AISD’s financial woes: Why a tax swap?

Although Austin Independent School District trustees have been lamenting the district’s troubled financial state for more than a year, it may not be readily apparent what the problem is, particularly given recent news that the district is bringing in $1.3 billion in revenue. But in March, Mayor Steve Adler spoke of a possible “tax swap” between the city of Austin and AISD, citing AISD’s budget shortfalls, among other factors, as an impetus for the proposal.

So, what gives?

First, some general background. AISD trustees have long argued that the state’s “Robin Hood” school financing system is unfair to the district. In fact, since 2013 the state has been taking more money away from AISD than it has been giving to it. In that year, the district received $101.8 million but was required to pay back $120.1 million.

Because Texas does not have a state income tax, property taxes are used, among other things, to fund school districts. In a process known as “recapture,” public school districts deemed to be “property rich” (through an algorithm of sorts) must forfeit a portion of their local property taxes to state coffers. The money is then redistributed to “property poor” school districts to fund public education. Because Texas has to pass a balanced budget, the fund can also be used to balance general expenditures as well.

Beyond property taxation, public school districts can raise general revenue mainly through one other method: funding from the state. The amount of funding Texas contributes to a given district is based on students’ average daily attendance. The more students a district has (and the more regularly they attend), the more state funding that district receives.

Under the current formula, which has not been updated in about 10 years, AISD is the state’s largest contributor of recapture payments. In the 2015-2016 school year, AISD contributed nearly $273 million – roughly 30 percent of AISD’s property tax revenue. For the 2016-2017 school year, AISD is expected to contribute $406 million, about 38 percent of its revenue.

To give readers some financial context, AISD proposed spending $434.6 million on teachers’ and other employees’ salaries next school year, so the district’s current recapture payment could fund a workforce near its current size.

To make matters worse, AISD is having trouble holding on to quality teachers. AISD teachers, on average, are the lowest compensated teachers in Central Texas, yet they have the highest cost of living. Teachers also have the additional difficulty of providing instruction for a student population that is increasingly economically disadvantaged (60 percent). These students traditionally are less prepared than peers who are economically more well off. Meanwhile, AISD does not have the money to fund substantial salary increases for its teachers under its current pay structure.

Adding fuel to the fire, the district’s student enrollment is in its fourth year of decline. More than 3,000 students have left the district since 2012, which means that AISD’s funding from the state is dwindling even as its recapture payments increase. Chief Financial Officer Nicole Conley predicts that student enrollment will continue to decline, partly because of Austin’s rising cost of living, competition from charter schools and the general population’s low birth rate.

Meanwhile, payments to AISD make up the largest portion of Austin residents’ property tax bills. In 2015-2016, AISD had a $1.20 tax rate, the largest by far compared to all other area taxing entities. Yet, much of that money is not ending up at AISD. According to the Travis Central Appraisal District, AISD’s average taxable home value was about $278,000 in 2015, which means the average Austin resident paid a little more than $3,000 in AISD taxes – but $1,000 of that went back to the state.

The takeaway is this: Austin residents’ tax bills — read “rent” for residents who don’t own property — are rising, and a significant part of that ballooning revenue is not going to the financially struggling local district.

Meanwhile, AISD is spitballing a number of ideas to address these problems. Proposals include creating affordable housing for teachers, becoming an innovation district, developing more specialized academic programming, hiring a marketing firm to help increase enrollment and, more recently, entering into a tax swap with the city of Austin.

This tax swap could take many forms. In general, it would mean that a portion of the city’s tax revenue — which is not subject to recapture — would go toward helping AISD. City staff presented recommendations for the tax swap in April.

However, there are substantial legal hurdles to overcome. For example, the city must ensure that the funds are used for municipal purposes as well as district purposes, because there are a number of Austin students who do not attend AISD schools but instead go to one of eight other districts zoned within city limits.

In addition, there are questions related to how the city would take over staffing responsibilities for the potentially swapped services. For example, the city could take over AISD’s Communities in Schools programs, but it’s unclear if the city would hire employees for the program or retain the current staff, who work for the district.

The potential swap may also increase senior citizens’ tax bills, given differences in how AISD and the city of Austin calculate the homestead exemption for property owners 65 years of age and older.

Nonetheless, the tax swap could be a win-win for Austin residents and AISD. If implemented, it would keep the district from having to pay about $11 million back to the state, which means that, on average, Austin residents would see a $27 reduction in their tax bills.

Meanwhile, there is a glimmer of hope for Austin residents. The legality of Texas’ school financing system has been challenged many times, and currently educators are waiting on the Texas Supreme Court to rule on the issue again.

The Republican justices might choose to kick the decision back to legislators, but even if they do, AISD might be in better shape than it was two years ago. State Rep. Jimmie Don Aycock, R-Killeen (former chair of the House Public Education Committee), already drafted an extensive reform bill, which died on the House floor last session. So, lawmakers at least have a place to start in terms of potential public school financial restructuring.

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