Rising construction costs, higher assessments lead more boards to pass nickel taxes
Kentucky School Advocate
November 2023
In 2021, the Paris Independent school board passed a double nickel tax, two of the five-cent equivalent taxes that Kentucky school districts can levy for facility funding. The tax, which is recallable by voters, received no opposition with its revenue earmarked for a preschool building and a list of smaller facility needs.
Two years later, that preschool is now under construction; but thanks to rising building costs, the $4 million price tag has risen to $10 million, said Paris Independent Superintendent Stephen McCauley.
“So now all the other stuff that we wanted to do, remodeling science labs, our auditorium, this and that, now we are just unable to do it,” he said.
So, this fall McCauley and the board team saw an opportunity to fund those remaining projects – another nickel tax.
Thanks to an increase in the overall value of property in the district, the board was able to maintain its current property tax rate of 71.5 cents per $100 of assessed value even while passing the tax rate that generates 4% more revenue than the previous year – and adding a nickel tax.
The board voted unanimously for the plan.
“They understand the need that we have here and they don’t want to put any additional burden on the taxpayer, but they also want to provide facilities that our kids deserve,” McCauley said.
Record number
Paris Independent is one of a record number of Kentucky school boards that have passed a nickel tax during the past two years.
“It used to be we’d have two or three a year and that was it. I have 24 districts trying to get that right now, which is just unheard of,” said Chay Ritter, director of the Division of District Support at the Kentucky Department of Education.
Main reason, he said, is need. As Paris Independent discovered, construction costs have skyrocketed leaving many districts unable to afford even small, but desperately needed facility projects.
“What one nickel would get you a few years ago, now you need two,” Ritter said. For example, a few years ago an elementary school renovation might have cost $10 million, today that same project could be $18 to $20 million, he said.
“In order to do that, one nickel, even two nickels don’t do it,” Ritter said. “That bonding capacity just gets evaporated.”
A nickel tax can exponentially increase a district’s bonding capacity – how much the district can borrow for a project – because a portion of the tax revenue is usually matched by the state under what is commonly called equalization. The formula for equalization works much like the SEEK education funding formula in that it is based on local property assessments, compared to the statewide assessment, so a “property poor” district will receive more equalization funding than a “property rich” district. Though equalization is not guaranteed, the legislature usually includes the provision in the state’s biennial budget. The track record of equalization is so strong that fiscal agents use the calculations when determining districts’ bonding capacity, Ritter said.
Public Finance Banker Kelly Mrsic, a director at Baird, a Louisville-based financial services company, worked with three school boards that passed nickel taxes this year.
Mrsic also believes the need to fund facility projects amid increasing construction costs is leading more districts to pass the nickel tax. Since 2007 non-residential construction costs have increased 51%, she said.
A new elementary school now costs between $25 and $30 million, while just 10 years ago that same school was about $14 million, Mrsic said.
Because of how state law allows school boards to fund district facilities, boards have to be pro-active, she said.
“The only way districts are getting more funding is if they’re the ones initiating it and then not willing to give up,” she said. “K-12 funding is not Publisher’s Clearing House. You are not getting a knock on the door and getting a big check.”
Of the 24 boards that passed a nickel tax in 2022 or 2023, 12 passed the tax this fall after districts received their property assessments and corresponding tax rates from the state.
“My opinion is everyone has seen rising assessments and it’s a great opportunity if you need that additional funding to take the nickel, while not necessarily pushing a five-cent increase on your constituents,” she said.
For example, if a district’s total property assessment went up, and therefore its compensating tax rate – the rate that generates the same amount of revenue as the previous year – went down, that district could add a nickel tax without raising the overall tax rate, or raising it very little.
“They are looking at it as an opportunity to capitalize on the healthy assessment growth,” she said.
Assessments up, tax rates the same
That was the situation in Allen County, where Mrsic helped walk the board team through the nickel process.
Superintendent Travis Hamby said he and the school board began talking about passing a nickel tax this spring after talking to local legislators.
All districts must put 5 cents of their tax rate into a building fund, commonly called the “first nickel.” For years Allen County had been restricting 18.7 cents for building – but because it was not a recallable nickel tax it was not eligible for equalization.
“We were told that we really needed to go through the recallable nickel process to get the match. And so, our board decided that we were going to do that,” Hamby said.
