Property tax digests : impact on education funding

Special Examination Report No. 12-25

January 2013

Georgia Department of Audits and Accounts
Performance Audit Division
Greg S. Griffin, State Auditor Leslie McGuire, Director

Why we did this review
This review was conducted at the request of the Senate Appropriations Committee. Specifically, the Committee is interested in arrangements that alter the tax digest; the impact of changes in the tax digest on education funding; and instances in which counties can receive funds through special arrangements as well as receive increased education earnings for a lower tax digest.
About Tax Digests and
Education Funding
K-12 education funding in Georgia is comprised of federal, state, and local funds. State funds are largely provided through the Quality Basic Education Funding formula. Two components of education funding are impacted by a local tax digest: the local fair share obligation and equalization grants. The local fair share is the amount each school system must contribute to local education from its own tax revenues. The Department of Education calculates the local five mill share for each school system, largely based on the system's tax digest. Equalization grants provide additional funding to school systems that have lower tax revenues relative to the number and type of students they serve.

Property Tax Digests
Impact on Education Funding
What we found Local economic development arrangements provide incentives by reducing or abating taxes for companies that agree to expand or locate in an area. These arrangements may remove taxable property from a school system's tax digest, thereby reducing local tax revenues for education. A reduction in tax digest size, for any reason, changes two aspects of K-12 funding formulas: it lowers the school district's share of overall education costs, and may increase the amount the school system receives from the state in equalization grants, if eligible. However, because of austerity cuts to the total education budget, the impact of tax digest reductions on state funding is currently negligible. Instead, increases in education funds to one system require reductions in funds to other systems. Whether an increase in funding is enough to offset a system's lost tax revenues depends on a number of factors, and would be hard to predict at the local level.
Payments in lieu of taxes (PILOT), special arrangements used to mitigate a school system's revenue losses, can influence these gains in equalization funds. If PILOT funds are treated as tax revenue, equalization grants generally increase, to the system's advantage. Current revenue reporting practices do not ensure consistent reporting of PILOT funds. However, our survey of county chief appraisers and tax commissioners indicated that PILOT arrangements are not prevalent statewide.
Tax digest values are used to calculate a small portion of the total education funding: local fair share and equalization grants. In fiscal year 2013, the state spent $6.3 billion in education funds for the Quality Basic Education formula. By comparison, the state awarded a total of $436 million in equalization grants and the local districts' local share was $1.7 billion.

270 Washington Street, SW, Suite 1-156

Atlanta, Georgia 30334

Phone: (404)657-5220

www.audits.ga.gov

Education Funding Components SFY 2009-2013 (Billions)

Billions

$10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $2009

2010

2011

2012

State Funds before Equalization

Equalization Grants

Local Fair Share

Unfunded

2013

Source: Department of Education QBE State Allotment Sheets

As noted, because of austerity cuts, changes to the tax digest have a negligible impact on the state education budget. However, under normal budget conditions, a decrease in tax digest size would reduce a school system's local fair share obligation, improve its chances for equalization grant eligibility, and increase the size of that grant, if eligible. As a result, state education costs would increase.
Fluctuating property values, economic development deals and other property exemptions are not the only cause of changes to the size of tax digests. Intentional or accidental misclassification of property can cause increases or decreases in the size of a digest. Successful appeals of property valuation can also reduce a digest. In addition, recent legislative changes have affected the ability of tax officials to reflect the actual value of properties within a digest. For example, from tax year 2009 until 2011, the state declared a moratorium on increases to the assessed value of property, unless improvements had been made.
What we recommend During the course of this special examination, areas were identified that may warrant additional review and analysis. For instance, before changes are considered for the specific reporting of PILOT funds, we recommend overall consideration be given to the reporting of tax revenues by school systems. Whether or not PILOT funds to school systems should be included as revenue in equalization grant calculations is a policy decision beyond the scope of this report. However, currently, DOE can neither include nor exclude PILOT funds from the calculations unless these payments are reported separately from other revenue sources. Making their existence more transparent would require extensive changes across multiple entities. For both school system and county officials, revenues are reported only in fairly generic categories, and detailed source information is not required. Therefore, PILOT funds, in the rare instances they are received, are not identifiable under current revenue reporting practices.
This report is intended to provide answers to questions posed by the Senate Appropriations Committee. We hope that this report provides pertinent information to inform policy decisions.

Property Tax Digests: Impact on Education Funding

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Table of Contents

Purpose of the Special Examination

1

Background

1

Property Tax Digests

1

Impact of Tax Digests on Education Funding

5

Requested Information

8

Determine what arrangements alter tax digests.

8

Development authorities, working with county and municipal

governments, enter into bond agreements that reduce a company's property

tax obligations in order to encourage economic development.

These property tax reduction arrangements are common across the state but vary considerably in their substance.

Errors, appeals, and legislative changes can also alter tax digests.

Determine the impact of changes to a tax digest on education

funding calculations.

14

In the current budget environment, the impact of local digest changes on state education appropriations may be minimal, but the influence of one system's digest change on all other systems' funding formulas has increased.

Any change to its tax digest will create a similar change in the size of a school system's local fair share obligation.

A reduction in an eligible school system's tax digest will increase its equalization grant funds.

A reduction to a school system's digest could raise one school system's final equalization grant while lowering another's.

Identify the circumstances under which counties receive funds under special arrangements and increased formula earnings from lower tax digest values. 21
Reductions to a local tax digest may produce greater losses in estimated property tax revenue at the local level than is gained from beneficial adjustments to the local fair share requirement and equalization grant. In the majority of cases in our study, estimated property tax revenue losses outpaced local fair share and equalization gains.

Whether or not a county reports PILOT payments as local tax revenues has direct influence on the outcome of equalization grant calculations.

The reporting of revenues paid in lieu of taxes is not standardized; this gap is part of a greater lack of transparency in tracking school system revenues.

Property Tax Digests: Impact on Education Funding

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Appendices:

Appendix A: Objectives, Scope, and Methodology

27

Appendix B: Georgia Property Tax Classifications

30

Appendix C: Timeline for Education Funding

31

Appendix D: Survey Information

32

Appendix E: Local Arrangement Examples

36

Appendix F: Equalization Grant Calculations

38

Property Tax Digests: Impact on Education Funding

1

Purpose of the Special Examination
We conducted this review of local property tax digests and their impact on K-12 education funding at the request of the Senate Appropriations Committee. To address their questions, we developed the following objectives:
1. Determine what arrangements (for example, payment in lieu of taxes for economic development projects) alter a tax digest.
2. Determine the impact of changes to a tax digest on education funding calculations.
3. Identify the instances in which counties can receive funds from special arrangements and increased formula earnings from lower tax digest values.
A description of the objectives, scope, and methodology used in this review is included in Appendix A. Because they provided assistance and information during the course of this review, a draft of the report was provided to the Department of Revenue, the Department of Education and the Governor's Office of Planning and Budget for review. Comments from all agencies were addressed, as necessary, in the body of the report; responses to specific issues were also incorporated.
Background
Property Tax Digests A property tax digest is the listing of all taxable and exempt property held within a tax district's boundaries.1 Both real property, such as land, and personal property, such as manufacturing equipment, are subject to ad valorem taxes. Creating an accurate and complete tax digest is fundamental to a district's ability to tax residents and businesses for the value of their property, and thus generate the revenue required for governmental operations, including education. The process by which local property is valued and assessed for taxes, and then validated at the state level, involves a number of local and state entities. The process is ongoing over the tax year, and includes the following key steps:
Assess value of all potentially taxable property (county); Classify property to determine if taxable and if so, at what rate (county); Equalize values to ensure consistent valuations within and among
counties (state) ; Authorize digests for collection of taxes (state); and Bill and Collect taxes based on digest (county).

1 According to DOR, "A tax district is a geographical grouping of property within which an authority, such as a county board of commissioners, a school board or a city council have authority to levy taxes. For example, a school board may have the authority to levy taxes on all property in the county, whereas a city would have authority to levy taxes only on the property within the city limits." Any given property may be in multiple tax districts, and therefore multiple digests. For example, a property will generally be on a county tax digest, and a school system digest (either the county school system or an independent school system.) Both districts collect taxes through a single tax bill.

Property Tax Digests: Impact on Education Funding

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The digests segregate properties into classes, which can include exemptions or specially assessed property types. (Appendix B contains a listing of all property classifications currently authorized for use in Georgia.)
Extensive state and local laws and regulations govern the processes by which local property taxes are assessed and education funding is allocated. Georgia's Constitution establishes the right of taxation and places limits on the process. Title 48 Revenue and Taxation of the O.C.G.A. governs the taxation process, including the State Auditor's responsibilities for equalizing each tax digest, and the Department of Revenue's authority to review and approve the digest. Title 20 Education outlines the education funding processes, which relies on digest information. Title 36 Local Government governs activities of Local Development Authorities (LDA), which can impact tax revenue as described later in this report. Finally, two Georgia Supreme Court findings are mentioned frequently in LDA bond agreements: DeKalb County Board of Tax Assessors v. W.C. Harris & Company (1981) and Macon-Bibb County Board of Tax Assessors et al. v. Atlantic Southeast Airlines, Inc. (1992).
Creation of Local Tax Digests
Within a county, three entities are involved in the compilation of local tax digests. (See Exhibit 1.) The Chief Appraiser determines the value of all property in the county, and reports to the Board of Assessors, which reviews these appraisals and property assessments to certify that they reflect appropriate values. The Tax Commissioner submits the digest package to the Department of Revenue (DOR) and, once it is approved for collection, calculates, bills, and collects taxes on all taxable property in the county.
Equalization of Tax Digests
The Sales Ratio Division (SRD) of the Department of Audits and Accounts, applying international standards, tests the accuracy and uniformity of county property tax digests. SRD provides counties, the Department of Revenue, and the Board of Education with an equalized adjusted property tax digest for each county and independent school system. The intent is to provide corrected total property valuations within counties and among counties in order to compare taxable values despite different levels of appraisal accuracy. SRD tests accuracy and uniformity by comparing a county's real estate sale prices2 to the appraisal values established by county officials. In addition, SRD staff performs appraisals on a sample of unsold properties of various classes and compares to county valuations. The results of these comparisons are analyzed statistically to measure accuracy and detect potential bias among assessments of specific property types (e.g., analyzing whether lower-valued properties are assessed closer to market value than are higher-valued properties).

2 Sales data comes directly from the Georgia Superior Court Clerks Cooperative Authority. The Authority receives this data from county courts.

