Wednesday, April 29, 2009

Schools and Taxes

Lots of travel means less blogging; meanwhile, I've spent a lot of time on the phone over the last couple of days talking with reporters (read the just-released issue of the City Paper, link to follow; the Columbia Journalism Review wanted to talk about copyright law, Shephard Fairey, and the future of traditional media; and Dutch public broadcasting somehow got the idea that I could help explain Pittsburgh's relative prosperity).

But all of that pales in comparison to this afternoon's news: The Pennsylvania Supreme Court has upheld the trial court judgment in the case testing the validity of Allegheny County's real estate assessment system. The county's base year assessment system is unconstitutionally unfair, and something must be done.

Well, then. Political heads will focus on what County Executive Dan Onorato will do. I'd prefer to link the story to state-level proposals to consolidate the many school districts in the Commonwealth. Assessments get set by the county, but most of my tax dollars go to my local school district.

And it's at the school district level where the inequities in the current system really come home to roost. The consolidation proposal focuses on cost savings, but the real problem is the gross inequities in the quality of educational resources across Pennsylvania's many districts. Districts with high assessment bases can tax themselves modestly, come up with a generous pile of cash, and fund impressive school systems. Districts with low assessment bases can't tax themselves enough to fund anything decent. Districts with high cost programs and heterogeneous assessment bases -- the City of Pittburgh, for example -- have little choice but to tax everyone at a high level. And the quality of the program is uneven at best.

So, with either assessment reform or school district reorganization, watch out for the "Whack-a-Mole" effect: fixing a problem over here will create unanticipated problems over there. When assessment reforms cross wires with school district reorganization, we may end up with Caddyshack, that is, chaos. If the county finds a way to equalize tax burdens, it may indirectly make the school district inequity problem worse. And consolidation makes no sense unless it takes assessment methods into account.

Here is some history of note:

Some of you may have heard of a lawsuit titled Serrano v. Priest, which started in the California state courts way back in the early 1970s. The plaintiffs in that case offered a simple argument: California's method of financing its public schools violated the equal protection clause of the state constitution. California's method then, like Pennsylvania's method now, required that local authorities set property tax rates. Poor communities couldn't raise the same money per student that wealthy communities could raise. The Supreme Court struck that down. In response, the California Legislature centralized collection and distribution of property tax revenues, so that every student in the state was funded (nominally) at the same per-pupil level, regardless of where that student attended school. The total per-pupil revenue of each district was capped. Extra collections from wealthy districts were, in effect, distributed to poor districts.

Around the same time, the Legislature took a stab at property tax reform, enacting legislation requiring that property tax assessments be marked to market value. That effectively eliminated the discretion that local assessors previously had applied to hold down assessments for fixed income homeowners and generally to bias the system in favor of residential property owners and against owners of commercial property.

The product, in the mid-1970s, was a toxic combination: Climbing property values, producing escalating property taxes, linked to a wealth-redistribution requirement. Wealthy and middle class homeowners in California were mad as hell, and they weren't going to take it any more!

If you haven't heard of Serrano v. Priest, you may still have heard of the resulting tax "revolt," Prop. 13 (not "Proposition 13," but "Prop. 13," or "Jarvis-Gann" as it was universally known), the property tax "reform" initiative that left the school financing system in place but transformed the property tax assessment scheme. Under Prop. 13, now part of the California Constitution, real estate can be reassessed only upon a "change of ownership," and assessment increases during the term of ownership are capped at a tiny percentage of the property's value. Local authorities are barred from raising supplemental revenue (school boards could not impose local taxes or sell local bonds) except under conditions that are nearly impossible to meet. (Those conditions have been relaxed just slightly since 1978.) If you watch the movie "Airplane!," and if you watch the credit all the way to the end of the flick, you'll see a man sitting in a taxicab waiting for Robert Hays, the driver and star of the movie, to return from landing the stricken plane. That man is Howard Jarvis. The man who led the California tax revolt is also a minor footnote to a slapstick satire of disaster movies.

Which is, in a way, appropriate. Initially, all assessments were frozen as of 1978 values, which meant that public authorities in California were essentially unable to capture much of the taxable value of the huge increases in property value that the state witnessed over the succeeding 10 years -- though demand for public education and other public services skyrocketed. Many of the dire predictions of Prop. 13 opponents -- that schools and other public services would be starved of revenue -- proved accurate, though the full force of the effect only became clear over a period of years. Some of the damage was concealed and even reversed in the late 1990s as a result of a bubble in tax revenues associated with a bubble of the dot.com economy. But that money is long gone.

