Georgia Department of Audits and Accounts Performance ... · PDF fileeconomic development...

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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.

Georgia Department of Audits and AccountsPerformance Audit Division

Greg S. Griffin, State AuditorLeslie McGuire, Director

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.

Special Examination Report No. 12-25 January 2013

Education Funding Components SFY 2009-2013 (Billions)

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.

Source: Department of Education QBE State Allotment Sheets

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State Funds before Equalization Equalization Grants

Local Fair Share Unfunded

Property Tax Digests: Impact on Education Funding i

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 ii

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.


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.


Exhibit 1 Timeline for Property Tax Digests

Local Tax Officials Department of RevenueDOAA

Sales Ratio DivisionTimeline

Dig

est

Dev

elo

pm

ent

Res

po

nsi

bili

ties

by

Age

ncy

Review Digest Submission Packages for each County

Order Authorizing Collection of Taxes

Begin Extended Third Year Review of Tax Digests

Tests1. Assessment Ratio

2. Coefficient of Dispersion

3. Assessment Bias

Conduct Sales Ratio Study

100% Equalized Adjusted Tax Digest and

Assessment Ratio

Tax Commissioner Sends Tax Bills per Digest

Determine Fair Market Value (FMV) of Property

Chief Appraiser

Compute Assessed Value (FMV x 40%)

Classify Exempt Properties

Board of Tax Assessors

Compiles Tax Digest Submission Package

for DOR review/certification

Tax Commissioner

January

July

September

June

October

November

December

January

February

March

April

May

June

February

March

April

May

August

Compile Tax Consolidation

Summary Sheets

Computation Sheets

July

August

Source: Agency interviews and program documents


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

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.

Source: 2011 Sales Ratio Study State-wide Equalized 100% Adjusted Property Tax Digest Report- revised November 7, 2012


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 non-profit 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.

Depending on the valuation and classification of the property prior to these arrangements, tax districts may lose revenue because of resulting changes to their tax digests. To reduce the impact on tax revenues, authorities can use payment in lieu of taxes (PILOT) agreements, which require the company to make payments to offset at least a portion of the taxes that would have been paid if the company had title to the property. These payments may or may not be designated for specific purposes, such as education, and the recipient varies depending on the 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:

Local Development Authority (LDA):

A local government entity created for specific

economic development purposes. LDAs may

issue industrial revenue bonds, purchase land,

and enter into economic development

arrangements with private entities to provide

incentives such as low-interest financing or

property tax avoidance. LDAs are required to

register with and report to the Department of

Community Affairs.


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)

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

Base Earnings

$2,744.80 x 1.2866 x 682 + $1,109,440 = $3,517,900

Base Cost Program Weight Grades

1-3

Full Time Students

(Projection)

Teacher Training

and Experience

Total Earnings,

Grades 1-3

Source: Department of Education QBE state allotment sheets

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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 20131

FTE Total2

1,630,671 1,641,396 1,650,981 1,650,904 1,656,992

100% State-wide

Equalized Adjusted Tax

Digest3

$873,776 $962,389 $1,029,613 $1,005,719 $935,559

Education Funding

Local Fair Share $1,690 $1,698 $1,698 $1,698 $1,698

State QBE Share $6,094 $5,663 $6,162 $6,176 $6,279

Unfunded $496 $1,355 $1,090 $1,148 $1,144

QBE Earnings Total

$8,279 $8,715 $8,949 $9,021 $9,120

Equalization Grants $557 $436 $436 $436 $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.


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

: 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

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Exempt Property(Not on Digest)

Taxable Property(on Digest)

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

Digest increases annually at an agreed-upon rate


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

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.

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Exempt Property(Not on Digest)

Taxable Property(on Digest)Assessed Value increases,

is basis for payments in lieu of taxes

(School District Only)

MillionsMillionsMillions

Year of Arrangement

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

Improved property reverts to digest at end of arrangement


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.


