Adopt the correct tax rate. Adopting the correct tax rate to meet the district’s funding needs is essential to good financial management.
Adopting a tax rate that is too high can result in collecting more money than the district needs to operate. If a district accrues an excessive fund balance, it will receive a negative rating in the Texas Education Agency’s School FIRST financial accountability system. Setting the tax rate too low, on the other hand, will limit local collections and can jeopardize state funding.
The Texas public school funding system is a shared arrangement between the state and local school districts. State and local funds for public education in Texas are distributed through a system of formulas known collectively as the Foundation School Program (FSP). The two-tiered system includes a number of adjustments and weights to distribute funding according to the characteristics of the school district and its students. Tier 1 is the base or “foundation” funding level in the Texas FSP. Tier II provides equalization funds to school districts beyond the base funding level in Tier I. To participate in the system, school districts must levy a minimum tax rate of $0.86. The Local Fund Assignment (LFA), the district’s share of the Tier I cost, is the amount that can be raised locally at the $0.86 tax rate. While districts must levy the LFA to receive state funds, the Tier II tax rate is discretionary.
The tax rate is important only in that it reflects the relationship between a school district’s ability to tax (the tax base) and the school board’s financial decisions and policies. While, in theory, the school district’s tax base is a function of free markets (market value) and not subject to manipulation, a school district’s budget is much different. The budget is directly attributable to policies and decisions of the school board. So, state law recognizes the relationship between tax base and budget in what is known as the truth-in-taxation process. The Property Tax Code requires taxing units to comply with truth-in-taxation laws in adopting their tax rates. The law has two purposes: to make taxpayers aware of tax rate proposals and to allow taxpayers, in certain cases, to roll back or limit a tax increase.
The Texas Constitution and the Property Tax Code require taxing units to follow certain steps in adopting a tax rate. Although part of the truth-in-taxation process involves notice by the appraisal district to taxpayers of value increases, most of the truth-in-taxation provisions pertain to the calculation and adoption of tax rates. In order to ensure equity among taxpayers and an acceptable level of financing for school districts, boards must not only make sound budgetary decisions, but should also be involved with ensuring an accurate measurement of its available tax base. To gain a more detailed understanding of truth-in-taxation laws and rules, see the Comptroller’s publication Truth-in-Taxation: A Guide for Setting Tax Rates.
Property Tax Code Section 26.01 sets out the dates and format for various certifications to school districts by the chief appraiser, effectively compelling a minimum level of communication between the two parties. By June 7, for example, chief appraisers are required to certify to each school district an estimate of the taxable value for the district and to assist school districts in determining value for budgetary purposes. This provision, added in 1999 and effective January 1, 2002, was necessary for those school districts that switched to a July 1 fiscal year and must adopt a budget during June before the appraisal district certifies final property values.
Typically, the chief appraiser certifies final property values in late July, when the appraisal review board (ARB) completes its hearings. In addition to the certified property values, Section 26.01(c) requires the chief appraiser to certify to the school district a listing of properties still under protest and a list of properties not yet included on the certified appraisal rolls for that district. The ARB can approve the appraisal roll when it has completed 95 percent of the properties in the appraisal district and place the remaining properties on the supplemental appraisal roll. So that the school district will know about pending properties, this listing requires the chief appraiser to give to the school district not only the list of protested properties, but also information concerning the estimated value of each property under protest. Each list includes the appraisal district’s value and the value claimed by the property owner. If no value is claimed by the protesting property owner and the current year value is either less than or the same as the previous year, then the chief appraiser must provide the school district a reasonable estimate of value if the property owner’s protest is upheld by the ARB. In a case where no value is claimed and the current value is higher than the previous year, the chief appraiser must either list the current value or if there is a reasonable chance that the ARB will lower the value, then the chief appraiser must give a reasonable estimate of that lower value if the protest is upheld.
While the truth-in-taxation laws require some taxing units to calculate both an effective rate and a rollback rate, school districts are only required to calculate a rollback tax rate. The rollback tax rate is the tax rate that, if exceeded, triggers an election where the voters decide whether to agree with a higher rate or reduce it to the rollback rate. In a simplified version, a school district’s rollback rate consists of the tax rate necessary to generate the same amount of maintenance and operating (M&O) funds as the previous school year based on the current year’s tax base to yield the same amount of revenue per student as the previous year, plus 6 cents, plus the debt rate needed to meet the upcoming year’s debt payments. For other taxing units, the rollback rate is the rate needed to raise 8 percent more than the maintenance and operating funds from the previous tax year on the same properties and a rate for debt payments.
If the school board adopts a rate higher than the rollback rate, the board calls for an election for voters to ratify the adopted rate. If a majority of voters vote not to ratify the higher rate, then the school district’s rate becomes the rollback tax rate for that year. Unlike other taxing units, where taxpayers petition for a tax rate rollback election, a rollback tax election for school districts is automatic. A school district rollback election cannot be earlier than 30 days or later than 90 days after the school board adopted the tax rate.
The Property Tax Code requires school districts to adhere to several important steps in the tax rate adoption process:
- Decide how much revenue they need (budget) for operating and debt funds and, using the current certified appraised values, calculate rates necessary to generate those funds.
- Publish a quarter-page notice of a public hearing to discuss the budget and proposed property tax rate. The notice includes the proposed rates for operating and debt, the rollback rate and estimated fund balances, along with the date, time and place of the hearing.
- Hold a public hearing on the budget and proposed tax rate to allow public comment.
- Adopt the tax rate by resolution or other form for official action.
- Administer a rollback election, if required.
The tax code requires taxing units to adopt their tax rates before the later of September 30 or within 60 days after receiving their certified appraisal roll from the appraisal district. Tax bills are normally mailed in October. School districts adopt their budgets before their fiscal year begins (either before July 1 or before September 1). Most districts adopt their tax rates at the same meeting, except those on a July 1 fiscal year. If both the budget and tax rate are adopted at the same board meeting, they must be separate agenda items with separate votes. For those districts where certified values are not ready when the school budget is adopted, the tax rate may be set at a later meeting.
School trustees must note that waiting until the school budget is complete and the time to set a tax rate arrives is far too late in the calendar year to consider whether the tax base is sufficient. School districts must work closely with their appraisal districts, and other taxing units participating in the appraisal district, to ensure that the tax base is both sufficient and equitable to all taxing units and taxpayers months before the budget process begins.
