B April 21, 1994 The Honorable Howard M. Metzenbaum United States Senate

Transcription

1 GAO United States Genera Accounting Office Washington, D.C Heath, Education and Human Services Division B Apri 21, 1994 The Honorabe Howard M. Metzenbaum United States Senate Dear Senator Metzenbaum: This etter responds to your request that we review the impact of tax abatements1 on severa arge city schoo districts. We briefed your staff on September 21, 1993, on the resuts of our survey of five schoo districts in Ceveand, Phiadephia, St. Louis, and San Antonio.2 (See the encosed briefing charts for information presented in the briefing.) This effort foows work that you previousy requested on the impact of property tax abatements on pubic schoo funding, which we reported to you on May 21, 1993 (GAO/HRD R). That work showed that the true impact of property tax abatements on pubic schoo funding was uncear and debatabe. Thirty-two states offered property tax abatements to businesses. However, more than haf of these states protected their schoos against possibe adverse impacts of abatements through means such as payments instead of taxes or not aowing abatement of schoo property taxes. Avaiabe data provided by some states that did not protect their schoos indicated that tax abatements had itte potentia for widespread impact on pubic schoo funding. Of the four arge cities we visited in this review, schoo district officias in two of the cities did not beieve tax abatements had a major impact on schoo funding, They beieved that other factors, such as decining state aid, were a greater revenue probem. Schoo district officias 'Tax abatements are a temporary suspension, for a certain period, usuay 5 to 10 years, of a or some of the tax on property owned by a business. 2We visited two schoo districts in San Antonio--the San Antonio Independent Schoo District and Northside Independent Schoo District.

2 B in one of the cities beieved that tax abatement was as responsibe for the district's revenue probems as stagnant state aid. Schoo district officias in the fourth city beieved tax abatements increased their revenues by generay stimuating the oca economy or requiring the payment of back taxes to the schoos when agricutura and is converted to deveoped property. In 1992, revenue forgone to business and residentia tax abatement in the five schoo districts ranged from 0.11 percent to 1.9 percent of tota schoo district revenues. OBJECTIVE. SCOPE, ~r,~cy Our objective was to determine the extent to which big city schoos were osing money to property tax abatements given to businesses. We seected Ceveand, Phiadephia, and St. Louis for our study because the schoo districts' responses to a 1992 Nationa Association of Schoo Board Advisors survey indicated that each district ost arge amounts of revenue to business property tax abatements. We seected San Antonio because the city's schoo districts can choose not to participate in oca tax abatement programs. San Antonio has 10 independent schoo districts and we surveyed the two schoo districts that had given th; most property tax abatements. At each district, we interviewed city and schoo district officias to identify appicabe tax poicies and tax abatement criteria and to get their perceptions on the effect of tax abatements on schoo funding. To determine the amount of revenue forgone to tax abatements by the schoo districts, we obtained and anayzed property tax, assessed property vaue, and schoo miage rate data on property tax abatements granted to businesses in each of the schoo districts. Officias in four of the five schoo districts we visited did not view tax abatements as a primary cause of financia difficuties. Athough officias in each of the five schoo districts said they were strugging financiay ony St. Louis district officias beieved tax abatements were a primary cause for their current financia difficuties. Schoo revenues forgone in the five districts in 1992 due to business and residentia tax abatements equa a reativey sma percentage of tota district revenue-- ranging from 0.11 percent to 1.9 percent. 2

3 B In addition, none of the schoo districts saw a need for federa intervention in the tax abatement issue. Officias cited other factors as causing more significant financia probems for the districts. They said suggish state aid, federa and state unfunded mandates, property tax imitation aws, and exempt property had a greater effect than tax abatements on schoo district finances in a districts but St. Louis. In St. Louis, stagnant state aid was as great a financia probem as tax abatements, according to district officias. Stagnant state aid and to some extent rea decines in state aid were a major revenue probem cited in a but one schoo district we visited. The recent suggish economy was party to bame for states' reduced contributions to state aid, Ceveand schoo district officias tod us. Unfunded mandates were aso a factor in stagnant state aid, they said, because unfunded mandates reduce states' genera funds. As a resut, schoos must compete with these unfunded programs for state revenues. Revenue demands of state and federa unfunded mandates were aso a primary reason for financia probems, according to schoo district officias in Ceveand, Phiadephia, and San Antonio. For exampe, some federa mandates, such as the Americans with Disabiities Act (ADA), affect schoos directy. One schoo district officia in San Antonio tod us that, to compy with ADA, the district wi have to ower the schoos' drinking fountains by 17 inches to provide access for wheechair users. Athough schoos want to compy with ADA and other mandates, compiance costs strain schoo districts' budgets. In Ceveand, State House Bi 920 was aso a major factor in the schoo district's inabiity to keep up with revenue needs. Under the taxing provisions enacted in the bi, schoo districts can no onger receive tax revenue increases that resut when property vaues appreciate due to infation. Due to House Bi 920 and stagnant state aid payments, the Ceveand schoo district must rey more on new construction for additiona property tax revenue. However, new residentia and commercia construction is eigibe for property tax abatement in Ohio. Tax-exempt property caused revenue probems in two schoo districts, according to schoo district officias. In St. Louis, schoo district officias tod us that increases in nonprofit and government tax-exempt property hurt the 3 '

