A formula for fertilizer or disaster ?

Balancing the State’s Budget on YOUR Backs

OHIO’S LOCAL GOVERNMENT FUNDS and the ’06/’07 Biennial Budget

The Coalition Members County Commissioners’ Association of Ohio Ohio Municipal League Ohio Township Association Ohio Library Council Ohio Parks and Recreation Association

The Goal In the State of Ohio’s FY 2006/2007 biennial budget process: In the State of Ohio’s FY 2006/2007 biennial budget process: Assure no further cuts occur to the 3 funds Assure no further cuts occur to the 3 funds Return to the permanent law funding formula Return to the permanent law funding formula

Setting the Stage… The State’s Fiscal Picture Temporary sales tax expires Temporary sales tax expires Yielding about 1.25 Billion per FY Yielding about 1.25 Billion per FY FY 04/05 Biennial Budget – GRF $49 Billion FY 04/05 Biennial Budget – GRF $49 Billion expenses grew by 8% over 02/03 [GF 10.1%] expenses grew by 8% over 02/03 [GF 10.1%] Medicaid “pac-man” [40% of the FY 04/05 growth] Medicaid “pac-man” [40% of the FY 04/05 growth] Human services including Medicaid [30%] Human services including Medicaid [30%] Primary and secondary education [34%] Primary and secondary education [34%] Higher education [17%] Higher education [17%]

Setting the Stage… “Structural Deficit” Defined: “the funding of ongoing expenditures with one-time money” Defined: “the funding of ongoing expenditures with one-time money” Estimate is 3.8 Billion Dollars for FY 06/07 Estimate is 3.8 Billion Dollars for FY 06/07 One-time revenue components of FY 04/05 One-time revenue components of FY 04/05 Temporary sales tax 2.5 B Temporary sales tax 2.5 B Federal Medicaid Fiscal Relief 771 M Federal Medicaid Fiscal Relief 771 M Tobacco Trust Fund Money 234 M Tobacco Trust Fund Money 234 M Freeze of Local Government Funds 297 M Freeze of Local Government Funds 297 M

Setting the Stage… Tax Expenditure Limitation Proposed as Constitutional Amendment sponsored by Citizens for Tax Reform & Joint Legislative Resolutions Proposed as Constitutional Amendment sponsored by Citizens for Tax Reform & Joint Legislative Resolutions Restricts state spending growth to the prior year’s level plus an increase for inflation and population adjustments Restricts state spending growth to the prior year’s level plus an increase for inflation and population adjustments Spending “cap” can be exceeded only if: Spending “cap” can be exceeded only if: legislation passed by 3/5 vote of the Legislature legislation passed by 3/5 vote of the Legislature Approved by the governor Approved by the governor Receives a majority vote at a statewide election Receives a majority vote at a statewide election Prohibits “unfunded mandates” Prohibits “unfunded mandates” 7.25% of state revenues to the Local Government Fund 7.25% of state revenues to the Local Government Fund Vote required for local governments’ spending/tax increase Vote required for local governments’ spending/tax increase Increase spending beyond inflation and population adjustments Increase spending beyond inflation and population adjustments Levy a new tax or increase the rate of an existing tax Levy a new tax or increase the rate of an existing tax

Proposed Budget - Spending $51.4 Billion in GRF over the Biennium $51.4 Billion in GRF over the Biennium Lowest rate of GRF increase in 40 years Lowest rate of GRF increase in 40 years FY $25.4 Billion – 1.1% FY $25.4 Billion – 1.1% FY $26.0 Billion – 2.3% FY $26.0 Billion – 2.3% Many agencies spending less than in 2000 Many agencies spending less than in 2000 Reduces or holds flat 36 of 68 state agencies Reduces or holds flat 36 of 68 state agencies Growth drivers curtailed Growth drivers curtailed Medicaid - $577 Million increase after cuts to save $832 Medicaid - $577 Million increase after cuts to save $832 $8.1 Billion / 38% of all state spending [40%] $8.1 Billion / 38% of all state spending [40%] Education Education K-12 – FY ’06 $9.37 Billion/2% - FY ’07 $9.61 Billion/2.5% K-12 – FY ’06 $9.37 Billion/2% - FY ’07 $9.61 Billion/2.5% Higher Ed – FY ’06 $2.47 Billion/1% - FY ’07 $2.52 Billion/2% Higher Ed – FY ’06 $2.47 Billion/1% - FY ’07 $2.52 Billion/2%

