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State ofVerrnont
Agency of Administration

Office of the Secretary

lphonel 8oz-828-3322

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Susanne R. Young, Secretary

8o2-828-3920

Pavilion Office Building
1o9 State Street, Sth Floor
Montpelier, VT o56o9-ozor
www.aoa.vermont.sov

TO:

Reptesentative Janet Ancel

CC:

Senator Ann Cummings, Chair, Senate Finance Committee
Rebecca Flolcombe, Secretary, Agency of Education
Adam Greshin, Commissioner, Dep aftment Finance and Management
Kai Samsom, Commissioner,
Taxes

FROM:

Secretary Susanne R.

SUBJECT

Continuing the collabotative discussion on reforming education funding, alleviating
the property tax burden and closing the gap between revenues and spending

DATE:

January 18, 2018

Thank you for your continued willingness to an open, honest discussion on the challenge in the Education
Fund.

The Administtation's goal is to work with you to eliminate the current defi.cit, establish a more affotdable and
sustainable way to fund out schools into the future and provide districts the necessary flexibility to save
money while maintaining quality and expanding opportunities for our children.
We appreciate your committee's willingness to take on this difficult conversation, and to do so with an openmind and a sense of urgency. We want you to know that we are committed to giving all of your ideas fair
considetation as well. As the Govetnor has tepeatedly noted, solving this complex challenge requires that we
put all ideas on the table. In this spirit, we offer additional ideas for further study and consideration.

It is our view that Vetmonters want us to work together and be willing to think outside the box that has
constrained education financing discussions for many yeats. And we know they want us stave off the
continued growth in statewide ptopefty tax rates, which has been increasing faster than wages - even for
Vermoriters who ate income sensitized.
Alongside ideas fot immediate tax telief, we believe we must also collaborate on a multiyear plan to transform
school systems and leverage economies of scale that will release resources that can be used to alleviate tax
incteases and invest in mote and better opportunities for our kids. It will be a challenge to balance urgent
needs with a longer-term plan, but both must be a focus throughout.
The Administtation looks forward to discussing the ideas in the enclosed memo as well as
offered
in the coming weeks to reach a favorable outcome for Vermonters. If there are any ideas in^nyother
this memo you
would like to pursue further, we would look forward to working with you.

 Some Backgtound on the Administtation's Percpective:

Under the current funding formula, the local homestead property tax rates ate believed to be the primary
regulator on local education budgets. To the contr^rry, it is our view that all evidence suggests the current
formula does not adequately connect local budgets to local taxpayers in a way that would constrain statewide
property tax growth to a r^te that is less than the growth in wages. Put another way, the current system
allows tax rates to rise faster than the taxpayers' ability to p^y, without falling economically behind'
Specifically, looking at budgets and homestead ptopety taxes in the aggregate, the Vetmonters voting on a
local budget (as well as the majority who do not vote on school budgets) contribute, on average, 27 cents on
the dollar ($45S million/$1,681 million).
Many of the changes to the funding formula outlined below seek to futthet locahze the tax implications of
budgets after a level of state suppoft that, according to out counsel, meet the Bdgham test. In other words,
these ideas reflect attempts to establish a stronger connection between local spending decisions and local
taxes.

Additionally, while we view reforming the funding fotmula as one area of opportunity, we propose ideas to
close the gap between revenues and budgets. It is our view that Vetmontets deserve a second consecutjve
yeat of level, or slightly lower, statewide property tax rates. We understand that this is a challenge, patticulady
given the nature of our two-decade old fundrng formula and the population trends that are impacting both
the tax base and the total numbet of students we serve.
As we note above, we look forward to discussing these ideas with you and look forwatd to hearing your
proposals as well.