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Exhibit 1 Timeline for Property Tax Digests

Timeline

Local Tax Officials

Department of Revenue

January February

Chief Appraiser
Determine Fair Market Value (FMV) of Property

March April May June

Board of Tax Assessors
Classify Exempt Properties
Compute Assessed Value (FMV x 40%)

July August September October November December

Tax Commissioner Compiles Tax Digest Submission Package
for DOR review/ certification
Tax Commissioner Sends Tax Bills per Digest

Review Digest Submission Packages for each County
Order Authorizing Collection of Taxes
Compile Tax Consolidation Summary Sheets

January

February

March

April

May June July August

Tests 1. Assessment Ratio
2. Coefficient of Dispersion
3. Assessment Bias
Begin Extended Third Year Review of Tax Digests

DOAA Sales Ratio Division
Conduct Sales Ratio Study Computation Sheets
100% Equalized Adjusted Tax Digest and
Assessment Ratio

Digest Development Responsibilities by Agency

Source: Agency interviews and program documents

Property Tax Digests: Impact on Education Funding

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Exhibit 2 contains an excerpt from the 2011 State-wide Equalized 100% Adjusted Property Tax Digest Report, published November 2012. By law, only 40% of the value of a property is taxable.3 Each county appraises potentially taxable property and then calculates the assessed value, which is generally 40% of the appraised amount. The equalized digest contains two numbers for each county and independent school system: a "ratio" that indicates how close the county's assessments are to the 40% target as computed by SRD, and a 100% adjusted digest dollar amount. The adjusted digest reflects the total value of the system's taxable property, once equalized to remove the impact of appraisal variations. For example, the exhibit illustrates that properties were generally undervalued in Appling County (33.87) and overvalued in Banks County (41.78) for the period under study, so the overall value of each district's property was adjusted accordingly to create the 100% Digest.
Exhibit 2 Equalized Digest Excerpt: 2011 Data

Source: 2011 Sales Ratio Study State-wide Equalized 100% Adjusted Property Tax Digest Reportrevised November 7, 2012
Tax Digest Review and Approval The digest packages submitted by counties to DOR include a listing of all real and personal property in each tax district and its assessed value. Once DOR has established that a county meets its review standards, the digests are authorized for the collection of local taxes. Using statistical analysis provided by the State Auditor to determine the average assessment ratio for each property class, DOR reviews all digests to ensure goals for uniformity are met. Final approval of a tax digest occurs a year later, after the State Auditor's and DOR's review. Annually, revenue staff provides a rotating in-depth 3-year review in one third of the state's counties.
3 The law allows for harvested timber to be assessed at 100% of fair market value and preferential assessment property to be assessed at 30% of fair market value. In addition, certain independent school systems in municipalities are authorized to assess property in excess of 40% of fair market value.

Property Tax Digests: Impact on Education Funding

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Arrangements Affecting Property Tax Digests
Property may be classified as exempt from taxation or eligible for reduced taxation for a number of reasons. For example, land owned by governments or qualifying nonprofit organizations is by law exempt from ad valorem taxes. Additionally, homeowners in Georgia may claim a partial "homestead" exemption on their primary residences. The state also offers exemptions or preferential tax rates to encourage certain activities such as land conservation or urban redevelopment.

Similarly, although the Georgia constitution does not allow for tax "abatements", local development authorities can enter into arrangements that allow tax incentives to be created for economic development purposes. As a government entity, the authority's property is exempt from property taxes. To provide tax incentives, title to property is transferred to the authority, generally using revenue from bonds issued by the authority. Issuance of bonds is at the discretion of the authority, and the duration and amount of lease agreements is negotiated between the development authority, the company and county officials.

Local Development Authority (LDA):

Depending on the valuation and classification of the property prior to these arrangements, tax districts may

A local government entity created for specific lose revenue because of resulting changes to their tax

economic development purposes. LDAs may digests. To reduce the impact on tax revenues, authorities

issue industrial revenue bonds, purchase land, can use payment in lieu of taxes (PILOT) agreements,

and enter into economic development

which require the company to make payments to offset at

arrangements with private entities to provide

least a portion of the taxes that would have been paid if

incentives such as low-interest financing or

the company had title to the property. These payments

property tax avoidance. LDAs are required to may or may not be designated for specific purposes, such

register with and report to the Department of

as education, and the recipient varies depending on the

Community Affairs.

agreement. Other arrangements increase the company's

tax liability as the bond payments are made. Either of

these types of arrangements can have requirements for the company to provide a

specified number or jobs or amount of investment for the agreements to continue.

Cities and counties can adopt policies defining the terms and conditions under

which these arrangements can be made.

Impact of Tax Digests on Education Funding
Each public school system in Georgia is provided state funding through a series of calculations called the "Quality Basic Education (QBE) Funding Formula." The QBE funding formula is used as both a planning tool during the budgeting process and as the state's official allotment calculation to determine each school system's QBE earnings. A timeline of the funding process is included in Appendix C.
The primary QBE formula is comprised of a set of base earnings values that are created using a weighting system for educational program types, and the number of full-time equivalent (FTE) students. Total QBE earnings include the base calculation plus an adjustment for teacher training and experience unique to each school system. For example, to calculate the earnings for a primary grades program within one school system, the QBE formula would incorporate these components:

Property Tax Digests: Impact on Education Funding

6

$2,744.80 Base Cost

Base Earnings
x 1.2866 x Program Weight Grades 1-3

682
Full Time Students (Projection)

+ $1,109,440 = $3,517,900

Teacher

Total

Training

Earnings,

and

Grades

Experience

1-3

The QBE earnings themselves do not reflect the total amount of funds transferred to the local systems, but instead represent a beginning point for the sharing of education costs between state and local governments. In addition, the state provides education related grants. These grants, combined with QBE earnings, comprise education funding state-wide (Exhibit 4).

Exhibit 4 Education Funding Components SFY 2009-2013 (Billions)

Billions

$10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $2009

2010

2011

2012

State Funds before Equalization

Equalization Grants

Local Fair Share

Unfunded

2013

Source: Department of Education QBE state allotment sheets

Local tax digests affect two aspects of education funding calculations: the school system's share of QBE earnings and the state's efforts to provide additional grants to systems with low relative wealth per student served. As shown in Exhibit 4, these two aspects represent a small portion of overall education funding. They are discussed briefly below, and in greater detail later in the report:
Local Fair Share (or "Local Five Mill Share"), discussed in more detail on page 15, represents the amount each school system is required to contribute to local education from its own tax revenues to remain eligible for state QBE funds. The Department of Education compiles the local fair share for each school system based largely on the 100% equalized tax

Property Tax Digests: Impact on Education Funding

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digest provided by SRD, minus certain exemptions. The local fair share is then deducted from the state QBE calculation.
Equalization Grants, discussed in more detail on page 17, are designed to provide additional aid to school systems whose local tax revenues are low relative to the number and type of students needing education. DOE adds grant funds after QBE earnings are calculated and then reduced by the school systems' local fair share. To qualify, school systems' taxable wealth per student must fall below a state average and the school board must levy a minimum effective millage rate for local education funding purposes.4 The process for calculating eligibility for and the size of equalization grants changed for the 2013 budget year, as the result of recent legislation.

Since the 2002-2003 school year, budgetary constraints have resulted in austerity reductions that limit the amount of state funds available for QBE. As shown in Exhibit 4, QBE base earnings have not been fully funded recently. In fiscal year 2013, total state QBE and equalization spending served 1.66 million full time students (FTEs) for $6.7 billion. Exhibit 5 provides detailed spending information and related activity data.

Exhibit 5 Education Funding Components SFY 2009-2013 (Millions of Dollars)

2009

2010

2011

2012

FTE Total2

1,630,671

1,641,396

1,650,981

1,650,904

100% State-wide
Equalized Adjusted Tax Digest3

$873,776

$962,389

$1,029,613

$1,005,719

Education Funding

20131
1,656,992 $935,559

Local Fair Share State QBE Share
Unfunded QBE Earnings Total Equalization Grants

$1,690 $6,094
$496 $8,279
$557

$1,698 $5,663 $1,355 $8,715
$436

$1,698 $6,162 $1,090 $8,949
$436

$1,698 $6,176 $1,148 $9,021
$436

$1,698 $6,279 $1,144 $9,120
$436

Note: QBE charter system adjustments and other educational grant funds are not included in this table. (Approximately $180 million in 2013) 1 For all years except FY2013, the mid-term adjustment state QBE allotment sheet was used. 2 When used to calculate QBE funding and equalization grants, FTE counts are weighted by program. Our reported FTE values are unweighted aggregate state-wide counts. 3 The values represent the equalized tax digest used to calculate the funding for the associated fiscal year. The tax year used is three years prior to the fiscal year budget (e.g., Tax Year 2010 is used to calculate Fiscal Year 2013).
Source: Department of Education QBE State Allotment Sheets; Department of Audits and Accounts Sales Ratio Study

4 Effective millage rate is the amount of local tax revenue collected for education, compared to (divided by) the assessed value of a school system's tax digest.

Property Tax Digests: Impact on Education Funding

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Requested Information

Determine what arrangements alter tax digests.
Development authorities, working with county and municipal governments, enter into bond agreements that reduce a company's property tax obligations in order to encourage economic development. In general, these bond arrangements reclassify property from privately-owned (taxable) to government-owned (tax-exempt) status for a particular period. Because tax digests are used to compute and collect ad valorem taxes, moving property from taxable to exempt classifications reduces the total value of a tax district's digest. The short-term loss in tax revenue is expected to be offset by escalated employment, increased sales taxes, or improved infrastructure leading to future increased tax revenues.
Exhibit 6 Sample arrangement for property tax abatement

Millions $50

$45

Assessed Value

$40

$35

$30

Exempt Property

$25

(Not on Digest)

$20

$15

$10

$5

$0

Year of Arrangement

0

1

2

3

4

5

Taxable property removed from digest, gradually increases in value as improvements are made

Taxable Property (on Digest)

6

7

8

Digest increases annually at an agreed-upon rate

9

10

11

: Generalized from results of county tax official survey

The impact of these arrangements on a particular district's tax digest varies based a number of factors, including the monetary size of the deal in proportion to the overall digest, the previous taxable value of the property exempted and the number

Property Tax Digests: Impact on Education Funding

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of such deals in the district at one time.5 Exhibit 6 provides a common example of arrangements that exist in Georgia.

In this example, an existing manufacturer is encouraged to expand local operations through a bond transaction that finances improvements to the property and facilitates the creation of additional jobs. The development authority takes title to the property and the manufacturer pays back the bond over ten years. The manufacturer pays taxes on its increasing leasehold interest in the property (10% per year of the assessed value.) The school and county tax digests increase each year by the taxable value of the leasehold interest. For example, in year one, the entire property is exempt from taxation. In year two, the assessed value of the property has increased to $25 million because of improvements made. The manufacturer pays tax only on the value of its leasehold interest, which is equivalent to 10% of the total value of the bond. Because this accrued leasehold interest is classified as taxable industrial property, the digest increases by that amount.