4 B schoo district financiay because it ost revenue sources when taxabe property was converted to entirey tax-exempt property. Schoo district officias in Phiadephia aso said that the amount of tax-exempt federa property in the city created financia difficuties for the schoos. The vaue of the totay exempt properties in Phiadephia in 1992 was more than six times greater than the vaue of taxabated property percent versus 3.6 percent of tota property vaue, respectivey. Ony one schoo district, St. Louis, said that tax abatements were a major revenue probem for the schoo district. Schoo district officias said the 25-year ength of abatements in the city causes some revenue probems. Moreover, amost a new businesses in St. Louis have received an abatement, Tax abatement decisions prompted ega action in St. Louis and threats of ega action in Ceveand--when schoo districts were forced to participate in abatement programs and schoo officias fet their views were not considered. In both cities, previous oca government administrations were unsympathetic to the schoo districts' requests for prudence in granting tax abatements. As a resut, Ceveand's schoo board threatened to take ega action against the city's pans to proceed with two tax increment financing projects.3 St. Louis's schoo board sued the city for approving a 25-year tax abatement that the schoo board beieved was inappropriate. However, the schoo board's ega action faied, and the board fied an appea in May 1993 that is sti pending. In both St. Louis and Ceveand, new city eadership resuted in better rapport between the schoo district and the city, eading to tax abatement compromises. Ceveand schoo district officias said that the new oca government administration exhibited a more cooperative and considerate attitude toward the schoo district's concerns, and the percentage of taxes abatabe was reduced from 100 percent to a maximum of 70 percent. In St. Louis, under the new mayor, the ength of most new abatements was 3Tax increment financing is an instrument used by oca governments to finance infrastructure improvements. Tax increment financing authorities (TIFAs), estabished by oca governments, freeze property tax revenue at a given point in time. Thereafter, any increase in property tax revenue is diverted for financing a TIFA project. 4

5 B reduced from 25 years to 10 years. However, schoo district officias sti beieve that too many businesses are receiving tax abatement. TAX ScHooJ DISTRXZLLAEDION~ OF Officias in each of the five schoo districts beieved that economic deveopment benefitted their communities and schoo districts. However, two of the five districts expressed some frustration with tax abatements, and three were either neutra or supported them. Both Ceveand and St. Louis schoo district officias expressed a desire to share in the cities' other revenue sources, since the schoo districts have no say in tax abatements. The city governments receive a smaer share of a community's tota property tax revenues than do schoo districts, according to Ceveand and St. Louis schoo district officias. As a resut, when the city grants a tax abatement, it forgoes ess property tax revenue than its schoo district. Both Ceveand and St. Louis city governments may increase their overa revenue, however, through other revenue sources such as income taxes or saes taxes generated by new businesses. These other oca revenue sources are generay not avaiabe to the schoo districts. Phiadephia and San Antonio schoo districts reported different situations from those of Ceveand and St. Louis. Phiadephia schoo district officias were neither for nor against tax abatements. The city's tax abatements have a maximum ength of ony 3 years, and, according to schoo district officias, it is difficut to know if businesses woud have ocated in Phiadephia without tax abatements. Schoo districts in San Antonio reported increased revenues due to tax abatements and were peased with the eve of cooperation and coordination from the city and county. One schoo district cited gains to the overa community because deveopers who receive tax abatements must purchase suppies from oca businesses and empoy oca residents. The other schoo district reported increased revenues as a resut of tax abatements because agricutura and is assessed and taxed at a much ower rate than deveoped property in Texas. Any deveoper that converts agricutura and to deveoped property must pay a roback recovery amount to the schoos equa to 5 years of back taxes at the higher tax rate for deveoped property. 5 '

6 B Schoo districts in San Antonio do not have to participate in the state-authorized tax abatement program athough they have chosen to do so in every case. In fact, San Antonio Schoo District officias have initiated tax abatements in their jurisdiction to retain jobs and residents that otherwise woud have eft the district. When granting abatements, San Antonio city officias receive input from every affected taxing jurisdiction. Representatives from the city, county, schoo district, and community coege negotiate the abatement terms before it is granted. The schoo district of Abany, New York, (incuded in the work covered by our May 21, 1993, report, GAO/HRD-93-27R) aso chose to participate in a tax abatement program when not required. However, tax abatements in Abany expire in just 5 years, with the abatement amount starting at 50 percent and decining 10 percent annuay. According to Abany Schoo District's assistant superintendent, tax abatements do not appear to directy benefit the schoo district, but it is difficut to determine if a business woud have ocated in Abany without a tax abatement. Without the schoo district's participation, tax abatements in Abany woud be somewhat ineffective since about twothirds of oca property taxes are for the schoo district, and abatement of the remaining one-third woud not offer much incentive. Another concern you expressed was that tax abatements may increase student enroment and ead to increased financia expenditures by schoo districts. Schoo district officias in each of the districts we visited tod us that tax abatements did not increase student enroment. In fact, from fisca year 1983 to fisca year 1992, four of the five districts, enroment decreased. Northside Schoo District, in San Antonio, was the ony district whose enroment increased--49 percent since Northside Schoo District officias beieve enroment increased because the northern area of San Antonio has become an attractive bedroom community for young coupes with 6 '

7 B chidren. abatements famiies. However, officias did not beieve that tax were responsibe for the arge infux of these If you or your staff have any questions on this etter, pease contact me on (202) Sincerey yours, Director Encosure of Operations j ;

8 GAO Heath, Education, and Human Services Division Nature and Extent of Tax Abatements in Four Cities March 1994 GAO Objective Determine the impact of tax abatements on pubic schoo funding in four arge cities 8

