Funding for schools pits farmers against city dwellers in rural Minnesota

CLEVELAND, MINN.

School officials in this southern Minnesota town of 715 people will be asking voters on Monday for $18 million, a hefty sum for a rural school district with only one school.

They hope their request — to add a gym and classroom space — goes better than the last time around.

Not quite a year ago, 70 percent of the Cleveland district voters who went to the polls rejected a much larger construction bond issue of $34 million. And they weren't alone.

Across rural Minnesota last year, voters in more than 20 school districts rejected requests for more taxpayer money to build, many by overwhelming margins. In all, voters in outstate Minnesota said "no" to nearly $600 million worth of school construction and renovation projects.

At the root of the rejection, many say, is a divide between farmers and city dwellers over who should bear the brunt of the funding in rural districts, where the tax base is heavily dependent on agricultural land.

"Property tax on school construction bonds has become quite a battle between town people and farm people," said Pat O'Toole, a farmer who is on the school board of the Russell-Tyler-Ruthton district in southwestern Minnesota.

When a district asks voters for money to build a new school or to renovate an old one, individual farms may wind up paying several hundred thousand dollars in additional taxes over the life of a 20- or 30-year construction bond.

As Cleveland awaits its voters' decision Monday, Gov. Mark Dayton and legislative leaders from both parties are working on a plan to significantly cut school construction taxes on farmland.

A proposal for a 40 percent cut in a tax bill passed by the Legislature last year died on Dayton's desk for unrelated reasons. Now, the administration is working with lawmakers to get the same proposal passed this year. The tax break could be worth up to $34 million a year for more than 74,000 farmers.

Minnesota farmers already get a host of tax breaks. Certain types of agricultural machinery are exempt from sales taxes, which will save farmers $67.6 million this year alone, while a break on repair and replacement parts will save them $19 million. They also receive an agricultural homestead market value credit.

Farms were never included in the statewide general tax on commercial and industrial property. Although farmland pays some levies that go toward school operations, farmers are exempt from voter-approved school operating taxes. And on school construction levies, farmland is taxed at a lower rate than homes, businesses and vacation properties.

The Legislature "has made the decision that the ability to pay, especially for small farmers, is lower," said Tom Melcher, director of the School Finance Division of the Minnesota Department of Education. "And this has been the policy for many, many years."

Despite existing tax breaks, farmers and their advocates say they're caught in a bind: The commodity boom of the early 2000s pushed up property values, which boosted taxes. But in recent years crop prices have collapsed — by 47 percent on a bushel of corn, for instance. That means less revenue for farmers at a time when their property taxes are rising.

In Cleveland, 52-year-old Lance Fahning is the fifth generation to run his family dairy farm, going back to 1884. His father, Wayne, is still active on the farm at age 77 and served for nearly a decade on the local school board. Both men are proud of their school, one of a handful in Minnesota that houses students in all grades — preschoolers through high school seniors — under one roof.

But the Fahnings, who milk 109 cows, have been hit hard by low milk prices.

"It really bottomed out this summer," said Lance Fahning. "We need a higher milk price to get caught up on our bills."

Wayne Fahning estimated that, should it pass, the bond issue could raise the farm's taxes by about $10 an acre. With 325 acres — a relatively small farm by today's standards — the Fahnings could pay an additional $65,000 or more over the 20-year life of the school bond.

Neither Fahning would say how he plans to vote, but both expressed support for the school.

"We want a good school, for our kids and the community," Wayne Fahning said. "But we'd like to make it a little more fair in how things are paid for. Whether we pass our bond or not, let's get it straightened out."

Some economists question the wisdom of special carve-outs in the tax code for agriculture or other industries.

"The revenue has to get raised. So if you are giving someone a preference, everyone else pays more," said Norton Francis, a tax economist at the Urban Institute in Washington, D.C.

"The difference has much more to do with property-rich and property-poor districts," Olson said. "There are urban districts that are facing the same kind of inequity, although I would say there are more rural districts in that situation."

Olson has created a spreadsheet showing the cost of construction borrowing for every school district in the state, based on the number of students and the property values in the district. According to his calculations, for example, the St. Louis Park school district could pass a building bond in the same amount as Worthington, yet it would cost the typical homeowner in St. Louis Park only half as much as the homeowner in Worthington.

Most credit the original push for ag tax relief to Rep. Steve Drazkowski, R-Mazeppa, who said he got the idea for reform after talking with farmers in his district who saw their property taxes soar after a school construction levy passed.

But the November elections almost certainly intensified the bipartisan focus on the issue, with many farmers, once loyal to the DFL Party, voting for Republican candidates in one rural district after another.

Lt. Gov. Tina Smith, a potential DFL candidate for governor with a decidedly metro profile, has jumped on the farm tax cut bandwagon, giving it still more momentum. Smith said the state should do even more, arguing that its overall education funding efforts have fallen short.

Smith said the state should consider increasing its funding directly to schools, as well as boosting spending on special education, which has burdened local districts with a host of unfunded state and federal mandates.

Melcher, of the Department of Education, pointed out that the state used to give local districts more help with construction funding. In the 1990s, the state created a debt service equalization formula that paid about 11 percent of the debt service cost of local districts. The state's share has dropped to about 3 percent today, Melcher said.

Rep. Paul Marquart, DFL-Dilworth, sees the issue up close in his job as a high school social studies teacher in the Dilworth-Glyndon-Felton district in northwestern Minnesota. It's a question of fairness, not only for farmers, he said, but also for rural students.

"We have put farmers in a very unfair position when it comes to school building bonds," he said. "If rural Minnesota schools can't pass these bonds to upgrade their aging buildings and have the technology to build tomorrow's workforce, it's going to put rural students behind the rest of the state."

John Reinan • 612-673-7402 J. Patrick Coolican • 651-925-5042