Exhibit 7 Sample PILOT arrangement payments in lieu of taxes

Millions $50
$45
$40

Assessed Value increases, is basis for payments in
lieu of taxes (School District Only)

Taxable Property (on Digest)

Assessed Value

$35

$30

Exempt Property

(Not on Digest)

$25

$20

$15

$10

$5

$0

Year of Arrangement

0

1

2

3

4

5

6

7

8

9

Taxable property removed from digest, gradually increases in value as improvements are made

Year of arrangement

Improved property reverts to digest at end of arrangement

10

11

Source: Generalized from results of county tax official survey
Exhibit 7 illustrates an arrangement of equivalent value and duration in which no leasehold interest accrues. The assessed value of the property increases as
5 Multiple tax districts, and therefore multiple digests, can be affected by a single arrangement of this sort. In general, a property will be listed on the county digest and that of one school system. It may also be listed on a municipal digest.

Property Tax Digests: Impact on Education Funding

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improvements are made, but the property is not on the tax digest for the ten years of the agreement. No property taxes are paid for the duration of the arrangement. However, the manufacturer makes PILOT payments, equivalent to the school taxes that would have been levied, based on the assessed value of the property. In this example, in year one and all other years, the manufacturer pays no county taxes, but makes non-tax payments equivalent to what it would owe for school taxes if it owned the property. The payments escalate with the increase in property value. The digest (as relates to this property) is unchanged for the duration of the arrangement. Based on our survey responses, this type of arrangement is much less common than that shown in Exhibit 6.

These property tax reduction arrangements are common across the state but vary considerably in their substance.
We were unable to quantify the number of such arrangements in the state, or measure the degree of their impact, because no comprehensive database exists to track them; reporting requirements are minimal. However, bond data reported to the state Department of Community Affairs provide some idea of the number and size of deals that exist. This listing is not exhaustive, but its 735 current deals total approximately $24 billion. The top 10% (73) of deals represent over half of the bond value in the list.
We acquired a significant amount of information on the arrangements in place across the state by using a survey that drew on the knowledge of each county's chief appraiser and tax commissioner. Officials from 134 of 159 counties (84%) responded to our request. Respondents reported that approximately 60% of their jurisdictions (75 of 134) have at least one such arrangement currently in effect. Many respondents supplied, as requested, additional documentation describing the details of the agreements.6 We were able to draw a number of conclusions from the information they provided, as discussed below.
At least a dozen local entities have created specific policies for the establishment of these arrangements, and therefore we saw contracts that were consistent within the same jurisdiction.7 Among the survey responses we found: Boards of Assessors establishing rules for property valuation and tax calculation for such arrangements, local ordinances dictating a common structure for these deals, and development authorities using standard formats for all tax abatement agreements. We also talked to county officials who had requested examples from neighboring counties to help guide their process when creating an arrangement for the first time. In reviewing the text of agreements, we noted that a number of counties/development authorities use the same law firm(s) for representation; their agreements use a common template making language largely consistent from one deal to another.

6 We received information on more than 500 arrangements. The level of detail provided ranged from a single statement to complete contracts hundreds of pages long.
7 Our survey did not specifically ask about the existence of such standards so we cannot estimate the frequency of their use. Based on a review of hundreds of contracts within and across individual jurisdictions, however, standardized processes appear to be the exception and not the rule.

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Overall, however, we found marked variation in the details of these arrangements across the state:
Dollar values ranging from hundreds of thousands to hundreds of millions for a single agreement. (In our survey, we saw bond agreements ranging from $300,000 to $1,130,000,000.)
Property types including real (land) and personal property (equipment), and both industrial and commercial classifications.
Durations extending 5 years to 30 years.
Enterprises involving entities as diverse as car dealerships, resorts, manufacturing plants, prisons, and data centers.
Performance standards and reporting requirements ranging from nonexistent to explicit requirements for number of jobs created, minimum salaries and minimum investments, with stringent "clawbacks" of tax breaks for failure to meet them.
Payment requirements mitigating some of the dollar value of tax exemptions, including PILOT agreements to ensure school revenues are protected, to fees and payments covering county or development authority costs.
Participants limited to the development authority, county commission and the company, or broadly including acknowledgement of the arrangement by Board of Assessors, Tax Commissioner, and School Board.8
Aggregate information from the survey responses is included in Appendix D. We also provide a few case studies describing details of specific arrangements as examples in Appendix E.

Errors, appeals, and legislative changes can also alter tax digests. Economy-related fluctuations in property values, economic development deals and other property tax exemptions are not the only causes of changes to the size of tax digests. Intentional or accidental misclassification of property can cause increases or decreases in the size of a digest. Successful appeals of property valuation can also reduce a digest. In addition, recent legislative changes have affected the ability of tax officials to reflect the actual value of properties within their digests.
Errors/Misclassifications: Each county is responsible for ensuring the accuracy of property classification within its districts. Classifying a taxable property as exempt will reduce the size of a digest by the assessed value of that property. Similarly, classifying an exempt property as taxable erroneously increases the size of a digest.
Appeals: After local tax officials send assessed value notifications to property owners, the owners may then appeal these valuations. Typically a
8 According to the National Education Association, it is a good practice to have tax officials and school boards sign their acknowledgement to these deals, in order to ensure that agreed-upon taxes are properly collected and the impact on school funding has been evaluated.

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local board convenes to hear the appeals and the rulings of these boards may significantly adjust the appraised and/or assessed value of a property. In tax year 2012, two of the counties with the largest tax digests had approximately $1.2 billion and $1.5 billion of assessed property value in dispute.
Legislative Changes: From tax year 2009 until 2011, the state declared a moratorium on increases to the assessed value of property, unless improvements had been made. (The moratorium has since been lifted.)
In addition, the statutory definition of an "arm's length, bona fide sale", which is used to determine the fair market value of property, was changed to include distressed, short, bank and public auction sales. Prior to this change, these types of sales were not considered to reflect the fair market value of the property involved. The inclusion of these properties inherently lowers the overall value of a tax digest, because their reduced values become part of appraisal calculations based on comparable sales.
The consequences of these changes are outside the scope of this special examination. Therefore, we did not attempt to measure their impact. However, the ramifications of relative changes to digest size on education funding discussed in the rest of this report would also apply to the influences discussed above.

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Our Education Funding Impact Model
To determine the effect of changes to a tax digest (for example, by reclassifying property from taxable to exempt) on local fair share requirements and equalization grants, we obtained the Department of Education's (DOE) calculation tool used to determine each school system's funding for fiscal year 2013. We used this tool as the basis for a spreadsheet model to test the impact of one system's digest reduction on local fair share obligations and equalization grants for all 180 school systems in the state. The model simulated a 5% reduction (one system at a time) for every school system in the state. Results were used to determine the impact to the adjusted school system and compare the impacts among school systems.
The model also estimates changes in tax revenues resulting from a reduction in a tax digest. This feature estimates the ad valorem property tax revenue associated with the value of property removed from the digest during test iterations. The revenue estimation considers value of property, actual school system millage rates, and assessment ratios as determined by the Department of Audits and Accounts. This adjustment assumes that the taxing authority did not adjust school millage rates or otherwise collect additional revenues to accommodate for the loss of taxable property value.
During the 2012 legislative session, HB824 amended the way the state calculates equalization grants. The Department of Education implemented the new formula as the standard calculation structure starting in fiscal year 2013. The impacts discussed in this report reflect the HB824 equalization grant formula.
Because equalization grants are calculated based on an adjustable average benchmark, it would be challenging for any school system to anticipate its relative digest wealth compared to all other systems in the state. While the model assesses the impact of an isolated digest reduction to one school system holding all other factors constant, in reality, tax digests throughout the state change each year and those changes do not occur in isolation. In addition, other components such as tax revenues and student counts also fluctuate each year within one school system and among school systems. Therefore the model can only provide generalized guidance on the operation of the local fair share and equalization grant formulas in the context of the current budget environment.
Our use of a theoretical 5% reduction was a fairly arbitrary choice, and in most cases would exaggerate the impact of one reclassification action. Average taxable industrial classifications we deemed to be most likely to be exempted in an economic development deal (I1 Industrial Real Property-Improvements and IF Industrial Personal Property-Furniture/Fixtures/Machinery/Equipment) represent approximately 2% each of the total value of property statewide, as reported for the 2011 school system digests. Median values are 1.5% and 1.8% of individual digest value, respectively. Four school tax districts reported industrial real property of >10% of digest (max 16%), a dozen districts reported industrial personal property >10% of digest (max 30%).

Property Tax Digests: Impact on Education Funding

14

Determine the impact of changes to a tax digest on education funding calculations.

In the current budget environment, the impact of local digest changes on state education appropriations may be minimal, but the influence of one system's digest change on all other systems' funding formulas has increased.
Under normal budget conditions, a decrease in tax digest size would reduce a school system's local fair share obligation, improve its chances for equalization grant eligibility, and increase the size of that grant, if eligible. The general effects of a digest change are shown in Exhibit 8.

Exhibit 8

General Effects of a Change to a Local School System's Tax Digest

(from local perspective)

As Designed

School System

State

100% Equalized

Funding

Tax Digest

Local Funding

to

Local

Local Fair

Equalization School

Revenues

Share

Grant

System

Obligation





















School System 100% Equalized
Tax Digest


Local Revenues


Under Austerity Budgets

Local Funding

Local Fair

Equalization

Share

Grant

Obligation





State Funding
to School System












Overall State Education Funding

Overall State Education Funding


Source: Auditor analysis of funding model

Austerity reductions (the unfunded portions shown in Exhibit 4, page 6) have kept overall state education funding flat over the 2010-2013 budget years. State appropriations have been held constant for the local fair share obligation and equalization grants for this period. For example, in 2011 and 2012, equalization grants totaled $436 million and overall state spending decreased from $6.89 billion to $6.79 billion. During the same period, the unfunded portion of QBE earnings increased from $1.09 billion to $1.15 billion. As a result, as shown in Exhibit 8, reductions to a school system tax digest will currently not affect overall state spending.9
However, holding state appropriations for local fair share and equalization grants constant means that each system's calculated earnings are reduced by prorating down to the specified limit. Therefore, reductions in one system's tax digest will not only affect that system's education funding formula, but potentially change all other
9 In rare cases, errors in digest submissions discovered after the equalization formula calculation has been finalized can result in additional state funding through a supplemental budget appropriation.

Property Tax Digests: Impact on Education Funding

15

school systems' local fair share obligation and equalization grant eligibility and size. Exhibit 9 demonstrates these effects.
Exhibit 9 Interactive Effects among School Systems in Current Budget Environment

Local Fair Share
Any change to its tax digest will create a similar change in the size of a school system's local fair share obligation.
Each year, DOE parses total QBE earnings for each school system between the amount the state will contribute and the local fair share to be contributed by school systems. To determine the share of QBE earnings required locally, DOE calculates five mills of the assessed value of taxable property using each school system's 100% Equalized Tax Digest, less some exemptions. As shown, a simplified version of the

Property Tax Digests: Impact on Education Funding

16

calculation for one hypothetical school system conveys the process. In this example, the $483,750 local fair share obligation would be further prorated as would every other school system's calculated obligation to meet statewide funding limits.

