In 1972, when Kansas implemented a school-finance equalization formula, John Bottom was one of its staunchest critics.
Like equalization formulas in other states, the one in Kansas was designed to help poor, primarily urban districts, not the sprawling, land-rich agricultural areas of the state, like Beloit, where Mr. Bottom serves as superintendent of schools.
For nearly a decade, that’s exactly how it worked. Until three years ago, Beloit, a relatively wealthy district in north central6Kansas, didn’t receive one penny from the state through the equalization formula.
Then, almost overnight, everything changed, as the farm boom of the 1970’s gave way to the crisis of the 1980’s. Declining exports, high interest rates, and the lower inflation combined to cut into the value of farm property throughout the 12-state farm belt, reducing farmers’ wealth and increasing their opposition to local taxes that support schools.
Each of the last two years, when Mr. Bottom went before the local school board, he was told, he said, that “there could be no tax increase, period. The economy simply would not stand it.” Program and staff cuts seemed inevitable.
But fortunately for Mr. Bottom, the school-aid formula that he had railed against came to his district’s aid. In three years, due to the decline in local property values, Beloit’s state aid jumped from nothing to $900,000, now accounting for almost 40 percent of the district’s $2.5 million budget. In the next fiscal year, state aid could reach more than $1.2 million, according to Mr. Bottom.
“It’s just been our salvation, that’s it,” Mr. Bottom said. “Without it, we’d be riffing staff and cutting programs as fast as we could.”
As it is, he added, “we’ve not had to cut anything.”
“I can tell you, in the last three years I’ve changed my mind,” Mr. Bottom said, referring to the equalization formula. “I don’t mind eating a little crow.”
Beloit’s experience, says another Kansas superintendent, Furman Marsh of Shawnee Heights, is simply an example of an equalization formula working as it is supposed to: When a district loses wealth, it is compensated by the state.
Shift in Taxation
Mr. Marsh’s district and others have not been so fortunate. Due to its newfound property wealth relative to districts like Beloit, Shawnee Heights, which mixes farm land with suburban property, has seen its state share drop from 63 percent last year to 59 percent this year.
“We desperately need a 4 percent increase [in local taxes] to stay where we were last year, and that would be without improving anything,’' Mr. Marsh said.
But due to the economic downturn fueled by the farm crisis, Mr. Marsh, like Mr. Bottom, is in no position to obtain a local tax increase.
“The community is already facing its maximum amount of property tax,” he said. “I don’t think the public could support schools more even if it wanted to.”
According to Ray Hill, president of the Washington State Grange, farmers feel that property taxes place a disproportionate burden on them, and they oppose measures that would make it easier to raise levies. “We recognize the fact that there have to be taxes, but we feel the burden should be on the general public as a whole,” he said.
But as Mr. Marsh pointed out, non-farmers have also been hurt by the farm crisis and in many cases are no more capable of withstanding a tax increase than the farmers. “In Kansas, everything that isn’t agriculture is agriculture-related,” he said.
Farm-Belt Pattern
School districts in other farming states face similar problems, but their experiences vary depending on the way property is assessed, their ability to tax, the type of state-aid formula, and the level of state funding.
But while these factors differ from state to state, some common patterns emerge across the Farm Belt. The problems of the agricultural sector have brought increased pressure on the property tax--a widely disliked but usually stable source of revenue--a shifting of the tax burden from rural to urban areas, and an increased demand for state funding.
In several states, including Iowa, Nebraska, and North Dakota, legislatures are moving, or already have moved, to change the state’s school-finance structure, in part due to the financial stresses caused by the farm crisis.
In Nebraska, for example, the legislature is considering a constitutional amendment that would limit property taxes to funding one-third of local school budgets. If approved, that would require a massive shift to sales and income taxes collected at the state level to support the schools, according to Gary Healey, a consultant for the finance division of the state’s education department.
State revenue currently provides about one-third of the cost of precollegiate education in the state, he said.
In Iowa, legislators are considering a wholesale revision of the school-aid formula that would take into account declining enrollments and the stagnant economy, and would increase the state’s share of precollegiate-education costs to 50 percent.
