap Elimination Ad- to increase. Without aid increases, school districts will justment coupled with the simultaneous implementation deplete their fund balances and reduce services to off- of the New York State Tax Levy Cap have created an un- set cap-piercing tax increases forcing districts to make tenable funding scenario for school districts to both main- economic decisions based on maintaining solvency in tain current levels of service and address mandated cost the face of rising mandated cost drivers and a limited drivers. If aid increases are not a feasible option from ability to collect revenue. New York State or the Federal Government, then a prag- matic “pressure release mechanism” adjustment to the This study will help guide legislators and New York State Tax Levy Cap must be considered to en- policymakers in evaluating the efficacy of the tax levy cap sure that school districts can sustain current levels of as well as provide guidance to boards of education, school educational service. This would allow districts to raise district superintendents, and school business officials as revenue to cover mandated cost drivers such as pension they address cost drivers related to planning budgets and and healthcare increases. This study indicates that with school district fiscal plans under the tax levy cap. a limited ability to increase tax revenue and a reduction in state aid, school districts have been forced to utilize fund Recommendations balances and reduce instructional expenditure increases to address mandated rising TRS benefit-healthcare con- S 1. Financial Forecasting, Strategic Planning and Fiscal tributions. This strategy has led to four districts being p rin Tolerance Assessment identified by the New York State Comptroller as being in g 2, some form of fiscal stress. 0 1 equacy aSntaralytseigsi cis pelassnennintiga l.b aSscehdo oolf fd oisft raicnt leefafedcetrisv eh aavde- In 2011, New Jersey adjusted its tax expenditure Jo7 u a fiduciary responsibility as part of their governance duties limitation law to a 2% increase with a majority override to rn a that includes knowledge of ongoing financial conditions, enable school districts to seek increased property tax l fo compensation and benefits, and budgeting as they relate revenue during periods of fiscal difficulty (Chang and Wen, r L e to the mission and goals of the organization. The practice 2014). This was intended to provide districts with the da e of financial forecasting, strategic planning and the use of a ability to address debt payments, rising health benefit rsh relevant fiscal tolerance assessment should be standard and pension costs and unforeseen emergencies. This aip n policy among school district leadership as its vital need in turn made the New Jersey Tax Expenditure Limit similar d has been demonstrated by the impact of both the New York to Massachusetts’s Proposition 2-½, which allows a 2.5 Ins State Property Tax Levy Cap and the economic stressors percent annual growth (Bradbury, Mayer, & Case, 2001). truc related to the 2007-2009 Recession. tion 13 3 . Recommendations for Further Research Lyons, K. and Lav, I.J.(2007, June) The Problems with Prop- erty Tax Revenue Caps Retrieved from Policy Archive http:// The results and research conducted for this study www.unz.org/Pub/PolicyArchive-2007jun-00222 has revealed the possibilities for a multitude of follow up studies regarding the impact of Tax Expenditure Limits on New York State School Boards Association (2015): Issue Brief: school district leadership practices, educational finance Gap Elimination Adjustment. Retrieved from http:// policy, and school district financial planning practices. www.nyssba.org/nyssba-news/ Additional research is recommended not only on New York State Association of School Business Officials. (2014). School Districts Exhausting Their Fund Balances NYSBO. Re- the effects of the New York State Tax Levy Cap, but also the trieved from http://www.nysasbo.org/page/press-releases-28/ impact of the 2007-2009 Recession on municipal and news/school-districts-exhausting-their-fund-balances-3.html school district planning practices. The New York State Tax Levy Cap is a relatively new policy at the time