100% Equalized
Digest

Determine the Assessed Digest
Value

Subtract Exemptions

Calculate Local Fair Share (Five Mills)

$250 million

x 40% =

$100 million

-

$3.25 million

=

$96.75 million

x

0.005

= $483,750

Before proration, the relationship between digest values and local fair share obligations statewide is linear, so for any school system in the state, a 5% reduction of its equalized tax digest reflects a 5.2% reduction, on average, to its local fair share obligation. Following a hypothetical 5% reduction, school systems with relatively small digests exhibited a slightly greater reduction to local fair share than those with larger digests. However, because of interactions among the digest and other factors within the formula, this is a less than standard relationship. Exhibit 10 shows changes, before proration, to local fair share following a 5% reduction to the tax digest of five sample school systems with varying digest wealth. As shown below, a 5% reduction in System A's equalized digest results in a 5.1% reduction in its local fair share obligation. The same reduction in a system with a smaller equalized digest, for example, System E, results in a larger percentage reduction of 5.5%.

Exhibit 10 5% Equalized Digest Reductions: Impact on Local Fair Share (Before Proration)

School System

100% Equalized Digest

5% Digest Reduction

Change in Local Fair Share

Percent Reduction

A

$79,077,080,255

($3,953,854,013)

B

$4,046,114,033

($202,305,702)

$7,907,708 $404,611

-5.1% -5.3%

C

$1,802,997,505

($90,149,875)

$180,300

-5.2%

D

$768,302,204

($38,415,110)

$76,830

-5.2%

E

$128,289,279

($6,414,464)

$12,829

-5.5%

Source: Auditor analysis of funding model
Since fiscal year 2010, the state has held the total local fair share obligation constant and prorated each school system's obligation. Therefore, a reduction in one system's digest increases the prorated obligations for all other school systems. For example, if a system with digest wealth of $4 billion (such as "System B" in Exhibit 10) underwent a 5% digest reduction ($200 million) and a corresponding local fair share reduction of $404,611, after proration, all other school systems' requirements would increase by 0.022%. In real dollars, the increase would impact every school system differently (from $48 to $32,500), but as a percentage of overall local fair share, each system would see a similar effect.

Property Tax Digests: Impact on Education Funding

17

A 5% reduction to the system with the largest tax digest (System A, approximately $79 billion) would have the greatest ripple effect throughout the state after proration (0.437% increase for all other school systems). By the same logic, a 5% reduction in the system with the smallest tax digest (System E, about $128 million) would have the least impact (0.001% increase for other systems).

Equalization Grants
A reduction in an eligible school system's tax digest will increase its equalization grant funds.
Equalization grants are designed to offer a measure of education funding equity for those school systems with a low relative taxable wealth per student served.10 As shown, the calculation of these grants relies on three factors: wealth per student gap, effective millage rate and recent student count. The basic formula calculates and then multiplies these three factors together to provide additional funding to school systems with wealth per student below the calculated statewide average.

Wealth per Student Gap

Statewide Benchmark

-

Local Wealth
per Student

Effective Millage Rate

Most

x

Tax Revenues

Assessed
Digest
Value

x

Recent Student Count

=

Equalization Grant

As shown in Appendix F, which contains a detailed explanation of the equalization grant formula, the process ranks each system based on its calculated wealth per student. The highest-ranked 5% and the lowest-ranked 5% of schools are excluded and the average is calculated for the remaining systems to obtain a benchmark. School systems with a wealth per student below this benchmark qualify for an equalization grant, provided they meet other stipulations.11
School systems above the benchmark do not qualify for equalization grants. In our tests of 5% tax digest reductions, 50 (28%) school systems would not receive an equalization grant before or after the simulated change, because their reduced wealth per student would still be above the benchmark wealth per student. Five other systems, however, would become eligible for equalization grants following a 5% digest reduction.
The remaining 125 school systems would see an increase in equalization funds resulting from a decreased digest value. Including the five newly-eligible systems, grant fund increases for a school system ranged from $25,000 to $17 million with an average increase of $741,000. Grant increases ranged from $14 per student to $111 per student, with an average increase of $60 per student. Exhibit 11 illustrates the changes that would be experienced by four different school systems as a 5% drop in
10 Wealth per student is a simplified term we are using to describe the calculation of the assessed value of the equalized tax digest (wealth) divided by the weighted FTE count. References to "student" in this discussion are equivalent to "weighted FTE" as calculated in the QBE formula. 11 Qualification stipulations are discussed on page 18 and currently include a minimum effective millage rate greater than five mills. Per HB824 (2012), the minimum effective millage rate will increase in coming years.

Property Tax Digests: Impact on Education Funding

18

digest value reduced each system's wealth per student, its distance below the benchmark, and the resulting increase in that system's equalization grant.

Exhibit 11

Impact of 5% Digest Reduction on Equalization Grant Funding: Sample

of Four Systems Ranked by Wealth per Student

R A N K

Wealth/ Student

School System

Rank Change

Gap from Benchmark (Thousands)

Effective Millage

Grant $/ Student

10 $300,000

20

250,000

30

200,000

Average

40

180,000

(Benchmark) 50

165,000 A

#51

60

150,000

#58

n/a

9.56 $

-

$1

9.55 $

10

70

145,000 B

#75

80

140,000

#86

$15 12.11 $ 182 $20 12.07 $ 241

90

130,000

100

125,000 C

#101

110

120,000

#110

$30 10.59 $ 318 $35 10.51 $ 368

120

115,000

130

110,000

140

100,000

150

95,000 D

#151

160

85,000

#158

$65

9.26 $ 602

$70

9.31 $ 652

170

75,000

180

25,000

Source: Auditor analysis of funding model

The magnitude of any grant increase is influenced by the factors within the formula:
Changes to a school system's wealth per student relative to the benchmark. Digest reductions decrease wealth per student value and rank. When a school system's wealth per student falls further below the statewide benchmark, the formula increases equalization funds that the system will receive.
Changes to a school system's effective millage rate. The calculated effective millage rate (tax revenues divided by assessed digest value) is used as a multiplier in the equalization formula, in order to encourage adequate local taxation rates. A higher effective millage rate means a higher equalization grant to a qualifying school system. According to our model calculations, school system revenues fall at a different rate than a reduction

Property Tax Digests: Impact on Education Funding

19

in overall digest, resulting in a higher or lower calculated effective millage rate.12

Differences in student counts between school systems. Any increase in the distance between the statewide benchmark and the school system's wealth per student is multiplied by the most recent student count. If two school systems each fall ten dollars below the benchmark, a school system with a FTE count five times greater than the other will end up with five times the equalization increase (all other factors being equal).

Because of these factors, a subset of school systems in our model demonstrated equalization grant gains when their individual digest wealth decreased 5%. Exhibit 12 displays the ten school systems with the highest gains following a 5% digest reduction. For example, the school system that would recognize the largest increase is the one originally ranked 86. With a 5% reduction to its tax digest, this system moves to a rank of 89 as the wealth per student declines. As a result, its equalization grant increases by $17 million.

Exhibit 12

5% Digest Reduction: Highest Equalization Grant Gains

(By Dollar Amount)

Original

Original Wealth New

New Wealth

Increase in Grant

Rank

per Student Rank

per Student

Funds

86

$136,012 89

$129,060

$17,003,271

118

$115,332 130

$109,427

$4,185,316

116

$115,418 130

$109,490

$3,688,935

110

$118,350 123

$112,114

$3,395,372

130

$110,006 138

$104,323

$3,380,429

70

$144,988 81

$137,540

$2,892,357

75

$140,850 86

$133,484

$2,774,897

103

$123,397 111

$116,898

$2,685,328

57

$153,131 68

$145,269

$2,628,496

67

$146,755 77

$139,220

$2,546,477

Source: Auditor analysis of funding model

A reduction to a school system's digest could raise one school system's final equalization grant while lowering another's. Changes to a single tax digest may affect the equalization grants of all other school systems. First, a reduced equalized digest results in a lowered wealth per student, which may then shift the benchmark if the system was originally included in the average. Some considerations include the following:
12 This is the case because ad valorem tax revenue is only one of the seven kinds of local tax revenue associated with the equalization grant formula. Our model estimated ad valorem tax revenues lost relative to a decrease in the digest value, but other tax revenues, such as Local Option Sales Tax or Real Estate Transfer Tax, would not have a related reduction.

Property Tax Digests: Impact on Education Funding

20

A school system's digest reduction can rank it out of (below) the middle 90% and therefore increase the state-wide benchmark. This will increase all other school systems' calculated equalization grants.

A school system's digest reduction can move it into the middle 90% from above, causing the benchmark to be lowered. In this case, all other school systems' calculated equalization grants would decrease.

Secondly, even if there is minimal effect on the benchmark, a change in wealth per student may exert a change on other systems because total equalization grant funding is currently limited and then prorated due to budgetary constraints.

Exhibit 13 demonstrates how 5% changes in selected systems would affect equalization grant funds to two other systems. In this example, a 5% reduction to System 48 moves the benchmark down by $9. As a result, System 57 receives $2,733 less than it would have previously; however, System 161's equalization grant increases by $920. These differences are influenced by each system's distance from the benchmark.

Exhibit 13 Change in Total Equalization Grant for Two Systems Based on a 5% Digest Reduction for Selected Systems

Original Rank 16 20 48 67 73 95 109 113 138 140 170 173

Benchmark Change
($2) ($754)
($9) ($107) ($17)
($4) ($45) ($23) ($13) ($34) $71
$0

Impact on System #57 Prorated Grant Funds
($469) ($68,294) ($2,733) ($32,235) ($5,211) ($1,232) ($13,486) ($6,861) ($3,783) ($10,190) $21,192
($22)

Impact on System #161 Prorated Grant Funds
$158 $74,348
$920 ($20,382) ($2,293)
($598) ($6,901) ($9,231) ($1,623) ($9,231) ($8,897) ($1,922)

Source: Auditor analysis of funding model

Property Tax Digests: Impact on Education Funding

21

Identify the circumstances under which counties receive funds under special arrangements and increased formula earnings from lower tax digest values.

