Introduction

Property tax abatements caused 180 school districts across Ohio to forgo $125.6 million in revenue, according to financial reports the districts issued covering the 2017 fiscal year. With $43.8 million, or a little more than a third of that amount, schools across the state could refill the positions of 662 librarians whose positions were eliminated between the 2005-2006 school year and 2016-2017.[1] That demonstrates that while the forgone revenue from tax abatement is relatively small compared to total K-12 spending, it’s still quite meaningful.

Photo: Cleveland Metropolitan School District

The reports are the first of their kind under a new rule by the nonprofit that sets financial accounting standards for local governments, the Governmental Accounting Standards Board (GASB). The new GASB standard covers tax abatements in which tax revenue is reduced because of an agreement between a government and a taxpayer. Generally, it applies when a government agrees to forgo revenue, and the taxpayer promises to take specific action contributing to economic development or otherwise benefiting the government or citizens broadly.[2] Governments that abate taxes are required to disclose in notes to their financial statements the specific taxes being abated, the authority for doing so, and the criteria that make a recipient eligible. The report should include the amount abated under each program. The standard covers governments that use Generally Accepted Accounting Principles (GAAP), which includes most school districts in the state. Though they can’t abate taxes themselves and don’t have to report the same details as those that do, school districts must report abatements that are approved by other governments and affect their revenue.[3]

A substantial share of the data in this study was collected by Good Jobs First, a national nonprofit that focuses on accountability for tax breaks. Policy Matters Ohio also reviewed school districts’ financial reports. Altogether, we reviewed reports from 464 of the state’s 608 districts, of which 180 disclosed specific amounts of abatements.[4] Most of the disclosures report on property tax abatements under two major such programs available under state law, the Enterprise Zone (EZ) and Community Reinvestment Area (CRA) programs. This study relies largely on school district financial statements, without additional explanation.

The district reports we reviewed include all 100 of the state's largest districts and a majority of the public-school students. The abatements came about because of the action of cities, villages, counties and townships, but schools, as the recipient of nearly two-thirds of Ohio’s property-tax levies, are the ones that forgo the most revenue when such taxes are abated for economic development.[5]

Though the data omit a substantial amount of tax abatement for reasons discussed below, they allow a partial look at the impact of such abatements on schools across Ohio. Data from the 25 districts among the 464 that reported the largest amount of forgone revenue are shown in Table 1. Cleveland had by far the largest total, at more than $34.2 million, followed by Cincinnati, at almost $18.4 million. While most are among the state’s larger school systems, some much smaller districts also showed up on the list, including Warrensville Heights, Garfield Heights and Rossford. If the districts reported receiving compensation from local governments for abatements, we included that in the numbers in Table 1. Most of the top 25 received such compensation. All but Mansfield, No. 25 on the list, were located in one of the state’s eight largest metro areas. These 25 accounted for $99.4 million in forgone revenue, or nearly four-fifths of the total. They are scattered across six metro areas, though none are in the Akron or Canton areas and just one is in Youngstown. Twenty-two of the 25 experienced revenue losses of at least $1 million.

Reports from the Big 8 urban school districts are shown in Table 2. Cleveland and Cincinnati together accounted for most of the reported abatements among the Big 8. The Canton City district reported that it had implemented the new standard, but that it did not have any "material" abatements. Akron did not report, but told Policy Matters Ohio that the single abatement there was immaterial to its financial statements.[6] The six cities that reported abatement amounts accounted for $58.5 million in total.

Though the Columbus district reported a considerably smaller total than Cleveland or Cincinnati, the revenue loss for districts across metropolitan Columbus came close to the total in the Ohio portion of the Cincinnati metro area (only Ohio data was collected for this report, the Cincinnati area includes parts of Kentucky and Indiana). Altogether, as shown in Table 3, abatements in Ohio’s eight largest metro areas accounted for a total of nearly $120 million in forgone revenue last year, the overwhelming share of abatements in the 464 districts covered in this report. Together, these metro areas include 311 districts. Another 153 districts outside the eight metro areas accounted for less than $6 million in abatements in Fiscal Year 2017. Overall, 69 of the 100 districts with the largest student enrollment reported specific forgone revenue. Clearly, abatements are concentrated in metro areas and in larger school districts.

