The Relation of Palo Alto School Finance and Development--Background Concepts and Data Sources | Invest & Innovate | Steve Levy | Palo Alto Online |

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The Relation of Palo Alto School Finance and Development--Background Concepts and Data Sources

Uploaded: Sep 21, 2014
Parents and residents in Palo Alto are naturally interested in and concerned about K-12 school funding and class size and the relationship of school finance to development of jobs and housing.

This is a very complicated and at some times emotional issue and I invite members of the school board and staff to weigh in with local data and insights. This blog is meant to be a very general background piece on the issue.

Most school districts in California get the majority of operational funding from the state through state revenue limits. They are called revenue limit districts. The revenue limits are governed by state revenue growth and inflation under a set of complicate formulas set forth in Proposition 98. Recently the state has made changes for a portion of this revenue limit funding to help students in low wealth districts.

Background from the Public Policy Institute of California (PPIC) and the state Legislative Analyst's Office (LAO) are linked to below and more information can be found on their websites or by searching for education funding in California.

web link

web link

Palo Alto schools are funded differently. There are approximately 125 districts in California covering 5% of students who get the majority of school funding from property taxes and do not get state revenue limit funding. These districts get more funding per student under this arrangement as their property taxes are high enough to exceed what the state revenue limit funding would provide.

Property tax funding for schools in Palo Alto has two important implications in relation to job and housing development.

Most districts get additional per student revenue limit funding from the state as the student population increases. Palo Alto does not. Many residents then point to the fact that some types of new housing do not provide sufficient revenue to offset additional student costs. This is true but is only part of the relationship between school funding and development.

First, all commercial development that adds to the tax base without adding students is a net gain to local school funding. Second, there are many types of housing development that add few or no students such as housing for seniors whether to downsize or for other reasons, and smaller housing for 1 or 2 person households?studios and one-bedroom units.

So if you want a development policy that favors school funding, you would favor high property tax commercial development and smaller housing units. Note that while hotel taxes and sales taxes do help the city budget, only property taxes help fund schools.

Moreover, if you really wanted to control school enrollment you would pass a law (probably not legal) to forbid anyone from selling their home to someone with more kids than are living in the house now. I believe the school district demographers found that most (not all but most) of the recent enrollment increase came from the turnover of existing housing units. Of course we would not do that even if legal as it would infringe on the rights of property owners including single family home owners from realizing the full value of their investments.

But it does point to the major source of ups and downs in school enrollment.

There is also the issue of school capacity and class size. This is an issue that the school board is following closely and cares deeply about. It also is complicated and has a long history based when the district had excess capacity, sold or rented school sites and used the revenue to support services, and now finds the need potentially to expand capacity again.

Finally there is the issue of whether school districts exist to serve students or to challenge development policies to reduce student loads. Someone before me built the schools our children attended and provided capacity as our student population expanded. As a resident I would like to return the favor. As a senior we pay the parcel tax that we are allowed to opt out of and support with our tax dollars school bonds though we will never have family members in Palo Alto schools again.

Comments

 +  Like this comment
Posted by Wayne Martin, a resident of Fairmeadow,
on Sep 22, 2014 at 9:27 am

> Most districts get additional per student revenue limit
> funding from the state as the student population increases.
> Palo Alto does not.

The two kinds of school districts in California are called ADA (Average Daily Attendance) and Basic Aid. As described in the posting above, the State contributes the bulk of the funding in ADA districts, and very little in Basic Aid districts (on a per head basis). Basic Aid Districts have received some per head funding in the past, but with the ups and downs in the California economy having such a drastic impact on the State government?s finances?the per head funding for BA Districts pretty much dried up a few years ago. It?s an open question if it will ever be restored, or in what amount.

There is a second kind of funding that the State provides, which comes to about 30% of the PAUSD?s funding. This funding is essentially discretionary?based on the whim of the Legislature. This sort of funding is used to provide education on issues that are generally outside the purview of academics?such as parenting skills, drug and alcohol avoidance, and similar topics. This money is not dependent on whether a school is an ADA school, or a Basic Aid school.

> First, all commercial development that adds to the tax base
> without adding students is a net gain to local school funding.

This is not exactly true. As commercial development increases, the demand for more housing increases. Additional student population and attendant education costs, are then directly linked to this increase in commercial development, even though there are no students living on the property being taxed as ?commercial?.

Moreover, the Allen Act allows people who work in Palo Alto to petition the school district to allow their children to go to school here. These additional students would not come with any funding from their home districts. The cost of educating such students would be borne by the PAUSD property owners. The PAUSD has denied all such requests for some years now?but if the Board were to be inclined to open up the District to anyone who wants to go to school here, potentially hundreds, or thousands, of students might apply, and transfer into the District.

> Note that while hotel taxes and sales taxes do help the city budget,
> only property taxes help fund schools.

This is true at the moment, but the legislature could, at its whim, reallocate the revenue from the various streams at its disposal.

One key thing to remember about school funding?about 85% of all public school budgets go to staff salaries and benefits. Increasing school funding more often than not means increasing the salaries for staff?not providing ?better education? for the students.