Reductions to a local tax digest may produce greater losses in estimated property tax revenue at the local level than is gained from beneficial adjustments to the local fair share requirement and equalization grant. In the majority of cases in our study, estimated property tax revenue losses outpaced local fair share and equalization gains.
In addition to calculating local fair share and equalization grant gains, the model estimated tax revenue losses in proportion to a reduction in digest value. As demonstrated in Exhibit 14, a school system's original eligibility for equalization grants appears to be the best predictor of whether a reduction in tax digest would result in an overall revenue loss or gain in our model:

Exhibit 14 Impact of 5% Digest Reduction to Estimated Net Revenues

Before Proration

R

63 of 180 sytems (35%) gained A

net revenue

N

Wealth/

with a reduced digest

K

Student

1 system remained

10 $300,000

ineligible for grants,

20

250,000

earned more revenue

30

200,000

40

180,000

50

165,000

Original Benchmark

60

150,000

70

145,000

80

140,000

90

130,000

100

125,000

62 systems remained eligible for grants,
earned more revenue

110

120,000

120

115,000

130

110,000

140

100,000

150

95,000

160

85,000

170

75,000

180

25,000

117 systems (65%) lost net revenue
with a reduced digest 49 systems remained ineligible for grants, and lost revenue
5 systems became eligible, but lost revenue
63 systems remained eligible, but lost revenue

After Proration

R

22 of 180 sytems (12%) gained A

net revenue

N Wealth/

with a reduced digest

K Student

10 $300,000

20 250,000

30 200,000

40 180,000

50 165,000

Original Benchmark

60 150,000

70 145,000

80 140,000

90 130,000

100 125,000

22 scattered systems

110 120,000

remained eligible for

120 115,000

grants, earned more

130 110,000

revenue

140 100,000

150

95,000

160

85,000

170

75,000

180

25,000

Source: Equalization grant impact model analysis

158 systems (88%) lost net revenue
with a reduced digest 50 systems remained ineligible for grants, and lost revenue
5 systems became eligible, but lost revenue
103 systems remained eligible, but lost revenue

Revenue Loss- Before proration, a 5% reduction in digest value would produce a net revenue loss for 117 (65%) of 180 school systems, in spite of gains from adjustments to local fair share and equalization grant funds. After prorating local fair share and equalization grant revenues, the number of school systems receiving a net revenue loss increases to 158 (88%). All school systems that were ineligible for an equalization grant prior to the digest reduction experienced a net revenue loss after proration. In addition, 103 (82%) of the school systems qualifying for an equalization grant also ended up with a net loss in revenues.

Revenue Gain- Before proration, the remaining 63 (35%) of 180 school systems would experience an overall net increase in funds through the local fair share and equalization grant adjustments in spite of estimated tax revenue losses. After the proration of local fair share and equalization grants, only 22 (12%) school systems would achieve an estimated net revenue increase. All such cases involve the receipt of some equalization

Property Tax Digests: Impact on Education Funding

22

dollars. The school systems with the lowest wealth per student were slightly more likely to receive a positive net gain after proration following a 5% digest reduction.
These scenarios assume arrangements where a reduction in tax digest value is not accompanied by any additional payments to the local school system in lieu of taxes (PILOT). Any additional dollars received through a special arrangement would decrease the impact of lost tax revenues.
Whether or not a county reports PILOT payments as local tax revenues has direct influence on the outcome of equalization grant calculations.
Our analysis of the impact of a 5% change in digest size assumed that tax revenues decline with a digest reduction. Therefore, when a digest fell by 5%, our model adjusted the amount of tax revenue associated with the digest size to match the decreased digest value. However, this may be a false assumption if the system receives mitigating payments in lieu of taxes depending on whether and in what manner these payments are reported as revenue.
Tax revenues factor into the equalization grant formula through the effective millage rate determination. As discussed on page 18, the effective millage rate (revenues per tax digest) raises the potential size of an equalization grant if revenues are high compared to digest size. In order to determine the amount per student used to equalize each qualifying school system, the formula incorporates the effective millage rate as a representation of each school system's local tax effort. If a school system's digest value falls, typically, its ad valorem tax revenues fall by a similar margin, thereby keeping the effective millage rate in check. If a school system reports additional PILOT funds as tax revenues, the effective millage rate is inflated because those revenues are not balanced by an equivalent digest value.13 In this scenario, the school system reports tax revenues for property that it is not able to tax. When the effective millage rate is inflated, the equalization grant calculated for the school system also becomes inflated.
Based on our review of DOE and DOR revenue data and calculation processes, and our survey of tax commissioners regarding how revenue from economic development deals is reported, we can describe three different "bond for title" scenarios and their differing effects on equalization grant calculations, depending on whether revenue is received and how the revenue is reported.
Exhibit 15 presents a hypothetical local arrangement, which we will then adjust with varying stipulations and revenue reporting scenarios. Through a bond arrangement, a local development authority takes title to an industrial property worth 5% of a school system's tax digest ($20,000,000), thereby removing that property from the digest. Tax revenues associated with the exempted property are $80,000.

13 The formula only equalizes up to 15 effective mills, so any inflation of effective mills would also be subject to this cap.

Property Tax Digests: Impact on Education Funding

23

Exhibit 15 Sample Local Arrangement14

Tax Digest Local Tax Revenues Effective Millage Rate Exempt Industrial Property Exempt Tax Revenues

$400,000,000 $1,600,000
$1,600,000 ($400,000,000 x 40%) = 10 mills $20,000,000 (5% Reduction in digest and revenues)
$1,600,000 x 5% = $80,000

Scenario 1: Gradually increasing tax revenue. The local development authority leases the property to the bond purchaser, who accrues a gradual leasehold interest in the property. The local government is legally able to tax the leasehold interest and transfer those funds to the school district. Over time, the taxable portion of the property increases until the whole value of the property is taxed. Each time the digest increases, tax revenues associated with that increase are aligned. Therefore, the effective millage rate15 is consistent with the tax digest throughout the entire arrangement period. Exhibit 6 on page 8 illustrates this common scenario.

Scenario 1 (millions)
Tax Digest Local Tax Revenues Effective Millage Rate

Before Exemption
$400 $1.60 $1.60 ($400 x 40%) = 10 mills

After Exemption Year 1
$380

Year 2 $390

$1.52 $1.52 ($380 x 40%)
= 10 mills

$1.56 $1.56 ($390 x 40%)
= 10 mills

Scenario 2: No Revenue. The local development authority takes title to the property, but does not receive any funds to offset school tax revenue losses, nor does the company establish a leasehold interest in the property. In effect, the property stays off the digest for the length of the arrangement and the school system's tax digest does not increase until the property is returned to the original owner and taxed at its full value. Since local tax revenue decreases are consistent with digest reductions, the effective millage rate remains aligned and does not cause any further inflation of the equalization grant.

Scenario 2 (millions) Tax Digest Tax Revenues Effective Millage Rate

Before Exemption $400 $1.60
$1.60 ($400 x 40%) = 10 mills

After Exemption $380 $1.52
$1.52 ($380 x 40%) = 10 mills

Scenario 3: PILOT or other non-tax revenue. The company does not accrue a leasehold interest in the property; therefore the property is exempt for the period of the bond payback. The taxable portion of the property value
14 As noted earlier in this report, the details of each of these arrangements vary from county to county and within a county. These hypothetical scenarios are not meant to imply that such an arrangement explicitly exists as stated. 15 As effective millage rate relates to ad valorem taxes.

Property Tax Digests: Impact on Education Funding

24

remains at zero. Separately, the company agrees to pay funds in lieu of taxes either at 100% of the school millage rate or on a graduated schedule. Exhibit 7 on page 9 illustrates this much less common scenario. The school system either reports or does not report to DOE PILOT funds as tax revenue.

o 3A: The school system does not report these revenues as local tax revenues. The school system receives additional revenues from the PILOT arrangement. When the equalization grant is calculated, the school system will experience an increased equalization grant by virtue of the digest decrease (seen as an increased distance below the statewide benchmark). However, because PILOT funds are not considered, the school system will benefit from the PILOT funds but will not experience additional equalization grant funds due to an inflated effective millage rate.

Scenario 3A (millions)

Before Exemption

Tax Digest

$400

Local Tax Revenues

$1.60

PILOT Funds

$0

Tax and Non-tax Revenue

$1.60

Effective Millage Rate

$1.60 ($400 x 40%) = 10 mills

1 PILOT funds are not reported as revenue.

After Exemption $380 $1.52 $0.08 $1.60
$1.521 ($380 x 40%) = 10 mills

o 3B: The school system reports PILOT funds as local tax revenues. As a result, the equalization grant calculation increases the effective millage rate. Now, when the equalization grant is calculated, not only is the grant value increased by virtue of the digest reduction, but the school system benefits from additional PILOT revenues and an increased effective millage rate.

Scenario 3B (millions)

Before Exemption

Tax Digest

$400

Local Tax Revenues

$1.60

PILOT Funds

$0

Tax and Non-tax Revenue

$1.60

Effective Millage Rate

$1.60 ($400 x 40%) = 10 mills

1 PILOT funds are reported as revenue.

After Exemption $380 $1.52 $0.08 $1.60
$1.601 ($380 x 40%) = 10.5 mills

We adjusted the model to consider this final scenario by eliminating any revenue losses associated with a school system's digest reduction. This adjustment assumed that PILOT funds equal to the tax revenue associated with exempt property were received by the school system and reported as revenue. For the sample of school systems we tested, effective millage rates inflated between 4% and 9% compared to effective millage rates generated with revenue and school system digest reductions aligned. Before proration, equalization grants increased by the same percentages as did the effective millage rates. After proration, the impact of the inflated effective millage rates was slightly reduced for each sample school system.
The circumstances under which counties receive funds under special arrangements and increased formula earnings from lower tax digest values therefore depend on whether payments in lieu of taxes are made, and if those payments are reported as revenue.

Property Tax Digests: Impact on Education Funding

25

The reporting of revenues paid in lieu of taxes is not standardized; this gap is part of a greater lack of transparency in tracking school system revenues.
Whether or not PILOT funds to school systems should be included as revenue in equalization grant calculations is a policy decision beyond the scope of this report. However, DOE can neither include nor exclude PILOT funds from its calculations unless these payments are reported separately from other revenue sources. Making their existence more transparent would require extensive changes across multiple entities. For both school system and county officials, revenues are reported only in fairly generic categories, and detailed source information is not required. Therefore, PILOT funds, in the rare instances they are received, are not identifiable under current revenue reporting practices.
Both DOR and DOE require school systems and other local officials to report revenues related to school funding, but neither reporting mechanism segregates economic development related revenues paid "in lieu" of taxes from other revenues. DOR requires tax commissioners, county commissioners, city manager/clerks, and superior court clerks to report annually, for each school system in their jurisdiction, "local revenues ... distributed to the school system for its maintenance and operation". However, we found no consistency in whether PILOT funds are reported, or in how they are identified if reported. Additionally, in an interview, DOR officials could not specify how such funds should be reported, but generally agreed they were non-tax revenues.
DOE collects revenue and expenditure information from each school system for each fiscal year. However, the process lacks a category specific to funds received from a PILOT arrangement. As a result, related payments may or may not be included in those reports of local revenues.
The ability of a school system to accurately identify PILOT funds is limited by whether the funds are clearly identified upon receipt. PILOTs may be paid to a school system directly by the corporation, by the local development authority, or through the county tax commissioner. It may be impossible for school systems to report revenues in more detail, if it is submitted to them without detail. Education auditors desire more detail be provided to school systems. Tax commissioners, in the interim, are required to provide detailed ad valorem collection data as part of the annual audit process.
Additionally, the account categories available for revenue reporting are broad, and DOE does not require detailed subaccounts that would enable transparency regarding revenue sources. Education auditors within the Georgia Department of Audits and Accounts state they have recommended that DOE provide and require the use of standard subaccounts.
Arrangements that include PILOT funds may have unintended consequences on equalization grant calculations, depending on how their revenues are reported. However, ensuring that these payments are reported accurately and consistently will require changes in practices at the local and state level, among multiple entities. Any efforts to address these issues should be studied more closely and be conducted in the broader scope of improving overall transparency of school system revenue reporting.

