News
Treasurers and auditors warn the plan to cap school cash reserves would cause major problems for districts and taxpayers
By: Theo Peck-Suzuki | Report for America
Posted on:
ATHENS, Ohio (WOUB/Report for America) — On paper, it looks like a simple idea.
Property values in Ohio have skyrocketed, causing property taxes to spike. Most of that money has gone to school districts, which are sitting on billions of dollars in cash reserves. Why not just take some of the money back and redistribute it to taxpayers?
That’s what the Ohio House of Representatives wants to do in its version of the biennial budget. If passed as-is, the new law would create a cash reserve cap for school districts. If a district has too much cash on hand at the end of its fiscal year, property taxes go down the next year. That means property owners keep more of their money — at least, in theory.
As it turns out, this seemingly straightforward plan has left school treasurers, county auditors and others aghast. They warn the cash reserve cap would throw the most basic aspects of money management for schools into complete disarray. It also would also pose glaring logistical problems and may not even provide the relief its authors envision.
Lawrence County Auditor Chris Kline supports tax reform for Ohio property owners, but he had nothing good to say about the cash reserve cap.
“The proposed capping of school district cash reserves … is deeply concerning and, in my view, misguided,” Kline wrote in an email to WOUB.
Fort Frye Treasurer Kaitlin Huck shared Kline’s sentiment.
“It almost feels punitive that we’ve been good stewards of public funds and it’s like, ‘Ah! But you did it wrong!’” she said.
Huck, Kline and others warn the House plan would make financial planning for districts much harder. Saving money for big projects would be harder. Managing risk would be harder. Even a basic task like paying employees would be harder.
Reducing districts’ tax revenue could have bizarre consequences elsewhere. Kline mentioned a “yo-yo” effect where taxes vary wildly from one year to the next. Athens City Schools Treasurer Jared Bunting said the system could end up over-reducing districts’ revenue and even impact the real estate market.
That’s the short version. For those who want to know exactly why the House plan causes all these problems, a bit of math will be necessary.
How the cap would work
Schools operate on a fiscal year that starts July 1 and ends June 30 of the following year. Right now, we are in fiscal year 2025. It started on July 1, 2024, and will end on June 30.
If the House plan became law today, then on June 30, districts could not carry over more than 30% of the past year’s expenses in cash reserves. If they did, the property taxes they collected would be reduced by whatever the surplus is.
For example:
Say a district’s expenses for fiscal year 2025 were $10 million (an unrealistically low but simple number).
On June 30, the district should not have more than 30% of $10 million in cash on hand. That’s $3 million.
But what if the district has $4 million on hand? Now it is $1 million over the cap.
In this case, property owners in the district will get a cumulative $1 million knocked off their 2025 property taxes. That’s $1 million in tax revenue the district will lose in 2026 when those taxes are paid out.
This is where the problems start.
Tax revenue comes in shortly before the end of the fiscal year
Exactly when schools get the money depends on the county. In Athens, one chunk comes in April and another in August. Each chunk has to last several months before the next payment comes in.
Athens City Schools Treasurer Bunting said if the cash reserve cap comes into effect, that April tax payment becomes a big problem. It arrives just a couple months before the end of the fiscal year. That means Athens schools look much wealthier on June 30 than they really are because much of the money is already spoken for.
Bunting provided some data to show how his district’s cash reserves fluctuate over the course of a year. This shows fiscal year 2021 — that is, July 1, 2020, to June 30, 2021.
The important takeaway here: Athens spent several months with cash reserves below 30%. However, on June 30 — right after the spring property tax payment came in — the reserves were at 41%.
If the 30% cap had been in place back then, Athens would have lost that extra 11% in the next year’s revenue. In actual dollars, that would have been a $3.5 million cut.
This is not money Athens really had to lose. We know the district got all the way down to 18.9% — or $6 million — in April 2021. Knock an additional $3.5 million off of that, and things get very scary.
It’s a generally accepted rule of thumb that an organization should keep at least 25% of its budget in cash reserves. That helps ensure an unexpected emergency doesn’t lead directly to bankruptcy. On top of that, schools need 25% in reserves to maintain an AAA credit rating, which lowers the interest it pays on bonds.
Athens could let its reserves dip below 25% in April 2021 because it knew they would shoot back up the next month after property tax revenue came in. A cash reserve cap at the end of June throws a wrench in this kind of decision-making.
Bunting said for Athens, that was about $4.7 million at the end of fiscal year 2024, benefits included. In other words, $4.7 million of the district’s cash reserves on June 30, 2024, was money it was about to spend.
So this isn’t really money Athens has to lose, either. But the proposed cap wouldn’t recognize this.
Lawrence County Auditor Kline said the situation would be even worse in counties that do all their property tax collections at the start of the year.
“So a school would receive all of its money in the last half of the fiscal year (spring) and not receive anything for the first six months of its next fiscal year (summer/fall),” Kline said. That’s a huge amount of money the district would have to spend down to reach 30% — and then it would have to wait another six months or so for its next infusion.
“Put the math together: Six months is 50% of the year. So 30% reserves to operate 50% of the year — doesn’t work,” Kline said.