9 Schoo districts visited-. Ceveand Louis 9 San Antonio Northside *ocated in San Antonio GA3 Scope Schoo districts visited- * Ceveand Phiadephia St. Louis San Antonio Northside* *ocated in San Antonio 9

10 GAO Overa Concusion Other financia probems more significant to schoos: stagnant state aid,. federa and state unfunded mandates, property tax imitation aws, and exempt property. ~0 Nature of Tax Abatements in Ceveand Amount 4Jp to 1 OO%-now 70% Lengths 4Jp to 20 years, impacted city 15 years, new construction 12 years, rehabiitation 10 years, enterprise zone Who quaifies aa businesses and residents 10

11 NATURE OF PROPERTY TAX ABATEMENTS IN CLEVELAND Ceveand has three property tax abatement programs that can affect schoo district funding: the (1) enterprise zone program, (2) impacted city program, and (3) community reinvestment area program. The first two programs are for businesses ony, whie the ast program is mainy for residentia improvements. A three programs are authorized to abate up to 100 percent of new taxes on improved property. However, under the current mayor's administration, the maximum abatement granted to businesses has been imited to 70 percent of property taxes on improvements, and many businesses have received ess than 70 percent. The enterprise zone program provides a o-year abatement. Enterprise zone abatements are avaiabe to businesses investing an amount that wi increase the existing faciity's vaue by at east 10 percent. The city imits this incentive to manufacturers ony. The impacted city program provides property tax abatements primariy to arge commercia investors. Ceveand's Community Deveopment Department must determine that the proposed abatement site is bighted before an abatement can be granted. The city must aso devise an urban renewa pan for the site before abatement. The maximum abatement ength is 20 years athough Ceveand city officias beieved that 20-year tax abatements were too ong. Because of this, they have not used the impacted city abatement program under the current mayor. The community reinvestment area program provides property tax abatement for up to 12 years on the rehabiitation of an existing business faciity and up to 15 years for new business construction. However, ony about 5 percent of a abatements ever granted under this program were to businesses. The remaining 95 percent were for residentia rehabiitation and new residentia construction. The program provides a oo-percent tax abatement for up to 10 years on residentia improvements. 11

12 GM Property Abated in Ceveand in 1992 a$149 miion in assessed property vaue (both residentia and business) or 03% of tota city assessed property vaue EXTENT OF PROPERTY ABATED IN CLEVELAND In 1992, Ceveand's rea property, incuding exempt property, was assessed at $5.0 biion. About $149 miion,' or 3 percent of this tota, was tax-abated property under one of the city's three tax abatement programs. Ceveand assesses rea property vaue at 35 percent of fu market vaue. Therefore, the estimated fu market vaue of the abated property equaed approximatey $424.6 miion in For a comparison with other cities we visited, see appendix I. *This number incudes a three abatement programs pus some municipa exemptions. City officias coud not separate the two business tax abatement programs-- impacted city and enterprise zone--from the community reinvestment area program and municipa exemptions. 12

13 GAO 1992 Revenue Profie for Ceveand Schoo District Property tax accounted for 37% of tota schoo district revenues. Revenue sources 39.6%-oca a51 X)%-state 9.4%-federa Property tax accounted for 93.3% of tota oca sources. REVENUE PROFILE FOR CLEVER SCHOOL DISTRICT In 1992, property tax revenues accounted for 93.3 percent of city revenues in Ceveand but ony 37 percent of the schoo district's revenues. The schoo district got the remaining 63 percent of its revenues from sources, incuding other oca revenue, from earnings on investments, tuition, and other income (2.7 percent), state aid (51 percent), and federa assistance (9.4 percent). See appendix I for a comparison with other cities we visited. 13

14 GM Schoo Revenues Forgone in Ceveand Schoo District in 1992 $5.5 miion in schoo property tax revenues or 1.2% of tota schoo district revenue EXTENT OF CLEVELAND SCHOOL DISTRICT'S REVENUES FORGONE TO TAX ABATEMENTS In 1992, the Ceveand schoo district gave up an estimated $5.5 miion' of property tax revenues due to property tax abatements. We based this estimate on the district's evy of mis mutipied by $149 miion of property vaue abated in Ceveand. Revenue forgone due to tax abatements was about 1.2 percent of the district's tota schoo revenues of $443 miion in 'The $149 miion used to cacuate this number incudes a three abatement programs pus some municipa exemptions. As stated earier, city officias coud not separate the business tax abatements from this amount. 14

15 GM Ceveand Schoo District s Revenue Probems Decine in state aid Unfunded federa and state mandates Previous abor agreements *State House Bi 920 CLEVELAND SCHOOL DISTRICT'S REVEN-UE PROBLEMS Ceveand schoo district officias cited four primary revenue probems: (1) decine in state aid, (2) unfunded federa and state mandates, (3) previous abor agreements, and (4) state House Bi 920. State aid is the district's argest revenue source, accounting for more than haf of the tota revenues in When adjusted for infation, state aid decreased since 1990 due to state budget constraints. According to schoo district officias, part of the reason for the stagnant state aid is competition with unfunded federa and state mandates. In certain cases, when the state or federa government enact an unfunded mandate, a strain is paced on the state's genera fund. Thus, the schoo district must compete with unfunded mandates for a share of the genera revenue fund. Moreover, schoo district officias said that previous abor agreements are aso a revenue probem because the cost increases guaranteed in the contracts have exceeded the district's revenue increases. Finay, schoo district officias said Ohio's House Bi 920 constrains the schoo district's second argest revenue source-- property tax revenues. House Bi 920 imits the amount of property tax revenue the schoo district can raise through tax evies on existing rea property. The bi was intended to counteract tax increases due to infation. This poses a probem, 15