When the district’s assessments went up this fall, Hamby knew it was time. Because of the assessment increase, the district’s compensating rate fell to 47.7 cents per $100 of assessed value. Adding a nickel tax (5.9 cents) brought the district’s rate to 53.6 cents, just 2.3 cents above last year’s rate.
Before the public hearing on the tax, Hamby said he called stakeholders in the community to explain the district’s plans which include the renovation of its primary center. With state equalization the nickel tax will increase the district’s bonding capacity from $18.5 million to $52.5 million, he said.
Few people attended the hearing where one person spoke for the nickel and another asked questions.
“By the time everybody left I won’t say that they went out and championed for it, but at least everybody understood what we were doing and why we were doing it,” Hamby said. “And they didn’t leave there and go out and vocally oppose what we were trying to accomplish.”
Last year, Wolfe County Schools had the lowest property tax rate of all 171 school districts at 36.6 cents per $100 of assessed value. This year – with a nickel tax – it has the same tax rate.
The board decided to pass the tax after its financial advisers from Compass Municipal Advisors suggested it would benefit the district, but not raise taxes because the district’s tax assessments had brought down its compensating rate to allow for a nickel at the same rate, said Superintendent Kenny Bell.
Before the vote the board members did a lot of research and the district held multiple meetings with the financial advisers, he said.
“Once you do the math on it, it was a no brainer,” he said. “It’s a win-win-win for everybody.”
The district expects an increase of $6 million in bonding potential and plans to use some of the revenue to fund the multipurpose auditorium now under construction between its middle and high schools.
Wolfe County is now working on its district facility plan, but Bell expects that the nickel revenue will also be used for HVAC, parking lot improvements and other needs in the district where three of the five schools are more than 50 years old.
“We would love to be able to turf our fields and put some lights at our soccer field,” he said. “They have to end games when it gets dark, so it’s not optimal.”
Before the vote, Bell reached out to stakeholders in the community to explain that the tax rate would not increase. No one filed a petition to recall the tax.
But Bell knows nickels do not always pass so easily in other Kentucky districts. Often when a petition to recall the tax is filed and certified, boards decide to rescind the tax instead of taking the question to a vote – either in a special election, which the district must pay for, or in a general election.
“It’s a tough vote,” he said. “I wish the districts had the option to do this for the benefit of our students that we serve without it being recallable, because it’s a really hard vote to win for someone to push a lever and say, ‘Yes, I want my taxes raised.’”
Recall petition
It’s a problem that Bath County Superintendent Steven Evans knows all too well. In 2022, the Bath County board passed a nickel tax, but rescinded the tax after a recall petition was certified.
This year, the board is trying again. The board voted for the compensating rate of 55.6 plus the nickel, bringing the overall rate to 61.7 cents. The deadline for opponents of the tax to file a petition is Nov. 26 and Evans expects that will happen.
In order for a petition to be certified, the opposition needs signatures of 10% of the number of people who voted in the last presidential election. In a small county such as Bath, that’s just 567 signatures.
If the petition is certified, Evans believes this time the board may decide to put the issue on the November 2024 ballot. A special election would cost too much, he said.
The district’s 84-year-old middle school needs more than $31 million in repairs, so if the nickel passes the district hopes to build a new school for $34 million, he said.
Evans said that over the next year he will try to educate the community about how the district is likely to get state funds if the community agrees to the nickel tax.
“What I’m trying to say is let us help you take the load off your backs by letting the state help us,” he said. He’ll also explain that, under state law, if the nickel tax fails, the tax rate automatically goes to the 4% rate instead of the compensating rate.
Evans even created a tax calculator on the district’s website where residents can type in their current tax bill and see how much more a year they would pay with a nickel tax.
Bath isn’t the only county to see opposition to a nickel tax. On Nov. 7, voters in Lawrence County will decide whether to pass a double-nickel. Trigg County’s board rescinded its nickel tax earlier this year after the district lost a court case challenging the recall petition.
KDE’s Chay Ritter said passing a nickel tax is impossible in some districts and very difficult in others. For example, Adair County tried three times before the nickel passed in 2022.
If districts anticipate a negative reaction to a nickel tax, Ritter said the best thing to do is communicate early how the money will be spent and get the community on board early in the process.
“I always tell districts, go in eyes wide open and assume the worst – assume you get petitioned, assume you’re going to pay for a special election,” he said. “And then that way your board is like, ‘OK, we can handle this.’”