ACT 388ACT 388

PROPERTYPROPERTY TAX REFORMTAX REFORM

John Butler

Chief Financial Officer

Lexington Co. School District No. 1

Lexington, SC

Theodore B. DuBose

Attorney

Haynsworth Sinkler Boyd, P.A.

Columbia, SC

At A GlanceAt A Glance Passed in 2006Passed in 2006 Effective June 1, 2007, increased the state sales tax Effective June 1, 2007, increased the state sales tax

by 1 centby 1 cent Reduced the sales tax on unprepared foods (All sales Reduced the sales tax on unprepared foods (All sales

tax on unprepared foods was subsequently tax on unprepared foods was subsequently eliminated)eliminated)

Provided an exemption of owner-occupied residential Provided an exemption of owner-occupied residential property from school operating millage property from school operating millage

Created the Homestead Exemption FundCreated the Homestead Exemption Fund Placed a limitation on millage rate increases for all Placed a limitation on millage rate increases for all

local governing bodieslocal governing bodies

Homestead Exemption FundHomestead Exemption Fund(HEF)(HEF)

Proceeds from the additional penny sales tax Proceeds from the additional penny sales tax are credited to a fund separate and distinct for are credited to a fund separate and distinct for the state general fundthe state general fund

The Board of Economic Advisers shall make The Board of Economic Advisers shall make an annual estimate of the receipts by the HEF an annual estimate of the receipts by the HEF by February 15by February 15

This estimate must be provided to the This estimate must be provided to the legislature and each school district and countylegislature and each school district and county

Homestead Exemption FundHomestead Exemption Fund(HEF)(HEF)

In 2007, additional legislation created three “tiers”:In 2007, additional legislation created three “tiers”: Tier I is the amount received by a district for the first $100,000 of Tier I is the amount received by a district for the first $100,000 of

assessment on owner-occupied propertyassessment on owner-occupied property Tier II is the amount a district receives for the first $50,000 for Tier II is the amount a district receives for the first $50,000 for

taxpayers age 65 or older or those totally and permanently disabledtaxpayers age 65 or older or those totally and permanently disabled Tier III, for FY 2007-08, consists of an amount equal dollar for Tier III, for FY 2007-08, consists of an amount equal dollar for

dollar to the revenue that would be collected by the district from dollar to the revenue that would be collected by the district from property tax for school operating purposes imposed by the district property tax for school operating purposes imposed by the district on owner-occupied residential property for that fiscal year as if no on owner-occupied residential property for that fiscal year as if no reimbursed exemptions applied reduced by the total of the district's reimbursed exemptions applied reduced by the total of the district's tier one and tier two reimbursementstier one and tier two reimbursements

Distribution of RevenueDistribution of Revenue Beginning with FY 2007-08 school districts were reimbursed Beginning with FY 2007-08 school districts were reimbursed

for the actual amount that was to be collected from school for the actual amount that was to be collected from school operating millage imposed on owner-occupied residential operating millage imposed on owner-occupied residential propertyproperty

Beginning with FY 2008-09 the aggregate reimbursements are Beginning with FY 2008-09 the aggregate reimbursements are increased annually by an inflation factor equal to the increased annually by an inflation factor equal to the percentage increase in the CPI, SE Region plus the percentage percentage increase in the CPI, SE Region plus the percentage increase in the population of the State as published by the increase in the population of the State as published by the Office of Research and Statistics multiplied by the prior year’s Office of Research and Statistics multiplied by the prior year’s total reimbursementstotal reimbursements

An additional add-on weighting for poverty of .20 was added An additional add-on weighting for poverty of .20 was added to provide additional revenues for students in K-12 who to provide additional revenues for students in K-12 who qualify for Medicaid or are eligible for free and/or reduced qualify for Medicaid or are eligible for free and/or reduced luncheslunches