School districts can’t save money with a cap
After fiscal year 2021, Athens’ cash reserves started to grow. At the end of 2024, the district was sitting on a healthy 57.3%. Bunting said that was actually part of a long-term plan.
“The story for Athens goes back to 2018, when the bond levy was first passed for the facilities master plan — where we were going to build two new elementaries, do a remodel of a building and build a new high school,” Bunting said.
The costs for that project skyrocketed due to the pandemic, and the district realized the initial bond levy wouldn’t be enough. In response, it began saving money with the help of COVID relief funds. The dollars it saved have sat in the district’s general fund ever since — not as unneeded extra cash, but as savings for a big future expense. Athens still had to return to voters for a second bond levy in 2023, but Bunting said the ask was much lower because of those savings.
If the cash reserve cap becomes law, saving up money for big projects will become significantly harder, because districts will have to spend down their reserves at the end of every fiscal year.
There are some ways of getting around the problem. For example, districts can put money for building improvements into a permanent improvement fund. This kind of fund doesn’t count toward the 30% threshold. However, it can only be spent on very specific things — and not on payroll, which is the biggest expense for any district.
Bunting said there are reasons districts don’t like putting money into these special funds too quickly.
“We have to have an actual plan … with an architect giving us an estimated cost of what the project is. Otherwise, when we are audited, they could say that that was an unlawful transfer, and then that would obviously cause more issues,” Bunting said.
Fort Frye Treasurer Huck said it’s also a question of local control. Schools are supposed to manage their own finances — not the state. That comes with responsibilities, but it also gives districts the flexibility to ensure they can meet their individual needs. The 30% cap gets in the way of that.
“Let us keep local control. Hold us accountable. Come to our board meetings. Set a cash balance policy: ‘OK. Our board of education’s comfort level is X percent.’ Hold us accountable to that percent,” Huck said.
As it happens, Fort Frye is in an even more difficult position than Athens. Huck said the district’s cash reserves are sitting at a whopping 86%. The reason is similar to Athens’.
Huck said it has taken 20 years for the district to save this money.
“We’ve been able to do all this and have this because of these (cash reserve) carryovers. We have not been back to our voters for new money since 2006, and we’re actually the lowest tax base in our county,” Huck said. “So you know, that’s been a point of pride for our district and our community.”
That’s why Huck said the proposed cap feels like a punishment for good financial stewardship.
“If this were to go into law today … they would need to reduce our tax collection by $8.3 million. When you consider our annual budget’s 17 million, that’s a huge hit,” Huck said. “I mean, that’s 75% of our annual salary that’s just gone.”
To complicate matters further, Fort Frye only pulls in about $2 million a year in property taxes. Huck said that means property owners wouldn’t even get much relief from the tax reduction.
“Even if they’d go to a zero collection year — let’s say, worst-case scenario — that’s still going to look very small on (property owners’) total tax bill,” Huck said.
Actually making the tax refund work as intended is tricky
It’s not entirely clear how the tax refund would work in Fort Frye’s case, since its excess reserves ($8.3 million) would actually be larger than a year’s tax revenue ($2 million). Presumably, people just wouldn’t pay any school district property taxes for four years. And that’s just one issue with the new proposal.
Here’s an example from Bunting: Say Athens is $1 million over its cap on July 1, 2025. That’s $1 million that gets knocked off residents’ 2026 property taxes.
Those taxes will be collected at the start of 2026. Half will be paid out to the district in April, and half in August. Presumably, the April 2026 payment will be about $500,000 lower than planned. The August 2026 payment will be about $500,000 lower, too.
That’s $1 million spread over two payments.
The problem is, the fiscal year rolls over in between those two payments. That means Athens has only lost half of its $1 million “surplus” by July 1, 2026. All else being equal, the other half — that $500,000 it will lose in August — is still sitting in its bank account, which the state may see as excess reserves. Bunting said he’s worried that would trigger a new $500,000 reduction on top of the existing $1 million reduction.
Here’s an analogy: Say you earn $3,000 a month at work. In January, your boss accidentally pays you $4,000. He says he’ll lower February and March’s paychecks by $500 each to recoup the $1,000 he lost.
In February, your boss only pays you $2,500. Then he looks at his balance sheet and says: “Wait a minute. I’ve paid you $6,500 in the last two months. I should have only paid you $6,000. I’m going to reduce your April and May paychecks by $250 to make up that $500.”
Now your boss is actually underpaying you. He made another reduction before he was done correcting the original overpayment. This is more or less what Bunting is worried about, just over a longer period of time.
This may feel a bit headache-inducing, but the bottom line is this: The way the law is written suggests to Bunting that districts could lose even more money than they should.
As a county auditor, Kline would be one of the people responsible for implementing the tax reduction. He’s worried the process could produce a “yo-yo” effect on taxpayers.
“The first year, the budget commission’s going to be forced to reduce their (tax) rate. … Then the school gets below the 30% threshold, the rate goes back,” Kline said. “So now we bump back up to the high rate again, we have to pay that tax bill, and if they build up a surplus, we get to drop the rate again. So you can never have any predictability on what’s going to happen there.”
