Multiple issues at stake in county tax portion of state education funding lawsuit
It appears the second prong of the two-prong lawsuit challenging Delaware’s education funding system will see a trial early next year.
A month after the portion focused on the state and its funding method was settled, a March trial date is set for the portion focused on the county and its property tax system.
That system was ruled unconstitutional earlier this year by Chancery Court Vice Chancellor J. Travis Laster – but he deferred imposing a remedy. And that’s what will be at issue in the trial after no settlement was reached.
Contributor Larry Nagengast looks at what’s at stake in this trial.
The upcoming legal battle over when Delaware’s three counties will conduct real estate reassessments and who should pay for the work isn’t actually related the issue at the heart of the lawsuit, says a University of Delaware expert who has been following tax assessment issues for more than a generation.
“It has nothing at all to do with it,” says Edward Ratledge, director and associate professor at the university’s Biden School of Public Policy and Administration.
The suit challenging the structure of the state’s school finance system was filed in early 2019 by Delawareans for Educational Opportunity and the NAACP Delaware State Conference, who claimed that inequities in the funding system resulted in diminished educational opportunities for three groups of students – those from low-income families, English-language learners and special needs children in kindergarten through third grade. Reassessment does not address those issues, Ratledge says.
The “state track” in the two-pronged suit produced a mediated settlement last month, with Gov. John Carney pledging to ask the General Assembly to commit to more than $130 million in additional spending in a variety of education programs through the 2024-25 school year. That spending would benefit, directly or indirectly, the student groups identified in the suit. The settlement is not final, however. The General Assembly must approve the additional spending by next June 30.
But Vice Chancellor J. Travis Laster this week set March 29-30 as the dates for a trial in the Court of Chancery on the remedy phase of the suit’s “county track” in the two-pronged suit. The county track focuses on the use of outdated assessment data – some of it more than 45 years old – in setting school and local property tax rates.
Ratledge, whose familiarity with the issue dates back to his work on the 1983 reassessment in New Castle County, says reassessment would correct what he calls “horizontal inequities” – the differences in valuations for similar properties that have crept into the system through the use of outdated methodologies and data. This would make the system fairer for individual property owners, he says, because all properties would be assessed using the same standards.
But, he adds, it would have no direct impact on equitable distribution of funds to benefit disadvantaged students. The Cape Henlopen and Seaford school districts, for example, could have the same tax rate, but that rate would generate more revenue for the affluent coastal district than it would for the one in rural western Sussex County.
On the county track, Laster ruled in May that the methods the counties use to determine property values for tax purposes violated both state law and the state Constitution, but he deferred imposing a remedy.
Lawyers for the counties and for the plaintiffs appear to agree that the resolution will require a reassessment of property values. Laster set the trial date this week after lawyers for both sides said they had been unable to negotiate their own settlement on how soon the counties can conduct real estate reassessments and who is going to pay for it.
The counties recently submitted separate reports to Laster – all prepared by the same consultant and using virtually identical language – that explained how reassessments would be conducted and setting out a timeline for completion in early 2024. But their lawyers said they did not want to be held to meeting the timelines set out in the reports and added that they wanted to see some form of “state involvement” in the solution.
Why the counties pay
That presumably means getting the state to pick up some, or all, of the tab for reassessment.
The question of who pays raises some interesting issues as well.
Daniel Rich, professor of public policy at UD’s Biden School, notes that, by law, it is the responsibility of the counties to pay for reassessments. However, both Ratledge and Rich point out that the counties serve as collection agents for school property taxes – and that most of the property tax money collected is actually for school taxes.
According to figures provided by John Marinucci, executive director of the Delaware School Boards Association, school districts received nearly $800 million in property tax revenues for the 2018-19 school year.
“If you add all the counties and municipalities together, their property tax revenues would be less than $700 million by a long shot,” Ratledge says.
According to a September news release from the Sussex County government, the county sent out tax bills totaling $166.3 million this summer. Of that total, roughly 90 percent was for school taxes and only 10 percent to fund county government.
Such numbers suggest that perhaps the school districts should pay for a portion of reassessment costs because they are the prime recipients of the taxes collected.
Marinucci says the idea of having the school districts pay “has never been brought up. When it’s discussed, it’s always been whether it will be the state or the counties, or some combination.”
The reason for not imposing the cost on the school districts, Marinucci and Rich say, is that they do not have a revenue stream that could be used to incur such an expense.
“To increase the amount to be collected [to pay for a reassessment], you would need to hold a referendum,” Marinucci says. “You’d be asking people to vote on their own reassessment. You do the math on that.”
Rich, an education policy expert who has been involved with researching school equity issues for much of the past decade, said the counties should have been preparing for the likelihood of reassessment for years and should have been setting funds aside for that inevitability.