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 non-existent 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.


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.


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%).


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 100% Equalized

Tax Digest

Local Funding

State Funding

to Overall State

Education Funding

Local Revenues

Local Fair Share

Obligation

Equalization Grant

School System

↓ ↓ ↓ ↑ ↑ ↑

↑ ↑ ↑ ↓ ↓ ↓

Under Austerity Budgets School System 100% Equalized

Tax Digest

Local Funding

State Funding

to Overall State

Education Funding

Local Revenues

Local Fair Share

Obligation

Equalization Grant

School System

↓ ↓ ↓ ↑ ↑ ↔

↑ ↑ ↑ ↓ ↓ ↔

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.


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


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) $7,907,708 -5.1%

B $4,046,114,033 ($202,305,702) $404,611 -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%


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.


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

x

Effective Millage Rate

x

Most Recent Student Count

= Equalization

Grant Statewide Benchmark -

Local Wealth

per Student

Tax Revenues ÷

Assessed Digest Value

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.


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


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 state-wide 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

R

A

N

K

Wealth/

Student

School

System

Gap from

Benchmark

(Thousands)

Effective

Millage

Grant $/

Student

10 300,000$

20 250,000

30 200,000

40 180,000

50 165,000 #51 n/a 9.56 -$

60 150,000 #58 $1 9.55 10$

70 145,000 #75 $15 12.11 182$

80 140,000 #86 $20 12.07 241$

90 130,000

100 125,000 #101 $30 10.59 318$

110 120,000 #110 $35 10.51 368$

120 115,000

130 110,000

140 100,000

150 95,000 #151 $65 9.26 602$

160 85,000 #158 $70 9.31 652$

170 75,000

180 25,000

D

Rank

Change

Average

(Benchmark) A

B

C


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

Rank Original Wealth

per Student New Rank

New Wealth per Student

Increase in Grant 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


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.


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

Benchmark Change

Impact on System #57 Prorated Grant Funds

Impact on System #161 Prorated Grant Funds

16 ($2) ↓ ($469) ↓ $158 ↑ 20 ($754) ↓ ($68,294) ↓ $74,348 ↑ 48 ($9) ↓ ($2,733) ↓ $920 ↑ 67 ($107) ↓ ($32,235) ↓ ($20,382) ↓ 73 ($17) ↓ ($5,211) ↓ ($2,293) ↓ 95 ($4) ↓ ($1,232) ↓ ($598) ↓ 109 ($45) ↓ ($13,486) ↓ ($6,901) ↓ 113 ($23) ↓ ($6,861) ↓ ($9,231) ↓ 138 ($13) ↓ ($3,783) ↓ ($1,623) ↓ 140 ($34) ↓ ($10,190) ↓ ($9,231) ↓ 170 $71 ↑ $21,192 ↑ ($8,897) ↓ 173 $0 ↔ ($22) ↓ ($1,922) ↓



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

Source: Equalization grant impact model analysis

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

R

A

N

KWealth/

Student

R

A

N

KWealth/

Student

10 300,000$ 10 300,000$

20 250,000 20 250,000

30 200,000 30 200,000

40 180,000 40 180,000

50 165,000 50 165,000

Original Benchmark 60 150,000 Original Benchmark 60 150,000

70 145,000 70 145,000

80 140,000 80 140,000

90 130,000 90 130,000

100 125,000 100 125,000

110 120,000 110 120,000

120 115,000 120 115,000

130 110,000 130 110,000

140 100,000 140 100,000

150 95,000 150 95,000

160 85,000 160 85,000

170 75,000 170 75,000

180 25,000 180 25,000

Before Proration After Proration

22 of 180 sytems (12%) gained

net revenue

with a reduced digest

158 systems (88%) lost

net revenue


50 systems remained

ineligible for grants,

and lost revenue

1 system remained


earned more revenue

5 systems became

eligible, but lost

revenue

22 scattered systems

remained eligible for

grants, earned more

revenue

103 systems remained

eligible, but lost

revenue

63 of 180 sytems (35%) gained

net revenue


117 systems (65%) lost

net revenue


5 systems became

eligible, but lost

revenue

62 systems remained

eligible for grants,

earned more revenue

49 systems remained


and lost revenue

63 systems remained

eligible, but lost

revenue


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.


