Taxing times in Vermont

 

By MAURY THOMPSON
Contributing writer

 

The debate over school funding in Vermont is gaining new urgency after an election that wiped out Democratic supermajorities in both houses of the Legislature.

Even as the Democratic presidential ticket was carrying the state by more than 30 percentage points on Nov. 5, Republican Gov. Phil Scott won re-election to a fifth term by his biggest margin yet — and voters gave him nearly two dozen new allies in the Legislature.

The results were widely interpreted as a reaction this year’s sharp increases in property taxes for education, which Scott has cited as part of what he calls a broader “affordability crisis” for the state.

“Vermonters had their pocketbooks in mind when they overwhelmingly voted for change, and more balance, because they could no longer afford the direction lawmakers had set,” Scott said at a press conference on Nov. 13.

The Republican incumbent succeeded in his campaign on behalf of down-ballot candidates, flipping six seats in the 30-member state Senate from Democratic to Republican. The GOP also posted a net gain of at least 17 seats in the 150-member House, with one race still not settled as of late November. (In Bennington and Rutland counties, incumbent Democratic Reps. Robin Chesnut-Tangerman, Stephanie Jerome, William Notte and Mike Rice all lost their seats.)

Although Democrats still will control both chambers when the General Assembly begins its new session in January, the change means Democrats by themselves will no longer have the votes to override Scott’s vetoes, as they had done repeatedly over the past two years — including on this year’s education funding bill.

Scott said he believes the start of property tax reform can be achieved in 2025.
“I do think we need a bridge to get us to where we need to go,” he said. “But it has to come coupled with structural changes — some of the things we have talked about in the past and some new ones.”

State Rep. Seth Bongartz, D-Manchester, who won election in November to one of the two state Senate seats covering Bennington County, agreed that the election results will shift the dynamics of the state’s education funding debate, though he sees the change from a different perspective.
With a greater number of Republican legislators come January, the public will hold both parties accountable, whereas this year Democrats absorbed a disproportionate share of the blame for failure to achieve reform, Bongartz said.

 

Small schools, fewer students
Vermont is hardly the only state trying to figure out how to pay for its schools. Funding for education is also expected to be a hot topic as new legislative sessions begin in January in New York and Massachusetts.

All three states in the region are grappling with how to absorb inflation — and the additional costs of schools’ changing role in their communities -- without putting even more burden on property owners.

But with a shrinking number of students and its overall population stagnant and graying, and without a dynamic metropolis like Boston or New York City to offset population losses in rural areas, the situation seems more critical in Vermont.

Like its neighbors, Vermont spends more per student and has smaller class sizes than most other states.

New York, which spent $24,881 per student this year, has the highest spending per student in the nation, according to World Population Review, which bases its reports on United Nations data.
In this ranking, Vermont placed fourth, at $21,219 per pupil, and Massachusetts ranked sixth, at $19,193.

In 2022, Vermont had the lowest student-to-teacher ratio — 10.6 — of any state in the nation, according to the National Education Association. New York, at 11.1, had the third lowest.
Vermont schools employ twice as many teachers per student as California, Arizona or Utah, according to The 74, an online national education news site. Northeastern states tend to hire fewer teachers certified by alternatives to college degree programs and also tend to have a greater proportion of teachers with master’s degrees, according to the site.

Despite Vermont’s tradition of small schools and local control, the state has pushed for consolidation in recent years in an effort to reduce costs. But there are some practical limits to school mergers in a rural state with mountainous terrain and winter weather that can make travel hazardous.

A state-commissioned study completed in September by Picus Odden & Associates concluded that Vermont schools are spending between $400 million and $462 million more than necessary. The study estimated the state could deliver an adequate education for a cost of less than $13,000 per student but actually spent $16,869 per student in the most recent fiscal year. But the consultants noted that the state’s per-pupil education costs are driven up by its decision to maintain many smaller schools and districts rather than consolidating them.

Vermont NEA, a statewide teachers union, quickly dismissed the study, suggesting it does not recognize the model of small schools and small class sizes in Vermont – a feature that is often prized by voters in local communities.

“Like many other rural states, most of Vermont’s districts and schools are very small, making it difficult to achieve the economies of scale of larger schools in larger districts,” a state Agency of Education report concluded in November. “But in Vermont, this challenge is compounded because many districts tend to treat their small schools as if they were medium-size schools or even large schools when it comes to staffing.”

