A Report on the Washington County Commission s Funding Strategy for Capital Projects, Including a Response to Claims by the Johnson City Board of Education, and a Review of the Education Funding Disparity in Washington County April 26, 2017 By Dan Eldridge, Mayor
Purpose In June 2016, the Washington County Board of County Commissioners adopted a Capital Projects Plan which laid out a strategy for the County Commission s funding of near and long term capital project requirements for Washington County. Since the adoption of that plan, there have been several accusations of unfairness from members of the Johnson City Board of Education. This report recaps the County Commission s strategy for funding capital projects, including the conditions that precipitated and influenced development of the Capital Projects Plan. It also addresses each of the claims with the reasoning, justification and legal authority for the actions taken by the Commission. Claims of unfairness along with threats of legal action against the County have resurrected the conversation regarding funding disparity between the County and City School Systems and the inequity in education opportunity created for Washington County students as a result. This issue is reviewed near the end of the report. Background Old, obsolete and overcrowded school facilities led the Washington County Board of Education to perform a facilities review and adopt a long-range facilities plan in 2013. That plan had a price tag of over $100 million and would have required a property tax increase of more than 50 cents. It would have also required $214 million in new debt, including Johnson City s share, on top of $150 million in existing debt. Washington County would have owed more than $360 million. This plan and funding amounts did not take into account the cost of any other non-educational capital needs of the county. It was unreasonable to place such a burden on the county property taxpayers and to jeopardize the financial stability of the county by incurring debt that would have undoubtedly meant a credit rating downgrade and increased borrowing costs. The County Commission wisely agreed and sought alternative solutions. Due to limited available funding and the limited amount of debt the County could issue after the $130 million school debt issued in 2007 which was structured as interest-only payments during the first 12 years with no principal reduction - the County Board of Education was asked to scale back their facilities plan. County management simultaneously began developing a capital projects plan intended to identify, provide funding for, and manage the long term capital needs of the county, including those of the county school system, but within the limits of a reasonable tax increase and manageable debt levels. The Capital Projects Plan was adopted in June of 2016, along with project funding allocations for each of the upcoming needs and a 40 cent property tax increase was approved to provide recurring revenue to sustain the plan. Recognizing the importance of not overleveraging the county s finances in the anemic economic conditions we have experienced for several years, the County Commission subsequently established a borrowing limit for the proposed capital projects. 1
Each project now has a budget allocation, and the aggregate new debt for all projects has been limited to not more than $78 million. In August of 2016, the Washington County Board of Education revised their facility plans to reflect adoption of The Washington Way. The revised plan included the Boones Creek K-8, Jonesborough K-8, and a new element, an Academic Magnet School, with a combined cost well in excess of the funding previously committed for the school projects. With little or no flexibility in the established budget allocations due to the property tax increase having been adopted prior to the School Board revising their plan, they were again requested to scale back their facility needs. As a result, the plan for a completely new K-8 facility in Jonesborough, to replace the aged and obsolete Jonesborough Elementary and Middle School facilities, one of which will soon be seventy years old, was scrapped. Instead, the K-8 will be developed utilizing the existing elementary school building with an addition and renovations. The completion date for the K-8 will be delayed until 2020 and the final Jonesborough phase, the Academic Magnet, being developed in the old Middle School building, has been pushed out to 2021. The delayed completion dates will allow sufficient cash to accumulate in the Capital Projects Fund, which, when combined with the remaining borrowing capacity authorized by the County Commission, will be adequate to complete the projects. In addition, the budget for the new Boones Creek K-8 School was reduced through the elimination of several classrooms and an auxiliary gym. Four years ago, Washington County taxpayers were facing a $110 million county school building project that would have required more than $200 million in new debt. Through the diligence and prudent financial planning of the County Commission, these projects are now budgeted at about $60 million for construction and will require less than $63 million in new debt, including about $30 million to be shared with Johnson City Schools. Budgeting the projects within these cost and debt amounts required extensive cuts to the facility needs of the Washington County Board of Education and compromises between the Board and the County Commission. It has also reduced Johnson City School s share of expected funding, due to the limited amount of borrowing under the capital projects funding structure. However, the County Commission has a fiduciary responsibility to minimize the burden placed on the County property tax payers, including taxpayers residing within Johnson City, and to insure that the issuance of additional debt does not leverage the County to the point of impeding its long-term ability to make future investments in other capital needs or adequately provide other County services. These were the primary factors that influenced development of the Capital Funding Plan. 2
