Faulty projections put Beaufort County schools in $4 million hole

sbowman@beaufortgazette.comApril 5, 2014 

A perfect storm of inaccurate projections and last year's property value reassessment have left the Beaufort County School District more than $4.2 million short in its 2013-14 budget, according to school and county officials.

Now the district will have to make up for that gap with its reserve funds this year and rethink its tax rate for next, schools officials say.

However, Beaufort County's budget has not had the same shortfall. Its tax collections are right on the money, officials say.

"One of the questions the school board couldn't initially figure out is, 'Why are the county's collections running true to form and the schools' aren't?'" said County Council Chairman Paul Sommerville. "But they have more variables in their equation than we do."

Now district and county leaders are asking themselves if there's a better way to predict those variables.

It's a question they don't yet know how to answer.

THE VARIABLES

Both county and schools officials say setting the district's budget is difficult because of Act 388. The 2006 state law allows property taxes that fund school operations to be collected only from owners of second homes and commercial properties. This group pays taxes on 6 percent of their property's assessed value; owner-occupied homes are taxed on only 4 percent of their value.

In theory, those who live in homes they own still contribute to operating expenses through a state sales tax set aside for schools.

But in reality, the economy and funding formulas make it difficult for school districts to predict revenue for operations.

And the law created an incentive for taxpayers to convert second homes to primary residences, so they can pay at the lower rate. Local government officials have long said this is particularly true in places like Beaufort County, where property values are high and many homeowners are retirees or transplants who can reclassify their second homes as primary residences.

"When people switch from 6 to 4 percent, the county still gets revenue after the switch," school district chief operational services officer Phyllis White said. "But we don't, because we really only get revenue from those 6 percent properties."

Almost $3.4 million of the district's shortfall this year can be attributed to that shift, according to White.

A 2013 reassessment of property values also factored into the revenue shortfall, White said. Counties are required to revalue property every five years, and in the most recent round of revaluation, values generally declined.

However, the school district came up $5 million short during the last reassessment in 2008, which followed a period of rapid growth in property values, White said. This suggests reassessment's effect on the school district goes beyond fluctuations in real estate prices.

"I think now, what we have found out, with it being the second time, is that we cannot use the same methods and mechanisms in the county because we have a lot more volatility in our collections from tax revenue," White said.

WHO'S TO BLAME?

Other factors notwithstanding, White and superintendent Jeff Moss say the county's collection projections were simply wrong and led the district to set a tax rate that did not bring in enough revenue to run the schools.

However, Sommerville contends the shortfall was not the result of a miscalculation.

"People are going to be quick to say, 'Who screwed up?' " he said. "Nobody screwed up. It was everybody's best guess based on what we knew at the time."

It's impossible to predict all of the variables that affect property tax collection during the budget process, county administrator Gary Kubic said.

For example, neither the county nor the school district knows how many homeowners will switch from the 6 percent tax bracket to the 4 percent bracket or how many appeals owners will file on their assessments, until they occur, Sommerville said.

True enough, but it was still the county that provided inaccurate revenue predictions, Moss said.

Kubic contends that's why reserve funds are so important.

"The reserve is there to be used to stabilize the operation, but you need stability in the delivery system," Kubic said.

White agrees, saying the situation illustrates why the school district has a reserve fund.

"No one could have predicted this," White said. "Now, it's just, how are we going to deal with this?"

WHAT CAN BE DONE

The school district intends to make up the shortfall by tapping its $30 million reserve fund this year, but it will need to consider a tax increase to make up the lost revenue in the long run, Moss said.

In September, the school board returned what was expected to be a $3 million revenue windfall based on property value projections. While crafting the current budget, the district had to stick to a state law to remain revenue-neutral.

Now that the shortfall has been exposed, board members and district officials say they need to ask County Council to restore a tax-rate increase -- and the $3 million expected windfall that never panned out -- for next fiscal year's budget.

"That's not a tax increase," board chairman Bill Evans said. "That's where we should have been for this year, and then we will have to decide if we are going to go up beyond that."

Ultimately, County Council must approve the school district's budget.

Both groups' finance committees will meet April 14 to discuss the collective budgeting process and whether any changes need to be made to improve it.

The groups will never be able to predict collections precisely or prevent such a shortfall, Sommerville said.

But knowing the different variables the school district faces, it's worth taking a second look at the process, White said.

"No one really understood the substantial drop that we would be seeing," White said, "But now we are working to put a plan in place for next year so this doesn't happen again."

Follow reporter Sarah Bowman at twitter.com/IPBG_Sarah and reporter Zach Murdock at twitter.com/IPBG_Zach.

Related content:

School district has revenue shortfall, needs to adjust budget, March 28, 2014:

Beaufort County school board turns over unexpected $3 million windfall, September 9, 2013:

Sen. Davis seeks more money for Beaufort County, January 13, 2014:

Property values decrease across Beaufort County for first time, Sept. 29, 2013:

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