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If voters approve Azle Independent School District’s proposed tax rate “Penny Swap” in the September 8 tax ratification election, the district will indeed get more money from the state — just know you are also voting for a backdoor tax increase that will raise your taxes in the future.

The easiest way to illustrate this is to imagine that Bill Gates comes to Azle tomorrow and decides to pay off all the district’s bond debt. Without the Penny Swap, the Azle ISD tax rate would be then lowered by the school board to $1.04 (per $100 of home value). If the Penny Swap passes, it would only be lowered to $1.17.

The tax rate “swap” is trading a temporary tax that can only repay bonds for a permanent tax used for general funds. Here’s how.

By state law, for Azle ISD the maximum tax rate for Maintenance and Operations (M&O) without voter approval via a tax ratification election is $1.04 (our current tax rate). The maximum rate with voter approval is $1.17 (the proposed new rate). The district can use M&O funds for anything. The original intention was that if a school district was in financial trouble, it could come to voters for up to an additional 13 cents.

The other tax we pay to Azle ISD is for Interest and Sinking (I&S). This money is specifically earmarked for paying off bond debt. The rate increases when voters approve a bond for AISD and decreases when a bond is paid off, or if the board votes to decrease it because revenues exceed what is needed to make the bond payments.

Azle ISD’s website states it can afford to lower the I&S rate by $0.13 “due to higher valuations and fiscally responsible refinancing over the years.” Don’t get too excited – they will only lower the I&S rate by 13 cents if you agree to raise the M&O rate by 13 cents. This is incredible for two reasons – first, “over the years” must mean the last two years, because the I&S rate was raised by 13 cents just two years ago; and second, they will only lower it if we agree to raise another tax rate to the highest level allowed by state law. Again, if the Penny Swap doesn’t pass, the board won’t give you an I&S tax reduction, even though they just said they could afford to. So much for “fiscally responsible.”

A couple of years ago, Texas school finance wonks figured something out. Even though there wasn’t a crisis, districts could convince taxpayers to vote to increase their M&O rate and capture additional funds from the state — so long as the school board promised to use its power to decrease the I&S rate by the same amount (or more; Azle isn’t being as generous as some other districts).

Thus, the Penny Swap was born, and it sounds like a win-win. The overall tax rate stays the same, and the state partially matches the additional M&O funds, so the overall revenue the district gets goes up.

But there are a couple of catches. When your property value increases, even though the AISD tax rate stays the same, the amount of taxes you pay goes up. Those extra funds collected from the I&S tax can only be used to pay off bond debt, which are fixed payments per year. As I&S revenue exceeds what is actually needed to make the bond payments, the board is supposed to lower the I&S tax rate (the power the board is using to make the Penny Swap happen).

By doing the Penny Swap, the 13 cents cut from I&S doesn’t go back to taxpayers but instead goes to M&O, where the district can do anything with it. When M&O revenue rises with property value increases, the district gets to spend it any way it wishes — it is not forced to pay back bonds with it, or lower your taxes.

The other potential is that after the swap is done, the school board can vote to increase the I&S tax back up as much as 13 cents anytime it wants to. Midland ISD has already done just that because they decided they “cut taxes too much” when they did a Penny Swap.

Make no mistake, voting for the Penny Swap is voting for your taxes to increase in the future. Again, we do get that additional $2.5 million from the state (which of course comes from other taxes we pay), and the state keeps reducing what it pays as locally collected per-student tax revenue goes up, so an argument can be made the money is needed and it’s worth it. However, it’s not free “reward” money from the state. In fact, if we ever find ourselves classified as a “rich” district like neighboring Aledo has, the state will take a lot of it away. I&S taxes for bond debt are protected from “Robin Hood” recapture, but everything above $1.06 in M&O taxes is subject to a very harsh repayment percentage to the state.

I haven’t heard plans from the district on what they intend to do with the extra money (which is not just the extra $2.5 million from the state, but also the other $8 million from the M&O tax increase). I also haven’t heard any explanation regarding why they are not having this election in November on the uniform election date, or why the only polling place is the Azle ISD Administration building – but the true reasons seem pretty obvious to me.

I would caution taxpayers in all of these “Penny Swap” elections to look carefully at what they are voting for, even if they are “popular.” Like the old saying goes, if something seems too good to be true, it probably is.

This is an outside commentary submitted and published with the author’s permission. If you wish to submit a commentary to Texas Scorecard, please submit your article to [email protected]

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