Exhibit 15 Sample Local Arrangement14

Tax Digest $400,000,000 Local Tax Revenues $1,600,000 Effective Millage Rate

$1,600,000 ÷ ($400,000,000 x 40%) = 10 mills

Exempt Industrial Property $20,000,000 (5% Reduction in digest and revenues) Exempt Tax 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 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) Before Exemption After Exemption Tax Digest $400 $380 Tax Revenues $1.60 $1.52 Effective Millage Rate $1.60 ÷ ($400 x 40%)

= 10 mills $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.

Scenario 1 (millions) Before Exemption After Exemption Year 1 Year 2

Tax Digest $400 $380 $390

Local Tax Revenues $1.60 $1.52 $1.56 Effective Millage Rate $1.60 ÷ ($400 x 40%)

= 10 mills $1.52 ÷ ($380 x 40%)

= 10 mills $1.56 ÷ ($390 x 40%)

= 10 mills


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 After Exemption Tax Digest $400 $380 Local Tax Revenues $1.60 $1.52 PILOT Funds $0 $0.08 Tax and Non-tax Revenue $1.60 $1.60 Effective Millage Rate $1.60 ÷ ($400 x 40%) = 10 mills $1.52

1 ÷ ($380 x 40%) = 10 mills

1 PILOT funds are not reported as revenue.

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 After Exemption Tax Digest $400 $380 Local Tax Revenues $1.60 $1.52 PILOT Funds $0 $0.08 Tax and Non-tax Revenue $1.60 $1.60 Effective Millage Rate $1.60 ÷ ($400 x 40%) = 10 mills $1.60

1 ÷ ($380 x 40%) = 10.5 mills

1 PILOT funds are reported as revenue.

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.


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.


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.


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


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


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.

Return to Report


Appendix B: Georgia Property Tax Classifications

Source: Program Documents Return to Report

S6 - Elderly F lo at ing - A ge 62 (F ed A gi < $ 30,000)

S7 - R eserved

E6 - Educational institutions

E5 - Charity hospitalsE0 - Non-profit homes for the aged

EXEMPT PROPERTY CODES

E2 - P laces of religious worship & no rent income residences

E3 - Property used for charitable purposes

E4 - P laces of religious burial

See O.C.G.A. § 48-5-7.4

See O.C.G.A. § 48-5-41.2

S2 - R eserved

S3 - Elderly - A ge 62 (N et Inco me < $ 10,000)

S4 - Elderly - A ge 65 (N et Inco me < $ 10,000)

S5 - D isabled Veteran & surviving spo use o r mino r children

SD - A ge 65 - 100% D isabled Veteran; Unremarried surviving spo use o r mino r children o f D isabled Veteran

SS - Surviving Spo use o f US service member killed in act io n

SE - A ge 65 - Unremarried surviving spo use o f US service member killed in act io n

SG - Unremarried surviving spo use o f a f iref ighter o r peace o ff icer killed in line o f duty

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

S8 - Elderly F lo at ing - A ge 62 (F ed A GI < $ 30,000 & N et Inco me < $ 10,000)

See O.C.G.A. § 48-5-7.7SJ - F o rest Land C o nservat io n Use P ro perty - Difference of the 40% assessment and current use assessment.