Issues Raised by the Johnson City Board of Education Claim The Capital Funding Plan is unfair to Johnson City residents paying County taxes The County Commission s fiscally responsible actions are being portrayed by some as unfair to Johnson City residents paying County property taxes. This claim suggests that the County Commission should distinguish between taxpayers based on their geographic locale and somehow provide special consideration for those living in Johnson City. However, State law regarding funding of the County School System is clear. The Government of Washington County is mandated to operate a County School System and to appropriate from the collection of County-wide property taxes, revenue necessary to operate and maintain the system (TCA 49-2-101 and 49-3-315). A crucial point is being overlooked when making this claim. The County Commission was constrained by both tax rate and bonding capacity limitations. Therefore this plan was developed out of necessity. Without the plan, either the county property tax rate and indebtedness would have been substantially and perhaps even prohibitively higher or the facility needs of the county school system, as determined in 2013, would have been further compromised and delayed. This approach represents an acute awareness by the County Commission of its responsibility to all county tax payers, carefully balanced with its mandate to fund the needs of the county school system. The result is a responsible plan that provides funding for the school facilities, limits the cost, requires substantially less from the taxpayers, responsibly manages the debt level of the county, and sends $30 million to Johnson City schools, providing for all their current capital project needs, with funding left over for, as of today, unplanned future projects. How is this unfair to the taxpayers? Claim The 40 cent County property tax increase isn t being shared with Johnson City Schools Washington County is required by law to share with Johnson City Schools, based on the ratio of enrollment, bonded debt proceeds for school capital projects (TCA 49-3-1003 and 9-21-129). As a result, of the $63 million projected to be borrowed, Johnson City will receive around $30 million as its share of county capital project debt proceeds. Additionally, 3 cents of the tax increase was allocated to school operations, and generates $400 thousand annually to Johnson City Schools. But, even more to the question of fairness to the taxpayer; because of the County 3
Commissions disciplined approach, the project cost will be $50 million less and total projected indebtedness has been reduced by more than $140 million. Again, how could this ever be characterized as unfair to the taxpayers? The claim the County isn t sharing is not only factually incorrect, it also leaves an uninformed Citizen with the misperception that their County property taxes were raised 40 cents in order to pay for County school construction. When in reality, the 40 cent tax increase, in conjunction with the Capital Projects Plan, is intended to fund all the capital needs of Washington County, longterm. When the tax increase was adopted, it provided for much more than just school construction, as you can see from the initial allocation below: Boones Creek K-8 Jonesborough K-8 and Magnet School School Technology and other Capital Needs School Bus Replacement Public Safety Communication System Other General Government Capital Needs Highway and Bridge Infrastructure General Purpose School Fund County General Fund 14 cents 5 cents 5 cents 2 cents 1 cent 4 cents 1 cent 3 cents 5 cents Claim - It is unfair for Johnson City schools not to be allowed to request capital funding from the Washington County Capital Projects Fund. Tennessee Code Annotated clearly defines the sharing of funding in counties having a City operating schools independent of the county. By operation of TCA 49-3-315 and 9-21-129 the Johnson City School System receives operational and maintenance funding from the Washington County property tax levy, as apportioned by the Washington County Trustee. By operation of TCA 49-3-1003, the money arising from the sale of school bonds shall be turned over to the trustee of the county, who shall pay to the treasurer of the city the amount apportioned according to the ratio of average daily attendance between the two systems. Other than the apportioning provisions of the above statutes, education finance laws in Tennessee do not require or provide for counties to fund city school systems. The Johnson City 4