The total of $125.6 million reported in forgone revenue does not include significant abatements that GASB does not require to be reported. Tax increment financing[7] (TIF) accounts for more than half of the property tax abatement in Ohio, but GASB does not require most of it to be reported—or reporting of payments that may be received in lieu of taxes to make up for lost revenue on TIF properties. While a small number of districts included TIF abatements, most didn’t, so the school district reports may understate how much tax abatement is occurring. For instance, though it wasn’t cited in the district’s note on tax abatement in its financial report, The Dayton Daily News reported recently that the Dayton Public Schools didn’t see about $1.22 million in abated taxes because of tax-increment financing there.[8] According to the attorney general’s economic development manual, as of June 2016, the state’s three most populous counties – Franklin, Cuyahoga and Hamilton – had a total of 526 active TIFs.[9]

The data also are understated because many districts haven't reported on details of other abatements that affect them. In some cases, this may be because they deem them to be insignificant. Take the Canton City Schools, which reported that it did not have any "material" abatements, based on information from the county auditor.[10] Most of the 284 districts that did not report tax abatement amounts said that they had implemented the new abatement reporting standard, but that it had no effect on their financial position, or that it had no material effect. Indeed, GASB standards “relate only to significant (material) amounts,” GASB notes, and it does not provide specific guidance on what that means.[11] This represents an unfortunate gap in the GASB standard.

At least 20 other districts did not mention the GASB rule in their financial report and did not disclose figures on abatement amounts. Asked about these omissions, the office of the state auditor said that districts don’t have to provide a GASB 77 note if they have no agreements to evaluate, if the agreements don’t meet the GASB 77 definition or if the dollar amount of the agreements is immaterial.[12] It said further that districts don’t need to disclose a change in accounting principle in the first instance, and, “It is a matter of professional judgment whether it would be included” if the agreements don’t meet the GASB definition or are considered immaterial. While these may provide technical justification for the lack of reporting, the omission of any mention of abatement should not be acceptable. Any Ohioan should be able to look at the financial report of their local school district and see what tax abatement is costing. If it’s costing nothing, the district should say so – and explain how that is so if there are abatement agreements.

Under the new GASB rule, school districts are supposed to report compensation that they receive from governments that abate taxes (‘abating governments’) to make up for lost revenue.[13] Under Ohio state law, abating municipalities that levy income taxes are required to provide such compensation when new employee payroll from a CRA, EZ or TIF project is $1 million or more a year.[14] The municipality must attempt to negotiate a compensation agreement, and if none is implemented, half of the income tax from new employees minus certain costs goes to the school district. Local governments must give advance notice to school districts when they are planning to enter into CRA, EZ or TIF agreements, and in most instances, if an abatement meets certain thresholds, school board agreement is required. For instance, if a TIF deal is going to last more than 10 years or exceed 75 percent, school boards have a right to reject it. In many instances, school districts and cities may reach broader agreements on abatements.[15] Toledo and Cincinnati, for instance, have such agreements, while in Dayton, the school district just approved a new, 10-year agreement with the city.[16]

At least 42 districts reported as part of their GASB 77 disclosures receiving specific compensation from abating governments to make up for lost revenue. Altogether, these districts reported getting $18.4 million in compensation, compared to abatement amounts of $54.8 million. Thus, compensation made up about a third of the abatements reported in these districts. However, reporting of such compensation is not always complete. A number of districts with more than a single abating government did not break out the amounts by jurisdiction, though the GASB requirement on this point is unclear. And Cincinnati did not explicitly report in its tax abatement note on an agreement negotiated with the City of Cincinnati in the 1990s under which it receives $5 million a year and other benefits, and the city can give certain tax breaks without school board approval.[17]

Apart from its GASB 77 note, the Cincinnati district reported “revenues in lieu of taxes” of $38.57 million. These monies are received, the report says, “via agreements with the City of Cincinnati, Hamilton County and certain townships that overlap the District, in an attempt to “make whole” tax revenues that were lost via abatements, enterprise zones or Tax Increment Financing plans created within their jurisdictions.”[18] In response to questions from Policy Matters Ohio, the district said that these revenues include the $5 million from the city as part of the long-standing agreement.[19] Yet in the tax abatement section of its financial report, it omitted any mention of that and instead said: “The district is not receiving any amounts from this other government in association with the forgone property tax revenue.” The district told Policy Matters Ohio that it has raised this point with its auditors “and we will address it in next year’s financial statements.” It is likely to reword its tax abatement note.[20]