See O.C.G.A. § 48-5-47

See O.C.G.A. § 48-5-48

See O.C.G.A. § 48-5-48

R eserved - D O N OT USE

See O.C.G.A. § 48-5-47.1 & 48-5-52

See O.C.G.A. § 48-5-47.1 & § 48-5-52

QUA LIF IC A T ION S

See O.C.G.A. § 48-5-44

See O.C.G.A. § 48-5-48.3

C OD E

STATE EXEMPTIONS

S1 - R egular

SC - A ge 65

Z - OT H ER P ER SON A L - Includes all o ther personal property not o therwise defined.

E7 - A ir and water po llution equipment

5 - LA R GE T R A C T S - Includes all land which is normally described and appraised in terms of large acreage, which is o f such size as to limit multiple uses, e.g., cultivatable lands, pasture lands, timber

lands, open lands, wasteland and wild lands. The acreage breakpoint between small tracts shall be designated by the Board of Tax Assessors as being that where the market price per acre reflects a

distinct and pronounced changes as the size of the tract changes. In the event the breakpoint cannot be easily determined, the Board of Tax Assessors shall designate a reasonable breakpoint not less

than 5 acres nor more than 25 acres.

6 - P R OD UC T ION / ST OR A GE/ A UXILIA R Y - Includes those improvements auxiliary to residential or agricultural dwellings not included in the improvements improvements stratum and all

improvements to land which are utilized by a farm unit for the storage or processing of agricultural products.

9 - OT H ER R EA L - Includes leasehold interests, mineral rights, and all real property not o therwise defined.

STRATA FOR PERSONAL PROPERTYA - A IR C R A F T - Includes all airplanes, ro tocraft and lighter-than-air vehicles; including airline flight equipment required to be returned to the State Revenue Commissioner.

I - IN VEN T OR Y - Includes all raw materials, goods in process and finished goods. It shall include livestock and products o f the land, water and air. It shall include all consumable supplies used in the

process of manufacturing, distributing, storing or merchandising of goods and services. It shall not include inventory receiving freeport exemption under O.C.G.A. § 48-5-48.2

PROPERTY CLASSIFICATIONS

1 - IM P R OVEM EN T S - Includes all inground and above ground improvements that have been made to the land including leasehold improvements and excluding all production and storage

improvements utilized in the operation of a farm unit and those improvements auxiliary to residential and agricultural dwellings not included in the Production/Storage/Auxiliary stratum. Land is not

included in this stratum.

2 - OP ER A T IN G UT ILIT Y - Includes all real and personal property o f a public utility, tangible and intangible, utilized in the conduct o f usual and ordinary business. Real and personal property o f a

public utility not utilized in the conduct o f usual and ordinary business shall be designated non-operating property and shall be included in the appropriate alternative strata.

3 - LOT S - Includes all land where the market indicates the site is so ld on a front footage or buildable basis rather than by acreage.

4 - SM A LL T R A C T S - Includes all land which is normally described and appraised in terms of small acreage, which is o f such size as to favor multiple uses.

J - F OR EST LA N D C ON SER VA T ION USE - Classifies all land receiving current use assessment under O.C.G.A. § 48-5-7.7 due to its good faith production of timber.

F - F OR EST LA N D F A IR M A R KET VA LUE - Classifies all land assessed according to O.C.G.A. § 48-5-2(6) due to its good faith production of timber.

W -EN VIR ON M EN T A LLY SEN SIT IVE - Classifies all land receiving current use assessment under O.C.G.A. § 48-5-7.4 due to its certification as environmentally sensitive property by the Georgia

Department o f Natural Resources.

C - C OM M ER C IA L - Classifies all real and personal property utilized as a business unit the primary nature of which is the exchange of goods and services at either the wholesale or retail level. A lso

includes multi-family units having four or more units.

I - IN D UST R IA L - Classifies all real and personal property utilized as a business unit the primary nature of which is the manufacture or processing of goods destined for wholesale or retail sale.

E1 - Public Property

E8 - Farm products in hands of producer

E9 - Other

U - UT ILIT Y - Classifies the property o f companies which are required to file an ad valorem tax return with the State Revenue Commissioner; includes all the real and personal property o f railroad

companies, railroad equipment car companies, public utility companies and the flight equipment o f airline companies.