Commission, as the funding body for the City school system, is the entity to which the Johnson City School Board should direct their request for additional capital funding. Claim Washington County should be sharing more of the school project costs Washington County s financial projections indicate Johnson City Schools will receive around $30 million as its share of county capital project debt proceeds. Johnson City Schools FY 2017 Capital Improvement Plan indicates the need for $26.335 million in project funding over the next 5 years. City schools will be receiving more from the County than what their own CIP indicates they have a need for. Yet the Johnson City School Board has repeatedly insisted they should receive additional funding. This presents several challenges for the County Commission. First, Washington County, by law, will be sharing every dollar of debt issued for County school projects with Johnson City. Therefore, to increase the amount shared with Johnson City, the County would be forced to issue additional debt. The current debt level of Washington County, plus the anticipated debt issuance for the proposed capital projects, including Johnson City s share, will place the county among the twelve highest indebted counties in Tennessee, with per capita debt exceeding $1,630. Additional borrowing for the purpose of providing additional funds, in the form of a special appropriation to Johnson City Schools would require the County Commission to again raise the County property tax rate in order to pay the increased debt service. It also would require the County Commission to approve total indebtedness well above a level deemed prudent, in violation of its own Debt Management Policy, thereby placing the County in a highly leveraged position as compared to its peers. The ramifications of such action include the potential for a downgrade of the County s bond rating, which would result in higher borrowing costs. But even more significant, Washington County s long term ability to make future investments in other capital needs or to address other County services would certainly be impaired. The scenario of additional borrowing for the purpose of additional sharing also has the effect of partially shifting responsibility of funding a City service to the rural County property taxpayers, who have no responsibility to fund Johnson City School capital needs and derive no benefit from it. City schools are not available to County students unless tuition is paid. All tax payers need to understand that paying more in County property taxes for the sole purpose of sharing more with Johnson City Schools, is in essence, the funding of a City service by the County property taxpayers. 5
Claim - Making a cash contribution to school related capital projects is a legal loophole TCA 49-3-1003 and 9-21-129 govern the sharing of capital funding in a County with a City School system and have been established state law for many years. But more importantly, Washington County s Capital Projects Plan is a prudent and long over-due strategy to reduce the amount of borrowing by Washington County and thereby accomplish, in a fiscally responsible manner, the County Commission s statutory responsibility to provide for capital project funding, including the facility needs of the County schools, albeit at a substantially reduced level, and to require less from the County property tax payers. Therefore, the County Commission s commitment to limiting the amount of capital project related debt as a result of making a capital contribution toward the cost of County school construction, rather than being unfair, as claimed, actually benefits all County property tax payers. Reduced debt and the resulting lower debt service expense requires less revenue from the property tax levy which results in a lower property tax rate and less taxes paid by all property owners. At a minimum, a 23% higher tax increase would have been required if this capital funding plan had not been adopted by the County Commission. The difficult decisions to direct budget cuts and delay projects in much needed County school facilities is further evidence of the Commission s commitment to responsibly manage taxpayer dollars. How is this unfair to the taxpayers? A few years ago this very issue was litigated. The Tennessee Court of Appeals at Knoxville in City of Athens Board of Education ET AL. v. McMinn County, TN ET AL. found, When a county makes a tax assessment for future capital outlay projects, such an assessment is not subject to proration among all LEA s in the county. The Education Finance Act merely requires proration among all LEA s of all school funds for current operation and maintenance purposes collected by any county. TCA 49-3-315(a). Funds collected for future capital projects are not for current operation and maintenance. A county s voluntary capital contribution to assist in defraying the cost of constructing a public school, likewise is not subject to proration under TCA 49-3-1003. Claim Johnson City residents pay 65% of all County property taxes The following schedule details the residential assessed values of properties inside and outside of Johnson City and the corresponding amounts of county property taxes paid. 6
Washington County Total Residential Assessed Value 1,737,461,650 Rural Washington County Residential Assessed Value Unincorporated 792,466,700 Jonesborough 80,333,875 Watauga 11,425 Total Rural Residential Assessed Value 872,812,000 50.23% County Taxes Paid by Residents outside Johnson City 20,771,180 Johnson City Residential Assessed Value 864,649,650 49.77% County Taxes Paid by Johnson City Residential Property Owners 20,576,932 Washington County Funding for Johnson City Schools County Prop Tax to JC Schools 11,029,121 Rural County Sales Tax to JC Schools 835,000 Other County taxes & collections 1,200,000 Debt Service on 2007 Debt Sharing 3,000,000 Debt Service on 2013 Debt Sharing 58,000 Debt Service on Proposed Debt Sharing 2,100,000 Total County Funding Benefitting Johnson City Schools 18,222,121 Property Taxes paid by JC residents in excess of school benefit 2,354,812 37.38 per capita There are two important observations from this schedule. Rural Washington County residential assessed property values are actually slightly greater than Johnson City residential assessed property values. The equivalent of 89% of all County Property taxes paid by Johnson City residential property owners, directly benefits the Johnson City School System. 7