Property Tax Digests: Impact on Education Funding

26

Agency Response: In their written response, DOE authorities stated, "We agree that the reporting mechanism for PILOT agreements is not standardized. We do not believe that the onus should be DOE or local school systems to establish specific categories for the reporting of PILOT arrangements in the collection of local revenues. While we agree that tracking this information improves transparency, this tracking should be done by the Georgia Department of Revenue or by local tax commissioners. In light of the ten years of austerity reductions experienced by local school systems, it appears unreasonable to suggest that DOE and local school systems incur additional expense by creating detailed subaccounts to track PILOT funds. Additionally, it may be premature to create such subaccounts when PILOT funds are not identifiable under current revenue reporting practices. Furthermore there is no consistency in how PILOT funds, in the rare instances when they are identified, are reported."
DOAA Comment: We agree with DOE assertions that any solution should not address just PILOT fund reporting, and cannot be the responsibility of DOE alone. As stated, such efforts would require the input of multiple entities. Any attempts to address these issues should be studied more closely and be conducted in the broader scope of improving overall transparency of school system revenue reporting.

Property Tax Digests: Impact on Education Funding

27

Appendix A: Objectives, Scope, and Methodology
Questions This report examines local property tax digests and their impact on K-12 education funding. Specifically, they asked:
What is the impact on the calculation of the Quality Basic Education formula (QBE) and Equalization formula from changes in the tax digest?
What state or local arrangements (for example, payment in lieu of taxes for economic development projects) alters the tax digest? In what instances can counties receive funds from special arrangements and increase formula earning from lower tax digest values?

Objectives
Based on our initial research regarding the development of tax digests and their relationships to education funding, we developed the following objectives:
1. Determine what arrangements (for example, payment in lieu of taxes for economic development projects) alter a tax digest.
2. Determine the impact of changes to a tax digest on education funding calculations.
3. Identify the instances in which counties can receive funds from special arrangements and increased formula earnings from lower tax digest values.
Scope
This audit generally covered activity related to tax digest creation and K-12 education funding decisions that occurred during fiscal years 2009-2012 with consideration of earlier or later periods when relevant. Information used in this report was obtained by reviewing relevant laws, rules, and regulations, interviewing agency officials and staff from the Department of Education, the Department of Revenue, the House Budget and Research Office, and the Governor's Office of Planning and Budget, analyzing data from the Department of Community Affairs, and conducting a survey of the chief appraiser and tax commissioner in each county. We relied on the expertise of two DOAA divisions for relevant information: we interviewed staff of the Sales Ratio Division about the process of creating and equalizing tax digests, and the implications of appeals and recent legislation on the accuracy of digests. SRD also provided historical digest information for analysis. In addition, we interviewed staff within the Education Audit Division regarding the processes in place for reporting local revenues.
Methodology
To determine what arrangements (for example, a payment in lieu of taxes for economic development projects) alter a tax digest, we surveyed Chief Appraisers and Tax Commissioners in 159 counties, using contact information provided by DOAA's Sales Ratio Division. The brief survey asked a series of questions about the respondent's awareness of bond-for-title tax abatement agreements in their districts. If such arrangements existed, we asked for the total number of arrangements, plus detailed information on the ten largest. Requested details included start and end dates, assessed value of the property, whether or not PILOT payments were part of

Property Tax Digests: Impact on Education Funding

28

the arrangement, and if these payments went to the school system. We also asked the Tax Commissioner how revenues from all arrangements were reported to DOR. The initial survey was sent in September 2012, and a reminder notice was sent to those who failed to respond by the requested date. In all, we received responses from 134 counties, often with input from both the appraiser and commissioner, sometimes with information from other county officials or from the local development authority. In addition to using the results to characterize the types of arrangements that exist in Georgia, we selected representative arrangements from the responses that included detailed contractual information to be included in an appendix as case studies.
To determine the impact of changes to a tax digest on education funding calculations, we developed a model based on the fiscal year 2013 DOE spreadsheet calculation mechanism used to determine each school system's local fair share obligation and equalization grant. Specifically, we constructed an overlay that allowed analysts to alter the 100% State-wide Equalized Adjusted Property Tax Digest input for any county and track the resulting changes to local fair share and equalization grants for the affected school system and all other school systems in the state. Additionally, we designed an adjustment to the tax revenue calculation used to determine the effective millage rate for each school system. The adjustment reflected an assumption that any tax digest reduction should mirror a proportional revenue reduction relative to local assessment ratios and actual millage rates. The model construction was informed by a review of the spreadsheet mechanism as well as interviews with OPB and DOE personnel.
We ran iterative test scenarios through the model representative of a 5% reduction to each school system's tax digest holding all other factors (sans tax revenues) and all other school system digests constant. The 5% reduction factor was informed by a review of SRD data from fiscal year 2011.
In addition to a review of the modeled outputs relevant to changes in local fair share obligations and equalization grant funds, we assessed the calculation structure to determine the components and interactive effects within the mechanism and the law that may impact the changes we observed. This effort helped identify general trends in the results as described in the report.
To identify the instances in which counties can receive funds from special arrangements and increased formula earnings from lower tax digest values, we used the previously discussed model to compare the estimated tax revenue losses to local fair share obligation reductions and equalization grant gains associated with any digest reduction. In addition we conducted a thought experiment based on arrangements discovered through the tax commissioner survey and an assessment of the local fair share and equalization grant calculation mechanisms to design scenarios discussing the impact of the reporting of PILOT funds. We also adjusted the model to assume PILOT funds equal to 100% of school tax revenues were collected and reported as tax revenue to determine the impact on equalization grants.
We interviewed relevant personnel at DOE, DOR, and the Department of Audits and Accounts Education Audit Division, to determine the transparency of PILOT funds within reported revenue data. We also reviewed DOR data collection mechanisms

Property Tax Digests: Impact on Education Funding

29

and the Chart of Accounts, used by DOE to manage the way school systems report financial information.
This special examination was not conducted in accordance with generally accepted government auditing standards (GAGAS) given the timeframe in which the report was needed. However, it was conducted in accordance with Performance Audit Division policies and procedures for non-GAGAS engagements. These policies and procedures require that we plan and perform the engagement to obtain sufficient, appropriate evidence to provide a reasonable basis for the information reported and that data limitations be identified for the reader.
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Property Tax Digests: Impact on Education Funding

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Appendix B: Georgia Property Tax Classifications
PROPERTY CLASSIFICATIONS R - R E S ID E N T IA L - Classifies all land utilized, o r develo ped to be utilized as a single family ho mesite, the residential impro vements and o ther no n-residential ho mesite impro vements thereo n.
Duplexes and triplexes shall also be co nsidered single family residential impro vements. P erso nal pro perty o wned by individuals which has no t acquired a busineess situs elsewhere and is no t o therwise utilized fo r agricultural, co mmercial, o r industrial purpo ses.
T - R E S ID E N T IA L T R A N S IT IO N A L - Classifies land and impro vements receiving current use assessment under O.C.G.A . 48-5-7.4 due to its pro ximity to o r lo catio n in a transitio nal area.
H - H IS T O R IC - Classifies land and impro vements receiving preferential assessment under O.C.G.A . 48-5-7.2 o r 48-5-7.3 due to its designatio n as rehabilitated histo ric o r landmark histo ric pro perty. A - A G R IC ULT UR A L - Classifies all real and perso nal pro perty utilized as a farm unit. Includes the single family ho mesite which is an integral part o f the farm unit, the residential impro vements, the no n-
residential impro vements, the no n-ho mesite farm land and the pro ductio n and sto rage impro vements. A lso includes all perso nal pro perty o wned by individuals which is no t co nnected with the farm unit but has no t acquired a business situs elsewhere and the perso nal pro perty co nnected with the farm unit which shall include the machinery, equipment, furniture, fixtures, livesto ck, pro ducts o f the so il, supplies, minerals and o ff-ro ad vehicles.
P - P R E F E R E N T IA L - Classifies land and impro vements receiving current use assessment under O.C.G.A . 48-5-7.1due to its devo tio n to bo na fide agricultural purpo ses. V - C O N S E R V A T IO N US E - Classifies all land and impro vements receiving current use assessment under O.C.G.A . 48-5-7.1due to its go o d faith pro ductio n o f agricultural pro ducts o r timber. B - B R O WN F IE LD P R O P E R T Y - Classifies all land and impro vements receiving preferential assessment under O.C.G.A . 48-5-7.6 due to its release o f hazardo us waste, co nstitutents and
substances into the enviro nment.
J - F O R E S T LA N D C O N S E R V A T IO N US E - Classifies all land receiving current use assessment under O.C.G.A . 48-5-7.7 due to its go o d faith pro ductio n o f timber. F - F O R E S T LA N D F A IR M A R KE T V A LUE - Classifies all land assessed acco rding to O.C.G.A . 48-5-2(6) due to its go o d faith pro ductio n o f timber.
W - E N V IR O N M E N T A LLY S E N S IT IV E - Classifies all land receiving current use assessment under O.C.G.A . 48-5-7.4 due to its certificatio n as enviro nmentally sensitive pro perty by the Geo rgia
Department o f Natural Reso urces.
C - C O M M E R C IA L - Classifies all real and perso nal pro perty utilized as a business unit the primary nature o f which is the exchange o f go o ds and services at either the who lesale o r retail level. A lso
includes multi-family units having fo ur o r mo re units.
I - IN D US T R IA L - Classifies all real and perso nal pro perty utilized as a business unit the primary nature o f which is the manufacture o r pro cessing o f go o ds destined fo r who lesale o r retail sale. U - UT ILIT Y - Classifies the pro perty o f co mpanies which are required to file an ad valo rem tax return with the State Revenue Co mmissio ner; includes all the real and perso nal pro perty o f railro ad
co mpanies, railro ad equipment car co mpanies, public utility co mpanies and the flight equipment o f airline co mpanies.