Proposed Budget – Tax Reform Property Tax Property Tax Business Tangible Personal Property Business Tangible Personal Property Machinery & Equipment Machinery & Equipment Assessment rate 12.5% in ‘06 and none in ’07 Assessment rate 12.5% in ‘06 and none in ’07 New purchases not taxed New purchases not taxed Inventory [phasing out at 2%/year / no replacement] Inventory [phasing out at 2%/year / no replacement] Maintain 21% rate for ’06/ and ’07 [instead of 19% / 17%] Maintain 21% rate for ’06/ and ’07 [instead of 19% / 17%] 21%/ %/08 – 7%/09 – gone/ %/ %/08 – 7%/09 – gone/2010 Furniture, fixtures, and “all other” stay taxable [25%] Furniture, fixtures, and “all other” stay taxable [25%] REIMBURSEMENT to local governments REIMBURSEMENT to local governments Held harmless through FY 2011 Held harmless through FY 2011 Phased out from FY 2012 through FY 2018 Phased out from FY 2012 through FY 2018

Proposed Budget – Tax Reform Personal Income Tax Personal Income Tax Cut rates 21% over 5 years Cut rates 21% over 5 years Revenue lost: ’06 – $ 325 M / ’07 – $690 M Revenue lost: ’06 – $ 325 M / ’07 – $690 M $2 Billion in reduced collections by 2010 $2 Billion in reduced collections by 2010 Corporate Franchise Tax Corporate Franchise Tax Phased out over 5 years Phased out over 5 years Replaced with a “Commercial Activity Tax” CAT Replaced with a “Commercial Activity Tax” CAT Gross proceeds from sales -.26% rate Gross proceeds from sales -.26% rate $1.5 Billion in collections in 2010 $1.5 Billion in collections in 2010 Sales tax – no base expansion Sales tax – no base expansion

Proposed Budget - Tax Reform Property tax rollbacks reimbursement REMAINS Property tax rollbacks reimbursement REMAINS Real property [10% - 907M] – but Commercial/Industrial removed Real property [10% - 907M] – but Commercial/Industrial removed Owner occupied [2.5% - 128M] Owner occupied [2.5% - 128M] Homestead Exemption / Senior citizen reduction [65M] Homestead Exemption / Senior citizen reduction [65M] About $308 Million in 2002 [28% of total collections] About $308 Million in 2002 [28% of total collections] Compared to HB th GA - last draft provisions Compared to HB th GA - last draft provisions Tangible personal property tax eliminated Tangible personal property tax eliminated local governments NOT reimbursed for lost revenue unless supporting debt issuance local governments NOT reimbursed for lost revenue unless supporting debt issuance About $463 Million in 2003 [28% of total collections] About $463 Million in 2003 [28% of total collections] Corporate franchise tax LGF’s percentages rolled back Corporate franchise tax LGF’s percentages rolled back To reflect BAT calculation’s “neutrality” To reflect BAT calculation’s “neutrality” Sales tax base expansion Sales tax base expansion County sales tax extended to expansion County sales tax extended to expansion LGF’s contributions increase from expansion LGF’s contributions increase from expansion

The Local Government Funds

The LGFs in Jeopardy… What’s At Stake? Essential everyday local services: Essential everyday local services: Police/sheriff patrol & response Police/sheriff patrol & response Fire and EMS response Fire and EMS response Homeland security Homeland security Sanitation, recycling, and yard waste services Sanitation, recycling, and yard waste services Libraries Libraries Criminal justice/public safety Criminal justice/public safety Parks and recreation programming Parks and recreation programming Winter road/street snow removal Winter road/street snow removal

The LGFs in Jeopardy… What’s At Stake? The services that: The services that: Only local governments provide Only local governments provide Keep our residents safe and secure in their homes and in their communities Keep our residents safe and secure in their homes and in their communities

