DALLAS – How Ohio schools tap local funding is playing a bigger role in districts’ credit profiles, says Moody’s Investors Service.
“For nearly a decade, most Ohio school districts have seen state aid decline as a share of total operating revenue, rendering them more reliant on local taxes to fund operations. As a result, levy elections, the primary mechanism through which Ohio schools increase local revenue, have become an increasingly important driver of a school district’s financial strength," Moody’s wrote.
But Moody’s also warned in a commentary published Tuesday that school districts’ credit strength depends on how vulnerable their revenue raising ability is to voter approval.
“Districts that need to frequently approach voters for both tax renewals and new taxes are more vulnerable to negative election outcomes than districts that only need to request new levies,” Moody’s wrote.
Three out of four Ohio school districts saw state aid decline as a share of total revenue between 2008 and 2016, according to Moody’s. In the five years through May 2017, 83% of Ohio's school districts held at least one levy election. Voters approved 70% of the more than 1,200 ballot requests, with the majority of approvals for extending expiring taxes. The approval rate for new levies was much lower at 38%.
Levies typically fall into one of four categories. Bond levies repay debt issued for various capital purposes. Permanent improvement levies typically finance maintenance of facilities and property. Current expense levies fund a school district's general operations and voters can approve them on either a temporary or continuous basis. Emergency levies fund operations and generate a fixed amount of revenue on a temporary basis.
Districts that have continuous operating levies are less exposed to voters because they only need voter support for new taxes and do not risk losing existing revenue in an election defeat, according to the report.
Shaker Heights Local School District, for example, benefits from the reliable revenue provided by continuous operating levies. The district seeks new taxing authority from voters on a consistent three- to-four year cycle.
On the other hand, Walnut Township Local School District has held 19 levy elections between 2000 and 2017. Eight of these requests were for new levies while 11 were for levy renewals. Nearly all of the district's approved levies are on a temporary basis, which require periodic renewal. “As a result, the district must approach voters relatively frequently to request a levy renewal in addition to requesting a new levy,” said Moody’s.
Districts with the least amount of voter exposure levy are at the “20-mill floor,” according to Moody’s. School districts that levy at 20 mills capture property tax growth due to both new construction and appreciating property values. When property values increase, voter approved millage decreases so the amount of taxes collected remains flat.
Moody’s said in the report that school districts’ exposure to voter uncertainty can be mitigated by policies that guide the timing of elections or require preemptively identifying budget cuts if a request fails.