Act 388 strangles education budgets

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New homes require new schools, but contribute no tax revenue to LCSD

By Greg Summers

Research presented in September to Lancaster County leaders, predicting how our rocketing growth will affect local government revenues, paints a rosy picture for the county and a foreboding one for the school district.
The study by Clemson University’s Regional Economic Analysis Laboratory (REAL) shows that while the county government gains operating revenue from the arrival of new residents, the schools do not.

The study shows that the Lancaster County School District might be running a $2 million annual deficit on day-to-day operations by 2021, if tax rates stay constant. The district’s 2018-19 budget is $110.5 million.
The culprit behind that shortfall, said Lancaster County Council member Charlene McGriff, is Act 388.
“The problem is in Columbia, and we know that,” said McGriff, who served four terms on the school board before being elected to county council in 2009.
“Our hands are tied because state statute won’t allow us to do but so much…. We’ve been singing the same song for 20-something years,” she said.
Passed by the S.C. legislature in 2006, Act 388 largely exempted homeowners from the property taxes that support public education. A 2-cent increase in the state sales tax, earmarked for schools, was supposed to make up the difference for the lost property-tax revenue – in fact the law required that – but it hasn’t.
Dr. Jonathan Phipps, superintendent of the Lancaster County School District, said he isn’t against the idea of putting the tax mechanism that funds education on sources other than residential property owners, but Act 388 has been a total bust.
“I don’t have a problem with it if it works, but it’s crystal clear to everyone after 12 years that the method we use isn’t working. Act 388 was not written to support public education,” he said.
And Phipps seriously doubts if anyone in the General Assembly is willing to get the law changed. He just wishes “they had the intestinal fortitude to admit they made a mistake and fix it.”
Rep. Mandy Powers Norrell (D-Lancaster) said there are no pending proposals to repeal Act 388, but state legislators are aware of the concerns.
“I believe we can implement a plan to mitigate the damage Act 388 causes through the growth that is projected to come to South Carolina in the near future,” said Norrell, who is running for lieutenant governor.
In addition to cutting off the residential revenue steam, the act also limits how much local governments – including school districts – can increase their property tax millage rates in any given year.
Phipps noted that if the same taxing mechanism that was used prior to Act 388 were still in place, the district would have received $7 million more in taxes for the current fiscal year.
“We budget very conservatively and our folks do an excellent job at stretching each and every dollar. A little more than 85 percent of our operating budget is salaries and an additional $7 million would go a long way to reduce class size. That’s the real key to better education. Think about how many teachers we could add with that additional $7 million,” Phipps said.

Business taxes
Under Act 388, businesses still pay school property taxes as they did before, though one business component is paying less because of a law change in 2011 that now extends an additional tax break to commercial properties once they change hands. That reduced the education revenue stream even more.
But commercial property – not homes – still bears the brunt of the tax burden.
“If you bring in more commercial [growth], it would help. I say it like it’s an easy thing…. The more you grow that part of it, the better off you’re going to be,” said Dr. Robert Carey, director of REAL, who presented the results at the workshop.
The impact of this problem is being felt by public school systems across the state. In January, Charleston County School District leaders said they were anticipating a $43.5 million deficit by 2021.
“The problem isn’t in Lancaster County,” Carey said.
While the county schools benefit from commercial growth in Indian Land, the benefit is offset by the number of new students flooding into the county’s public schools because of residential growth fed by the Charlotte region’s booming economy. And that commercial growth isn’t spilling over to other parts of the county.
“You can look at growth studies all day and look at the trend analysis, but the truth is we don’t really know with 100 percent certainly when the growth is coming,” Phipps said.     
County council Chairman Steve Harper lamented the lack of commercial growth south of S.C. 5.
“In 15 years, we’ve gotten three Dollar Generals and a Family Dollar store. We’re faced with having two different counties.”