Claim-The Washington County Commission is a funding body for the Johnson City School System. Contrary to popular belief, the County Commission has no funding responsibility to the Johnson City School system. Johnson City schools are operated as a service of the City of Johnson City available only to residents of Johnson City. This claim implies Johnson City residents pay County taxes in order to fund City services. The City of Johnson City is not mandated by state law to operate an independent city school system; rather, it is empowered to do so upon the affirmative vote of residents within the City. Once adopted, the City retains exclusive control and management regarding the independent school system established for City residents. By law it receives funding from the State BEP, apportioned County property tax revenue and other miscellaneous revenues from the Washington County Trustee, and its apportioned share of the first 50% of local option sales tax collected in Johnson City and 100% of that collected in rural Washington County. However, the second half of sales tax collections inside Johnson City goes to the City s General Fund from which more than $13 million is appropriated to the Johnson City School system and $0 is shared with the Washington County School system. This is where funding for the City and County schools begin to diverge. Additionally, the Washington County Commission, having no responsibility to fund the Johnson City School System, also has no authority to review or approve the operating budget or capital expenditures of the Johnson City School System. Therefore there is no accountability to the County Commission for taxpayer funding it may appropriate to Johnson City Schools. However, the Government of Washington County is mandated by State Law to operate a County School System and to appropriate from the collection of county-wide property taxes, revenue necessary to operate and maintain the system. County schools also receive funding from the State BEP on a per pupil basis as determined by the county-level fiscal capacity to pay. Based on the ratio of enrollment between County and City Schools, Washington County Schools receive apportioned property tax revenue and other miscellaneous revenues from the Washington County Trustee which have been allocated by the Washington County Commission for the General Purpose School Fund. The Washington County Trustee also apportions to Washington County schools, its share, based on the ratio of enrollment between County and City schools, of the first 50% of local option sales tax collected in Johnson City and its share of 100% of the rural Washington County sales tax collections. The Washington County Commission has the dual responsibility of adequately funding the County School System and exercising responsible stewardship over tax dollars by minimizing the burden placed on County property tax payers. 8
Claim - The County Commission can solve the operational funding disparity between the County and City school systems by simply increasing the rural property tax rate. TCA 49-3-315 states All school funds for current operation and maintenance purposes collected by any county, shall be apportioned by the county trustee among the LEA s in the county on the basis of the WFTEADA (enrollment ratio) maintained by each, during the current school year. Therefore, whatever the source or location from which state or local revenue is collected, if the Washington County Commission allocates such revenue for current operation and maintenance purposes (General Purpose School Fund) of the Washington County School System, the funding shall be apportioned by the County Trustee to the Johnson City School System, making the funding disparity impossible to overcome, regardless of the amount the County Commission increases funding. However, there is no legal requirement for Johnson City to share with Washington County Schools, funding allocated from the Johnson City General Fund to Johnson City Schools. As a result, there is no mechanism in law in the State of Tennessee to resolve the inequity in educational opportunity created by the funding disparity between the Washington County and Johnson City School Systems. Overview of the Education Funding Disparity The inequity in educational opportunity between the Washington County and Johnson City School Systems results from funding advantages that have been created in various State laws, over many years, in favor of City School Systems. As a result, Johnson City has the statutory authority to add revenue from taxes imposed inside their borders, without being required to share that revenue with the County School System. This gives them the capacity to enhance educational quality and outcomes of their schools through supplemental funding. Washington County, conversely, is statutorily prevented from supplementing revenue to the County schools in order to provide the same educational opportunity as in Johnson City Schools. Again, TCA 49-3-315 states All school funds for current operation and maintenance purposes collected by any county, shall be apportioned by the county trustee among the LEA s in the county on the basis of the WFTEADA maintained by each, during the current school year. The result is $1,100 less per student in funding for the County Schools compared to Johnson City Schools, and growing. Recognizing that per pupil expenditure is a key metric in comparing the educational opportunity we provide our children, the effect of this statute is that 52% of the students in Washington County are being prevented, by law, from receiving a substantially equal education opportunity as required by the state constitution. Another factor contributing to the funding disparity is the sharing of sales tax. In addition to the first half of local option sales tax collected in rural Washington County being appropriated to school funding and shared with Johnson City as mandated by law, the Washington County 9
