The High Cost of Education Reform

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Under a constitutional amendment passed in 1992, any tax to replace the one on possessory interests would require a two-thirds vote of the Legislature--an unlikely event, given the preponderance of antitax Republicans at the statehouse.

The elimination of this obscure tax law has devastated the Wilson Elementary School District.

Wilson is located just east of downtown Phoenix. The district's average home is valued at about $40,000. Its two schools are home to 1,000 children, 85 percent of whom are Hispanic. All Wilson students qualify for a free- or reduced-cost lunch program--meaning that all of them live at or below the federal poverty line.

Sky Harbor Airport sits in the Wilson Elementary School District. When the Legislature repealed the possessory interest tax, Wilson's tax rolls lost $50 million in value assessed on the businesses that operate on city-owned land at the airport.

To compensate for that lost-business tax revenue, the tax rate for homeowners in the Wilson school district increased 135 percent. The property-tax bill for a $40,000 home rose from $119.88 to $281.30.

"We were trying to be fiscally responsible, and we were planning for the future," says Wilson Superintendent Roger Romero. "And then, all of a sudden, up jumps the devil."

There's more.
Last year, the Legislature enacted a gradual reduction ofthe rate at which two of the state's largest business sectors--mines and utilities--are assessed for property-tax purposes. In the years to come, those industries will see their property-tax values drop from 29 percent of their assessed value to 24 percent.

And in school districts where mines and utilities are located, homeowners will again see their property-tax burden increase.

School-district tax hikes caused by state funding shortfalls and legislated shifts in the property-tax base are significant and widespread.

Increasingly, Arizona school districts are asking voters to approve tax overrides--that is, increases in tax rates above the level normally allowed by law. These overrides can pump up to 10 percent more revenue into a school's budget through a property-tax hike.

Between 1990 and 1995, the revenue that school districts received from such overrides increased 24 percent statewide.

The Mesa Unified School District--with 65,000 students and 65 schools, one of the largest districts in Arizona--included an $8.8 million tax override in its budget this year. It is the first override in the history of the school district.

"We are using that override to cover for the lack of inflation funding and for the lack of current-year funding," says assistant superintendent Chuck Essigs. "If the statehad funded those things, we wouldn't have had the override."

Secondary school taxes in Arizona--those connected to overrides and debt payments--have increased more than 13 percent in just the past three years. And debt has exploded.

Confronted by growing enrollments, shrinking federal and state funding and obstacles to levying new taxes locally, Arizona's school districts are doing something that is anathema to the tenets of the Republican Revolution and the Contract With America.

They are borrowing.
Between 1991 and 1994, long-term school district debtjumped 37 percent, to a staggering $3.3 billion. The interest on the debt alone was more than $330 million in 1994, the last year for which official data are available.

School districts take on debt by selling bonds, which can only be issued in Arizona with voter approval. The bonds, repaid through local property taxes, are ordinarily used to pay capital expenses, such as building new schools and renovating old ones.

To be sure, part of the increase in school-district debt is directly related to growth. More than 65,000 new students came into Arizona's public school system between 1991 and 1994.

But there's more to the school-debt explosion than just building classrooms to house more kids.

Arizona law allows school districts to move a portion of their capital money into operating budgets meant to fund day-to-day education. And, largely because of state funding shortfalls, some 70 percent of school districts in the state are using a portion of their capital money to run their schools.

The net result is not the type of frugality that Symington and legislative leaders tout. School districts go into long-term debt for short-term operations, mortgaging their ability to pay for the education of future students. For example, a $1,500 computer paid for through a ten-year bond issue, sold at a 3.5 percent interest rate, ends up costing more than $2,000.

During the 1993-94 school year alone, Arizona school districts borrowed more than $133 million in capital funds to pay day-to-day expenses.

The law sets debt limits for school districts--a hedge against insolvency. By 1994, 75 school districts were within $1million of their legal bonding limits.

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Lisa Davis