16 schoo district officias tod us, because the district's expenditures continue to rise due to infation. GAO Threats of Lega Actions by Ceveand Schoo District *TWO threats of action against TIFs - no cases fied Threats infuenced bond issues THREATS OF LEGAL ACTION BY CLEVELAND SCHOOL DISTRICT The schoo board has not fied a awsuit against any of Ceveand's tax abatement projects. However, it threatened to sue the city if two tax increment financing (TIFJ6 projects were approved--the Rock 'n' Ro Ha of Fame and Payhouse Square projects. According to the schoo district's ega counse, suing the city over tax abatements woud be ineffective because tax abatements do not invove a pubic funding source. However, threatening to sue over the TIF projects coud adversey affect the city's pans to issue bonds to finance the proposed construction. The schoo board beieved that investors woud be ess wiing to purchase bonds if they beieved the bonds to be at risk of defaut due to ega action. 6Tax increment financing is an instrument used by oca governments to finance infrastructure improvements. TIFAs, estabished by oca governments, freeze property tax revenue at a given point in time. Thereafter, any increase in property tax revenue is diverted for financing a TIFA project. 16

17 r Because of the ega threats, the city agreed to reimburse the $ schoo district some of the property tax-revenue forgone to the two TIF projects. The schoo district wi receive a 6-percent tax on admissions for the Rock 'n' Ro Ha of Fame that wi be distributed to the schoos monthy unti a cap of $15,125,000 is reached. The tax wi go into effect when the Ha of Fame is competed in ate 1995 or eary The Payhouse Square hote project paid the schoo district a one-time sum of $75,000 in October In addition, the owners of Payhouse Square wi provide at east one empoyment training program to Ceveand schoo district students in the first 7 years of the hote's operation. The program wi be hote/restaurant-reated training. Schoo district officias estimated that the district wi forgo $33 miion in property taxes for the two projects during a 20-year period--$26 miion and $7 miion, respectivey. The schoo board's opposition to tax abatements and the newy eected mayor's wiingness to cooperate with the schoo district aso resuted in two new state aws. One aw requires the city to notify the schoo district of a pending tax abatement and aow it to have input into the tax abatement decision. The other aw aows the Board of Education in the schoo district to negotiate with the poitica subdivision and enter into an agreement for compensation for any oss of property tax revenue resuting from the tax abatement. 17 t

18 GM Exempt Property in Ceveand *$I.3 biion in property vaue or 026.7% of tota property vaue in 1992 incudes churches, charities, cemeteries, etc. EXEMPT PROPERTY IN CLEVELAND In 1992, about 26.7 percent, or $1.3 biion, of Ceveand's property vaue was tax exempt. These exempt properties incuded federa, state, and oca government property, educationa entities, charitabe institutions, churches, cemeteries, and monuments. For exampe, exempt property vaue of -- $363 miion was owned by charitabe institutions, -- $264 miion was owned by the City of Ceveand, -- $91 miion was owned by churches, and -- $88 miion was owned by the county. ia

19 GACI Nature of Tax Abatements in Phiadephia Amount 4 00% Length 3 years Who quaifies aa businesses and residents NATURE OF PROPERTY TAX ABATEMENTS IN PHILADELPHIA Phiadephia offers a 3-year, oo-percent property tax abatement to industria and commercia business owners and deveopers for new construction or expansion of an existing business. The abatement is aso avaiabe to homeowners, home purchasers, and residentia deveopers in deteriorating paces. 19

20 GAO Business Property Abated in Phiadephia in 1992 $437 miion in assessed property vaue (business and some residentia) or 3.4% of tota city assessed property vaue EXTENT OF BUSINESS PROPERTY ABATED IN PHILADELPHIA In 1992, Phiadephia's tota taxabe property vaue, incuding exempt property, was assessed at $13 biion. About $437 miion,' or 3.4 percent, of this tota was primariy tax abated business property. Phiadephia assesses business property at 32 percent of current market vaue. Abated business property in Phiadephia had a fu market vaue of about $1.4 biion.' See appendix I for a comparison with other cities we visited. 'This amount incudes some residentia property abated from property tax under a S-year abatement program repeaed in fisca year The program was for deveopers of condominiums in which one-third of the overa project was commercia deveopment. 3This figure incudes some residentia property at market vaue. 20

21 GAO 1992 Revenue Profie for Phiadephia Schoo District Property tax accounted for 34.8% of tota schoo district revenues. Revenue sources 46.9%-oca.53.0%-state 0.1 %--federa Property tax accounted for 74.1% of oca sources. REVENUE PROFILE FOR PHILADELPHIA SCHOOL DISTRICT Property tax represented 74.1 percent of the Phiadephia schoo district's ocay generated revenues. However, property tax represented ony 34.8 percent of the district's tota revenues in fisca year The remaining 65.2 percent of the schoo district's tota revenue came from sources, incuding other oca revenues such as business and occupancy tax, pubic utiity tax, and payments instead of taxes (12 percent), state aid (53.0 percent), and federa assistance (0.1 percent). See appendix I for comparison with other cities we visited. 21

