N.D. Schools Feel Impact of Tax-Abatement Choices
The North Dakota School Boards Association recently completed a renovation of its two-story office in Bismarck.
The improvements probably boosted the building's value by $100,000, says Richard Ott, the president of the organization. But because of a local tax-abatement effort, meant to encourage new development in the area, the association won't pay any increase in property taxes for the next three years.
It's just such tax incentives that are hurting the very school districts the association represents, Mr. Ott argues. And the association would like state legislators to consider the impact on schools when passing laws that allow such exemptions.
Next month, Mr. Ott and a handful of school leaders from around the state intend to testify before members of an interim legislative committee to discuss the issue and present findings of a statewide survey examining districts' financial losses because of tax abatements.
Mr. Ott surveyed all of North Dakota's 237 districts, and received responses from about 75 percent. More than half of the respondents said that they had been adversely affected by tax abatements and exemptions. The losses ranged from just a few hundred dollars in some districts to as much as $16 million a year in the 11,685-student Fargo school system where the annual budget is $58.6 million.
"We didn't realize that it was becoming this big of an issue," Mr. Ott said in a recent interview.
Some would argue the facts make a case for giving North Dakota educators a greater say in tax-abatement decisions, something that only a handful of states now allow.
A Pivotal Agreement
Because of tax exemptions, the West Fargo district, for example, lost about $350,000 during the 1993-94 school year. In 1996-97, that amount grew to $789,000, said Mark Lemer, the business manager for the 4,800-student district, which has an annual budget of about $19 million.
State laws allowing cities and counties to grant property-tax abatements for residences and commercial establishments have been on the books for several years in North Dakota, as well as many other states. ("Despite Rhetoric, Businesses Eye Bottom Line," March 19, 1997.)
In North Dakota, the effects have become more pronounced as districts have grown more reliant on property taxes for funding in recent years. The state contribution to schools has fallen in the past 15 years, from a high of 60 percent to about 43 percent now, says state Superintendent Wayne G. Sanstead.
Most observers, however, point to a single, but pivotal, decision by the legislature in 1994 as the reason for heightened concern among school officials.
In a special session that year, legislators made it possible for Richland County officials to extend a 20-year "payment in lieu of taxes"--or PILOT--offer to ProGold, a major corn-processing plant in Wahpeton in the southeastern corner of the state.
ProGold, which produces corn sweeteners and corn-feed products, still pays taxes on its property. But it will pay only about half of what it would have owed in taxes each year on its building.
In some ways, the result actually helped the community, because the previous law said that the County Commission could have exempted the company from 100 percent of its tax burden for 10 years, according to Larry Osborn, the supervisor of tax and property for Richland County.
But the ProGold deal opened the door to other 20-year PILOT arrangements, which can be negotiated to reduce property taxes to as little as a $1 a year. That's what worries school officials.
"Our board has taken a position that 20 years is really too long of a period of time to have an industry in the school district without paying some type of property tax," Mr. Lemer said.
The ProGold negotiations prompted the legislature to pass a law in 1995 that required school officials to be included in the abatement-consideration process. The law, however, didn't give the school officials any say in the matter.
The law also included a two-year "sunset" clause, and the measure was not renewed this year.
Finding a Voice
Some towns, like Wahpeton, still welcome school board members to the table when deals are being considered. But most educators, including Mr. Sanstead, say that's not enough.
"Schools ought to be consulted, and they ought to have some kind of voice in the decision," the state schools chief said.
No one begrudges the basic principle behind tax incentives--that they bring other economic benefits to a community. Economic-development experts talk about the "multiplier effect," meaning that what a town might lose in revenue by exempting a large business from property taxes is more than made up for by attracting new residents and spawning other residential and commercial development.
But those gains are hard to measure, Mr. Lemer says. "The data isn't really there to either support it or argue against it."
He adds that at least in West Fargo, tax abatements have outlived their usefulness.
"Right now, the construction industry is anything but slow. But we still have these incentives in place to encourage additional growth and construction," he said.
State Rep. Wesley R. Belter, the Republican chairman of the House interim taxation committee, said the tax-abatement issue is just one of the items on the committee's agenda. The full legislature, which convenes every two years, will not meet again until 1999.
"At this point, we're not far enough along in our work to say that we're at the decisionmaking stage," Mr. Belter said last month. "It will probably be April before we start proposing any legislation."
Next month, legislators also plan to discuss the tax-exempt status of certain institutions, such as health-care facilities.
As North Dakota's population concentrates more heavily in central cities such as Fargo and Bismarck, the state's hospitals have expanded to meet the demand and, as a result, are acquiring property that used to be on the tax rolls, according to Barry Hasti, the director of the property-tax division of the state tax commissioner's office.
But Bryan Nermoe, a managing partner for MeritCare Health System, a large hospital in Fargo, argued that tax-exempt status allows the hospital to reinvest in the community through education programs and other outreach efforts that benefit children.
He added that the hospital does pay property taxes on its satellite clinics in Fargo and West Fargo. But some hospitals in other areas of the state don't.
"These are supposed to be nonprofit organizations, but they're turning multimillion-dollar profits," said Mr. Belter, who lives in Leonard, N.D. " So what is our definition of charitable?"