B - B OA T S - Includes all craft that are operated in and upon water. It shall include the motors, but not the land transport vehicles.

STRATA FOR REAL PROPERTY

P - F R EEP OR T IN VEN T OR Y - Includes all inventory receiving freeport exemption under O.C.G.A. § 48-5-48.2.

F - F UR N IT UR E/ F IXT UR ES/ M A C H IN ER Y/ EQUIP M EN T - Includes all fixtures, furniture, o ffice equipment, computer embedded software and hardware, production machinery, o ff-road

vehicles, equipment, farm too ls and implements, and too ls and implements of trade of manual laborers.

B - B R OWN F IELD P R OP ER T Y - Classifies all land and improvements receiving preferential assessment under O.C.G.A. § 48-5-7.6 due to its release of hazardous waste, constitutents and

substances into the environment.

ST - R esident ial T ransit io nal pro perty - Difference of the 40% assessment and current use assessment.

SV - C o nservat io n Use P ro perty - Difference of the 40% assessment and current use assessment.

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. § 48-5-52.1

See O.C.G.A. § 48-5-48.3 & § 48-5-52.1

See O.C.G.A. § 48-5-48.4

R - R ESID EN T IA L - Classifies all land utilized, or developed to be utilized as a single family homesite, the residential improvements and other non-residential homesite improvements thereon.

Duplexes and triplexes shall also be considered single family residential improvements. Personal property owned by individuals which has not acquired a busineess situs elsewhere and is not o therwise

utilized for agricultural, commercial, or industrial purposes.

T - R ESID EN T IA L T R A N SIT ION A L - Classifies land and improvements receiving current use assessment under O.C.G.A. § 48-5-7.4 due to its proximity to or location in a transitional area.

H - H IST OR IC - Classifies land and improvements receiving preferential assessment under O.C.G.A. §§ 48-5-7.2 or 48-5-7.3 due to its designation as rehabilitated historic or landmark historic property.

A - A GR IC ULT UR A L - Classifies all real and personal property utilized as a farm unit. Includes the single family homesite which is an integral part o f the farm unit, the residential improvements, the non-

residential improvements, the non-homesite farm land and the production and storage improvements. A lso includes all personal property owned by individuals which is not connected with the farm unit

but has not acquired a business situs elsewhere and the personal property connected with the farm unit which shall include the machinery, equipment, furniture, fixtures, livestock, products of the so il,

supplies, minerals and off-road vehicles.

P - P R EF ER EN T IA L - Classifies land and improvements receiving current use assessment under O.C.G.A. § 48-5-7.1 due to its devotion to bona fide agricultural purposes.

V - C ON SER VA T ION USE - Classifies all land and improvements receiving current use assessment under O.C.G.A. § 48-5-7.1 due to its good faith production of agricultural products or timber.

SW - Enviro nmentally Sensit ive P ro perty - Difference of the 40% assessment and current use assessment.

SN - B usiness Invento ry - Inventory of a Business exempt from state ad valorem tax.

R eserved - D O N OT USE

S9 - Elderly F lo at ing - A ge 65 (F ed A GI < $ 30,000 & N et Inco me < $ 10,000)

SF - F reepo rt - 20%, 40%, 60%, 80% or 100% of certain personal property inventory - contact county for percentage amount set by resolution.

SA - P ro perty devo ted to A gricultural purpo ses - Difference in 30% and 40% assessment.

SB - B ro wnfield P ro perty - Difference of the 40% assessment & base year assessment.

SP - P erso nal P ro perty < $ 7,500 - Combined to tal o f all personal property less than $7,500.

SH - Landmark and R ehabilitated H isto ric P ro perty - Difference of the 40% assessment & base year assessment.