 

Soaring costs — and taxes
Discontent with education funding has been percolating in Vermont for a number of years.
“It’s been building,” said Bongartz, the Manchester legislator.

But the debate reached a boiling point this year when, faced with a projected average property tax increase of 18.5 percent, voters rejected 29 of 95 local school budgets on town meeting day in March. The previous year, only two budgets were rejected.

In Rutland County, four school districts had to pare their budgets and go back to voters at least twice more before winning approval. The Slate Valley district, based in Fair Haven, finally won voter approval on the fifth try.

“When Covid happened, everything came together in a perfect storm,” Bongartz said.
School districts faced new costs to provide mental health counseling services, health insurance expenses soared, and teacher salaries were increased to retain and recruit teachers as the labor market tightened, he explained. And inflation drove up nearly every other expense.
This year, Scott and legislative leaders were at a stalemate over education reform.
In passing the annual “yield bill,” which sets property taxes for education, lawmakers came up with about $70 million in one-time stopgap aid and other measures to reduce the average property tax increase around the state to 13.8 percent.

Scott vetoed the bill in June, saying immediate comprehensive property tax reform was necessary, but the Legislature overrode the veto. Legislative leaders dismissed the governor’s ideas for further reducing the property tax increase as unworkable, and the state treasurer warned that Scott’s suggestion for pushing some of the cost of this year’s education funding into future years might harm the state’s credit rating.

The Legislature had instead established a Commission on the Future of Education in Vermont. The new panel was charged with conducting a two-year study of how to restructure education funding. The commission is scheduled to release an interim report in mid-December that might include some recommendations for immediate first-step reforms.

Bongartz said he expects some of those recommendations, and possibly other measures, will be implemented in the coming legislative session. Many officials now believe the public is not content to wait for the completion of the two-year study in 2026 before taking cost-saving measures, he said.

The pressure could increase in early December, when the state tax department issues its first projection of property tax increases for the coming year.

Bongartz said he agrees with Scott that comprehensive property tax reform is needed.
“We need to just completely blow up the system and start over,” he said.

But replacing the current system could get murky quickly, given conflicting political views and the many interests at stake.

“I expect that it’s going to be a robust debate,” said Sue Ceglowski, executive director of the Vermont School Boards Association, in a telephone interview.

 

A mandate for equality
Under the current system, each school district sets a budget, and once voters approve it, the school district sends a bill to the state.

Vermont is one of just two states in which school districts bill the state to cover education budgets. The state, rather than individual school districts, collects education property taxes and then sends payments to the school districts.

The state calculates a “common level of appraisal,” which adjusts locally assessed property values to their estimated fair market value, with the aim of equalizing the tax burden between towns. But for several reasons, the education tax burden in an individual town sometimes rises more rapidly than the budget set by the local school district.

Property taxes cover the largest share of education funding in Vermont, accounting for about two-thirds of revenue. Other revenue comes from the state lottery, a state sales and use tax, Medicaid transfers, and taxes on meals and lodging, wind and solar energy production, vehicle purchases and short-term rental payments.

The current system was put in place in the late 1990s after the Vermont Supreme Court ruled that the previous system, because of wide disparities in property values between towns, violated the state constitution’s guarantee of equality in education.

The intention was for the new system to provide equal education opportunity statewide without losing local control, but Bongartz contends the implementation has been counterproductive.
Sometimes property owners in a school district that is conservative in its spending will wind up with a higher-than-average property tax bill, while in other cases property owners in a district that’s more generous in its spending will wind up with a lower-than-average tax bill, he said.
“The system is just so complicated that no one can understand it,” Bongartz said.

This is because of the mandate to provide equal education to all students statewide.
“Since Vermont pools education funds at the state level, higher spending in other districts can lead to higher statewide tax rates to cover the total statewide cost of education,” the Agency of Education report released Nov. 15 concluded. “Everyone in the state helps pay for every child’s education.”