22 MCI Schoo Revenues Forgone in Phiadephia Schoo District in 1992.$I 9.8 miion in schoo property tax revenues (business and some residentia) or 9 1.7% of tota schoo district revenue in 1992 EXTENT OF PHILADELPHIA SCHOOL DISTRICT'S REVENUE FORGONE TO ABATEMENTS Phiadephia schoo district officias estimated that they had forgone about $19.8 miion in property tax revenues in 1992 due to business and some residentia tax abatements. This represented 1.7 percent of the schoo district's $1.1 biion in tota schoo revenues for Schoo district officias based their estimate on the district's average evy of mis mutipied by $437 miion in tax-abated business and condominium residentia property vaue in The Phiadephia schoo district does not have the option of not participating in tax abatements granted by the city, unike other schoo districts in Pennsyvania. This is because the district is dependent upon the city and receives its funding through the city. The city evies a singe property tax for a the taxing entities in its boundaries. The schoo district's share of the property tax evy is 55 percent, which has remained constant since According to schoo district officias, the city has not taken tax abatements into consideration when determining the schoo district's share of the miage rate. However, the city counci raised the miage rate twice in the ast 10 years, and the schoo district's share has remained at 55 percent. 22

23 GAO Phiadephia Schoo District s Revenue Probems Stagnant state aid Unfunded federa mandates Federay owned exempt property PHILADELPHIA SCHOOL DISTRICT'S REVENUE PROBLEMS Revenue probems cited by Phiadephia schoo district officias incuded (1) stagnant state aid, (2) unfunded federa mandates, and (3) exempt property. According to the officias, stagnant state aid has forced the schoo district to cut $65 miion from its budget in the past severa years. Schoo district officias reported that state aid remained the same in fisca years 1992 and 1993, whie increasing ony 2 percent for the current fisca year Unfunded federa mandates paced additiona strains on the schoo district's budget, according to schoo district officias. The number of ega immigrants in the city has recenty increased. Phiadephia schoo district officias reported that federa mandates requiring schoos to provide specia education for immigrants has imposed a financia burden on the schoo district's budget. The officias aso reported that the amount of tax-exempt property in the city created another financia probem. The vaue of taxexempt properties in Phiadephia is much greater than that of taxabated properties. Officias woud ike these property owners to provide payments instead of taxes for tax-exempt properties. 23

24 GAO Exempt Property in Phiadephia in 1992.$2.9 biion in property vaue or 023.2% of tota assessed property vaue Incudes churches, hospitas, cemeteries, etc. EXEMPT PROPERTY IN PHILADELPHIA About 23.2 percent, or $2.9 biion, of property vaue was exempt from property taxes in Phiadephia during fisca year These exempt properties incuded hospitas, educationa entities, federa and, churches, and cemeteries. For exampe, exempt property vaued at -- $419.2 miion was owned by medica heath faciities, -- $299.4 miion was owned by coeges and universities, -- $253.0 miion was owned by the U.S. government, -- $203.1 miion was owned by reigious organizations, and -- $10.9 miion was in the form of cemeteries. j I E 24

25 @XI Nature of Tax Abatements in St. Louis Amounts and engths 025 years 4 00% first IO years 60% foowing 15 years Who quaifies A businesses and residents NATURE OF TAX ABATEMENTS IN ST. LOUIS The City of St. Louis maintains three types of tax abatement programs to provide assistance to redeveop properties that it has determined to be bighted. These programs provide a 25-year tax abatement to residents and businesses. Property owners receive a oo-percent abatement on the increased vaue of their property for the first 10 years. After 10 years, property vaues are reassessed, and owners are eigibe for an abatement on 50 percent of the improvement for the remaining 15 years. Most businesses currenty receive ony a o-year abatement, whie approximatey 5 percent of businesses have received the fu 25-year abatement. Residents, however, amost aways receive a 25-year tax abatement. Two of the programs permit a pubic authority, in this case the St. Louis Deveopment Corporation, to impement redeveopment or assist the private sector. The other program directy empowers the city to give private deveopment corporations the right to use the power of eminent domain to acquire and for redeveopment. However, a three tax abatement programs provide that appications for r 25

26 abatements must be approved by the city's Board of Adermen on a case-by-case basis.g GM Property Abated in St. Louis in 1992 *$I45 miion in assessed property vaue (both residentia and business) or 05.6% of tota city assessed property vaue EXTENT OF PROPERTY ABATED IN ST. LOUIS In 1992, St. Louis's rea property, incuding exempt property, was assessed at about $2.6 biion. About $145 miion, or 5.6 percent of this tota, was tax-abated business and residentia property.a St. Louis assesses rea property vaue for businesses at 32 percent and residents at 19 percent of fu market vaue. We coud not cacuate the fu market vaue of property abated because city officias did not know the percentage of business property as opposed to residentia property receiving tax abatement. For fu market vaues of other cities we visited, see appendix I. 'The Board of Adermen is a board of eected municipa officers representing a certain district or ward in the city. "The doar amounts used in this section incude business and residentia property tax abatements. 26

27 GAO 1992 Revenue Profie for St. Louis Schoo District Property tax accounted for 25.5% of tota schoo district revenues. Revenue sources 045.3%~oca 43.8%-state.10.9%-federa Property tax accounted for 56.3% of oca sources. REVENUE PROFILE FOR ST. LOUIS SCHOOL DISTRICT In 1992, property tax revenues accounted for approximatey 56.3 percent of ocay generated revenues and 25.5 percent of the schoo district's tota revenues. The remaining 74.5 percent of the schoo district's tota revenues came from sources, incuding other oca revenue, from saes tax, deinquent taxes, surcharges, and other income (19.8 percent), state aid (43.8 percent), and federa assistance (10.9 percent). See appendix I for a comparison with other cities we visited. 27