One factor underlying the resolution of the reassessment issue is whether the counties can get the state involved at this stage of the litigation. The state is not involved in the suit's county track, so it is unclear whether Laster could mandate a state role in reassessment. In a political sense, Karen Lantz, legal and policy director for the ACLU of Delaware, which has been providing legal support to the plaintiffs in the case, wonders whether state legislators would be eager to foot the reassessment bill with the governor already asking for more than $130 million in new education funding and lawmakers also having their own favored spending projects, in education and other areas, that they desire to implement.
Benefits for the state
But Rich and Ratledge can make a case for the state picking up the tab – at least at the outset – and Ratledge sees some long-term benefits for the state as well.
Having the state manage the reassessment, Rich says, would simplify administration of the process and ensure that the same standards are used in all three counties.
Using the same standards and compiling all the data in one database, Ratledge says, would eliminate some of the complications that now occur with the school districts that straddle the New Castle-Kent and Kent-Sussex county lines, where different assessment methodologies require the districts to set different tax rates for properties in each county.
In addition, Ratledge says that a centralized property database could be a valuable asset for other state agencies that have at least an occasional need for such information, like the Department of Transportation, the Department of Natural Resources and Environmental Control and the Delaware Emergency Management Agency.
Ratledge also suggested a possible approach for paying for a statewide reassessment: using a state-issued revenue bond to cover the initial cost and developing a formula based on property values for the counties and school districts to raise tax rates slightly to pay off the bond.
Having a centralized database, Ratledge says, would also be helpful if the litigation results in enactment of another reform: rolling reassessments, a practice employed in many states in which properties are scheduled for reassessment over a designated length of time, so the data does not get out of date and create the sort of imbalances that now exist in many parts of the state.
“That way we don’t get back into a situation like we have now, where we’re using 30- to 40-year old assessments,” Marinucci says.
The school boards association has not taken an official position on rolling reassessments because specific legislation has not been drafted in the General Assembly, Marinucci says, but he believes there is a general consensus among school boards to endorse such a process.
One factor underlying the resolution of the reassessment issue is whether the counties can get the state involved at this stage of the litigation. The state is not involved in the suit’s county track, so it is unclear whether Laster could mandate a state role in reassessment. In a political sense, Lantz wonders whether state legislators would be eager to foot the reassessment bill with the governor already asking for more than $130 million in new education funding and lawmakers also having their own favored spending projects, in education and other areas, that they desire to implement.
The counties’ interest in seeing whether the state would participate in the reassessment – and possibly pay for it – was one of the reasons they could not complete a negotiated settlement with the plaintiffs this month.
A negotiated settlement might have made it possible for the counties to solicit proposals from assessment professionals in early 2021, begin the work in the middle of the year and wrap it up in early 2024. However, the counties also told Laster they did not want to be held to that timeline – which was proposed by their consultant – because any delay in preparing specifications for the proposals would push the entire process back.
"At some point you have to make the commitment. And if you don't make the commitment, the court will make the commitment for you." - Daniel Rich, UD's Biden School of Public Policy and Administration
Working with the state on a reassessment proposal could easily stretch through the next legislative session, which ends June 30, and the trial schedule set by Laster means that a decision would not be issued until sometime in April, at the earliest.
Under all these scenarios, a reassessment would not likely be completed until the second half of 2024, and perhaps later, so the earliest that property tax bills could be issued with new property values and rates would be for the fiscal year that begins July 1, 2025.
No matter how the situation evolves, it is clearly nearing a resolution, Rich says.
“This issue has been out there for a while, and for the counties to use cost as an excuse [for delaying reassessment] is not going to be very convincing,” he says. “At some point you have to make the commitment. And if you don’t make the commitment, the court will make the commitment for you.”
No matter how the situation evolves, there will be no windfalls for the counties and the school districts, although some property owners will consider themselves winners or losers.
State law does allow counties to increase their tax rate by 15 percent in the year a reassessment takes place – essentially to cover the cost of reassessment. But there’s a big catch in the law: in the following year, counties have to reset their tax rate so the revenue generated post-reassessment is no greater than the amount property taxes generated the year before reassessment. While that temporary boost may help the county pay its assessment vendor, the problem is that the vendor is going to expect to be paid in stages while the work is under way, not waiting until it’s completed.
For the school districts, a reassessment would provide a one-time bonanza – the opportunity to increase their property tax revenues by 10 percent in the year the revaluation occurs. Unlike the counties, school districts are not required to roll back their rate the following year. While 10 percent might sound like a big increase, it applies only to the average of 33 percent of district revenues that come from the property tax, so it’s actually only a 3 percent hike in a district’s overall revenues.
As for property owners, they traditionally fear reassessments, in part because of a natural tendency to believe that the property you own is worth more than it really is.
Ratledge points to the conventional wisdom of reassessment: one-third of the properties will see a significant valuation increase, one-third will see a significant decrease, and one-third will remain about the same.
Should the conventional wisdom hold, property owners may fear reassessments but, Ratledge says, “two-thirds of them will be pleased with the results.”