DALLAS — The rapid growth of wind farms in sparsely populated West Texas is a mixed blessing for school districts that have become “property wealthy” under the state’s education funding formula, according to a report from Standard & Poor’s.
“Property poor” districts that were once receiving revenue from other, wealthier districts around the state are now finding that they must share their property tax windfalls.
“While tax base growth generally benefits school districts, a rapid transition to a property-wealthy designation can, in Standard & Poor’s view, bring with it budgetary and planning headaches,” wrote analyst Apple Lo in Standard & Poor’s Dallas office. “Therefore, the stability of our general obligation ratings for these property-rich districts will largely depend on the maintenance of a strong general fund balance, enrollment growth and other ancillary economic activities.”
The state’s school funding formula, under which districts share their tax revenues, is the subject of multiple lawsuits that will be heard before a state district judge in October. With a ruling expected six months later, the Legislature is expected to address the funding issue in its 2013 session. In 2011, the Legislature cut school funding for the first time in the state’s history.
Wind farms are an unusual form of economic development because they increase property values but only provide small increases in employment. The power generated by the turbines is transmitted to urban customers around the state.
In 2008, the Public Utility Commission of Texas awarded $5 billion in projects to build enough transmission lines across the state to deliver renewable energy from the wind farms to load-serving entities.
One small school district, the Hermleigh Independent School District, has seen its tax base increase 1,024% since 2006. The district is rated A-plus by Standard & Poor’s. Hermleigh ISD was one of seven districts that went from property poor to property wealthy after wind farms arrived, according to Standard & Poor’s study.
A district is considered property wealthy when its taxable value per weighted average daily attendance by students is $319,500 or more.
“Using $319,500 as our basis for wealth, the districts’ property wealth levels have at least doubled in the past six years,” Lo wrote.
Taxable assessed value can fluctuate in wind-rich districts under agreements with the producers. In Hermleigh ISD’s case, the wind farms are taxed at full value for the first two years. However, taxes are limited to about $5 million each for a 10-year period.
“The district might be designated as property wealthy, but it will likely become a property-poor district when the agreement goes into effect,” Lo said. “If the district is not well-prepared when the agreement expires, however, its financial position could come under pressure when it transitions back to the Chapter 41 status because the expiration could trigger a large sum of recapture payments.”
Without the transmission lines and connection with the existing grid, a wind farm would essentially be a worthless, stranded asset with no meaningful benefit to the local school district’s tax base, according to the report.
“Therefore, besides the production tax credit, the timely and successful construction of transmission is key, in our opinion,” Lo wrote. “With interconnectivity, the wind farm project’s sponsor can sign power purchase agreements with utilities that will buy the wind energy, allowing the project to generate revenues.”
To date, most projects have fallen within the anticipated timeline, though there have been some delays and cost overruns mainly due to difficulties securing easements to reroute the lines, but very few projects have been canceled outright, the report said.