Cost Containment (DePt ofFinance and Menagement)
rates: Although this
million - Freeze special education rates for independent schools
^tl0/l/17
does not require legislative approval, the legislatute could include it in the cost containment conversation. The
g1.5

state contribution to special education services in public schools has been level funded the last three years,
due in large part to distticts ovet-budgeting for this expense.

million - Increase IEP extraordinary teimburcement threshold ftom $50k to $?7k and tie futurc
increases to inflation: This threshold has not been increased for two decades. Currendy, the cost to suppoft
$1.5

kids on IEPs is shared between the supervisory union or supervisory disttict and the state, with the state
contributing 60 percent up to $50k and 90 percent when that thteshold is exceeded.
$3 million - Establish in statute the recommended cost sharing arrangements (in Act 85) for
employees' health benefits for conttacts ending beforc 7 /l/18: Based on the setdement data teported to
the VEHBC, we know most districts missed the targets outlined in Act 85 by a considerable margin.
Premiums are increasing because alarge maioitty of contracts negotiated at the local level agreed to use
Health Reimbursement Accounts that do not roll over into later yeats to compensate employees for their
higher out-of-pocket exposure. This outcome alone contributed to a more than a one-cent increase on
propefiy tax rates - about half of the 1,6.8oh rate increase requested by VEHI in late September 2017.
$30 million - Achieve a student-to-staff ratio of 1-to-4.45 through attrition in FY19: Over the last five
years, teacher retirements alone have averaged 470 (which does not include paraptofessional and other school
staff). Current student-to-staff ratios are 1-to-4.25.8y increasing by two tenths in year one, significant savings
could be achieved. The improvement could be managed by atttition thtough tetitements, vacancies and

 management of positions actoss govetnarice structures. How to.achieve these higher ratios should be left to
the highest governance level in a supewisory union ot district to provide flexibility, while meeting the unique
needs in different SUs/SDs. The five-year initiative could be to achieve student-to-staff ratios of more than 1to-5 in the aggregate, saving approximately $100 million/year once implemented.

Total =

$36

million

Refonnins Educetion Fundino: /Deot ofTaxes)
a level to raise up to $171000 per equalized pupil.
$20 million - Set yields and non-residential tate
^t to local districts' budgets. Districts
This amount would constitute the state's contribution
who spend more
than $17,000 per equalized pupil would be tequired to raise the difference on their local homestead grand list.
A payment of $17,000 per equalized pupil is an inctease to the statewide avera'ge but would ultimately be a
reduction of $20 million in total education spending, providing relief to statewide property tax rates.

million - Ctp statewide property tax rates at 2.5o per equalized pupil: Cap the revenues raised
thtough the cuttent statewide funding formula to 2.5 percent of trY1B per pupil expenditutes. All per pupil
educalion spending more than 2.5 percent of FY18 per pupil expenditures vrould have to be raised on the
local homestead gtand list. To local districts, this will be a small adjustment to the local homestead grand list.
$26

Education spending as of 1,2/ /17 is expected to increase by 3.9 percent per pupil across the state. Although
some districts may come in lower than this projection, many districts' budgets will exceed 2.5 percent per
pupil growth. Those districts will not know with any certainty the local tax impact of their budget, unless the
legislatute makes changes before budgets are warned in lateJanuary and eady February or enables additional
budget votes after adjoutnment.
1,

million - Implement a vadable growth cap on pet equalized pupil spending: The table below
shows allowable growth caps across varying spending brackets to achieve these savings. The total modeled
savings under the parametets outlined in the table is $37 million on the statewide propefty tax base. Per pupil
spending exceeding the allowable growth targets is shifted to local homestead grand lists.
$37

FY1SPerPupil Spending

Between

And

FY19

Allowable
Distrists in Bracket

Grourth

$

10000

$

11,0CI0

4.ffi6

$

12,000

3.5%'

$

11,000
12,000
13,000

$

13,CI00

3.0%

$

14q00

2.5?{

$

15,000

2"Wo

$

16,000

1.5%

$

17,000

1.0%

18,000

0.5%

(

$
$

14000
11000

$

16,000

$

11000
1&000

$

$

:

$
a nd

up

0.tr/.

$3.4 million - Freeze the total income sensitivity adiustment at FY18 level: The FY18 income sensitivity
adjustment Payments totaled $173 million. If that adjustment were frozen for FY19 the education fund would
pay out $3.4 million less than forecasted and provide time to furthet consider this issue in the context of a 5year plan.