Commission also appropriates the second half of sales tax to the General Purpose School Fund rather than to the County General Fund. In accordance with TCA 49-3-315, this revenue is also apportioned to Johnson City Schools. In Johnson City, the General Fund receives all of the second half of local option sales tax collected within the corporate limits of Johnson City plus an additional $5.2 million in municipal earmarked State-shared sales tax. From their General Fund, Johnson City then appropriates more than $13 million to their school system. However, there is no legal requirement to share this amount with the County Schools. Therefore, Johnson City shares $0 from its second half of the sales tax with Washington County Schools, even though a substantial portion of this tax is paid by rural Washington County residents. Ironically, Counties in Tennessee do not receive any State-shared sales tax, even though they have the statutory responsibility to operate the County School System. Creating further disparity in funding is the county-level fiscal capacity formula. This is a primary factor in determining a local government s ability to pay for education as well as the resulting State BEP allocation to each school system. About 87% of county-wide sales tax is collected in Johnson City. After apportioning the first half of all collections to the two school systems based on the ratio of enrollment, and allocating the second half to the point of collection, Johnson City Schools, educating 48% of the students in Washington County, have about 69%, or $37 million, of the county-wide local option sales tax collections available to them through their funding body, the City Commission. County schools, educating 52% of the students, receive only 27%, or $14.8 million, of total sales tax collected and the County General Fund receives none. However, for purposes of calculating local ability to pay, the formula considers Johnson City and Washington County to have the same fiscal capacity. The result is, Washington County Schools BEP allocation is underfunded by about $2.7 million per year and Johnson City Schools BEP allocation is overfunded by about $5.6 million per year, according to a TACIR analysis which compared funding based on a system-level capacity model rather than county-level. Johnson City Schools have the best of both worlds. They enjoy the revenue advantage from an enormous sales tax base which results in a $13 million per year General Fund transfer from the City, plus an enhanced BEP funding allocation at the expense of Washington County Schools. The creation of winners and losers within the same county is the unintended consequence of the State funding formula. Conclusion The County Commission has a statutory mandate to serve all the Citizens of Washington County. Its priorities and actions therefore must reflect the interests of all residents. The Capital Projects Plan and Funding strategy were developed with the specific intent of limiting the cost of government to all County property taxpayers, both today and over the long-term, by minimizing project costs and limiting the issuance of new debt. This approach is different from 10
past school building projects where the County borrowed 100% of the cost of new schools and counted on 4-5% economic growth rates to soften the blow of the tax increase. However, the County s existing debt load and anemic economic conditions made this a very irresponsible option for the current projects. The Johnson City School Board s claims regarding this matter obviously reflect their desire to collect as much capital projects funding from the County as possible, in spite of the fact they will be receiving more than enough to fund all their capital needs for the next 5 years. They want the County Commission to go back to the old way of building schools, where the cost is doubled, the full amount is borrowed, and the taxpayers are stuck with the bill. But the world has changed, and the way we fund school building projects today must consider the reality of slow economic growth for the long term and the impact that is having on the taxpayers budget and the County s budget, as well as the County s ability to cash flow increased debt service without impacting other services. Which means, the County Commission had to be especially diligent in minimizing any additional burden placed on the taxpayers and just as diligent about adding to an already sizeable debt burden, which will be left for the next generation to pay. It should be acknowledged that the Johnson City School Board s perspective is very different from that of the County Commission. They are not a funding body, they ve never faced the difficult decision to raise taxes. They have no responsibility for meeting the needs of the County School System and are not concerned that difficult decisions were made to scale back plans to meet those needs in order to fit them within the funding and debt limitations of the Capital Projects Plan. They aren t concerned about the effect of enormous debt obligations being left for future generations to pay, or the impact over-leveraging could have on the County s borrowing costs and financial soundness. They haven t considered the financial and economic conditions that influenced the capital projects funding strategy, or the County Commission s fiduciary responsibility to minimize the tax impact on all County property taxpayers. Fortunately, the County Commission carefully considered all these factors, and acted in a responsible and prudent manner to develop and adopt the Capital Projects Plan. Respectfully submitted, Daniel J. Eldridge, Mayor 11