of this re- New York State Association of School Business Officials. search. It is recommended that researchers further study (2014). School Spending and Proposed Taxes are Contained the impact and effect of the New York State Tax Levy Cap on as School Districts Draw on Savings. Retrieved from http:// school district financial planning within the next three to www.nysasbo.org/uploads/press/400521138_NY five years. As the economy recovers from the 2008 reces- SASBO%20-%20Property%20Tax%20Report%20Card sion, an analysis of future budgets with a comparison to %20Report%20-%20May%202014.pdf the findings of this study would provide further and in-depth analysis of the impact of the Tax Levy Cap on school dis- New York State Association of School Business Officials. trict financial planning. It is also recommended that re- (2014). The Road Ahead: School District Insolvency searchers conduct a comparative school financing analy- NYSBO. Retrieved from http://www.nysasbo.org/uploads/ sis on the effects of the implementation of the New York publications/1390919081_NYSASBO%20School%20 State Tax Levy Cap to tax expenditure limitations that have District%20Insolvency%20Report%20January%202014.pdf been previously implemented in other states such as California, Massachusetts and New Jersey. New York State Council of School Superintendents. (2012, November). Can't get there from here: A survey on school References fiscal matters. Retrieved from http://www.nyscoss.org/img/ news/news_4fuzv6ohxl.pdf Bradbury, K. L., Mayer, C. J., & Case, K. E. (2001). Property tax limits, local fiscal behavior, and property values: evi- New York State Department of Taxation (2012). Cap NY Prop- dence from Massachusetts under Proposition 2-1/2. Jour- erty Taxes: A Citizens Guide. Retrieved from http:// nal of Public Econ. reforminggovernment.ny.gov/?q=reforminggovernment/ guide-to-the-property-tax Brimley, V., Verstegen, D. A., & Garfield, R. R. (2012). Financing education in a climate of change (11th ed.). Boston: Pearson. New York State Education Department (2010). School Finance and Budget Matters. Retrieved from Web.http:// Cunningham, Deborah H. "New York Property Tax Cap Im- usny.nysed.gov/arra/sf-faq.html#ebp. plications for School Districts." Restructuring Local Gov- ernment. Mildred Warner / Cornell University, 17 Dec. 2014. New York State Education Department (2015) 2014-15 State Web. 26 Jan. 2015. Aid Handbook : State Aid Formula Aids and Entitlements for Schools in New York State as Amended by Chapters of the Chang, Hector, and Christine Wen. "Tax Caps in Other Laws of 2014. Retrieved from https://stateaid.nysed.gov/publicat n States: Lessons for New York." Restructuring Local Gov- o itcu ernment. Mildred Warner / Cornell University, Dec. 2014. Office of the New York State Comptroller. (2014). Fiscal Stress rts Web. 26 Jan. 2015. Monitoring System. Retrieved from http://osc.state.ny.us/localgov/ n I d pubs/fiscalmonitoring/pdf/Fiscalstress monitoring.pdf n pa Eom, T. H. (2004). Evaluation of New York state property tax ihs policy: Administration and behavioral impacts of school prop- Office of the New York State Comptroller. (2015) School Dis- red erty tax relief (STAR) program. (Order No. 3149045, Syra- trict Budget Data. retrieved from http://www.osc.state.ny.us/ a eL cuse University). ProQuest Dissertations and Theses, 167- from Open Data link on the Open Book New York Local ro 167 p. Retrieved from http://search.proquest.com/docview/ Government page. f la 305077721 ____________________ n ru o J71 GCaaplli goann , SJc. hJo. o(2l 0D1i5s)t.r icAtn FAinnaalnycsiias l oPf ltahnen Ninegw i nY otrhke S Ttaotwe nT aoxf J2o0h1n5 JG. rGadaulliagtaen o, fE Tdh.De .S, cish ao oplu obfl Eicd succhaotoioln a,d Dmeipnaisrttrmaetonrt aonf dIn a- 0 ,gnirp2 IPsrloipQ uNeeswt DYisosrek rt(aOtirodnesr &N oT.h e3s6e6s4 4G3lo0b).a lA. v(1a7il3a4b4le7 6F9r8o3m). sintr Nucetwio nYaolr &k. Administrative Leadership, at St. John’s University S Retrievedfrom http://search.proquest.com.jerome.stjohns. edu:81/docview/1734476983?accountid=14068 Anthony Annunziato, Ed.D., is an Associate Professor, Depart- ment of Instructional & Administrative Leadership, at St. John’s 14 University in New York.