During their first legislative session under Gov. Jim Pillen, Nebraska policymakers are considering legislation that aims to increase the state’s role in financing K-12 education and decrease local property tax burdens for school district residents. Specifically, two state bills address the fact that Nebraska is one of the most property tax-dependent education systems in the country, and many of its rural school districts get no state equalization aid under the state’s K-12 funding formula. However, while the legislation would help alleviate property tax burdens, there’s a substantial exception baked in that would prevent taxpayers from getting dollar-for-dollar property tax relief from the increase in state funds.
Backed by Gov. Pillen, Legislative Bill (LB) 583 would increase state reimbursements for special education expenditures as well as ensure that every school district—including the many rural Nebraska school districts that currently get no state formula aid—receives a minimum of $1,500 per student amount in state aid, also called Foundation Aid.
The bill would also set aside $2 billion in revenues to be collected from state taxpayers in a series of years in an Education Future Fund to sustain further increases in state education funding. All told, this would result in about $270 million in new revenues for K-12 education in the immediate year following the bill’s enactment.
Another bill, LB 589, aims to make the new influx of state funds from LB 583 result in a reduction in property tax burdens. This bill would cap the annual allowable growth in state and local school district revenues, both property tax and non-property tax, at three percent. Note that reimbursement funds for special education and donations are excluded from these revenues, which means that the increase in special education reimbursements wouldn’t count toward a school district’s revenue growth cap. Additionally, an amendment introduced would exclude payments on the principal and interest of bonds from the revenue growth limit. There are also exceptions allowing for higher revenue growth caps for districts that have substantial growth in total student enrollment or enrollment of low-income or English learner students.
Laying aside these exceptions, however, the many Nebraska school districts that rely primarily on property taxes should see a necessary reduction in property taxes from the new per-student Foundation Aid and the three percent annual budget growth cap.
Take the example of Centura Public Schools, a school district with 442 students in the 2022-2023 school year that is heavily reliant on local property taxes. LB 589 specifies that all local and state revenues, excluding only special education funds and private grants and donations, should be used to calculate a district’s three percent revenue growth limit. According to the district’s most recent annual financial report (AFR) from the 2021-2022 school year, Centura receives $6.61 million from those funding sources. Now, if Centura were to receive $1,500 per student under LB 583, that would represent an estimated $663,855 increase in funding—a 10% increase on the funding sources considered under the cap based according to the district’s latest AFR.
Assuming Centura doesn’t qualify for any of the enrollment growth exceptions granted in LB 589, the new aid from the state would require a reduction in property taxes for the district to meet the three percent revenue growth limit. Based on the district’s AFR figures, Centura would only be able to grow its budget by an estimated $198,237. Therefore, the new state aid should result in an estimated total property tax reduction of about $465,618, spread across all property taxpayers in the district. These calculations are all summarized in Table 1.
|TOTAL COUNTY AND EDUCATION SERVICE UNIT RECEIPTS||$27,232|
|TOTAL REVENUE FROM LOCAL SOURCES (exc. Private grants, donations)||$6,240,608|
|TOTAL REVENUE FROM STATE SOURCES (exc. SPED aid, SPED transportation)||$340,054|
|LB 583 Estimates|
|Foundation Aid Estimate||$663,855|
|Estimated % increase from Foundation Aid||10.05%|
|3% of State & Local Revenues with Exclusions||$198,237|
|Property Tax Reduction Estimate||$465,618|
This dynamic would apply to many of Nebraska’s other small, property tax-dependent school districts—the influx in state aid would necessitate a reduction in their property taxes to meet the three percent revenue growth limit.
But problematically, LB 589 provides a pathway whereby Centura–and similarly situated school districts– could minimize the property tax relief by allowing districts to override the revenue growth limit with the approval of 60 percent of the district’s voters in a special election. It also allows district school boards to override the revenue growth limit without petitioning voters at all if they receive an affirmative vote from at least 75 percent of school board members.
According to the bill, voter or school board approval would allow districts with “no more than four hundred seventy-one students”—which would include Centura—to have a revenue growth cap of seven percent instead of three percent. This cap would cut Centura’s required property tax reduction down to about only $200,000, a very small reduction in property taxes considering that Centura levied $5.55 million in local property taxes in the 2021-22 school year.
The advantages of LB 589 and LB 583 are that they aim to gradually decrease Nebraska’s heavy property tax burdens by increasing the state’s role in financing K-12 education. Future state investments would be subject to the same budget growth limits and should result in further property tax relief. But for the many Nebraska districts in similar situations as Centura, the current provisions in LB 589 that allow for school boards or voters to override the proposed three percent revenue growth limit risk creating a dynamic where $2 or $3 in new state funds are required to achieve only $1 in property tax relief.
To achieve cheaper and more immediate property tax relief, state legislators could consider removing provisions in LB 589 that allow school districts to increase their revenue growth cap with school board or voter approval.
More fundamentally, Nebraska lawmakers should also examine every aspect of how the state Tax Equity and Educational Opportunities Support Act (TEEOSA) formula works and how it’s funded. There are many problems in Nebraska’s education funding system that should be addressed, such as how the state formula sorts districts into complex, non-transparent comparison groups to determine base funding and how most Nebraska school districts raise more than their formula share from local property taxes alone. State policymakers shouldn’t pass up this opportunity to decrease the formula’s overreliance on property taxes and to make the formula more transparent and student-centered.