LGFs Contributions to Local Government’s Revenues Libraries – only source of funding for 176 of Ohio’s 251 library districts Libraries – only source of funding for 176 of Ohio’s 251 library districts Counties – up to 15% of the general fund Counties – up to 15% of the general fund Municipalities – average 10% to 25% Municipalities – average 10% to 25% Townships – in many over 50% Townships – in many over 50% Park districts - significant Park districts - significant

A History of Partnership Local Government Fund created in 1934 Local Government Fund created in 1934 Responding to the Constitutional Amendment of 1933 limiting unvoted property tax to 10 instead of 15 mills [“inside millage”] Responding to the Constitutional Amendment of 1933 limiting unvoted property tax to 10 instead of 15 mills [“inside millage”] In HB 134 – creating Ohio’s first sales tax In HB 134 – creating Ohio’s first sales tax Stated purpose for the tax was to “support local government activities” Stated purpose for the tax was to “support local government activities” 40% of the 3% sales tax went to the LGF 40% of the 3% sales tax went to the LGF

The Funds Today Local Government Fund [1934] Local Government Fund [1934] 4.2% of the following state taxes 4.2% of the following state taxes Personal income tax Personal income tax Sales & use tax Sales & use tax Corporation franchise tax Corporation franchise tax Public Utility tax Public Utility tax Kilowatt hour tax – 2.646% Kilowatt hour tax – 2.646% Replace revenue lost due to electric deregulation Replace revenue lost due to electric deregulation Dealers in intangibles tax – 62.5% Dealers in intangibles tax – 62.5% Distributed by situs to the counties Distributed by situs to the counties

The Funds Today Local Government Revenue Assistance Fund Local Government Revenue Assistance Fund 1989 [HB 71 – FY88/FY89 biennial budget] 1989 [HB 71 – FY88/FY89 biennial budget] Provide additional support to local governments Provide additional support to local governments Provide different distribution formula from the LGF Provide different distribution formula from the LGF.6% of the following state taxes [was to go to.7%].6% of the following state taxes [was to go to.7%] Personal income tax Personal income tax Sales & use tax Sales & use tax Corporation franchise tax Corporation franchise tax Public Utility tax Public Utility tax Kilowatt hour tax –.378% Kilowatt hour tax –.378% Replace revenue lost due to electric deregulation Replace revenue lost due to electric deregulation

The Funds Today Library & Local Government Support Fund Library & Local Government Support Fund Created in 1985 [HBs 291 & 146] Created in 1985 [HBs 291 & 146] Replace revenue lost from repeal of the intangible property tax Replace revenue lost from repeal of the intangible property tax 5.7% of the personal income tax [originally 6.3%] 5.7% of the personal income tax [originally 6.3%] Major support for Ohio’s 251 library districts Major support for Ohio’s 251 library districts 176 rely completely on the LLGSF 176 rely completely on the LLGSF

Undermining the “Partnership” Contribution to the LGF from the major tax sources reduced from 4.6% to 4.2% Contribution to the LGF from the major tax sources reduced from 4.6% to 4.2% “Temporarily” done in 1991 “Temporarily” done in 1991 Reduced permanently in 1995 Reduced permanently in 1995 Contribution to the LGRAF from the major tax sources was to increase to.7% Contribution to the LGRAF from the major tax sources was to increase to.7% Contribution to the LLGSF from the personal income tax reduced from 6.3% to 5.7% Contribution to the LLGSF from the personal income tax reduced from 6.3% to 5.7%

Undermining the “Partnership” No “credit” for revenues from: No “credit” for revenues from: 1 cent temporary sales tax increase 1 cent temporary sales tax increase Kilowatt hour tax for FY 04/05 Kilowatt hour tax for FY 04/05 Reclassification of taxpayers of the dealers in intangibles tax [HB 405] Reclassification of taxpayers of the dealers in intangibles tax [HB 405] If dealer owned/affiliated with a financial institution or insurance company – all to state If dealer owned/affiliated with a financial institution or insurance company – all to state

