The nickels and dimes of facility funding

Kentucky School Advocate
October 2023

By Eric Kennedy
KSBA Director of Advocacy

School boards levy a property tax each year to help defray the expenses of operating their schools. Most of the local property tax revenue goes into the board’s general fund and is not restricted in how it may be used. However, boards can also vote for a separate tax levy that is legally restricted for facility construction, renovation and debt service. These levies are commonly called “nickel taxes.”

What are nickel taxes?
While a board votes to impose a nickel tax as a separate motion, treating it as a separate tax, the rate is rolled into the overall tax rate imposed on a property tax bill. They are called nickels because they are legally set at the equivalent rate of five cents per $100 of assessed value. Some boards have imposed a “double nickel” rate which we sometimes refer to as a dime. All revenue from the nickel portion of the overall tax rate is restricted for use on facilities, most commonly as the source for long-term debt service payments on a bond issuance. By law, all boards must levy at least one nickel rate, often called the “first nickel,” and all have the option to levy or attempt to levy additional nickels.

Are all nickels subject to possible voter recall?  
Essentially yes, at this time the most common additional nickel tax available to boards is subject to recall. All boards must levy the first nickel, which therefore is not recallable. In prior years, there have been other nickel options that were not recallable, however they were generally only allowed under specific circumstances that did not apply to all districts (such as high levels of enrollment growth). All nickels that have been levied by boards in recent years have been recallable.

When can a board levy a nickel rate?
A board may explore this option, and may vote to levy a nickel, at any time. However, due to the recall process and the possibility of a vote, the timing for collecting revenues on tax bills is more complicated. If a recall vote will occur, it may lead to lengthy litigation, costly second tax bills, holding revenue in escrow for possible refunds and other issues before it is settled.

Can a board vote to rescind a nickel before a recall petition is filed?
No, we do not believe so. The General Assembly has enacted a specific provision to allow a board to vote to rescind a nickel in KRS 132.017(2)(j), and KSBA believes it is the only option that applies in this situation. The moment a board votes to levy a nickel, several rights and obligations immediately arise for other officials involved with collecting taxes, and for taxpayers who then have the right to seek a recall. Under this statute, a board may only vote to rescind a nickel after a recall petition has been certified by the county clerk.

Does collecting a nickel tax guarantee a board will receive state “matching” funds?
No! This is a common misunderstanding. For many years the General Assembly has provided state funds to equalize many local nickels, which is a form of “matching” funds, although under the formula it is not a dollar-for-dollar match. However, this is usually done in the state budget bill which is only in effect for the given period of the budget. It has also always been subject to the availability of funds. There is no legal requirement or guarantee that state equalization funds will be provided for any local nickel, and therefore this is a budget request advocated for during each budget session in Frankfort. Boards should not assume that equalization funds are guaranteed when making local tax, bonding and facilities decisions.