Distribution of Revenue (Continued)Distribution of Revenue (Continued) Beginning with FY 2008-09 , a school district receives Beginning with FY 2008-09 , a school district receives

reimbursement for the amount received in prior year plus a reimbursement for the amount received in prior year plus a proportionate share of the increase above based on of district’s proportionate share of the increase above based on of district’s WPU’s as a percentage of statewide WPU’sWPU’s as a percentage of statewide WPU’s

Any county that did not raise a minimum of $2.5 million from Any county that did not raise a minimum of $2.5 million from school operating millage must receive and additional reimbursement school operating millage must receive and additional reimbursement from the HEF to bring the reimbursements to districts in that county from the HEF to bring the reimbursements to districts in that county to at leas $2.5 millionto at leas $2.5 million

Multi-district counties qualifying for the additional reimbursement Multi-district counties qualifying for the additional reimbursement would split the funds based on 135 Day ADM of the district divided would split the funds based on 135 Day ADM of the district divided by the total ADM of all students of the districts in the countyby the total ADM of all students of the districts in the county

Any funds remaining after all of the above obligations have been Any funds remaining after all of the above obligations have been met must be distributed to counties for a credit against county met must be distributed to counties for a credit against county operations on owner occupied property taxesoperations on owner occupied property taxes

Millage LimitationMillage Limitation

A local governing body may increase millage for general A local governing body may increase millage for general operating purposes above the rate for the previous year only to operating purposes above the rate for the previous year only to the extent of the increase in the average CPI for the most the extent of the increase in the average CPI for the most recent 12 month period, plus the percentage increase in the recent 12 month period, plus the percentage increase in the previous year increase in the population of the entityprevious year increase in the population of the entity

Negative population growth was later amended to be zero for Negative population growth was later amended to be zero for purposes of this computationpurposes of this computation

The millage rate limitation may be suspended and the millage The millage rate limitation may be suspended and the millage rate may be increased upon a 2/3 vote or the local governing rate may be increased upon a 2/3 vote or the local governing body, but only for 5 purposes stated in Act 388body, but only for 5 purposes stated in Act 388

The restriction does not affect millage for levied for bonded The restriction does not affect millage for levied for bonded indebtedness or used to maintain a reserve accountindebtedness or used to maintain a reserve account

Five Authorized Purposes for Five Authorized Purposes for Suspending the Millage LimitationSuspending the Millage Limitation

11 The deficiency of the preceding year;The deficiency of the preceding year;

22 Any catastrophic event outside the control of Any catastrophic event outside the control of the governing body such as a natural disaster, the governing body such as a natural disaster, severe weather event, act of God, or act of severe weather event, act of God, or act of terrorism, fire, war, or riot;terrorism, fire, war, or riot;

33 Compliance with a court order or decree;Compliance with a court order or decree;

Five Purposes for Suspending the Five Purposes for Suspending the Millage Limitation (cont.)Millage Limitation (cont.)

44 Taxpayer closure due to circumstances outside Taxpayer closure due to circumstances outside the control of the governing body that decreases the control of the governing body that decreases by ten percent or more the amount of revenue by ten percent or more the amount of revenue payable to the taxing jurisdiction in the preceding payable to the taxing jurisdiction in the preceding year; oryear; or

55 Compliance with a regulation promulgated or Compliance with a regulation promulgated or statue enacted by the federal or state government statue enacted by the federal or state government after the ratification date of this section for which after the ratification date of this section for which an appropriation or a method of obtaining an an appropriation or a method of obtaining an appropriation is not provided by the federal or appropriation is not provided by the federal or state government.state government.

School Districts’ School Districts’ PerspectivePerspective

GrowthGrowth Act 388 adversely affects fast growing Act 388 adversely affects fast growing

districts.districts. Act 388 helps slow growing, no growth or Act 388 helps slow growing, no growth or

declining districts or districts that receive the declining districts or districts that receive the $2.5 million. $2.5 million.

Growing DistrictsGrowing Districts

$25,000,000.00$27,000,000.00$29,000,000.00$31,000,000.00$33,000,000.00$35,000,000.00$37,000,000.00$39,000,000.00$41,000,000.00$43,000,000.00$45,000,000.00

2007-08 2008-09 2009-10 2010-11Proj.