See O.C.G.A. § 48-5-52


Appendix C: Timeline for Education Funding

Office of Planning and Budget

General AssemblyDepartment of EducationTimeline

Cal

cula

tio

n a

nd

Fu

nd

ing

Pro

cess

Calculate QBE Earnings

Calculate Local Fair Share

Calculate Equalization Grants

Prepare Governor’s Budget Report

Approve Appropriations

Prepare Budget Request

Recalculate and Produce Allotment

Sheets

September

November

Janruary







July

August

October

December

June

February

March

Adjustments

Adjustments

DOAA provides 100% Equalized Adjusted

Tax Digest

School District Millage Rates

Weighted FTE Counts

Population Statistics

DOR providesRevenue and

Exemption DataSchool District

Reported Revenue

Inp

uts

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.

Return to Report


Appendix D: Survey Information

County

County

responded to

survey?

Respondent

aware of such

deals?

Could deals exist

without respondent's

knowledge?

Number of

known

arrangements?

Provided information

on at least one deal

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


County

County

responded to

survey?

Respondent

aware of such

deals?

Could deals exist


knowledge?

Number of

known

arrangements?



with PILOT?

43 Decatur

44 Dekalb 37

45 Dodge

46 Dooly 1

47 Dougherty 7

48 Douglas 37

49 Early

50 Echols

51 Effingham 5

52 Elbert 4

53 Emanuel

54 Evans

55 Fannin

56 Fayette 3

57 Floyd 12

58 Forsyth

59 Franklin

60 Fulton

61 Gilmer

62 Glascock

63 Glynn

64 Gordon

65 Grady 4

66 Greene 1

67 Gwinnett 4

68 Habersham

69 Hall 8

70 Hancock

71 Haralson 3

72 Harris 3

73 Hart 8

74 Heard

75 Henry 7

76 Houston 13

77 Irwin 5

78 Jackson 5

79 Jasper

80 Jeff Davis

81 Jefferson

82 Jenkins

83 Johnson

84 Jones


County

County

responded to

survey?

Respondent

aware of such

deals?

Could deals exist


knowledge?

Number of

known

arrangements?



with PILOT?

85 Lamar 2

86 Lanier

87 Laurens 5

88 Lee 1

89 Liberty

90 Lincoln 1

91 Long

92 Lowndes 13

93 Lumpkin 1

94 Macon 1

95 Madison

96 Marion

97 McDuffie

98 McIntosh

99 Meriwether

100 Miller

101 Mitchell

102 Monroe 1

103 Montgomery

104 Morgan

105 Murray

106 Muscogee

107 Newton 3

108 Oconee

109 Oglethorpe

110 Paulding

111 Peach

112 Pickens

113 Pierce 7

114 Pike 1

115 Polk

116 Pulaski

117 Putnam 2

118 Quitman

119 Rabun

120 Randolph

121 Richmond 9

122 Rockdale

123 Schley

124 Screven

125 Seminole

126 Spalding 3


Source: Summarized from results of county tax official survey

Return to Report

County

County

responded to

survey?

Respondent

aware of such

deals?

Could deals exist


knowledge?

Number of

known

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%


Appendix E: Local Arrangement Examples

Type of Enterprise

Purpose

Year Started 2011 Year Ends 2016 Duration: 5 years

Max Bond Value

Current Assessed Value (40%)

Arrangement:

Payments in lieu of taxes

Fees?

Purchase Option? Amount?

Performance Measures?

Clawbacks?

(Penalties for not meeting

performance measures)

Tax Officials Sign Off?

School Officials Sign Off?

Comments

Packaging and Paperboard

Acquisition of headquarters facility and expansion of existing operations.

$8,000,000

$0 (first year)

Leasehold interest taxable. Provided document does not

explain how quickly leasehold interest accrues.

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.

Not mentioned in document provided

unknown unknown

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

PILOT payments only required if job requirements or

capital investments are not met. Penalties are substantial

and failure can result in loss of tax exemption, plus

recapture of previous abatements.

