Spending on K-12 education is by far the largest piece of Indiana government. Appropriations for schools make up half of the state’s general fund budget. School budgets are 55% of all local government budgets. Total local school appropriations are $11 billion in 2019. About $7 billion of this comes from state support, and $3 billion comes from property taxes.
As any parent knows, kids are expensive!
The state has some pretty strict rules about school revenues and spending. School boards and superintendents cannot simply raise taxes to solve their budget problems. They don’t have that much discretion about how much money can be raised.
School budgets are divided into funds. The education fund is for direct spending on classrooms. Teacher pay and benefits are the biggest part of this fund. Districts aren’t allowed to use property taxes for the education fund. It’s funded mostly by state support, from state sales and income taxes.
State support money is divvied up among school districts by formula. The biggest part of state support is the foundation grant, which is paid at $5,352 per pupil. A complexity grant adds $3,539 for pupils who are eligible for SNAP, welfare or in foster care. There are also grants for pupils in special education, career education and others. The formulas are modified in each state budget year. For example, in 2020 the foundation grant amount will rise 3.7% to $5,548 per pupil.
State support depends on the number and characteristics of a school district’s pupils, so there’s not much discretion for school boards and superintendents. Demographics are destiny.
The operations fund has administrative salaries, transportation, building maintenance and all the other spending for day-to-day operations. Property taxes pay for 58% of operations spending. The rest comes from “miscellaneous revenue” —t he official term — which includes taxes like the schools’ share of the motor vehicle excise tax, textbook rentals, student fees, and state support transferred from the education fund.
Property taxes for the operations fund are limited by a state-imposed maximum levy. A school district cannot set its property tax revenue above this amount. The maximum levy increases each year, by the six-year average increase in Indiana non-farm personal income. That’s so property taxes don’t rise faster than peoples’ ability to pay. Again, school boards and superintendents don’t have discretion over this part of the property tax. State income growth is destiny.
In most school districts, the full operations levy is not received. Our constitutional tax caps limit the tax bills that property owners pay. If a taxpayer’s total property taxes for the county, city, school and other units of government exceed the cap, the taxpayer gets a credit, and pays less.
Tax cap credits reduce school property taxes by about 8%. Credits are highest where tax rates are highest, which tend to be in cities or towns. That means school districts that share taxpayers with city governments lose more revenue to credits. Location is destiny too.
Debt service funds repay borrowing for big construction projects. Almost all of this is paid with property taxes. Borrowing for big projects requires a majority of voters in a referendum. School officials can ask, but it’s up to the voters to approve. As of 2019, though, only about 11% of debt service property taxes are from referendum approvals. The rest must be for repayment of borrowing done before 2008, when the capital projects referendum requirement began, or for smaller projects below the referendum threshold, or for projects that weren’t challenged by the public, and did not go to a vote. There is some discretion for school officials here.
Then there are property taxes approved by referendum for general purposes. In 2019 these revenues are 8% of total property taxes and 2% of total school budgets. Unlike the rest of school property taxes, referendum operating tax rates are fixed. If taxable assessed value in the district goes up, more revenue is received. If assessments go down, there’s less. Property values are destiny.
Demographics, state income growth, location and property values set the revenues received by local schools. Maybe that’s why referenda have become more popular. They’re one of the few revenue options that school officials have.
Larry DeBoer is an agricultural economist at Purdue University. He can be reached at firstname.lastname@example.org. Follow him on Twitter: @INTaxRock-Stars.