Act 388 Funds

Res. TaxAmount

Declining DistrictsDeclining Districts

$20,000,000

$22,000,000$24,000,000

$26,000,000

$28,000,000

$30,000,000$32,000,000

$34,000,000

$36,000,000

$38,000,000$40,000,000

2007-08 2008-09 2009-10

Act 388 Funds

Res. TaxAmount

$2.5 Million Districts$2.5 Million Districts

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

2007-08 2008-09 2009-10

Act 388 Funds

Res. TaxAmount

Effect on Per Pupil RevenueEffect on Per Pupil Revenue Growing Enrollment DistrictsGrowing Enrollment DistrictsYear WPUs Allocation Per WPUYear WPUs Allocation Per WPU20082008 10,000 $ 20,000,000 $ 2,00010,000 $ 20,000,000 $ 2,00020092009 11,000 $ 20,500,000 $ 1,86411,000 $ 20,500,000 $ 1,86420102010 12,000 $ 21,000,000 $ 1,75012,000 $ 21,000,000 $ 1,75020112011 13,000 $ 21,500,000 $ 1,65413,000 $ 21,500,000 $ 1,65420122012 14,000 $ 22,000,000 $ 1,57114,000 $ 22,000,000 $ 1,57120132013 15,000 $ 22,500,000 $ 1,500 15,000 $ 22,500,000 $ 1,500

Effect on Per Pupil RevenueEffect on Per Pupil Revenue

Declining Enrollment DistrictsDeclining Enrollment DistrictsYear WPUs Allocation Per PupilYear WPUs Allocation Per Pupil20082008 10,000 $ 20,000,000 $ 2,00010,000 $ 20,000,000 $ 2,00020092009 9,500 $ 20,300,000 $ 2,1379,500 $ 20,300,000 $ 2,13720102010 9,000 $ 20,600,000 $ 2,2899,000 $ 20,600,000 $ 2,28920112011 8,500 $ 20,900,000 $ 2,4598,500 $ 20,900,000 $ 2,45920122012 8,000 $ 21,200,000 $ 2,6508,000 $ 21,200,000 $ 2,65020132013 7,500 $ 21,500,000 $ 2,867 7,500 $ 21,500,000 $ 2,867

State FundsState Funds Growing districts receive less state money since their Growing districts receive less state money since their

Education Finance Act (EFA) amount is based on their Education Finance Act (EFA) amount is based on their owner-occupied assessments and not the amount they owner-occupied assessments and not the amount they receive from Act 388.receive from Act 388.

Declining districts receive more state money since their Declining districts receive more state money since their EFA amount is based on their owner-occupied EFA amount is based on their owner-occupied assessments and not the amount they receive from Act assessments and not the amount they receive from Act 388.388.

If there is no change in legislation this year this will If there is no change in legislation this year this will correct itself for 2010-11, but there was legislation filed correct itself for 2010-11, but there was legislation filed last year that would leave this inequity in place and last year that would leave this inequity in place and probably will be introduced again this year.probably will be introduced again this year.

MillageMillage Districts are restricted to how much millage they can Districts are restricted to how much millage they can

increase and a mill is worth much less than it was increase and a mill is worth much less than it was prior to Act 388. prior to Act 388.

The more owner-occupied property a district has, the The more owner-occupied property a district has, the greater the decline in a value of a mill since owner-greater the decline in a value of a mill since owner-occupied assessments are not included in the value occupied assessments are not included in the value now. now.

This also means that any new mills added will be This also means that any new mills added will be entirely assessed against business and other non entirely assessed against business and other non owner-occupied property.owner-occupied property.

Property ReclassificationProperty Reclassification 2007-08 was the base year where DOR used the owner-2007-08 was the base year where DOR used the owner-

occupied assessments and each district’s millage rate to occupied assessments and each district’s millage rate to determine the dollar for dollar reimbursement to determine the dollar for dollar reimbursement to districts. districts.