STRATA FOR REAL PROPERTY
1 - IM P R O V E M E N T S - Includes all ingro und and abo ve gro und impro vements that have been made to the land including leaseho ld impro vements and excluding all pro ductio n and sto rage
impro vements utilized in the o peratio n o f a farm unit and tho se impro vements auxiliary to residential and agricultural dwellings no t included in the P ro ductio n/Sto rage/A uxiliary stratum. Land is no t included in this stratum.
2 - O P E R A T IN G UT ILIT Y - Includes all real and perso nal pro perty o f a public utility, tangible and intangible, utilized in the co nduct o f usual and o rdinary business. Real and perso nal pro perty o f a
public utility no t utilized in the co nduct o f usual and o rdinary business shall be designated no n-o perating pro perty and shall be included in the appro priate alternative strata.
3 - LO T S - Includes all land where the market indicates the site is so ld o n a fro nt fo o tage o r buildable basis rather than by acreage. 4 - S M A LL T R A C T S - Includes all land which is no rmally described and appraised in terms o f small acreage, which is o f such size as to favo r multiple uses. 5 - LA R G E T R A C T S - Includes all land which is no rmally described and appraised in terms o f large acreage, which is o f such size as to limit multiple uses, e.g., cultivatable lands, pasture lands, timber
lands, o pen lands, wasteland and wild lands. The acreage breakpo int between small tracts shall be designated by the B o ard o f Tax A ssesso rs as being that where the market price per acre reflects a distinct and pro no unced changes as the size o f the tract changes. In the event the breakpo int canno t be easily determined, the B o ard o f Tax A ssesso rs shall designate a reaso nable breakpo int no t less than 5 acres no r mo re than 25 acres.
6 - P R O D UC T IO N / S T O R A G E / A UX ILIA R Y - Includes tho se impro vements auxiliary to residential o r agricultural dwellings no t included in the impro vements impro vements stratum and all
impro vements to land which are utilized by a farm unit fo r the sto rage o r pro cessing o f agricultural pro ducts.
9 - O T H E R R E A L - Includes leaseho ld interests, mineral rights, and all real pro perty no t o therwise defined.

STRATA FOR PERSONAL PROPERTY A - A IR C R A F T - Includes all airplanes, ro to craft and lighter-than-air vehicles; including airline flight equipment required to be returned to the State Revenue Co mmissio ner. B - B O A T S - Includes all craft that are o perated in and upo n water. It shall include the mo to rs, but no t the land transpo rt vehicles. I - IN V E N T O R Y - Includes all raw materials, go o ds in pro cess and finished go o ds. It shall include livesto ck and pro ducts o f the land, water and air. It shall include all co nsumable supplies used in the
pro cess o f manufacturing, distributing, sto ring o r merchandising o f go o ds and services. It shall no t include invento ry receiving freepo rt exemptio n under O.C.G.A . 48-5-48.2
P - F R E E P O R T IN V E N T O R Y - Includes all invento ry receiving freepo rt exemptio n under O.C.G.A . 48-5-48.2. F - F UR N IT UR E / F IX T UR E S / M A C H IN E R Y / E Q UIP M E N T - Includes all fixtures, furniture, o ffice equipment, co mputer embedded so ftware and hardware, pro ductio n machinery, o ff-ro ad
vehicles, equipment, farm to o ls and implements, and to o ls and implements o f trade o f manual labo rers.
Z - O T H E R P E R S O N A L - Includes all o ther perso nal pro perty no t o therwise defined.

EXEMPT PROPERTY CODES

E0 - No n-pro fit ho mes fo r the aged

E5 - Charity ho spitals

E1 - P ublic P ro perty

E6 - Educatio nal institutio ns

E2 - P laces o f religio us wo rship & no rent inco me residences E7 - A ir and water po llutio n equipment

E3 - P ro perty used fo r charitable purpo ses

E8 - Farm pro ducts in hands o f pro ducer

E4 - P laces o f religio us burial

E9 - Other

STATE EXEMPTIONS

S1 - R e gula r

CODE

SC - A ge 6 5 S2 - R e s e rv e d S3 - E lde rly - A ge 6 2 ( N e t Inc o m e < $ 10 ,0 0 0 ) S4 - E lde rly - A ge 6 5 ( N e t Inc o m e < $ 10 ,0 0 0 ) S5 - D is a ble d V e t e ra n & s urv iv ing s po us e o r m ino r c hildre n SD - A ge 6 5 - 10 0 % D is a ble d V e t e ra n; Unre m a rrie d s urv iv ing s po us e o r m ino r c hildre n o f D is a ble d V e t e ra n SS - S urv iv ing S po us e o f US s e rv ic e m e m be r k ille d in a c t io n SE - A ge 6 5 - Unre m a rrie d s urv iv ing s po us e o f US s e rv ic e m e m be r k ille d in a c t io n SG - Unre m a rrie d s urv iv ing s po us e o f a f ire f ight e r o r pe a c e o f f ic e r k ille d in line o f dut y S6 - E lde rly F lo a t ing - A ge 6 2 ( F e d A gi < $ 3 0 ,0 0 0 ) S7 - R e s e rv e d

S8 - E lde rly F lo a t ing - A ge 6 2 ( F e d A G I < $ 3 0 ,0 0 0 & N e t Inc o m e < $ 10 ,0 0 0 )

S9 - E lde rly F lo a t ing - A ge 6 5 ( F e d A G I < $ 3 0 ,0 0 0 & N e t Inc o m e < $ 10 ,0 0 0 )

SF - F re e po rt - 20%, 40%, 60%, 80% o r 100% o f certain perso nal pro perty invento ry - co ntact co unty fo r percentage amo unt set by reso lutio n.

SA - P ro pe rt y de v o t e d t o A gric ult ura l purpo s e s - Difference in 30% and 40% assessment.

SB - B ro wnf ie ld P ro pe rt y - Difference o f the 40% assessment & base year assessment.

SP - P e rs o na l P ro pe rt y < $ 7 ,5 0 0 - Co mbined to tal o f all perso nal pro perty less than $ 7,500.

SH - La ndm a rk a nd R e ha bilit a t e d H is t o ric P ro pe rt y - Difference o f the 40% assessment & base year assessment.

ST - R e s ide nt ia l T ra ns it io na l pro pe rt y - Difference o f the 40% assessment and current use assessment.

SV - C o ns e rv a t io n Us e P ro pe rt y - Difference o f the 40% assessment and current use assessment.

SJ - F o re s t La nd C o ns e rv a t io n Us e P ro pe rt y - Difference o f the 40% assessment and current use assessment.

SW - E nv iro nm e nt a lly S e ns it iv e P ro pe rt y - Difference o f the 40% assessment and current use assessment.

SN - B us ine s s Inv e nt o ry - Invento ry o f a B usiness exempt fro m state ad valo rem tax.

Source: Program Documents

QUA LIF IC A T ION S See O.C.G.A . 48-5-44 See O.C.G.A . 48-5-48.3 R eserved - D O N OT USE See O.C.G.A . 48-5-52 See O.C.G.A . 48-5-47 See O.C.G.A . 48-5-48 See O.C.G.A . 48-5-48 See O.C.G.A . 48-5-52.1 See O.C.G.A . 48-5-48.3 & 48-5-52.1 See O.C.G.A . 48-5-48.4 See O.C.G.A . 48-5-47.1& 48-5-52 R eserved - D O N OT USE See O.C.G.A . 48-5-47.1& 48-5-52 See O.C.G.A . 48-5-47, 48-5-47.1& 48-5-52 See O.C.G.A . 48-5-48.2 See O.C.G.A . 48-5-7.1 See O.C.G.A . 48-5-7.6 See O.C.G.A . 48-5-42.1 See O.C.G.A . 48-5-7.2 & 48-5-7.3 See O.C.G.A . 48-5-7.4 See O.C.G.A . 48-5-7.4 See O.C.G.A . 48-5-7.7 See O.C.G.A . 48-5-7.4 See O.C.G.A . 48-5-41.2
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Property Tax Digests: Impact on Education Funding

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Appendix C: Timeline for Education Funding

DOAA provides 100% Equalized Adjusted
Tax Digest
DOR provides Revenue and Exemption Data
Timeline

School District Millage Rates

Population Statistics

Weighted FTE Counts

School District Reported Revenue
Department of Education

Office of Planning and Budget

Calculate QBE Earnings June

General Assembly

Inputs

July August September October November December Janruary

Calculate Local Fair Share
Calculate Equalization Grants
Prepare Budget Request

Calculate QBE Earnings
Calculate Local Fair Share
Calculate Equalization Grants
Adjustments
Prepare Governor's Budget Report

Calculate QBE Earnings
Calculate Local Fair Share
Calculate Equalization Grants
Adjustments

February March

Recalculate and Produce Allotment
Sheets

Approve Appropriations

Calculation and Funding Process

Source: Agency interviews and program documents
Each year, in preparation for the state budget, DOE, OPB, and staff working for the General Assembly calculate QBE earnings, local fair share, and equalization grants for every school system in the state. The calculations rely on a number of data points provided by many state-level agencies including DOR, DOE, OPB, and the Department of Audits and Accounts.
DOE performs relevant calculations to inform its annual budget request as does OPB for the Governor's Budget Report. OPB also recommends statewide funding levels relevant to QBE earnings and equalization grants. The General Assembly determines the final appropriations upon which DOE bases the specific obligations and earnings for each school system and DOE disperses the state funds.
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Property Tax Digests: Impact on Education Funding

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Appendix D: Survey Information

County

County

Respondent Could deals exist

Number of Provided information

responded to aware of such without respondent's

known

on at least one deal

survey?

deals?

knowledge?

arrangements?

with PILOT?

1 Appling

2 Atkinson

3 Bacon

2

4 Baker

5 Baldwin

2

6 Banks

7 Barrow

8

8 Bartow

3

9 Ben Hill

10 Berrien

1

11 Bibb

16

12 Bleckly

13 Brantley

14 Brooks

2

15 Bryan

4

16 Bulloch

17 Burke

1

18 Butts

19 Calhoun

20 Camden

1

21 Candler

1

22 Carroll

9

23 Catoosa

1

24 Charlton

25 Chatham

72

26 Chattahoochee

1

27 Chattooga

1

28 Cherokee

16

29 Clarke

37

30 Clay

31 Clayton

7

32 Clinch

33 Cobb

19

34 Coffee

17

35 Colquitt

6

36 Columbia

37 Cook

38 Coweta

10

39 Crawford

40 Crisp

?