The Crisis
Underlying these stresses on school finance is the most severe farm crisis since the Depression.
During the 1970’s, farmers experienced a boom, fueled by a surge in exports and an inflationary economy. Land values skyrocketed, enabling farmers to secure more loans and cultivate more land.
But the bubble burst in 1981, when the Federal Reserve Board, which controls the money supply, acted to raise interest rates to wring inflation from the economy. Due to the overvalued dollar, the level of American exports fell, and the price of farm goods dropped precipitously as farmers tried to unload the output of the holdings they had expanded during the 1970’s.
Land, which farmers use as collateral to secure loans, also declined in value, as farmers’ anticipated revenues fell and other investments became more attractive.
“With interest rates rising and inflation falling, you could not justify investing in land with a 3 percent return,” said Neil E. Harl, professor of agriculture and economics at Iowa State University. “Land values had to fall.”
From 1981 though 1984, farm land values dropped 8 percent nationwide, but far more steeply in the Farm Belt. According to Mr. Harl, Iowa has lost half the value of its farm land since the crisis began, while other Central and Midwestern states have seen land values drop 20 to 30 percent.
As the values have declined, lenders have increased the pressure on borrowers, catching them in a “pincer movement” of falling assets and rising debt loads. Since two-thirds of all farm debt is held by about one-third of all farmers--primarily family farmers, with mid-sized holdings--many, perhaps up to 15 percent, face the prospect of default, according to Mr. Harl.
An attendant problem, according to Calvin Beale of the U.S. Department of Agriculture, is that the farmers in the most trouble tend to be the younger ones, between the ages of 25 and 50, who were more aggressive in the 1970’s and now find themselves more deeply in debt.
Default by these farmers would accelerate movement off the land and place an added burden on rural school districts whose state aid is based on enrollments, Mr. Harl and others said.
el6Assessments
School districts in most farming states have yet to feel the full impact of the crisis, either because farm land has not been reassessed to reflect its lower value or because of a lag time between reassessments and collections.
In Iowa, for instance, taxes on farm land actually rose last year, despite the steep decline in land values, according to Mr. Harl. “The assessed valuation has been going up, even though the fair market value has been going down,” he said. “That’s causing people a lot of concern.”
One reason is that land in Iowa is assessed on the basis of productivity, rather than fair market value. A relatively common form of assessment, productivity indexes mitigate wild swings in assessments, so that assessments rise less sharply than land values in good times, and fall less steeply in bad times.
Also, according to Mr. Harl, taxes now being paid in Iowa were levied “more than a year ago,” and fail to reflect the declining productivity of the land.
“If assessments go down, then we’ll have problems,” said Lukas J. de Koster, president of the board of the state department of public instruction.
Declines in Illinois
One state where assessments have fallen and districts have seen their budgets squeezed is Illinois. Some rural Illinois districts have reported valuation declines of up to 33 percent in the past two years.
Illinois used to base agricultural assessments on a percentage of fair market value, but switched to a productivity index two years ago to soften the blow of declining land values.
According to Gerald Glaub of the Illinois Association of School Boards, the change in assessment procedures was a positive step. “If we were still on the old market-value system, taxable values would have gone down even more,” he said.
But since assessments based on the productivity index are being revised on an annual basis to closely reflect any changes in productivity, assessments in Illinois have more accurately reflected the farm decline than those in other states.
The Illinois legislature stepped in last year and placed a 10 percent limit on assessment declines in a single year, slowing the erosion in local funds that support schools.
According to Mr. Glaub, the erosion of local funds might seem to indicate that the state would pick up a greater share of education costs, but it does not work that way in Illinois, he said, because education “is funded at such a low level that only two-thirds of the districts even qualify for state aid.”
“If they’re considered wealthy, they might not make up a dang thing,” he said.
As in other states, like Kansas, “what happens when farm assessments decline is that the burden is shifted to nonfarm property,” he said.