> I believe the school district demographers found that most
> (not all but most) of the recent enrollment increase came from
> the turnover of existing housing units.

Given that there hasn?t been that many new housing units built in Palo Alto for a long time, this must be true. Historically, there have been about 550 single family homes turning over every year, except during recession years?when the turnover has been about 250 homes per annum. Apartment rents are fairly high in Palo Alto, so it?s hard to find many families spending $3,500 to $5,000 a month just to go to the PA schools.

New students also can be introduced from the Stanford Campus. Stanford identified perhaps an increase of some 1,200 new students that could be linked to new student housing on Campus some years ago, when the so-called Stanford/Terman Agreement was put into effect. To date, no increase of this size has been seen, but it?s a possibility in the future.

We need to remember that Stanford enjoys a $7.5B tax exemption here in Santa Clara County, as well as a much smaller exemption in San Mateo County. This Santa Clara County exemption amounts to over $750M every decade?money that could help support schools, roads, and other needed infrastructure improvement.

Finally?education financing in California is a right royal mess. It?s so complicated that some school districts find themselves hiring consultants to prepare their financial reports. In some rare cases, the consultants bungled the job and ended up facing criminal charges. It?s hard to believe that anyone in California really understands much about the totality of education finance.


 +  Like this comment
Posted by stephen levy, a resident of University South,
on Sep 24, 2014 at 5:01 pm

stephen levy is a registered user.

In considering the relationship of housing to school finance in Palo Alto, it is important to remember that the City has submitted a Housing Element (with unanimous vote of the Council) that identifies sites for approximately 2,000 new housing units over the next eight years. Thee units will be built unless there are insufficient applications. Moreover, the Council has pledged to revisit the sites currently selected in next year's Comp Plan review to see if more sites can be identified in the downtown and Cal Ave area and fewer in south Palo Alto.

To the extent to which the Council wishes to minimize the number of students associated with this new housing, they can adopt policies favoring smaller units and units designed for seniors. The impact on school district finance will depend on what kind oh housing is built BUT WILL BE PRIMARILY DETERMINED BY WHAT HAPPENS IN THE TURNOVER OF EXISTING PROPERTY AND HOW MUCH NEW COMMERCIAL DEVELOPMENT IS APPROVED.

Many areas of the city have had little new housing development yet have seen increased enrollment as homes turnover and homes add second stories. Over time this has created the need for more capacity even though the district is reporting small overall enrollment increases currently--I think 49 students this year, whcih is an increase of less than .5%.

Overall assessed values have seen strong growth last year (7.8%) and in the upcoming year (6.5%) driven by turnover of properties that are now assessed near full market value along with some new construction and reassessment of properties that had their valuations lowered during the recession. The Assessor's reports can be seen at [Web Link web link].

While in theory new commercial development could increase the number of housing units that Palo Alto is asked to plan for, in practice this effect has been minimal or non existent. Palo Alto has 3.6% of Santa Clara County's population and was allocated 3.6% of the county's housing planning target even though we have over 9% of county jobs and over 35% of average weekday Caltrain ridership. So new commercial development should be a plus for school finance although there are many additional considerations with regard to commercial development.


 +  Like this comment
Posted by Some Questions, a resident of another community,
on Sep 24, 2014 at 8:29 pm

Interesting thread.

Could you explain your understanding of how post-Prop 13 allocation of property taxes works including state v. local control?

Also, I don't understand the threat of Allen Act student transfers as described here. Can you explain or offer conditions that would motivate PA to approve these?


 +  Like this comment
Posted by stephen levy, a resident of University South,
on Sep 25, 2014 at 11:01 am

stephen levy is a registered user.

@ some questions

I am not an expert on the Allen Act issues. See the links below for more detail.

Since for most districts the revenue goes with the child, I do not think there was consideration of what would happen in cities like PA where the new students do not bring revenue. I do not see why PA would accept such students but that is a question for the district.

[Web Link ]

[Web Link ]

I am running to a plane and will answer the Prop 13 question (good one) later.


 +  Like this comment
Posted by Steven Nelson, a resident of Cuesta Park,
on Sep 26, 2014 at 8:50 am

Mr. Levy's explanations are pretty good. Everything you used to know - about CA school finance - is now 'a world turned upside down'. Basic Aid and Revenue Limit, though still lingering in state Ed Code - are really no longer relevant to the future. The concept - there are some districts, that are above the ADA funding levels in their local property tax revenues, is the main concept. And PAUSD and Los Altos Elementary, and Mountain View-Los Altos HSD are all districts that are above the ADA (Average Daily Attendance) minimum funding from the State Budget.
Levy's simple explanation of the property tax revenue/school services demand from different types of properties - is ALSO critical to understand. And the 'generation rate' of different residences, to school kids. The LASD has found that some of their increasing enrollment - is due to 'aging in place' of young families that bought (or rented) small homes. Their Business Manager has publicly noted that the student generation rate of these smaller housing units - is now producing more students - than when they first were build. Maybe these families - cannot afford larger homes in LASD (PAUSD?) as their infants grow into kindergardeners. But- like wealthier families - they want to stay with LASD (PAUSD) schools.


