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December 2007

School Referenda

Larry DeBoer

Professor of
Agricultural Economics
Purdue University


Between 2000 and 2006, the fastest growing part of the Indiana property tax was school debt service. Debt service is the repayment of principle and interest on a bond. School corporations use bonds to borrow money for big construction projects, like new school buildings.

The governor's tax plan would try to limit this growth with a referendum process. A majority of a school corporation's voters would have to approve a bond to borrow for new construction over a certain amount.

This would be nothing new in most states. The Legislative Services Agency reports that 40 states require voter approval of bond issues as a matter of course, and in seven more, voters can petition to have bond issues placed on the ballot.

One state uses a "petition-remonstrance" procedure. Guess who? In Indiana, opponents of a bond issue compete with proponents to gather signatures on petitions. The group with the most signatures wins. Since 1995 there have been 94 petition-remonstrance drives. In 45 (48 percent) the opponents stopped the project; in 49 (52 percent), the proponents won. Most bonds go through without a remonstrance, though.

Would referenda change these results? In Illinois, since 1973, voters approved school bonds in 64 percent of referenda. They've averaged 64 bond referenda per year since 1995. During that time, Indiana saw only 94 petition-remonstrance drives altogether. Illinois' process passes a larger share of bond issues, but a lot more bonds are approved without opposition in Indiana.

I found six research studies on school referenda, one each from California, Florida, Michigan and Oregon, and two from New York. Some of the studies compared the results of a lot of referenda, and some looked at voter surveys in one referendum. Some of the referenda were for construction bonds, and some were to approve or disapprove operating budgets.

Five of the six studies tested the importance of the "tax price" for referenda results. The tax price is how much extra money a voter would pay for the added school spending. No surprise, all five studies found that a higher tax price made voter approval less likely.

We've got some evidence that the tax price matters in Indiana, too. Indiana school corporations are allowed to ask their voters for a higher property tax rate to increase operating revenue. Six referenda have been held since 2002. In three cases, the school corporation pledged to hold the overall tax rate steady by reducing the rate on another fund. This gave the corporation the flexibility to shift money from one fund to another but didn't raise the tax price. Those three passed. In three cases, the overall tax rate would have increased. Those three lost.

Homeowners are the majority of voters in just about every school corporation, so the tax price paid by homeowners would matter most in a referendum. The homeowner tax price is less where there's a lot of commercial and industrial property. Homeowners pay less because business property owners pay more. The homeowner tax price is higher where there's mostly middle-priced homes and farmland. School corporations with a lot of business property might find it easier to pass referenda. Those with a lot of farmland might find it tougher.

Except, the governor's plan places a limit on homeowner property taxes equal to 1 percent of market value. If a homeowner is at that 1-percent limit, a new bond would cost the homeowner nothing extra. That's a zero tax price. Homeowners would likely vote "yes."

Of course, the budget arithmetic doesn't work out so well. Where would the money to repay the bond come from if a lot of homeowners don't have to pay? There are several possibilities. Homeowners below the 1-percent limit might pay more. Business and farm property owners might pay more. Other units of government might receive less revenue. Or, maybe the bond market would refuse to lend to school corporations where the ability to repay debt is so limited.

In a lot of school corporations, too few homeowners would be at the 1-percent limit to make a difference. But in some, we might find that two policies designed to limit homeowner taxes act together to encourage bigger increases in school spending.