In other farming states, including Iowa, Missouri, Nebraska, North Dakota, and Wisconsin, school-finance experts said that assessments have yet to reflect declining land or productivity values. But they agreed that assessments may drop in the near future.
“That could happen beginning this year, as lagging farm values creep into the computations,” said George Tipler, executive director of the Wisconsin School Boards Association.
In several states, the crisis has been felt in other ways: in greater state payments to local districts, farmers’ opposition to tax increases, and the increased likelihood of tax and loan defaults.
In Iowa, for example, Mr. de Koster reports that the second half of this year’s tax collections are running substantially behind the first half, a clear sign of a rising default rate.
Costs Shouldered
In Minnesota, the decline in property value has simply shifted costs from the local level to the state, according to Gordon Donhowe, finance director for the state’s department of education.
“It’s increased our costs by about $60 million a year,” he said. “It’s a costly item, but it’s our policy to pay it.”
According to Mr. Donhowe, Minnesota’s school-aid formula sets a basic expenditure level of $1,455 per student and subtracts from that the amount of money that a 23.5-mill levy raises at the local level. The state pays the difference, including any increase due to declining local assessments.
“It’s had a big impact this year, some impact last year and some next year,” Mr. Donhowe said. “We expect a continued drop.”
Same Shift in Wisconsin
Likewise, in Wisconsin, where land that used to sell for $3,500 an acre now fetches half that, Mr. Tipler reports that declining land values simply shift the burden of supporting schools to the state and to non-agricultural taxpayers.
“Suppose the valuation is split 50-50" between farmers and city dwellers in a given district, he said. “The city people will now pay 55 percent.”
According to Mr. Tipler, Wisconsin bases its state aid on a set valuation per child, and if a local district does not have that much wealth, the difference is covered by the state. As a result, he said, “if the value falls by 10 to 25 percent, the state will have a greater state-aid obligation.”
Local Problems Foreseen
In other states, the financial outlook is not as positive.
In Idaho, for instance, where only about 25 percent of precollegiate-education costs are raised through local property taxes, the state department of education received a smaller budget increase this year than it had expected, primarily due to the legislature’s unwillingness to raise taxes, according to Robert Dutton, the department’s associate superintendent for finance.
The previous legislature “almost promised” the department a substantial increase, Mr. Dutton said, but “they just simply couldn’t find the money, because they felt people couldn’t afford it.”
Idaho law limits the amount of lo-cal revenues that districts can raise in a given year without calling a special election. And the same pressures that came to bear at the state level could be felt locally, Mr. Dutton said. Districts “may have unique problems getting overrides or supplemental levies through,” he said.
North Dakota Shortfall
Many of these problems came together recently in North Dakota, where the legislature approved a switch to productivity-based assessments that will cost the statepercent of its taxable valuation--about $32 million--and shift the tax burden to cities.
Alton N. Koppang, director of finance and reorganization for the state education department, said districts can make up the shortfall by simply increasing local levies. But according to Dave Meade, executive director of the North Dakota Council of School Administrators, limitations on the amount districts can levy without calling a vote assure that “most of the districts won’t quite make up the 7 percent shortfall.”
And even if districts do put the matter to a vote, they stand little chance of winning. “Property owners are not willing to take on additional burdens,” said Eugene Burns, superintendent of the Epping schools. “With the economic situation the way it is, a mill increase is going down wherever it’s presented.”
“The concern of folks is such that they’ll oppose anything that looks like a tax increase,” added Richard Ott, president of the North Dakota School Boards Association.
Prediction’s Reality
For Reid Strabbe, who took over as superintendent in Karlsruhe in 1981 and predicted that the district would shut down within five years, the changes mean that his prophecy is likely to come true.
Mr. Strabbe had hoped to get a 10-mill tax increase passed this year, knowing that “if I asked for 15 or 20 mills, it wouldn’t pass.”
A 10-mill increase would have raised $9,000 for the schools, he said, but with land assessments dropping by 7 percent, “it’s zero.” Instead, it would take a 20-mill increase to raise the same $9,000, he said.
Within two years, the district will be operating in the red, Mr. Strabbe said.