 +  Like this comment
Posted by Steven Nelson, a resident of Cuesta Park,
on Sep 26, 2014 at 8:59 am

Wayne's comments (far down) on the County Property Tax Exemption (non-profit education institution) for Stanford also 'cuts me too'! I never thought of that local revenue problem! My own problem (for the last 7 years - 2 as a MVWSD Trustee) is that GOOGLE-vile (Shoreline Community District) was not closed down with the rest of the hundreds of RDAs (Redevelopment Districts)! Over $3 Billion of assessed property value out there, and only $300M of it is guaranteed to be assessed to fund my school district. Damn shame (Shoreline was formed by special legislation in 1969). We have a 'gentleman's agreement' contract for Shoreline/GOOGLE to share some of this property tax revenue - put it is only a fraction we would get at 'full commercial taxation' rates. $1 B of new commercial building - nothing new guaranteed as revenue to the schools!


 +  Like this comment
Posted by Sea-Seelam Reddy, a resident of College Terrace,
on Sep 27, 2014 at 2:08 am

Dear Palo Alto Citizens

WE love Palo Alto the way it is!

We do not want more commercial buildings! We have enough!

We do not want more condos or apartments; we have enough!

We need to refurbish, upgrade buildings and homes that are already there for energy efficiency, earth quake readiness and better appearance.


Respectfully


 +  Like this comment
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Sep 27, 2014 at 10:44 am

Peter Carpenter is a registered user.

To say that you want to keep things just like they are but to fix the infrastructure is an economic impossibility.

Keeping everything like it is means only a 2%/year increase in property tax revenues.

Operating the city with NO infrastructure improvements requires at least 3-4% increase in revenues.

In this case standing still means sliding backwards.


 +  Like this comment
Posted by fwiw, a resident of Woodside: other,
on Sep 28, 2014 at 5:43 am

> Keeping everything like it is means only a 2%/year increase in property tax revenues

Poppycock. Complete fiction.

Steve has pointed out the difference and posted the link to the assessor's annual report which tells a very different story.

In Santa Clara County last year the total assessments increased by 6.8% y/y. This number is low/typical for the county over the past 20 years with the exception of the 2009-2011 real estate crash years. In a "normal" year, this 6.8% would have included the Prop 13 increase of 2% of base value, but last year it was limited to a 0.45% increase since Prop 13 limits the increase of the lesser of the 2% or California CPI which was 0.45%.

The assessor's report points out that new construction accounts for about 12% of the total increase, which is notably double the amount received as result of Prop 13 base increase this past year. But in most years (with 2% base increases), this would have been flipped around with new construction accounting for half of this base total.

Either way, both new construction and inflation increase are dwarfed by the increases from changes in ownership and Prop 8 reassessment gains which account for almost 80% of the increase. In typical markets we aren't dealing with Prop 8 reassessments but in past years the increase from changes in ownership have been larger, too.

Overall, new construction is a notable but fairly minor factor in increasing assessments.

But there are other issues with the simplistic "development will fix the finances" canard. Post Prop-13 City Governments no longer solely rely exclusively on property taxes to balance their finances. Across the state, property taxes account for barely half of average city's incomes, with much heavier reliance on occupancy and sales taxes, for example.

And last but far from least, there is the elephant in the room of businesses having very successfully succeed in figuring out how to transfer their commercial property without triggering reassessment under Prop 13 by use of business share transfers rather than deed transfers. The most telling graph in the assessor's report is at the bottom of page 16 where it shows how over the last 40 years of Prop 13, residential property's share of the tax assessments has risen from 50% of the taxes paid to 65% of the taxes paid while commercial/industrial has declined from 50% of the total down to 35% of the total. Each year, those numbers diverge further and further apart not because there is more residential development than commercial but because businesses are exploiting a loophole that is letting them escape taxes that they historically paid. Expect this divergence to continue.


 +  Like this comment
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Sep 28, 2014 at 10:50 am

Peter Carpenter is a registered user.

"> Keeping everything like it is means only a 2%/year increase in property tax revenues

"Poppycock. Complete fiction."

Wrong - I chose my wording carefully; changes in ownership are NOT keeping everything like it is.

Without changes in ownership and without new construction Prop 13 limits property tax revenue increases to 2% or less.


 +  Like this comment
Posted by fwiw, a resident of Woodside: other,
on Sep 28, 2014 at 1:43 pm

> Wrong - I chose my wording carefully; changes in ownership are NOT keeping everything like it is.

Touche.

I agree that we should continue with the status quo of allowing properties to change hands without restriction if that was really your point. I don't know why you would think that anybody would lobby for that.


 +  Like this comment
Posted by Sea REDDY, a resident of another community,
on Oct 9, 2014 at 12:45 pm

Seeking additional revenues by allowing new/big buildings is like inviting an elephant to your living room.

I would rather forego increase in tax revenues to just 2%.
We do not want that money; we can do with what we have.

Specially Palo Alto, we are tired of tall buildings. We need no new.


Respectfully



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