County outlook  
By comparison, Carey’s projections show that Lancaster County government, which does benefit from property taxes generated by home construction, should continue to have a budget surplus through 2025, if tax rates stay constant.
The residential growth is a boon for county coffers, but presents a double whammy for the school district, said its board Chairman Bobby Parker.
That’s because local schools get no tax benefit whatsoever from new residential property taxes. And at the same time, the district is responsible for educating the children who live in the new homes.
The county, Parker said, sees one new house on the tax rolls, while the schools see only the multiple students living inside it.
“The residential [growth] has killed us,” a frustrated Parker said, noting that school district asked voters for a bond referendum to pay for several new schools in the Panhandle.
“People look at us to build new schools. They don’t look at the county; they look at us. All these houses going up, and we don’t get any of it…. It suppresses what we can do,” Parker said.        
Parker said the school board isn’t blaming the county for the relentless growth, regardless of how it impacts schools.
New residents, he noted, are moving to the Panhandle because Lancaster County taxes are lower than in neighboring Mecklenburg County.
“They’re going to live there [Indian Land] and work across the line. They are 7 miles from Charlotte…. That’s the way it is. It’s going to keep happening, and there is nothing we can do about,” Parker said.
Then, there are fee-in-lieu-of-tax (FILOT) agreements, which result in lower property taxes for industries that create a lot of jobs.
County council member Jack Estridge said no one in local government likes FILOTs, but they have become necessities.
These agreements are used as incentives to lure businesses to the county. In exchange for job creation, or an investment of $2.5 million or more, a company can get its real-estate property taxes reduced from 10.5 percent to 6 percent for a set amount of time that is negotiated.
“It’s so competitive…. We do give a lot, but you have to. If you don’t, you don’t get any business at all. They’ll go to other states,” Estridge said.

Impact fees
One possible option to help pay for new school construction in Indian Land may be impact fees.
The county, noted county council member Terry Graham, is moving forward on a plan to roll out impact fees in the Charlotte Road/Van Wyck, Indian Land and Pleasant Valley fire districts to help pay for the ever-increasing firefighting capital needs in those specific areas.
And school districts now can charge impact fees. A 2016 change in state law allows high-growth districts to pursue impact fees for new school construction.
The Fort Mill School District has been charging impact fees on new homes since 2006. The fee was $2,500 per home until July, when it was increased to $18,158 per newly built house and $12,020 per apartment. But York County, which enacted the fee on behalf of the school district, is now being sued by the Home Builders Association of South Carolina, Home Builders Association of York County, Soni Construction and Shea Homes over the increase.

Limited uses

Impact fees apply only to specific capital projects and must be used within a specific time period.
“It cannot be used for operating expenses,” said school district spokesman David Knight.
Tony Walker, the district’s finance director, said the fees are limited in how they can be used and can be levied only on future development. They could not apply retroactively to homes already on the tax rolls.
“We looked at it in the last couple of years when it opened up for school districts, but it’s very restrictive,” Walker said. “You’ve got to have a plan in place and a very detailed study. It just impacts the homes in a set area….
“We could do some small projects with it, but it’s not going to build a school,” Walker said, noting that the new Indian Land High School being built in the Panhandle might cost as much as $100 million.
Once the new high school gets built, seventh and eighth graders at the middle school will be moved to the current ILHS campus on River Road, with fifth and sixth graders at the middle school.
That will help relieve overcrowding at Harrisburg, Indian Land and the new Van Wyck Elementary School, making them grades K-4.
“It can go along with what we expect at about 100 kids per building, and then all the sudden, we’re hit a year where we get 200-300 kids in one building. That has been a challenge,” said Lydia Quinn, the school district’s planning and accountability executive director.   

Solutions needed

McGriff said it’s time for the county and school district to work together on solutions.
“We have to find a better way of partnering to understand what we do benefits each other…. We’ve got to be proactive,” McGriff said.
The county and school district met jointly on one occasion in 2006 before the Great Recession hit to open dialogue, but then never met again, said school board member Margaret Gamble. At the time, there was talk of enacting a $10,000 impact fee that would be split. However, the Great Recession hit two years later, marking a strong economic downturn.   
“We got nothing,” said school board member Don McCorkle, noting that little was accomplished.
Harper said going forward, the two bodies must work closely together in addressing growth issues to relieve any ongoing tensions.
“I’ve been on here (county council) for six years, and this is the first time we’ve gotten together. We need to do this at least once a year…. Everybody wants this place to be better,” Harper said.

Follow reporter Greg Summers on Twitter @GregSummersTLN or contact him at (803) 283-1156.