28 GAO Schoo Revenues Forgone in St. Louis Schoo District in 1992 $6.3 miion in schoo property tax revenues (both business and residentia) or 1.9% of tota schoo district revenue EXTENT OF ST. LOUIS SCHOOL DISTRICT REVENUE FORGONE TO ABATEMENTS We estimate that, in 1992, $6.3 miion in schoo property taxes were abated in St. Louis. We based this estimate on the St. Louis schoo district's evy of $4.31 per $100 in property vaue mutipied by the abated property vaue of $145 miion. Revenue forgone due to tax abatements was about 1.9 percent of St. Louis schoo district's tota schoo district revenue of $333 miion in

29 GAO St. Louis Schoo District s Revenue Probems *State aid growth sower than expenditures Increase in nonprofit and government property exemptions Length of tax abatements Overuse of bight restrictions ST. LOUIS SCHOOL DISTRICT'S REVENUE PROBLEMS The St. Louis schoo district cited four primary revenue probems: (1) state aid growth sower than expenditures, (2) increase in nonprofit and government property exemptions, (3) the 25-year ength of tax abatements, and (4) overuse of bight restrictions. According to schoo district officias, state aid increases have not kept pace with infation. When adjusted to 1992 doars, state aid decined 12 percent since During this period, expenditures rose at the rate of infation or more. Moreover, the schoo district beieved that increases in nonprofit and government tax-exempt property hurt it financiay. St. Louis has 65 tax-exempt hospitas. In addition, it has many nonprofit tax-exempt organizations such as the American Lung Association. Reigious organizations are aso causing some revenue probems for the schoo district because many once taxabe commercia properties have been converted to tax-exempt reigious uses. When taxabe property is converted to entirey tax-exempt status, the schoo district oses a revenue source. In addition, schoo district officias beieve that the maximum ength of 25 years for a tax abatement is too ong. By the time the abatement expires, the once new buidings are oder and have depreciated in vaue. This does not yied the schoo district 29

30 additiona revenues in the ong term. Moreover, schoo district officias beieve that the adermen overuse the bighting restriction in the tax abatement reguations. According to state aw, a property must be decared bighted by the area's adermen before a tax abatement can be granted for that property. However, according to a schoo district officia, some adermen have decared an area bighted when the schoo district beieved it was not. The adermen have the fina decision on whether a site is bighted. GAO Lega Actions Pursued by St. Louis Schoo District Fied awsuit against abatement for oca hote Schoo district disagreed with city - beieved renovation abatement reay for maintenance Judge decided against schoo district - currenty being appeaed LEGAL ACTION PURSUED BY ST. LOUIS SCHOOL DISTRICT The St. Louis schoo district sued the city over the upcoming tax abatement for a oca hote. The hote owners had originay received a fu 25-year tax abatement when the hote was constructed. When the abatement expired, the owners decided to renovate the hote. Schoo district officias beieved the hote shoud not have received another 25-year tax abatement because the improvements consisted of genera maintenance (e.g., painting and carpeting). The schoo district ost the awsuit because the judge rued that the adermen make the fina decision on whether the tax abatement is appropriate. In May 1993, the schoo district fied an appea with the Supreme Court of Missouri contesting the judge's ruing. 30

31 GAO Exempt Property in St. Louis in 1992 a$638 miion in property vaue or 024.7% of tota property vaue Incudes hospitas, associations, churches, etc. EXEMPT PROPERTY IN ST. LOUIS About 24.7 percent, or $638 miion, of property vaue was tax exempt, in St. Louis, in These exempt properties incuded federa, state, and oca government properties, educationa entities, hospitas, and churches. For exampe, exempt property vaue of -- $57.1 miion was occupied by parks, paygrounds, and pazas; -- $46.8 miion was for hospitas and sanitariums; -- $39.1 miion was owned by the St. Louis Board of Education; and -- $34.6 miion was owned by the federa government. 31

32 ~0 Nature of Tax Abatements in San Antonio Amount Up to OO%-based on capita cost of project improvement or number of new jobs Length 6 to 10 years depending on ocation or tota project cost Who quaifies Targeted businesses NATURE OF PROPERTY TAX ABATEMENTS IN SAN ANTONIO Tax abatements offered in San Antonio are granted on a case-by-case basis in reinvestment zones. The percentage of property tax abated is based on one of two criteria, whichever is most appropriate: (1) the capita cost of the project improvement or (2) the number of new permanent jobs created and sustained in each year of the abatement. For exampe, the percentage of property tax abated is 50 percent when the capita cost of the project is more than $1 miion and ess than $2.75 miion or the number of jobs created is between 26 and 65. (See tabe 1 for additiona abatement amounts). 32