Like the Cincinnati district, a number of others – including many of those with the most forgone revenue from abatements – reported separate from their tax abatement notes under the GASB 77 standard that they had received payments in lieu of taxes (PILOTs). Most often, this probably involves tax increment financing. The Columbus school district, for instance, reported payments in lieu of taxes because of TIF agreements totaling $59.6 million. Westerville reported $3.4 million. But since the GASB standard does not require reporting on most forgone revenues from tax-increment financing deals, one can’t easily say how substantial the additional revenue loss, if any, is from the school district financial statements.[21] The net impact is even cloudier, since a school district’s state aid depends on its property taxes. State aid may increase if property values are reduced, yet is unaffected by payments in lieu of taxes that districts may receive.

The new accounting standard sheds new sunlight on how tax abatements affect schools in Ohio. The overwhelming majority of schools have adopted the standard and said so in their official financial statements, a positive step for transparency. However, that still leaves a picture that is woefully incomplete. The GASB standard doesn’t go nearly far enough in what it requires – and the state auditor should insist on consistent, uniform reporting that would add clarity even without any change in the standard. In New Mexico, the state auditor at the time the standard became effective delivered a spreadsheet to every local government in the state and instructed them to complete it, including the tax revenue forgone and any payments in lieu of taxes or similar compensation they have received from others.[22] Ohio’s auditor should do the same.

Ohio law already provides school districts with the authority to approve many significant abatement agreements. These vary according to the kind of abatement, with differing thresholds for when approval is mandated. A thorough assessment is needed to determine how school districts use these rights, whether the array of varying requirements needs standardization and, most importantly, if it provides appropriate protection. Another option: As some already have, local governments could consider excluding school districts from tax increment financing, insulating them from revenue losses.

Too often, school boards face the unpleasant choice of simply agreeing to new abatements or being perceived as opposed to economic development if they exercise their full rights and demand the best possible deal. While greater transparency won’t end this, it does allow for greater accountability.

Policy Matters Ohio previously has set forth recommendations on tax abatement disclosure as part of an earlier study on reports by local governments,[23] most of which would be useful for school districts as well. In addition, school districts should inform stakeholders whether they are protected when incentive requirements – for instance, job gains that have been promised – are not met. And in its own GASB 77 note, the state of Ohio should report what it spends in additional school aid to make up for local tax abatement losses.

As noted in our earlier report, the Auditor of State can play an important and positive role in taking advantage of the GASB 77 standard. The auditor should publicly announce a commitment to the fullest possible disclosure of tax abatements and adopt practices to achieve that, including to:

• Ensure that all school district Comprehensive Annual Financial Reports have a clear section on abatements. If they have no abatements, it should clearly say that. Not mentioning abatements will not be acceptable.
• Provide every school district required to report under the GASB standard with a spreadsheet and instructions to complete it.
• Demand consistency and completeness in school district reporting on compensation payments received to offset abatements that affect them, and require a full description of the terms of any agreements districts have with abating governments.
• Consider mandating that school districts report on forgone revenue from tax increment financing, in the interest of transparency and consistency across districts. Ask that they outline specifically how much they are receiving in compensation payments to offset forgone revenue from TIFs.[24]
• Augment the existing Summarized Annual Financial Reports currently shown on the Auditor’s web site at https://ohioauditor.gov/references/summarizedreports.html. Aggregation of GASB 77 data in one place, available and downloadable from a web site, is critical to making the best, full use of the standard. The auditor should use the uniform spreadsheets provided to all school districts to provide the data. It should allow readers to easily see in one place how much abatements are in every reporting school district, including the most up-to-date figures.[25]
• Use data available from other state agencies, such as the Development Services Agency Department of Taxation, to make sure that abatements reported elsewhere are being fully reported in financial statements.

Candidates for auditor in November’s state-wide election should discuss their intentions for strengthening tax abatement disclosure. Beyond the general statements the major candidates have made supporting robust reporting, each should describe more specifically the additional steps they will take to make it happen.[26]

The new GASB rule provides a peek, if still an incomplete one, at tax abatements that affect school districts across Ohio. Ohioans should make use of this new trove of information, while demanding that school boards and state and local elected officials take steps to fully implement the rule and provide maximum transparency.

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