Undermining the “Partnership” The FY 02/03 “freezes” The FY 02/03 “freezes” Originally at the FY 2001 annual level for both years Originally at the FY 2001 annual level for both years Lesser of “freeze” or statutory formula Lesser of “freeze” or statutory formula 40 Million additional “correction” 40 Million additional “correction” The FY 04/05 “freeze” The FY 04/05 “freeze” Fixed monthly distributions for both years at the amount received in FY 03 Fixed monthly distributions for both years at the amount received in FY 03

Undermining the “Partnership” The Business Tax Phase-outs: The Business Tax Phase-outs: Speed-up of elimination of the personal property tax on business inventory Speed-up of elimination of the personal property tax on business inventory Phase-out of reimbursement for $10,000 exemption on business tangible personal property Phase-out of reimbursement for $10,000 exemption on business tangible personal property

Resources Reduced… over the last 2 Bienniums Revenue “lost” to Local Governments: Revenue “lost” to Local Governments: LGFs “freeze” = $ 340 Million LGFs “freeze” = $ 340 Million Business Taxes phase-outs = $ 54 Million Business Taxes phase-outs = $ 54 Million Inventory Personal Property Inventory Personal Property Tangible Personal Property Exemption Tangible Personal Property Exemption TOTAL= $ 394 Million TOTAL= $ 394 Million

And now…The Proposed Cuts… by the numbers 20% for Counties and Cities 20% for Counties and Cities “It’s more like a 2% cut to a city’s budget.” Taft Spokesman Orest Holubec “It’s more like a 2% cut to a city’s budget.” Taft Spokesman Orest Holubec Or 2+% for counties Or 2+% for counties 10% for Villages and Townships 10% for Villages and Townships “Would equate to a 2.3% cut” OBM Director Tom Johnson “Would equate to a 2.3% cut” OBM Director Tom Johnson 5% for Libraries 5% for Libraries Due to their exclusive reliance on LGF Due to their exclusive reliance on LGF

The “Appropriations” Local Government Fund Local Government Fund From $ Million ‘03/’05 to $ Million ‘07 From $ Million ‘03/’05 to $ Million ‘07 At $ Million in 1997 At $ Million in 1997 Local Government Revenue Assistance Fund Local Government Revenue Assistance Fund From $ 94.6 Million ’03/’05 to $ 77.4 Million ’07 From $ 94.6 Million ’03/’05 to $ 77.4 Million ’07 At $ 81.3 Million in 1997 At $ 81.3 Million in 1997 Library and Local Government Support Fund Library and Local Government Support Fund From $ Million ’05 to $ Million ’07 From $ Million ’05 to $ Million ’07 At $ 448 Million in 1999 At $ 448 Million in 1999

The State’s “Savings” Fiscal Year 2006 Fiscal Year 2006 At the “freeze” level = $ 180 Million At the “freeze” level = $ 180 Million With the additional cuts = $ 103 Million With the additional cuts = $ 103 Million ON THE FORMULA $ 283 Million ON THE FORMULA $ 283 Million Fiscal Year 2007 Fiscal Year 2007 At the “freeze” level = $ 235 Million At the “freeze” level = $ 235 Million With the additional cuts = $ 164 Million With the additional cuts = $ 164 Million ON THE FORMULA $ 399 Million ON THE FORMULA $ 399 Million For the Biennium $ 700 Million For the Biennium $ 700 Million

In Summary… The Good: The Good: Cuts not effective until Jan 1, 2006 Cuts not effective until Jan 1, 2006 Reimbursement for Property Tax Rollbacks Reimbursement for Property Tax Rollbacks Business TPP elimination - Held harmless 5 yrs Business TPP elimination - Held harmless 5 yrs The Bad: The Bad: What “statutory formula”? What “statutory formula”? EPA solid waste disposal fee increases EPA solid waste disposal fee increases $1.75/ton for taking EPA off GRF $1.75/ton for taking EPA off GRF $1.00/ton for DNR Recycling & Litter Prevention $1.00/ton for DNR Recycling & Litter Prevention Indigent Defense reimbursement cut 1.2 Million Indigent Defense reimbursement cut 1.2 Million No Sales Tax base broadening No Sales Tax base broadening The REALLY UGLY - Local Governments share disproportionately in the cuts The REALLY UGLY - Local Governments share disproportionately in the cuts