33 Tabe 1: Tabe of Abatement Percentases Appicabe for Given Criteria Project abatement (UP to1 Capita cost of the project "improvements" 0% 0 - $1,000,00 50% $1,000,000 - $2,750,000 or 1 Number of new ~ permanent jobs created and sustained in each year of abatements 75% 1 $2,750,001 - $4,500, I 100% over $4,500,000 over 100 Source: City ot San Antonio Economic Deveopment Department. The abatement ength ranges from 6 to 10 years depending on the project's ocation or tota costs. The abatement ength in San Antonio can be either 6, 8, or 10 years depending on the ocation of the project. If the project is ocated in the inner city of San Antonio in an enterprise zone area, the abatement ength is 10 years. If it is ocated in the inner city but outside an enterprise zone, the ength is 8 years. Projects ocated in the city but outside the inner city, have a 6-year abatement ength. San Antonio offers tax abatements to manufacturing/assemby faciities, biomedica/biotechnoogy faciities, regiona distribution faciities, regiona tourist entertainment faciities, downtown housing, aviation faciities, and exceptiona investment faciities. A faciity quaifies to be an exceptiona investment if the it creates 200 or more new permanent fu-time jobs or brings new investment of rea property improvements of $10 miion or more into the community. Tax abatements may be granted for constructing new faciities and modernizing or expanding existing ones. 33 1

34 GALI Business Property Abated in San Antonio in 1992.$94.6 miion in assessed property vaue or 0.35% of tota city assessed property vaue EXTENT OF BUSINESS PROPERTY ABATED IN SAN ANTONIO In 1992, San Antonio's tota property vaue, incuding exempt property, was $26.7 biion. About $94.6 miion, or 0.35 percent, of this tota was business property vaue exempt from property tax under the state's abatement program. San Antonio assesses business property at a ocay determined rate of 60 percent of market vaue. Business property under abatement in San Antonio had a fu market vaue of about $158 miion. See appendix I for a comparison with other cities we visited. 34 GAO/HERS-94-84R Loca Tax Abatement

35 GAO 1992 Revenue Profie for San Antonio Schoo District Property tax accounts for 25.7% of tota schoo district revenues. Revenue sources 29.0%-oca 64.2%-state 6.8%-federa Property tax accounts for 88.6% of oca sources. CITY OF SAN ANTONIO SCHOOL DISTRICTS The City of San Antonio has 10 separate independent schoo districts. We visited the two schoo districts--san Antonio and Northside-- that encompassed most of the tax abatements granted by the City of San Antonio. REVENUE PROFILE FOR SAN ANTONIO SCHOOL DISTRICT In fisca year 1992, property tax revenues represented 88.6 percent of the San Antonio schoo district's ocay generated revenues. However, property tax provided ony 25.7 percent of the district's tota revenues in Most of the district's revenue, (74.3 percent) came from sources, incuding other oca revenue from tuition and specia projects (3.3 percent), state aid (64.2 percent), and federa assistance (6.8 percent). See appendix I for a comparison with other cities we visited. 35

36 GAO 1992 Revenue Profie for Northside Schoo Districts Property tax accounts for 34.1% of tota schoo district revenues. Revenue sources 46.5%-oca 50.0%-state 3.5%-federa Property tax accounts for 73.3% of oca sources. REVENUE PROFILE FOR NORTHSIDE SCHOOL DISTRICT Property tax represented 73.3 percent of Northside Schoo District's oca revenues and 34.1 percent of the district's tota revenues in The remaining 65.9 percent of tota district revenues came from sources, incuding other oca revenue from tuition and specia projects (12.4 percent), state aid (50 percent), and federa assistance (3.5 percent). See appendix I for a comparison with other cities we visited. 36

37 GAO Schoo Revenue Forgone in Two San Antonio Schoo Districts San Antonio Schoo District a$307 thousand in schoo property tax revenues or 0.11% of tota schoo district revenue Northside Schoo District *$I miion in schoo property tax revenues or 00.54% of tota schoo district revenue EXTENT OF SAN ANTONIO AND NORTHSIDE SCHOOL DISTRICTS' REVENUE FORGONE TO ABATEMENTS San Antonio schoo districts may choose not to participate in tax abatements on a case-by-case basis. Schoo district officias are incuded in a tax abatement negotiations that are requested in their jurisdiction. City, county, community coege, and schoo district officias agree to the terms before the granting of an abatement. As of Juy 1993, the two schoo districts we visited had participated in a tax abatements granted in their jurisdictions. San Antonio Schoo District Property tax abatements in the San Antonio Schoo District represented about $307,000 in 1992 property tax revenues forgone. This equaed about 0.11 percent of the schoo district's tota schoo revenue for San Antonio Schoo District's average tax evy for 1992 was mis, and abated business property vaue totaed $59 miion. According to schoo district officias, the benefits of abatements to the schoo district outweigh the ost revenue. They said benefits were gained by the overa community because deveopers 37