Today, the result is that (i) communities that were wealthy then remain largely wealthy today; (ii) because the California system of public education, and particularly its K-12 system, was all but starved of the money that it needed to operate effectively, it operates well today only in wealthier communities that have developed workarounds to the Prop. 13 limits. My view is that California's school finance reform and property tax reform have left the state as a whole worse off than it was before. That's not to say that the old system was a good one, and it's not to say that improvements weren't warranted.

But when you start tinkering with assessments and schools, be careful what you wish for.

4 comments:

Anonymous said...

Mike -
Thanks for the post.
How would you take your post a step further - what is a solution that balances the need for equal access to quality education with the need for fiscal responsibility. It's no easy feat, but I'm not sure that Calif's Prop 13 is as bad as you think. (admittedly I currently live in Calif and we're drowning in taxes so the mere hint of even more tax hikes sends me up the wall).

The data I've seen doesn't show tremendous underfunding for education in California relative to the rest of the country and needs to be put in the context of an overall explosion in education funding generally.

But you're right that the inequities still exist. Middle class people flee SF and head to Marin or down the peninsula when they're kids are school age. I'm curious to hear how places like Marin do it with the same government money. I suspect part of it is the local community "fundraising" to supplement the gov't money.

I definitely think vouchers can play a role here. Giving parents that equalized amount of $ and allowing them to choose a different school will have dramatic impact on the quality provided. But that's a whole separate topic.

Mike Madison said...

I won't touch vouchers here, and I'll save thoughts on a solution for a later post.

On the California situation, I focused on that partly because it's the most salient example of the conflict, and also because I know a lot about it. I grew up on the SF Peninsula and was a high school senior there in '78-'79. (Prop. 13 passed in June '78, IIRC.) I left the state for college, returned in '84 and stayed until moving East in '97. I'm back in the state once or twice a year, with many friends and family in both Northern and Southern CA. So I've seen most of the impact first-hand.

Wealthy districts (some in Marin County, and in Palo Alto and Menlo Park) rely heavily on "private" foundations that raise money from families and private sources, and "voluntary" contributions from families that send their kids to the schools.

For example, the per-student budget in the Palo Alto Unified School District is roughly the same as the per-student budget in Mt. Lebanon. Demographically speaking, the two communities play similar roles in their respective regions. And the quality of the education in each district is pretty high. But last time I checked, the Mt. Lebanon district was getting more than 90% of its revenue from local taxes; Palo Alto was getting something like 65% of its revenue from local taxes. Palo Alto is a very wealthy place; it is (relatively speaking) easy to find extra money to donate to the schools. (Of course, homeowners there are already paying millions of dollars for modest houses!) A related anecdote: In the mid-1990s, I looked into enrolling my kids in the Palo Alto elementary schools. The kindergarten teachers handed out a list of school supplies that each family was "encouraged" to contribute to the classroom -- everything from boxes of paper to cases of Kleenex to sand for the playground. And the (additional) suggested "voluntary" cash contribution per child was around $500.

Less wealthy districts -- our kids were in the Oakland, CA schools for a few years -- simply did without. No foreign languages. No art. No music. No school library. Minimal classroom supplies (paper, pencils, chalk). If the school had those things, it was because the PTA raised money through bake sales and offered volunteers to staff them.

MH said...

I know it wasn't your main point, but the Prop 13/Airplane connection is easily the most memorable news I've heard all week.

Mike Madison said...

I re-checked the Mt. Lebanon/Palo Alto figures. Mt. Lebanon gets about 70% of its money from local real estate taxes, close to 10% from local Earned Income Taxes, and about 15% from the state. In all, it gets more than 95% of its funds from taxes and other public sources. With a total budget of between $70mm and $80mm, its per pupil cost is about $13.5k.

I overstated the amount of money contributed to the Palo Alto schools by local foundations, specifically "Partners in Education," which the largest source. PAUSD gets about 65% of its general funds from property taxes, in a total budget of over $140 million, but the bulk of the difference also comes from public sources. [Note that Palo Alto generates more than $20mm in property tax over and above what the state revenue limit permits the District to keep.] (Palo Alto is over twice the size of Mt. Lebanon, and it operates two high schools.) Still, PiE contributes just over $2 million per year to PAUSD, which is a lot of money, and that money funds college counselors at the PA high schools, among other things. PAUSD's per-pupil expense figure is somewhere around $13k -- that is, roughly what Mt. Lebanon's figure is. But the local foundation's fundraising goal is based on raising $650 per student *in addition to* each family's property taxes. In other words, as a crude measure of the impact of CA's different property tax system -- even in a high income community -- $650 of the school district's per-pupil cost comes from sources other than property taxes and other state and federal funding. That makes a big difference, and if you took $650 per year per student of Mt. Lebanon, USC, Bethel Park, or Peters (to pick four higher-end South Hills communities), those school districts would take a big hit.