And it gets worse. Some homeowners escrow, meaning their mortgage lender sets aside part of each mortgage payment to pay property taxes. The 30% cap could make this much more complicated.
Kline continued, “We have people coming to us every time where the values go up and the tax bills go up and then their escrows are short, and the bank has to make up for it. And so then, by the time they’re doing that, we’re dropping the rates and now there’s excess in their escrow, and … it just becomes problematic.”
Huck said she’s heard county officials are worried about calculating the tax reduction correctly.
“There’s a lot of assumptions that go into your property valuations. They don’t always know what the valuation is at the time of July,” Huck said. “Is there a penalty if they don’t get it exactly to 30%?”
As Huck understands it, the House’s proposal would require the county budget commission to cut the tax rate if the district passes the 30% threshold — but raising the tax rate back again would be optional. She’s worried the commission may face political pressure not to return rates to normal.
“Which puts our elected officials in a very difficult position,” Huck said.
Although he’s not a fan of the cap, Bunting said he doesn’t think Huck’s reading of the new law is correct in this respect.
“I have heard that concern, but that is not the way I’ve understood it,” Bunting said.
One concern he does have: what a one-off tax reduction could do to the real estate market.
“So you’re selling your house — people are looking at what the tax rate is for that house when you’re buying it,” Bunting said. “Well, that could have been one of the years where it (the tax rate) was cut. So then they get their tax bill the next year, and it was a lot different than what they thought they signed on for.”
There are other ideas for tax relief, but the state may have to step up
In Ohio, most property taxes don’t go up when property values do.
That’s because of a law from the 1970s called HB 920. The law was passed at a time of major inflation when property values — and property taxes — were skyrocketing.
To give property owners some relief, HB 920 created a new rule: If property values go up, the property tax rate goes down. That way the taxpayer pays the same dollar amount each year until voters approve a new levy.
But HB 920 left some exceptions, and one of the biggest involves school districts. No matter how high property values get, the tax rate for school operating levies cannot drop below 20 mills — that’s 2% of a property’s assessed value. It’s like a leak in the system that allows taxes to keep rising.
That rule — commonly known as the “20-mill floor” — is a big reason why property taxes keep going up in spite of HB 920.
Kline believes property owners deserve some relief after the staggering property value increases of the past few years. However, he doesn’t think the 30% cap is the way to do it. Instead, he supports a tax reform plan from the County Auditors’ Association of Ohio which includes, among other things, changes to the 20-mill floor.
For example: Say property values go up 25% in one year, but inflation as a whole was just 7%. Under the CAAO plan, school districts on the 20-mill floor would only see their property taxes go up 7%.
“The goal for the CAAO was … to stop having these very large 20, 30, 40% increases in revenue that no one’s ever seen before, and yet not harm school districts and allow them to have enough revenue,” Kline said.
But a 7% revenue boost is much lower than a 25% one, and this would in a sense still be a cut — one that comes when districts are already facing serious budget shortages despite the boost from the 20-mill floor.
Kline acknowledged this, but said the CAAO proposal wouldn’t prevent districts from putting new levies before voters. At least then, he said, voters would be approving the tax increases, not getting them unexpectedly.
Bunting said as a homeowner, he understands the desire for property tax relief. But he said he has a “philosophical disagreement” with the idea that the 20-mill floor leads to “unvoted” tax increases.
Without HB 920, Athens would be collecting 46.98 mills for its operating levies. These are levies voters have periodically approved at the ballot box. However, because of HB 920, the tax rate for the district has gone down steadily over the years and now sits at 20 mills — the lowest it can go.
“The voters have approved to be taxed at (46.98 mills). We’re only collecting at 20. So I have a philosophical disagreement with the fact that it’s an unvoted tax,” Bunting said.
In fact, Bunting said, before HB 920 passed, the tax rate for Athens was 29 mills. If HB 920 had never passed, “We’d have never asked for another levy and been better off.”
He also said Ohio is one of only a handful of states with laws like HB 920 on the books.
Bunting said he also doesn’t think it makes sense to redesign the tax system based on the recent swings in property values — something that last occurred in the 1970s.
“We’re talking about a once in a 50 year occurrence or a twice in 50 year occurrence,” he said. “It’s hard to want to really jump at something with a knee-jerk reaction when there could be a (market) correction coming.”
Kline and Bunting agree that the root of the problem lies at the Ohio statehouse. Both said in the last two decades, legislators have gotten into the habit of offloading all sorts of costs from the state to local governments. School funding is a good example.
In a series of cases from 1997 to 2003, the Ohio Supreme Court found Ohio relies too much on local property taxes to fund schools. Consequently, students in wealthier districts get more resources than students in poorer districts. Kline said the issue “never has really been settled.”
“So there needs to be something that actually fixes that problem and makes sure that the state is paying its fair share and not placing so much of the burden back on the property owners themselves,” Kline said.
The recent trend at the statehouse has been the opposite, however.
“Over the last 20 years, policies have been made in Columbus that have forced local governments to go to the ballot to ask their property owners for more revenue,” Kline said. “Whenever times get tough, they (state legislators) decide to share less. So that puts more of a burden back on the local governments.”