Some suggestions for reforming the system include:
• establishing a baseline “foundation aid” stream of state funding to supplement the property tax;
• establishing a multi-year state school aid stabilization fund:
• establishing a tax cap based on spending per voter, with a mechanism whereby voters in a school district could override the tax cap;
• allowing Vermont school districts to establish special education collaboratives, similar to the BOCES system in New York; and
• increasing the share of property taxes paid by second-home owners.
In addition, Scott has proposed establishing a statewide health insurance plan for teachers, which would reduce costs of coverage through economies of scale.

As of 2018, 33 other states, including New York, used a baseline system, in which the state provides a set payment that each school district uses as a first step in drafting a local budget.
The Vermont chapter of the National Education Association teachers union has called for switching the main source of revenue for the state education fund from residential property taxes to an income tax, but that idea does not appear to be drawing broad-based support.

“Taxing working Vermonters on the value of their homes is regressive and leaves millions of dollars in the pockets of the wealthiest Vermonters,” said Don Tinney, the union’s president, in a news release. “Using an income tax to support our schools would raise more from Vermont’s wealthiest representatives.”

 

Changing N.Y. aid formula
In New York, the debate over education funding in the coming legislative session will center not so much on the level of funding but on distribution of funding.

The state budget for the fiscal year that began April 1 provided a record $34.5 billion in school aid. This included $24 billion in foundation aid, an increase of $2.6 billion from the previous year, fully funding foundation aid for the first time.

Now lawmakers in Albany are expected to update the formula for distributing foundation aid, as the current system is considered outdated.

In New York, the school property tax collection system works in the opposite direction from Vermont’s. The state sets aid to school districts in the state budget, then issues a payment to individual school districts, which then determine how much to levy from local property owners to supplement the state funding. The school districts individually levy and collect property taxes.
Foundation aid is the largest pool of state funding to New York’s school districts.

The state has commissioned the Rockefeller Institute of Government, an academic think tank, to conduct a study of the foundation aid system and make nonbinding recommendations for changes. The institute is expected to release its report in early December.

One thing all sides seem to agree on is that New York’s system of foundation aid to school districts is highly complex.

“We have to have lawyers and our research team explain the formula,” said state Assemblyman Matt Simpson, R-Lake George. “It’s complicated.”

The formula for distributing foundation aid has not been updated since it was established in 2007.

In preparing its upcoming report, the Rockefeller Institute held a series of five public forums around the state this summer, the nearest of which was Aug. 14 in the Albany suburb of Guilderland.

Speakers at the Guilderland forum voiced concern that the current aid formula relies on outdated statistics that no longer reflect the degree of poverty, the percentage of students speaking English as a second language, or the increasing role of schools in providing mental health resources and social-services safety nets.

“Our student demographics are rapidly shifting, our kids are showing up to school with bigger and more urgent needs, and our schools are playing a larger role in our students and families than ever before,” said Malinda Person, president of New York State United Teachers, at the Guilderland hearing.

The state’s current aid formula is based on 2000 U.S. Census data for poverty and 2007 labor costs. The formula is based on K-12 education costs, but in recent years the state has consistently emphasized the importance of public pre-kindergarten programs. Court decisions also have increased the cost of providing special education services.

Another issue is that the formula does not factor in the state property tax cap that was implemented in 2011. The tax cap limits the annual increase in the dollar amount of property taxes collected by a school district to 2 percent or the rate of inflation, whichever is less, unless local voters approve the district’s budget by a supermajority.

One factor in the foundation aid formula involves setting a dollar amount that property owners could be expected to pay in each district. Education officials say the state’s expectations have been harder to achieve since the tax cap was implemented.

“Given the current tax cap formula, this collectible amount may not align with our community’s expectations,” said Jeffrey Simons, superintendent of East Greenbush school district in Rensselaer County.

The issue has been particularly problematic in school districts with a high concentration of lakefront properties.

“Some are what I would call property-rich and income-poor districts,” said Roger Catania, who represents the 4th Judicial District, stretching from Fulton and Schenectady counties north to the Canadian border, on the state Board of Regents. “Year-round residents there are generally working families, but these districts rely heavily on vacation property taxes, which is a revenue stream which doesn’t keep pace with costs due to the tax cap.”

Critics say the current aid formula also has become particularly problematic in school districts with a high concentration of farmland.

“Schuylerville is land rich with cows and corn,” said Erin LaBombard, president of the Schuylerville school district’s teachers union. “The formula is valued on land for condos and commercial use, not grazing and growing.”