Vermont’s education fund, the pot of money that finances the state’s schools, is brimming with a surplus of nearly $64 million.
But despite that windfall — caused primarily by lower-than-expected spending on special education and leftover funds from the previous year — Vermonters’ property tax bills are slated to grow in the coming year.
In the “December 1 Letter,” an annual slate of financial projections required by statute, Vermont Tax Commissioner Craig Bolio predicted increases in both homestead and non-homestead tax rates, even if all of the roughly $64 million surplus was used to pay down rates.
Those projected rate hikes are caused by two factors, Bolio said in an interview: rising property values statewide and increased local spending on education.
“If spending was flat, property appreciation wouldn’t necessarily, on its own, increase bills,” Bolio said. “But those two things coupled are what puts the pressure on the rate.”
In Vermont’s byzantine education funding system, tax rates vary depending on local school spending. School budgets, however, are paid for through a state pot of money, the education fund.
When the state education fund has a surplus, the Legislature and governor can use that money to buy down local tax rates or to finance other programs.
The state has different rates for homestead property, meaning primary residences, and non-homestead property, meaning second homes and commercial real estate.
If the state uses all of the surplus dollars to offset property taxes, the average property tax rate — combining both homestead and non-homestead rates — is projected to grow by 3.7%. But if some of that money is used elsewhere, tax rates could rise even more sharply, by an average of 8.3%, officials project.
Average homestead property rates are expected to rise from $1.50 to $1.57 per $100 of property value, if the surplus is used to buy down rates. The average non-homestead rate is expected to rise from $1.57 to $1.64 per $100 of property value.
Most homestead taxpayers pay based on their income instead of their property value. The average income rate — 2.31% — is not expected to change in the upcoming year.
This year’s expected roughly $64 million surplus in the fund was caused by a number of factors, including $17 million carried over from the previous year and $45 million in unspent education funds.
The latter sum is related to special education, officials said. In effect, the Agency of Education had set aside a chunk of money to pay for special education services in local schools, and costs turned out to be smaller than expected.
“There was more money available than was required, so it was reverted,” Ted Fisher, a spokesperson for the Agency of Education, said in an email.
Lawmakers and Gov. Phil Scott will have the final say over what that extra money gets used for. During the most recent legislative session, lawmakers wrangled over what to do with a nearly $90 million surplus, finally settling on a compromise that brought down tax rates and funded universal school meals and toxic chemical remediation.
“The Governor is recommending the Legislature apply all this year’s surplus to reducing property tax rates in FY24,” Thursday’s letter reads.
Over the past three years, fluctuations in tax rates and the education fund have “been somewhat chaotic,” Bolio said. During that time, Vermont’s education fund has enjoyed unusual surpluses.
In late 2020, officials predicted a nearly $60 million hole in the fund. Instead, federal pandemic relief and better-than-expected tax receipts created an $18.6 million surplus.
Last year, the fund saw a $90 million windfall, a figure officials said was unprecedented.
Prior to 2020, surpluses in the education fund would reach $15 million, “at most,” Bolio said.
“I feel like we should be really thoughtful about what the future looks like,” he said. “Because I don’t think we should expect to see these kinds of surpluses moving forward.”