Some taxpayers that had 6% property in 2007-08, which Some taxpayers that had 6% property in 2007-08, which is still taxed for school operations, reclassified it to 4% is still taxed for school operations, reclassified it to 4% property after the base year in order to obtain the 100% property after the base year in order to obtain the 100% exemption from school operating taxes. exemption from school operating taxes.

Therefore, no tax is now collected on it and it is Therefore, no tax is now collected on it and it is excluded in the amount the state uses to reimburse excluded in the amount the state uses to reimburse districts. districts.

Re-assessmentRe-assessment The value of property may not be increased by reassessment The value of property may not be increased by reassessment

more than 15%, except in the case of an “assessable transfer of more than 15%, except in the case of an “assessable transfer of interest.”interest.”

Legislation debated in 2010 but not passed would have deleted Legislation debated in 2010 but not passed would have deleted assessable transfer of interest exception.assessable transfer of interest exception.

According to a report from the state’s Chief Economist given to According to a report from the state’s Chief Economist given to Government Finance Officers in December of 2008, this will Government Finance Officers in December of 2008, this will have a greater adverse effect on school districts than Act 388 in have a greater adverse effect on school districts than Act 388 in the long term.the long term.

This was enacted as a result of a constitutional amendment This was enacted as a result of a constitutional amendment through a state-wide vote by citizens.through a state-wide vote by citizens.

Bright spot: For the purpose of calculating debt limit, assessed Bright spot: For the purpose of calculating debt limit, assessed value shall not be lower than 2006 assessed value.value shall not be lower than 2006 assessed value.

Assuming Amount ofThree Percent 15% Cap on 25% Growth Value Not

Year Annual Growth Reassessment Over 5 Years Taxed

2006 $150,000,000 $150,000,000 $150,000,000

2011 173,891,111 172,500,000 187,500,000 8.70%

2016 201,587,457 198,375,000 234,375,000 18.15%

2021 233,695,112 228,131,250 292,968,750 28.42%

Assuming total millage rate of 253 mills, annual lost revenue in 2021 would exceed $16,200,000.

IMPACT OF 15% CAP ON REASSESSMENT: LOST REVENUE, LOST DEBT LIMIT

By 2021, lost debt limit capacity would be approximately $5,200,000.

House Built House Built House Built House Builtin the Year 2005 in the Year 2011 in the Year 2016 in the Year 2021

Year

2006 $200,0002007 200,000 2008 200,000 2009 200,000 2010 200,000 2011 230,000 $250,0002012 230,000 250,000 2013 230,000 250,000 2014 230,000 250,000 2015 230,000 250,000 2016 264,500 287,500 $312,5002017 264,500 287,500 312,500 2018 264,500 287,500 312,500 2019 264,500 287,500 312,500 2020 264,500 287,500 312,500 2021 304,175 330,625 359,375 $390,625

Assuming a total millage rate of 253 mills, by 2021, tax on identical properties would vary by as much as $875.

IMPACT OF 15% CAP ON REASSESSMENT: UNEQUAL TAX BURDEN

Avoiding The Millage CapAvoiding The Millage Cap

Using Your Debt Limit forUsing Your Debt Limit for

Capital ExpendituresCapital Expenditures

SimpleSimple

Counties and municipalities may issue general Counties and municipalities may issue general obligation debt for any corporate purpose.obligation debt for any corporate purpose.

Many counties and cities use general fund millage to Many counties and cities use general fund millage to fund capital expenditures.fund capital expenditures.

Consider using general obligation bond funds, instead Consider using general obligation bond funds, instead of general funds, to fund capital expenditures.of general funds, to fund capital expenditures.

Bonds can be issued for short period, keeping interest Bonds can be issued for short period, keeping interest costs at a minimum.costs at a minimum.

Owing to petition rules, timing is critical.Owing to petition rules, timing is critical.

Not as SimpleNot as Simple

Act 388 makes it difficult in some cases to Act 388 makes it difficult in some cases to engage in lease-purchase financings for engage in lease-purchase financings for equipment and other capital items.equipment and other capital items.