No

No

County has an Economic Development Ordinance that

governs agreements.

Type of Enterprise

Purpose


Max Bond Value


Arrangement:


Fees?



Clawbacks?



Comments

Power Plant

not stated on document provided

$310,000,000

Unknown

Leasehold interest subject to ad valorem tax. Interest

increases over life of agreement.

Yes- escalating quarterly "supplemental payment to

County" at approximately half the size of tax payments.

Yes- Annual payments of $75,000 to Development

Authority

Unknown Unknown

Unknown

Unknown

Unknown

Unknown

Respondent only provided payment schedules- not actual

agreements


Source: Examples from results of county tax official survey

Return to Report

Type of Enterprise

Purpose


Max Bond Value


Arrangement:


Fees?



Clawbacks?



Comments

Packaging

Land, equipment, and improvements

$42,000,000

$1,600,000

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.

None

None stated

not stated, but implied

None stated

None stated

Yes- Policy Statement approved by Board of Tax Assessors

not stated

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

Purpose


Max Bond Value


Arrangement:


Fees?



Clawbacks?

(Penalties for not meeting

performance measures)



Comments

Prison

expand prison

$30,000,000

$19,000,000

10- year Lease exempt from property taxes.

Yes- to all taxing authorities (county and school) on sliding

scale over duration of agreement.

Yes- to LDA

Yes $100

83 new jobs, $28 million investment

Yes- reduction in tax discount and recovery of previously

deferred taxes

Yes

No

Language is similar to arrangements in other counties'

deals involving the same law firm.


Appendix F: Equalization Grant Calculations

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%.

R

A

N

K

Wealth/

Student

Gap

(Th

ou

san

ds)

Effe

ctiv

e M

illa

ge

Rat

e (

$1

/$1

,00

0)

Equ

aliz

atio

n p

er

Stu

de

nt

Cu

rre

nt

Stu

de

nt

Co

un

t

Bas

e E

qu

aliz

atio

n

Gra

nt

Pro

rate

d

Equ

aliz

atio

n G

ran

t

10 300,000$

20 250,000

30 200,000

40 180,000

50 165,000

60 150,000 5$ 12.50 63$ 2,000 126,000$ 113,400$

70 145,000 10 10.00 100 37,000 3,700,000 3,330,000

80 140,000 15 13.50 203 2,000 406,000 365,400

90 130,000 25 11.00 275 2,000 550,000 495,000

100 125,000 30 5.75 173 3,000 519,000 467,100

110 120,000 35 15.00 525 42,000 22,050,000 19,845,000

120 115,000 40 8.50 340 14,000 4,760,000 4,284,000

130 110,000 45 14.00 630 36,000 22,680,000 20,412,000

140 100,000 55 15.00 825 13,000 10,725,000 9,652,500

150 95,000 60 8.30 498 1,000 498,000 448,200

160 85,000 70 9.00 630 10,000 6,300,000 5,670,000

170 75,000 80 8.00 640 4,000 2,560,000 2,304,000

180 25,000 130 14.00 1,820 2,000 3,640,000 3,276,000

78,514,000$ 70,662,600$

Step 3Statewide Benchmark

$155,000

Gap x Effective Millage Rate$5,000 x 12.5 = $631,000

Step 1

Step 9Step 8Step 7Step 6Step 5Step 4

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

Equalization x Current Student CountStudent

$63 x 2,000 = $126,000

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

Step 2


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.

The Performance Audit Division was established in 1971 to conduct in-depth reviews of state-funded programs.

Our reviews determine if programs are meeting goals and objectives; measure program results and effectiveness;

identify alternate methods to meet goals; evaluate efficiency of resource allocation; assess compliance with laws

and regulations; and provide credible management information to decision-makers. For more information, contact

us at (404)657-5220 or visit our website at www.audits.ga.gov.

http://www.audits.ga.gov/

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