Millage Reductions - Involuntary and Voluntary
Reprinted from September 2024 SBO Quarterly
Download the complete September 2024 issue
The State of Ohio implemented reduction factors for voted property tax levies during an inflationary era (RC 319.301, 1976) and whittled away levy property tax rollbacks to reduce state outlay (RC 319.302, 2013). However, the state kept the 20-mill floor in place given school districts’ overreliance on voted property taxes and recognizing not every part of the state has growth from new construction yielding new revenue.
Fast forward – as a result of the 2023 valuation update, several county budget commissions1 requested all jurisdictions, including school districts, to voluntarily forgo millage to reverse the impact of inflationary increases on collections, particularly collections on inside millage. Now we have budget commissions moving beyond that to involuntary reductions of voted operating millage.
BUDGET COMMISSION AUTHORITY
Under RC 5705.31 and 5705.341, budget commissions have two determinations to make regarding property tax millage:
1. Was it property authorized? and
2. Is it clearly required by the budget?
INVOLUNTARY REDUCTIONS
The case law analyzing the “clearly required” determination is sparse. The more recent Ohio Supreme Court decision, Sanborn v. Hamilton Cnty. Budget Comm., 142 Ohio St. 3d 20 (2014), held that the “clearly required” standard of R.C. 5705.341 required the LEGAL » continue county budget commission to reduce the increased effective rate of taxation of the outside millage of the school district as the “increased revenue had to correlate to current expenditures, rather than constituting excess revenue for the district.” This was in response to an inside millage move to permanent improvement to hit the 20-mill floor without a corresponding budgeted need.
The Sanborn court cautioned that its decision should be interpreted narrowly by stating “[n]othing in this opinion should be construed to disapprove, as a general matter, the discretion of a board of education to budget with a surplus. A school district is generally entitled to collect revenue under its inside millage and its voter-approved outside mills (the latter being subject to the H.B. 920 reduction factors), while maintaining a significant balance of unencumbered funds.”
In Vill. of S. Russell v. Budget Comm. of Geauga Cnty., 12 Ohio St. 3d 126 (1984), the Ohio Supreme Court stated the phrase “clearly required by a budget” “does not require, nor grant, authority to a budget commission to make a judgment call on desirability of programs of the health district or in this sense to determine the ‘need’ of the district for sums as set forth in the budget as submitted.”
Despite the foregoing, the political fallout from the 2023 valuation update has caused some budget commissions to second-guess school districts’ needs.
How to best respond to that? Prepare to make the school district’s case.
- Establish a reserve balance account under RC 5705.13 to stabilize budgets against cyclical changes;
- Follow OASBO’s model cash balance policies;
- Educate the budget commission about the levy cycle and the five-year forecast and related requirements under RC 5705.391 regarding current and projected future deficits;
- Encourage board members and school district community members to attend budget commission hearings;
- Push for legislation similar to RC 5705.322 requiring the budget commission to consider the five-year forecast, publish notice of a public hearing solely on the millage reduction issue and permitting school district representatives to appear at the hearing and explain the financial needs of the school district.
What if the budget commission does not listen? Consider an appeal to the Ohio Board of Tax Appeals. R.C. 5705.37 allows a board of education to appeal any action of the budget commission within 30 days of receipt of the school district’s official certificate or notice of the county budget commission’s particular action. The matter is considered a de novo proceeding (proceeding anew) and any action of the budget commission may be modified regarding the fixing of tax rates. Finally, 1975 OAG No. 16 states that an involuntary reduction by a budget commission is not binding for future years if budget need is shown.
VOLUNTARY REDUCTIONS
A school district can always voluntarily reduce any of its millage.
In the bond millage context, it is customary for the millage to be reduced over time as valuation grows since bond millage is not subject to the reduction factors of RC 319.301. This is usually a collaborative process between the school district and budget commission to make sure the annual millage produces an adequate amount to cover that year’s debt service, allowing for delinquents, late payments and an appropriate bond retirement fund balance. Mid-year corrections in case of error are permitted, but rare.
Otherwise, school districts sometimes decline to levy millage to which they are otherwise entitled. This can be for various reasons, e.g. wanting to dovetail new bond millage coming on with old bond millage going off, not wanting to levy Ohio Facilities Construction Commission (OFCC) maintenance millage until OFCC funding is available, etc. Usually, this is done on a year-by-year basis to keep discretion with the school district. Put another way, it is not a voted reduction and is revisited annually.
The process is straightforward when choosing to decline to levy millage otherwise entitled to levy. The board of education passes a resolution in accordance with RC 5705.31/5705.32 directing the budget commission not to collect certain millage by amount and type. Any reduction in taxes is done at the county level and reflected in the next tax bills going out.
Such a decision has two-fold challenges:
1. determining the appropriate millage thus revenue to forgo, particularly given pending legislative changes; and
2. the interests of the various stakeholders in the school district’s finances.
These may include employee unions, who may bristle at a board of education voluntarily decreasing a revenue flow that will pay wages and benefits, along with taxpayers, who may have a long memory when it comes time for the school district to later ask for additional money via a ballot issue.
Additionally, currently school districts have to levy 20 operating mills or its equivalent under RC 319.301 and to qualify for the foundation program (state aid) under RC Chapter 3317.
In closing, valuation increases stem from factors beyond the control of school districts, such as inflation and the housing shortage. Millage reductions should not be the default reaction. School districts should be prepared to illustrate that their millage is properly authorized and the funds are clearly needed. Creating and following cash reserve policies are the best first step toward establishing need.
1 Establishing a reserve balance account under ORD 5705.13 and adopting a cash reserve policy can stabilize budgets against cyclical changes.