38 receiving tax abatements must purchase suppies from oca businesses and empoy oca residents. Northside Schoo District Property tax abatements in Northside Schoo District totaed about $1 miion in 1992 property tax revenues forgone. This represented about 0.54 percent of the schoo district's tota schoo revenue for Northside Schoo District's tax evy for 1992 was $ per $100 in property vaue with $208 miion in abated business property vaue. Athough Northside Schoo District abated $1 miion in property tax revenue in 1990, the schoo district gained $694,000 in revenues from the abated projects. In Texas, agricutura and is assessed and taxed at a much ower rate than deveoped property. Any deveoper that converts agricutura and to deveoped property must pay a roback recovery amount to the schoos. The recovery amount is equa to 5 years of back taxes at the higher tax rate for deveoped property. Therefore, any deveopment, incuding taxabated property, must pay 5 years of taxes in arrears to the schoo district and continue to pay at the higher rate for the ife of the deveopment. Ony the increased vaue due to property improvements and the introduction of persona property is eigibe for abatement. The schoo district aso gained through expansion of other businesses and infrastructure that were anciary to the abated business, according to schoo district officias. The district gained more than $5.7 miion in taxabe property vaue due to the construction of restaurants and recreationa faciities near two major amusement parks --Sea Word and Fiesta Texas Theme Park--that received an abatement. In addition, due to the construction of Sea Word, the schoo district aso gained a major interstate highway connecting the northern portion of San Antonio with the city's other major interstates. Schoo district officias were highy supportive of property tax abatements in their jurisdiction. They beieved that these projects woud not have occurred in their schoo district without the abatements. For exampe, schoo district officias reported that Sea Word originay panned to ocate on the east side of San i'northside's schoo board determines its tax rate annuay based on revenue needs. The 1992 tax rate was the owest in 10 years, and the 1993 tax rate of $1.49 per $100 in property vaue was the highest. Using a o-year average tax rate of $0.84, Northside Schoo District's forgone property tax revenue averaged about $1.7 miion in 1992 or about 0.9 percent of tota schoo district revenue. 38

39 Antonio in another schoo district. Northside Schoo District officias beieved that having Sea Word in their district woud benefit their schoos through increased revenue. Officias encouraged Sea Word, through the use of tax abatements, to ocate within Northside Schoo District. GAO San Antonio Schoo Districts Revenue Probems San Antonio Schoo District Limited state aid funding *New state aid formua Landocked community Northside Schoo District 4Jnfunded federa and state mandates Groirvth in student enroment +ew state aid formua SAN ANTONIO SCHOOL DISTRICTS' REVENUE PROBLEMS San Antonio Schoo District Revenue probems for the San Antonio Schoo District incude (1) imited state funding, (2) the new state aid formua, and (3) the andocked community in which the schoo district resides. Officias from the San Antonio Schoo District stated that the amount of state funding that their schoo district currenty receives is not enough to propery fund the educationa needs of students in the district. In addition to the aready imited state funding, the new state aid formua wi actuay reduce the current eve of state aid funding in the schoo district. The new formua, which became effective September 1, 1993, incudes the vaue of abated property in the community's reative weath measure. This measure, used by state officias to cacuate state aid, determines the amount of funding the schoo district can generate through property tax revenues. The new formua wi 39

40 incude the vaue of abated property in the schoo district's reative weath measure even though the property vaue is not being taxed. This wi resut in ess state aid for the schoo district. Schoo district officias beieved that this new formua is incongruous with the state's desire for economic deveopment of bighted areas. Finay, the inner city geography of San Antonio creates another revenue probem. Business growth is important to the vitaity of the inner city schoo district, according to schoo district officias. It is difficut to attract new business to the schoo district's jurisdiction because the portion of the city in which the San Antonio Schoo District is ocated has itte open space and vacant and. New construction woud have to invove demoition or rehabiitation of existing buidings. Schoo district officias reported that these factors make it difficut to attract new business to the district. They beieved that offering financia incentives ike tax abatements is often necessary for the economic stabiity of the district. Northside Schoo District Unfunded federa and -state mandates, growth in student enroment, and the new state aid formua generated most of Northside Schoo District's revenue probems, according to schoo district officias. Mandates such as the Americans With Disabiities Act and the state's increased teacher-to-pupi ratio requirement are some exampes that Northside Schoo District officias provided of unfunded mandates that are pacing a financia strain on the schoo district. Schoo district officias said that they need more money and time to carry out the mandates. Officias aso reported that money devoted to carrying out mandates takes funds away from basic education such as hiring more teachers and purchasing textbooks. Student enroment grew rapidy in Northside Schoo District in the past decade, but state aid did not keep up. Student enroment grew from 34,265 in 1983 to 51,134 in 1992, a 49-percent increase. State revenues in the form of state aid, however, increased ony about 35 percent during the same period. According to schoo district officias, the growth was not due to tax abatements. The northern area of San Antonio where Northside Schoo District is ocated has become a popuar residentia community for young famiies with chidren. Many of the residents do not work in the district but commute to other areas of San Antonio, according to schoo district officias. The new state aid formua is aso a revenue probem for the Northside Schoo District. As with the San Antonio Schoo District, the new state aid formua now incudes tax-abated property in the schoo district's avaiabe oca revenue. Northside Schoo District officias estimate that the new formua 40

41 wi cost the district $5.2 miion if a the abatements currenty in effect in Northside Schoo District are considered part of the district's avaiabe oca revenue. Schoo district officias informed us that they may be reuctant to grant abatements in the future if the amount of state aid forgone is greater than the economic benefits of granting an abatement. GAO Exbnpt Property in San Antonio in 1992 $2.3 biion in property vaue or 18.5% of tota assessed property vaue Incudes senior citizen, veterans, and historica site exemptions EXEMPT PROPERTY IN SAN ANTONIO About 8.5 percent, or $2.3 biion, of property vaue was exempt from property taxes in San Antonio during These exempt properties incuded exemptions for persons over age 65 and disabed veterans, free trade zones, historica entities, and transitiona housing. For exampe, exempt property vaue of --$2.0 biion was owned by senior citizens, -- $17 miion was owned by disabed veterans, -- $157 miion was cassified as free trade zones, -- $46 miion was occupied by historica entities, and -- $197 thousand was for transitiona housing for the indigent. 41