Consider using proceeds of general obligation Consider using proceeds of general obligation bonds to make payments on lease-purchase bonds to make payments on lease-purchase agreements.agreements.

Again, timing is critical.Again, timing is critical. Additional wrinkle for school districts—Additional wrinkle for school districts—

installment payments.installment payments.

SEVEN YEAR LEASING PLANSeparate lease agreements for each FYAll payments due in a FY on all leases repaid through short term g.o. bond.

FY 2010-2011Fire Engine 1 250,000 250,000$ Vehicles 2 200,000 400,000 Truck 1 40,000 40,000 Rescue 1 80,000 80,000

Total for Year 770,000$

FY 2011-2012 Fire Engine 1 250,000 250,000$ Large Ambulance 2 200,000 400,000 Sanitation 1 140,000 140,000

Total for Year 790,000$

FY 2012-2013 Public Works Vehicle 1 250,000 250,000$ Pickup Truck 2 40,000 80,000 Ambulance 1 140,000 140,000

Total for Year 470,000$

FY 2013-2014No vehicles for the year

FY 2014-2015Public Works Equipment 2 250,000 500,000$ Motor Pool 10 28,000 280,000

Total for Year 780,000$

FY2015-2016Fire Engine 1 250,000 250,000 Rescue 2 100,000 200,000 Pickup 2 40,000 80,000 Sheriff's Dept Vehicles 5 28,000 140,000

Total for Year 670,000$

FY 2016-2017Sanitation 4 125,000 500,000$ Motor Pool 10 28,000 280,000

Total for Year 780,000$

GRAND TOTAL 4,260,000$

SEVEN YEAR LEASING PLANSeparate lease agreements for each FYAll payments due in a FY on all leases repaid through short term g.o. bond.

PRO FORMA SCHEDULE OF LEASE PURCHASE AGREEMENTS.

Payments on Payments on Payments on Payments onPayments on Payments on Payments on Total Fiscal $770,000 $790,000 $470,000 $0 $780,000 $670,000 $780,000 Annual LeaseYear 2011 Lease 2012 Lease 2013 Lease 2014 Lease 2015 Lease 2016 Lease 2017 Lease Payment

2011 $167,677 $167,6772012 167,677 $172,033 339,710 2013 167,677 172,033 $102,385 442,095 2014 167,677 172,033 102,385 442,095 2015 167,677 172,033 102,385 $169,855 611,950 2016 172,033 102,385 169,855 $145,901 590,174 2017 102,385 169,855 145,901 $169,855 587,996 2018 169,855 145,901 169,855 485,611 2019 169,855 145,901 169,855 485,611 2020 145,901 169,855 315,756 2021 169,855 169,855

SEVEN YEAR LEASING PLANSeparate lease agreements for each FYAll payments due in a FY on all leases repaid through short term g.o. bond.

SCHEDULE AND ESTIMATED MILLAGE IMPACT OF BOND ISSUES

Total 3.50%Lease Bond Three Total

Fiscal Payment Issue Months Debt Mill MillageYear Due Amount Interest Service Value Required

2011 $167,677 $176,677 $1,546 $178,223 $100,000 1.78 2012 339,710 348,710 3,051 351,761 100,500 3.50 2013 442,095 451,095 3,947 455,042 101,003 4.51 2014 442,095 451,095 3,947 455,042 101,508 4.48 2015 611,950 620,950 5,433 626,383 102,015 6.14 2016 590,174 599,174 5,243 604,417 102,525 5.90 2017 587,996 596,996 5,224 602,220 103,038 5.84 2018 485,611 494,611 4,328 498,939 103,553 4.82 2019 485,611 494,611 4,328 498,939 104,071 4.79 2020 315,756 324,756 2,842 327,598 104,591 3.13 2021 169,855 178,855 1,565 180,420 105,114 1.72

Bonds will be issued in December of each year and paid off in March 1 of the following year.