School Coffers Feel Drag of Slowing Housing Market

Monday, March 19, 2007 | For five San Diego County school districts, the slowing real estate market is really hitting home. Last month, the districts learned that they would receive a combined $1.3 million less in local property taxes than county officials had estimated just three months earlier.

While the amount represents about one percent of the schools’ total general fund revenue, it was money several administrators say they had banked on to help balance their budgets.

The county’s updated estimates for the districts provide an early indicator of the potential havoc falling housing prices could wreak on local government finances, many of which have come to rely on the quickly growing property taxes of the recent real estate boom to make ends meet. That’s because, unlike with schools, the state law does not require the county to provide similar mid-year estimates to other government bodies that receive property tax revenue.

School leaders blame stalling housing sales on the midyear downward adjustment, though county accountants say many other factors may also have contributed to the revision in the amount of money the county will provide to Cardiff Elementary, Del Mar Union, Encinitas Union, Rancho Santa Fe and Solana Beach school districts — the five agencies hardest hit by the unexpected fall in property tax revenue.

Unlike most other government agencies, these five districts rely nearly exclusively on property taxes for their revenue, making them especially vulnerable to feast-or-famine cycles in the real estate market.

“I think we learned a lesson, to be honest,” said Vince Jewell, the superintendent of the Cardiff Elementary School District.

In November, county officials had estimated that Cardiff would receive almost $4.7 million in property taxes this fiscal year; just three months later, that figure fell to $4.6, wiping out 2.2 percent of the district’s revenue.

Cardiff, like the other four, is a “basic aid” school district, which means it receives almost all of its revenue from local property taxes. That separates these districts from the other 95 percent of school districts in California, which rely on money from both local taxes and the state general budget; it also makes them a bellwether of the fluctuations in the amount local governments collect from property owners.

To explain what makes basic aid districts distinct from the other school agencies in California, educators often use the analogy of a bucket: Using historical spending patterns, student body size and other factors, the state assigns each district an amount of per-student funding it should expect. This figure is known as the revenue limit — in other words, the size of a school district’s budget bucket. Local counties then turn over the district’s portions of the property taxes, and the state tops off the local taxes with whatever amount is needed to fill the bucket of each district to the top.

Basic aid school districts receive nearly all of their revenue from property taxes. In good years, it means they get more than the per-pupil funding level defined by the state. But in bad years, it means their fortunes can fall with the real estate market. It’s a headache for these districts, since they often craft annual budgets counting on the extra funds.

Basic aid districts, usually located in wealthier areas, are unique in that the local property taxes are enough to fill up their buckets — and often make them runneth over — without state funds. (The state must still provide each district a nominal per-student amount, set by the California constitution, known as “basic aid.”)

In years of bumper real estate activity, basic aid districts receive more per-pupil funding than most schools in the state, because they get to keep all of their property taxes, even the amount exceeding the state-defined funding goal. But in bad years, it also means that basic aid districts can see sudden declines in their revenue, since the state only steps in if property tax funding falls below the bare-bones revenue limit.

“Basic aid districts have no safety net,” explained Ron Bennett, the president and CEO of School Services of California, a consultancy that advises school officials on good governance and administration practices.

This looks like a bad year.

For Cardiff, in its second year as a basic aid district, it’s also a lesson in how quickly rosy property taxes projections can evaporate. It’s a lesson Jewell said the district has learned well: Next year, Cardiff will view the county estimate with some skepticism, using a more conservative number for its budget.

“Obviously, this time, we’re going to leave [the money] there, until we actually see some reports indicating what the collections are,” he said. “It’s tough, because the challenge is, if you do that, there are dollars that you could be using for programming for children.”

Three of the five districts, though, say Cardiff’s is a lesson they have already learned: Officials in Encinitas, Rancho Santa Fe and Solana Beach all say that the latest revision, while below the revenue the county originally projected, is still above the figures the three districts used to build their budgets. For now, they say the lower property tax revenue will not push their districts into the red, though that could change if the tax projections continue to slide in the remaining three months of the fiscal year. The county Auditor and Controller’s Office has promised to provide them with monthly updates.

“The Board of Education, the superintendent and myself remember the days in the 1990s when we kept projecting what the county was projecting, and when they had huge reassessments, we had to make significant program cuts,” said Sandy Benson, the assistant superintendent of administrative services at the Solana Beach School District. “And I think being a part of a basic aid district during that time, the memory of that allows you to maintain your property taxes conservatively, until you know reality.”

For the Del Mar Union School District, currently embroiled in a controversy over the role of a nonprofit foundation in raising private money for its schools, the county’s revenue revision has brought even more bad news. The district budget, already in deficit for the year, will drop at least $400,000 into the red, said Assistant Superintendent of Business Services Dena Whittington.

Historically, the long-time basic aid district has based its budget on the county projections, which have usually proven to be spot on, she said. Whittington said she is not sure whether, in light of this year’s revisions, that practice will continue.

“We’re just starting the budget process for ’07-’08, and it will be up to the board to make that decision,” she said.

Though basic aid districts are generally encouraged to keep significantly larger reserves than regular school districts, which usually maintain an amount equal to about 3 percent of their yearly budget in case of economic uncertainty, few guidelines exist for how they should take into account potential fluctuations in property tax revenues, said Rick Pratt, the assistant executive director of the California School Boards Association. A general principle that “today’s dollars should benefit today’s students” usually discourages districts from being overly cautious, he explained.

“This is a rare enough occurrence that it’s hard to plan to for, because it’s something that happens so rarely,” Pratt said.

None of the districts affected by the county’s revision say they expect to cut staff or programming in this fiscal year, though they say the bad news will make them approach next year’s budget more cautiously.

For all government agencies that use property taxes for at least part of their revenue, the run up in the housing market over the last decade has helped propel revenues to new heights. The roaring housing market of the first half of the decade helped local governments curb the impacts of Proposition 13, a 1978 state constitutional amendment that has limited the power of local governments to raise taxes on properties, even in the face of rising values, until they change hands. Not only has the recent bull market raised the values of all houses, it has meant that more of them have changed hands, bringing in more money to public coffers.

Now, though, it looks like that trend is cooling. In January, the number of homes sold in San Diego fell by more than 4 percent compared to 2006, and the average price of a home fell 5.6 percent, the second-steepest drop in Southern California.

Juan Perez, a senior accountant at the county Auditor and Controller’s Office, said that though the slowdown contributed to property tax decline, it is unclear how much of the fall should be attributed to the changes in the housing market.

“It does play a roll in it, but it’s really difficult to estimate given the fluctuations in the market,” Perez said, explaining that a change in a state law about how property taxes are divided was also a factor.

To see how big a dent, if any, the real estate slowdown will leave in local government finances, the county will have to wait until all of the checks are in. In the meantime, the basic aid school districts say they will be waiting gingerly.

“I would stay up nights, not sleeping, if we over-projected our revenues and underestimated our expenditures,” said Lean King, the superintendent of the Encinitas Union School District.

Despite the county’s reassessment — the Auditor and Controller’s Office estimated that the Encinitas district will get $495,000 less than it had thought in November — conservative budgeting will allow Lean sleep soundly at night, for now, he said.

Please contact Vladimir Kogan directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.