In Conversation With … features an interview between a leader or figure involved in public education and a representative of the Kentucky School Advocate.
Dr. Bob Wagoner has dealt with education finance issues both as a school superintendent and as director of the finance division of the Office of Education Accountability. Wagoner, the longtime executive director of the Kentucky Retired Teachers Association, still gets calls from superintendents who have finance questions. He talked to the Kentucky School Advocate about school boards’ responsibility for oversight of tax receipts.
Q: Recent news stories revealed that the Boyle County and Owsley County school districts have not received all the tax revenues due them because county clerks in those counties did not mail franchise tax bills on time this fall. The tax receipts due are significant in each case – $250,000 in Boyle County and $155,000 in Owsley County. Can you explain what franchise taxes are, first of all, and how this might have happened?
A. There is a category of property tax called franchise and it usually involves public service companies. What happens is the state Department of Revenue, as I understand it, produces certifications on these entities (public service companies) and sends those certifications to the county clerk’s office, which then prepares the bills and sends them to the public service companies. That appears to be where the hang-up was in these two counties. The certifications arrived but the bills were not prepared. The clerk’s office is responsible for preparing the bills and then the collection is done by the sheriff’s office.
Q. When issues like this occur, who should school districts contact and question?
A. There are four streams of tax revenue for public schools in Kentucky and three agencies involved. For utility tax (franchise) receipts you deal with the Department of Revenue. The county clerk’s office handles the motor vehicle tax receipts and prepares and mails the franchise tax bills. The sheriff deals with real estate and personal property taxes.
Q. For school districts to know whether their tax receipts are on target, they must make projections. What is your advice for making accurate forecasts?
A. I have always encouraged school districts to track receipts over a rolling, five-year period and come up with an average. The idea is that there won’t be any year where you collect 100 percent because there will always be somebody who doesn’t pay their taxes. So you look back over five years and see that one year you collected 97 percent, one year 94, one year 98 and you get an average and develop a target.
Q. How should districts then monitor the tax revenues they are receiving?
A. I suggest that districts watch their target because as they turn the corner in April, it becomes obvious whether you are going to be close, over or under your target. Districts understand that they are not going to collect 100 percent, but they should be savvy enough to determine where each of those streams of revenue is going to fall. In my opinion, if receipts are within 1 to 2 percentage points of the target, that is reasonable. But let’s say for real estate taxes, the five-year average on the targeted amount of receipts was 97 percent and they are only getting 92 percent – they need to go down and have a talk with the sheriff.
Q. Who would “they” be?
A. The superintendent, the district’s finance officer or whomever the superintendent designates to have that discussion.
Q. What can these conversations reveal?
A. My personal story on that is that one year, we had a fairly significant deficit and we had the conversation with the sheriff and traced it back to a company that was doing business in the county but was under chapter 11 protection, which meant the company didn’t have to pay its taxes.
Q. As far as the school board, what should it be doing to ensure that tax collection is in line with expectations?
A. I would hope every school board receives a monthly report that shows the receipts collected to date matched against what the budget is. This is usually part of the board packet and either the superintendent or their finance officer makes the report.
Q. What questions should board members ask about the report?
A. It is a real simple question. A board member should look at the financial report and ask, “How are we in terms of our target? Will we reach our benchmark for local tax revenue?” There are four streams of tax revenue. One may be down, one may be up. They should look at all four individually, but also collectively to see if there is significant variance.
Q. Are there other reports that board members should monitor in terms of tax receipts?
A. Every school district is a little different, but as long as they are looking at the financial report provided by the superintendent that has the projected and received revenue for those different streams of tax receipts, that should be more than adequate.
Q. When should the alarm bells go off, in terms of differences between actual tax receipts and projections?
A. If the district has been averaging 97 percent and it has fallen to 92 percent, it is time to have the conversation. Five percent doesn’t sound like a lot, but depending on expected receipts, it could be several hundred thousand dollars. And the basic question to be asked is, “Why are receipts lagging behind?” particularly when you get to the point in the collection cycle where you know the bulk of the collections are in.
Q. In the cases of Boyle and Owsley counties, those franchise bills will be mailed and the counties should still get those tax revenues. So although a significant difference can appear in reports, it doesn’t always mean that school districts won’t eventually receive those monies, correct?
A. Yes, there might be legitimate reasons for it, and the receipts are on the way. For example, the sheriff just hasn’t gotten the check written. And payments can fall outside of the years for which they assessed, depending on disputes over assessments. But, if the receipts are down 5 percent and the sheriff says, “Well, we aren’t expecting any more tax payments,” I’d be having more detailed conversations.
Q. What questions should be asked during those conversations?
A. I’d say, “Here is what we were expecting; here is what you have collected. Is there anything that has transpired? Have we had a company move out, file for bankruptcy or dispute their assessment and so it hasn’t paid its taxes?” You need to know that if a company closes down then the value of the property is going to drop. But if it is a dispute over an assessment, you will eventually get the tax receipts. What exacerbates the problem is that if the school district is operating on a fairly thin contingency, it can’t take too many blows.
Q. In forecasting tax receipts are there developments within the community that school boards should factor into their projections?
A. If there is enough notice when a company is leaving town, the board can anticipate a drop. One of the biggest things a school board needs to be conscious of is making sure that the district doesn’t have a cash flow problem. The budget at the end of the day on June 30 could be fine in terms of the receipts matching the target and the expenditures matching the target. But from July through October, districts normally are not receiving any tax revenue, and those are also the months when they have some of their highest expenses. So the district has to make sure there is enough cash to handle expenses or keep a line of credit at the bank to cover expenditures.
Q. Do school board members need to review these reports monthly?
A. Even looking at the reports on a quarterly basis would be due diligence. Most of the significant tax streams will be in by late November, but you might collect some significant amounts as late as March.
When we get to March, which is the end of the third quarter, and we are close to the mark, odds are good we will hit our estimate. But if we are significantly below our property tax receipts, then I think the conscientious board member would pose the question, “Are our tax receipts going to hit the target?” There is no reason for them to be surprised when the books close on June 30 because if they are going to miss it badly they will know well before June 30.
Q. Any other advice for school districts and school boards regarding monitoring tax revenues?
A. If the finance officer doesn’t know why tax receipts are not meeting projections, someone has to step up and ask the appropriate officials the question. I am quite certain superintendents do, and sometimes you have to be persistent in asking the questions. It is disconcerting if projections are missed badly and no one seems to know why. There should always be logical reasons why we didn’t meet the benchmark.