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Published in Print: October 27, 1999, as N.H. Supreme Court Rejects Funding System

N.H. Supreme Court Rejects Funding System

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New Hampshire lawmakers scrambled last week to come up with yet another plan to pay for schools this year after the state supreme court effectively crippled the finance overhaul that took effect just over three months ago.

In its ruling, the high court struck down the property tax that would have raised most of the money for the new plan. The problem, in the view of the justices and the poor communities that challenged it, was that the way the tax was being phased in unfairly favored rich communities over less affluent ones.

Under the formula, about 50 wealthy communities were given up to five years to raise their local property-tax rates to the uniform rate of $6.60 per $1,000 of property value that other towns and districts would have to pay. The legislature adopted that provision to give a break to property owners on fixed incomes, landlords locked into multiyear rental contracts, and others who would be hard hit by a steep and sudden tax increase.

But the five-judge panel said the phase-in was "neither reasonable nor fair" because most of the residents of the property-rich communities that got the breaks would not need them. A single dissenting opinion came from Justice Sherman Horton, who argued that the phase-in should be permitted because it was temporary.

Urgent Action

The Oct. 15 decision marked the second time in two years that the New Hampshire Supreme Court declared the school funding system unconstitutional. Both decisions grew out of a lawsuit brought in 1991 by five poor communities.

The new plan, which took effect July 1, was intended to address some of the concerns raised by those towns by increasing the state's share of education funding and evening out tax-rate differences among communities. ("At Long Last, N.H. Passes School Finance Plan," May 5, 1999.)

But even before the court made its ruling this month, the state already faced a shortfall of $100 million of the $825 million in state aid promised to districts under the formula. Now, the legislature will have to come up with $460 million more to make up for the loss of property-tax revenue.

"We are faced with an absolute catastrophe if we don't take some action," said Caroline McCarley, the chairwoman of the Senate education committee and a member the finance committee. Ms. McCarthy, a Democrat, predicted the Senate would approve a plan for resolving the issue by week's end.

Even if legislators fail to resolve the crisis, the state is still legally obligated to make good on its commitment to districts--a provision of the spending plan that the court left intact.

But resolving the issue is nonetheless urgent, because most towns and districts next month begin sending out local tax bills and debating their school budgets for 2000-01.

"The timing has simply wreaked havoc in terms of our budget preparations for next year," said Paul W. Krohne, the executive director of the New Hampshire School Boards Association.

Some local district leaders also worried that uncertainty about the property taxes could jeopardize upcoming bond elections.

"We're a little concerned that voters may be confused and may not want to pass a bond issue," said Leo P. Corriveau, the superintendent of a 1,400- student school district serving three central New Hampshire towns. The district is seeking from $8 million to $12 million in bonds to build new schools and expand existing ones.

Last week, several proposals were already being circulated to resolve the crisis. Gov. Jeanne Shaheen, for example, proposed a stopgap package that includes property taxes, a capital-gains tax, and some higher exemption thresholds for individual taxpayers and senior citizens.

And a proposal in the Senate would even impose an income tax in the "Live Free or Die" state for the first time. The Democratic governor, however, has already vowed to veto any such measure.

"If we do not act quickly," Ms. Shaheen said, "both the state and local communities will face severe fiscal problems. Indeed, many communities will run out of money in December--if we do not act within the next few weeks."

Vol. 19, Issue 9, Page 22

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