41 Dade

1

42 Dawson

Property Tax Digests: Impact on Education Funding

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County
43 Decatur 44 Dekalb 45 Dodge 46 Dooly 47 Dougherty 48 Douglas 49 Early 50 Echols 51 Effingham 52 Elbert 53 Emanuel 54 Evans 55 Fannin 56 Fayette 57 Floyd 58 Forsyth 59 Franklin 60 Fulton 61 Gilmer 62 Glascock 63 Glynn 64 Gordon 65 Grady 66 Greene 67 Gwinnett 68 Habersham 69 Hall 70 Hancock 71 Haralson 72 Harris 73 Hart 74 Heard 75 Henry 76 Houston 77 Irwin 78 Jackson 79 Jasper 80 Jeff Davis 81 Jefferson 82 Jenkins 83 Johnson 84 Jones

County

Respondent Could deals exist

Number of Provided information

responded to aware of such without respondent's

known

on at least one deal

survey?

deals?

knowledge?

arrangements?

with PILOT?

37
1 7 37

5 4

3 12

4 1 4
8
3 3 8
7 13 5 5

Property Tax Digests: Impact on Education Funding

34

County
85 Lamar 86 Lanier 87 Laurens 88 Lee 89 Liberty 90 Lincoln 91 Long 92 Lowndes 93 Lumpkin 94 Macon 95 Madison 96 Marion 97 McDuffie 98 McIntosh 99 Meriwether 100 Miller 101 Mitchell 102 Monroe 103 Montgomery 104 Morgan 105 Murray 106 Muscogee 107 Newton 108 Oconee 109 Oglethorpe 110 Paulding 111 Peach 112 Pickens 113 Pierce 114 Pike 115 Polk 116 Pulaski 117 Putnam 118 Quitman 119 Rabun 120 Randolph 121 Richmond 122 Rockdale 123 Schley 124 Screven 125 Seminole 126 Spalding

County

Respondent Could deals exist

Number of Provided information

responded to aware of such without respondent's

known

on at least one deal

survey?

deals?

knowledge?

arrangements?

with PILOT?

2

5 1

1

13 1 1

1
3
7 1 2 9
3

Property Tax Digests: Impact on Education Funding

35

County

County

Respondent Could deals exist

Number of Provided information

responded to aware of such without respondent's

known

on at least one deal

survey?

deals?

knowledge?

arrangements?

with PILOT?

127 Stephens

8

128 Stewart

129 Sumter

130 Talbot

131 Taliaferro

132 Tattnall

133 Taylor

134 Telfair

1

135 Terrell

136 Thomas

7

137 Tift

16

138 Toombs

0

139 Towns

140 Treutlen

141 Troup

12

142 Turner

143 Twiggs

1

144 Union

145 Upson

2

146 Walker

4

147 Walton

5

148 Ware

149 Warren

1

150 Washington

151 Wayne

4

152 Webster

153 Wheeler

1

154 White

155 Whitfield

3

156 Wilcox

157 Wilkes

6

158 Wilkinson

1

159 Worth

Totals

134

75

25

527

27

% all

84%

47%

16%

% respondents

56%

19%

Source: Summarized from results of county tax official survey

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Appendix E: Local Arrangement Examples

Type of Enterprise Packaging and Paperboard

Purpose Acquisition of headquarters facility and expansion of existing operations.

Year Started 2011 Year Ends 2016 Duration: 5 years

Max Bond Value

$8,000,000

Current Assessed Value (40%) $0 (first year)

Arrangement: Leasehold interest taxable. Provided document does not

explain how quickly leasehold interest accrues.

Payments in lieu of taxes Yes- but only if performance measures not met. Then PILOT payments equivalent to taxes on current assessed value, minus ad valorem taxes paid on leasehold interest. If performance measures are "substantially violated" then 20% penalty is added first year, 50% following years.

Fees? Not mentioned in document provided

Purchase Option? unknown

Amount? unknown

Performance Measures? Job and salary requirements for 2012-2014.

Cumulative job creation by 2014: 515 jobs at $89,761

average annual wage.

Cumulative capital investment $5,300,000

Clawbacks? PILOT payments only required if job requirements or (Penalties for not meeting capital investments are not met. Penalties are substantial
performance measures) and failure can result in loss of tax exemption, plus recapture of previous abatements.

Tax Officials Sign Off? No School Officials Sign Off? No
Comments County has an Economic Development Ordinance that governs agreements.

Type of Enterprise Power Plant

Purpose not stated on document provided

Year Started 2001 Year Ends 2022 Duration: 20 years

Max Bond Value

$310,000,000

Current Assessed Value (40%) Unknown

Arrangement: Leasehold interest subject to ad valorem tax. Interest

increases over life of agreement.

Payments in lieu of taxes Yes- escalating quarterly "supplemental payment to County" at approximately half the size of tax payments.

Fees? Yes- Annual payments of $75,000 to Development Authority

Purchase Option? Unknown Performance Measures? Unknown
Clawbacks? Unknown Tax Officials Sign Off? Unknown

Amount? Unknown

School Officials Sign Off? Unknown

Comments Respondent only provided payment schedules- not actual agreements

Property Tax Digests: Impact on Education Funding

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Type of Enterprise Packaging

Purpose Land, equipment, and improvements

Year Started 2005 Year Ends 2014 Duration: 10 years

Max Bond Value

$42,000,000

Current Assessed Value (40%)

$1,600,000

Arrangement: Authority will purchase land, equipment, and improvements

to be leased to the company.Leasehold interest will accrue

over the ten years of the agreement. In lease year one,

Authority owns 90% and Company's Leasehold interest is

10%. In year 9, Authority 10% and Company 90%. In year

10, 100% owned by company. Real and person Property

will be assessed by standard methods. Therefore, the

percentage ownership is established, but the actual taxable

value will vary and be taxed each year.

Payments in lieu of taxes None Fees? None stated
Purchase Option? not stated, but implied Amount? Performance Measures? None stated
Clawbacks? None stated Tax Officials Sign Off? Yes- Policy Statement approved by Board of Tax Assessors
School Officials Sign Off? not stated Comments In this arrangement, the leasehold interest grows based on actual assessed value of the property. So, in year one, the company could own 10% of a $4 million property, but by year nine own (and pay taxes on) 90% of a $5 million property.

Type of Enterprise Prison

Purpose expand prison

Year Started 2011 Year Ends 2020 Duration: 10 years

Max Bond Value

$30,000,000

Current Assessed Value (40%)

$19,000,000

Arrangement: 10- year Lease exempt from property taxes.

Payments in lieu of taxes Yes- to all taxing authorities (county and school) on sliding

scale over duration of agreement.

Fees? Yes- to LDA

Purchase Option? Yes

Amount? $100

Performance Measures? 83 new jobs, $28 million investment

Clawbacks? Yes- reduction in tax discount and recovery of previously (Penalties for not meeting deferred taxes
performance measures)
Tax Officials Sign Off? Yes
School Officials Sign Off? No
Comments Language is similar to arrangements in other counties' deals involving the same law firm.

Source: Examples from results of county tax official survey
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Property Tax Digests: Impact on Education Funding

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Appendix F: Equalization Grant Calculations

Step 4

Step 5

Step 6

Step 7

Step 8

Step 9

Gap (Thousands) Effective Millage Rate ($1/$1,000) Equalization per Student Current Student Count Base Equalization Grant Prorate d Equalization Grant

R A N K
Step 1

10

Step 2

20

30

40

Step 3

50

Statewide Benchmark

$155,000

60

70

80

90

100

110

120

130

140

150

160

170

180

Wealth/ Student

$ 300,000

250,000 200,000 180,000

Gap x Effective Millage Rate $5,000 x 12.5 = $63 1,000

165,000

150,000 $

5

12.50 $

145,000

10

10.00

140,000

15

13.50

130,000

25

11.00

125,000

30

5.75

120,000

35

15.00

115,000

40

8.50

110,000

45

14.00

100,000

55

15.00

95,000

60

8.30

85,000

70

9.00

75,000

80

8.00

25,000

130

14.00

Equalization x Current Student Count Student
$63 x 2,000 = $126,000

63 100 203 275 173 525 340 630 825 498 630 640 1,820

2,000 37,000 2,000 2,000 3,000 42,000 14,000 36,000 13,000 1,000 10,000 4,000 2,000

$ 126,000 3,700,000 406,000 550,000 519,000 22,050,000 4,760,000 22,680,000 10,725,000 498,000 6,300,000 2,560,000 3,640,000
$ 78,514,000

$ 113,400 3,330,000 365,400 495,000 467,100 19,845,000 4,284,000 20,412,000 9,652,500 448,200 5,670,000 2,304,000 3,276,000
$ 70,662,600

Statewide Benchmark - Local Wealth/Student $155,000 - $25,000 = $130,000

Base Equalization Grant x 90% Proration $3,640,000 x 90% = $3,276,000

This equalization grant calculation simulation conveys the general components used to determine each school system's grant funding. The simulation reduces the field of 180 school systems by selecting an evenly dispersed 18 school system (every 10th system). The values shown for the statewide benchmark, wealth per student, effective millage rate, current student count, and the proration percentage are all rounded approximations based on actual fiscal year 2013 data from the selected systems.
Step 1: Wealth per Student16 Divide the assessed value (40%) of each school system's 100% equalized adjusted tax digest17 (less some exemptions) by the student count from the digest year.
Step 2: Rank Rank all school systems largest to smallest by wealth per student.
Step 3: Statewide Benchmark Excluding the top ranked 5% and the bottom ranked 5%, find the average wealth per student of the middle 90% of school systems.

16 Refers to the weighted average FTE count for each school system. 17 Includes timber values at 100%.

Property Tax Digests: Impact on Education Funding

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Step 4: Gap For those school systems falling below the statewide benchmark18, subtract each school system's wealth per student from the benchmark value. School systems above the benchmark do not qualify for an equalization grant.
Step 5: Effective Millage Rate Divide each school system's local tax revenues19 by the assessed value (40%) of the 100% equalized adjusted tax digest (less some exemptions). 20 Reduce by five mills to account for the local fair share.
Step 6: Equalization per Student Multiplies the gap and the effective millage rate together to determine the amount of equalization dollars to be provided relative to each student currently served by the school system.
Step 7: Current Student Count The most recent weighted average student counts provided to DOE from each school system.
Step 8: Base Equalization Grant Multiplies the calculated equalization per student by the current student count. Represents the calculated dollar value each qualifying school system would receive in equalization grant funds if the state fully funded the program.
Step 9: Prorated Equalization Grant Because statewide funding is capped, each qualifying school system's equalization grant is prorated by an equal percentage to meet the statewide funding requirement. In this simulation, all grants were prorated to 90% of the calculated value.
Return to Report

18 School systems must also levy a minimum of five mills to qualify for a grant. 19 As reported to the Department of Education. 20 Each school system receives a small incentive for increases to its actual millage rate as reported to DOE.

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