A Tiger Behind Every Door

Vermont is now in the third year of Act 60, the earthshaking education finance reform of 1997. Its political dynamics are now becoming clear, as are the hard choices that legislators will soon have to make to keep Act 60 from collapsing.. As in the old fairy tale, policy makers will soon discover that there is a tiger behind every door. Every step needed to keep Act 60 working is fraught with dire political consequences.

Act 60 created two new state property taxes to pay for public education. The first one was straightforward: the state levied a tax rate of $1.10 per $100 of equalized grand list value across the state. When added to other state revenues earmarked for education, this now produces $5377 per pupil, which is returned to the towns as a block grant.

The second state tax is more subtle. All the town school meetings vote budgets. The resulting spending per pupil in each town is now greater than the $5377 per pupil received through the Act 60 block grant. Where do the towns get the additional money needed to get from $5300 per pupil to $6000 or $7000?

The spending amounts in excess of the block grant receipts are pooled, and divided by the same tax base as that of the state property tax. This yields an equalized rate, which is then applied to all the property in all the towns to produce a pool ("the shark pool") of additional money. Funds from this pool are distributed to the towns equally per pupil. This "equalized yield" mechanism taxes property-rich towns and sends the proceeds to property-poor towns.

As intended by the authors of Act 60, these two mechanisms together provide a way for the state to tax all property and distribute the proceeds equally to all children. By adding the second process, the state can maintain the notion that local voters still have something to say about how much their town spends on schools.

The state can also guarantee the yield of this "shark pool" by pumping money into it. Every dollar injected from state sources is one dollar less that has to be taken from property-rich towns and given to property-poor towns. So the state injection alleviates the otherwise painful results of the shark pool.. In FY 2000 the legislature voted $36.8 million of the surplus for this purpose.

In 1997 the Joint Fiscal Office published estimates of expected property tax revenues for education under Act 60. For FY 1999 they were right on the mark. For FY 2000 their estimate will be $80 million too low. In FY 2001 the shortfall will be $109 million. The following year it is projected at $147 million. This represents an increase in education property taxes of 27% in three years! What is happening here?

What is happening is that "receiving" school districts have figured out that the smart game is to vote huge school budgets, which "sending" towns will be forced to subsidize. What the receiving towns get back from the shark pool is, to them, "free money".

So long as the state uses a huge portion of a surplus to subsidize the shark pool, the property rich towns will feel less pain, and the political rebellion will be postponed. But when the surplus dries up, or is diverted to pay for other programs like Medicaid, mental health, or whatever, the "feeding" towns will one after another become "food", as Burlington already has. When the great majority of towns become sending towns, the demise of Act 60 will be at hand.

How can result this be avoided? There is a political tiger behind every door.

The state could raise the $1.10 state property tax rate to produce more money to increase the block grant and reduce the obligations of the shark pool. Not a popular idea.

The state could impose spending controls on local school budgets, thus wiping out the largely imaginary "local control" offered by Act 60. Not a popular idea.

The state could impose a statewide teacher contract, necessarily including regional cost variations, and hold down teacher pay to contain costs. Not a popular idea (to put it mildly) with the politically powerful Vermont NEA, the teachers union.

The state could take over the listing of property everywhere in the state, and rapidly jack up assessed values so that the statewide property tax produces higher revenues at the same rate. This is called "kicking the dog". It is intensely unpopular with taxpayers. (This is what produced the historic Proposition 13 property tax revolt in California in 1978.)

Local taxpayers have slowly figured out that their outrage at escalating property taxes for education should be directed at the state, not at local voters. Act 60 got rid of purely local spending decisions. Local voters can vote a budget, but how much local taxpayers must pay in property taxes to fund that budget is determined elsewhere by the actions of many other players, all trying to game the system to get more money. When the outrage grows, it will be directed at Montpelier and Act 60.

When will all this happen? Well, the FY 2003 education property tax spending is likely to be $180 million over the trend line projected in 1997. And the huge state surpluses won't go on forever. So the legislature and Governor elected this November will probably be the ones who will have to start opening the doors. They are not going to like what they find.

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March 2000