 $5 - $7 million - Apply an asset test and change the income sensitivity calculation: Under curtent law,
passive income ovet $10,000 is double counted toward household income for all filers under age 65. To earn
more than $10,000 in passive income an individual or maried couple would likely have a better ability to
contribute than required under cuffent law. When coupled with a change to the qualifiing house site value in
the curent income sensitivity calculation, up to $7 million in additional savings, spread over a wide gtoup of
ptoperty tax payers, could be achieved.

miilion - Change Current Use Program to teflect land values across Vermont towns ($1.2 million
Education Fund; $0.3 million General Fund):'
g1.5

Participants in the Current Use Program pay taxes on the "use value" of theit entolled land and farm
buildings. The use values are set by the Cutrent Use Advisory Boatd and applied statewide. The tax
differential paid into the Education Fund on these enrolled propetties is $45 million. Additionally, the
General Fund reimbursement for municipal taxes on these enrolled propetties is approximately $16 million.
an 85 percent exemption for all enrolled properties were applied, in lieu of the set value construct,
approximately $1.2 million in savings to the Education Fund and $0.3 million to the General Fund would be
achieved. Geographic equity would also result because the existing structure of Current Use ptovides a larget
benefit to paticipants in towns with highet property values. The percentage method would provide a uniform
conservation/development balance across all towns.

If

million - Refill the education fund reserves to 5 percentby FY2021: The statutory minimum fot the
education fund reserves is 3.5 percent and the current fund teserve is at 3.6 petcent. It is important to tefill
the reserves to statutory maximum of 5 petcent, which if done in FY19, will cost $8.9 million. If frlled
$6

incrementally, by apptoximately $3 million over each of the next three years, the reserves will be at the
statutorT maximum by FY21..
$1

million - Remove all exemptions ftom the excess sPending threshold: Thete

are cutrendy fourteen

exemptions to the excess spending thteshold including the exemption for districts that tuition all their
students. These exemptions insulate local tax payers from the full impact of local budget decisions. Removing
the exemption may encourage those districts to evaluate their long-term options or work more collabotatively
on cost containment with the receiving districts in their area.
$3.2 million - Reduce excess spending threshold ftorrl.l2loh to ll\oh; Curtently, budgets exceeding the
per pupil spending from the pdor yeat are subject to an excess spending assessment.
statewide
^vetage
Reducing the threshold from 121oh to 715oh rncreases the number of distticts subject to the assessment. The
$3.2 million projection takes into effect behavior at the local level to come in under the threshold as well as
increased penalty payments by high spending distticts.

Total =

$39

- 58 Million

Fiue-Yeat Initia tives : (Agency of Educa tion)
Create a school consolidation commission: Create a commission to consider whethet all schools with
extremely low student populations and student-to-teachet ratios temain viable. If deemed non-viable, the
commission will consider the most cost-effective way to consolidate schools in the same, ot adjacent, district.
The commission will also review v^cancy rates of schools in newly metged districts and make
recommendations directly to districts and to the State Board of Education on v/ays to better utilize space in

 schools. Part
capacity.

of this review should consider potential savings from closing schools in SUs/SDs with

excess

Collaborate with SUs/SDs to develop five-year attrition plans: Thq Agency of Education cbuld assist in
developing a ftamewotk fot supervisory unions and districts to create these plans if necessary. The
Administration and Legislature should allow SUs/SDs to reinvest a portion of savings into programs or other
needs.

Consider the rcgulatory envitonment and determine whether it is contributing to high student-tostaff ratios: Feedback ftom the Governor's education summit suggested a lack of flexibility in staff and
teacher requirements contribute to the number of adults in buildings. Two options could be explored: first,
ask the VSBPE (Vermont Standards Board or Professional Educators) to ensure an elementary endorsed
teacher be allowed to seek an extension of grade levels when employed by a K-8 or other such school.
Second, initiate a review of the cutrent list of endorsements, vrith the goal of reducing the number of
endorsements and/or creating more general endorsements.

Adopt recommendations from the UVM study on Vermont's funding of special education: University
of Vermont's College of Education and Social Services recently released a report examining Vermont's state
funding of special education. As previously highlighted, the study finds Vermont spends between 150 and 200
percent more per student on an IEP than other states with no discernable differences in outcomes. The
report recommends the state reconsidet the way it funds special education sewices, moving toward census
block grant model ovet five yeats. The Administtation supports this recommendation and would like to work
with the legislature and education stakeholders to implement this plan. The report identifies the potential for
$75 million in savings through successful implementation.
Enact a two-vote structure fot distticts with student-to-staff ratios below 1-to-5: This approach would
tequite districts below the target ratio to vote twice, the first time on a budget that supports the target
student-to-staff ratios and a second time on the actual budget supporting the lower tatio. This would provide
greater local ttansparency and accountability.

###