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Reform of Local Public Finance in Virginia

Virginia’s system of local public finance is an anachronism badly in need of reform. To paraphrase (from memory) Chris Braunlich – Vice President of the Thomas Jefferson Institute for Public Policy, “it is a relic of the days when dairy farming was a principal industry in Fairfax County.” The result is an indirect subsidy to real estate development and a frustration of efforts to preserve open space. Virginia is financing twenty-first century services with nineteenth century revenues. If open space preservation is to be the policy of the Commonwealth, the way we provide funds to local government needs to be changed.

 

This series will summarize a memo, 180 Acres a Day – Local Public Finance v. Open Space Preservation in Virginia. Readers interested in further detail, including tables of data analysis can obtain a copy of the memo by contacting the author at his email address.

 

The problems with local public finance in Virginia are illustrated by the way the Commonwealth distributes educational funds to localities. Understanding state educational funding is the key to understanding the larger problem. Such an understanding also points the way to reform.

 

Like most, if not all, states, Virginia distributes aid for public education according to need. ’Rich’ localities receive less funding per student than ‘poor’ localities. Need is determined by a formula – The Composite Index of Local Ability to Pay – CI for short. The CI is used to apportion a biennial fixed appropriation among Virginia’s localities.

 

The CI combines three weighted variables. The most important of which, accounting for fully half of the input, is True Value of Property (TVP). TVP is, in turn, composed of two sub variables True Value of Real Estate (TVRE) and True Value of Public Service Corporation Property (TVPSCP).

 

TVRE is the aggregate value of all real estate in the locality: houses, apartment and commercial buildings, farms and open space land. Each variable is reduced to a per capita (and per public school pupil) value, and then compared to the corresponding statewide values. These results are further combined to yield a four place decimal fraction. The larger this number, the “richer” the locality, and the less it receives in state funding. If state funding decreases, local revenues must increase to make up the loss. In the case of localities with valuable open space land, this means that real estate taxes must increase. At some point the tax burden on owners of open space forces them to sell, often for development.

 

To repeat, valuable open space land causes a locality’s CI to increase, leading to an increase in local real estate taxes and eventual loss of that very same open space, which caused the CI to increase in the first place!

 

Now the first thing to notice is the common sense observation that TVRE bears no relation to the ability of local citizens to pay their real estate taxes. That is because the CI is not based upon the ability of local people to pay anything, it is based upon the “ability” of the locality to collect taxes – the so-called revenue capacity of each locality. Revenue capacity can be described as the local revenues which any local government would realize if its various tax bases were taxed at statewide average rates of extraction. For this reason, I would argue that the CI is misnamed – it should be called the Composite Index of Local Ability to Collect.

 

As an exercise in pure comparative revenue capacity, the CI considers Virginia’s localities as the sum of their tax bases, and nothing else. In the case of real property, and most significantly open space land, the CI looks at whatever the market can bear. But it is a truism that the market ‘knows’ the price of everything and the value of nothing. Virginia’s remaining open space has value not reflected in its price. Left out of the calculation is the value, for example, of open space as a moderator of air and water pollution. Also ignored are the various spiritual amenities provided by open space – it is beautiful to look at.

 

From the Shenandoah Valley and the Appalachian Mountains to the Chesapeake Bay, Virginia real estate is reduced to the least common denominator of price. All qualitative distinctions are ignored. This is reductionism run amok.

 

Nor is this observation merely academic or abstract. In each of the three most recent iterations of the CI, disadvantaged localities had higher than average per capita open space valuations, dramatically so in the case of those most severely impacted.

 

I am not the first to notice perversity in the CI. In 2002, the Joint Legislative Audit and Review Commission (JLARC), the oversight agency of the General Assembly called for a reform of the CI to reflect the special needs of Virginia’s high population density urban areas. The CI thus manages the neat trick of simultaneously short changing our children in urban areas, and hastening the loss of our remaining natural heritage.

 

Of course pointing out perversity in the CI is one thing, reforming it is something else altogether. I gather that there is wide spread dissatisfaction with the CI, but like Dostoevsky’s families, each locality is unhappy in its own way. Any reform must immediately recognize that the CI is a zero sum game. Any locality’s gain comes at the expense of a loss elsewhere.

 

If the CI is to be changed, it must be done by the General Assembly, and is thus an inherently political matter. This means that the reform must be broad based, affordable and financed, preferably by a new source of local revenues. Also we cannot start from scratch with a blank slate. Any reform must recognize that the existing CI is a legacy which cannot be ignored. All localities will compare any reformed CI to what they would have received under the existing CI.

 

I suggest a multi-step reform which I submit meets these criteria.

 

Next: Reform of the Composite Index.

 

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