What is the Penny Swap?

The Penny Swap, also known as a Voter-Approval Tax Ratification Election (VATRE) adds more funds to the district’s operating budget by swapping two cents from the district’s interest and sinking (I&S) tax rate to the district’s maintenance and operations (M&O) tax rate.

Under the school finance system, the Eanes ISD tax rate will be compressed from $1.13 to $1.1164. This election will NOT change the compressed tax rate, but it will allow the district to dedicate more of the money it collects to teachers and school operations.

Approval by voters would move two cents from the I&S tax rate to the M&O rate, resulting in a $1.1164 overall tax rate after compression from the current rate of $1.13. If voters do not approve the penny swap proposal, the overall tax rate will still be $1.1164 per $100 valuation, but approval by voters would generate an estimated additional $3.3 million of local tax revenue that stays in the community for school operations.

Why did the Board call for a Penny Swap?

Each year Eanes ISD sends more money back to the state than it keeps because of recapture. The Penny Swap increases the amount of local dollars Eanes ISD is able to keep in the district for operations.

The district has sent more than $1 billion of local tax receipts to the state through the current Texas school funding formula requiring property-wealthy districts like Eanes ISD to pay back (called recapture) any amount of property taxes collected over and above an equalized wealth level established by the legislature. In the 2019/20 fiscal year, Eanes ISD residents paid more operations tax dollars to recapture ($96 million) than they kept ($63 million) to fund the district’s operating budget.

How will the Penny Swap benefit the District?

Approval by voters would generate an estimated additional $3.3 million of local tax revenue that stays in the Eanes ISD community.

What is a Golden Penny?

The state divides the M&O portion of the tax rate into two tiers. In 2020-21, the first $0.9164 of the tax rate will be Tier I. All of the recapture paid by Eanes ISD ($96M in 19/20 and approximately $99M in 20/21) is from the money collected in Tier I. The first eight pennies of Tier II are known as Golden Pennies because tax receipts collected from them are not recaptured. For comparison sake, each penny in tier 1 is worth about $570,000 after recapture is paid while a Golden Penny is worth about $1,660,000.

Eanes ISD currently has 6 Golden Pennies. The Board of Trustees is seeking voters’ consent to access the two additional golden pennies which would increase operating revenues for the district by approximately $3.3 million in 2020-21 and more in subsequent years.

What language will be on the ballot?

The ballot language for the Penny Swap may be confusing to voters due to the technical language required by law. Please see the sample language voters will see on the ballot.

Eanes Independent School District Voter-approval tax rate election

RATIFYING THE AD VALOREM TAX RATE OF $0.9964 IN THE EANES INDEPENDENT SCHOOL DISTRICT FOR THE CURRENT YEAR, A RATE THAT WILL RESULT IN AN INCREASE OF 1.8 PERCENT IN MAINTENANCE AND OPERATIONS TAX REVENUE FOR THE DISTRICT FOR THE CURRENT YEAR AS COMPARED TO THE PRECEDING YEAR, WHICH IS AN ADDITIONAL $2,942,000.  VOTING “FOR” THE PENNY SWAP WILL RESULT IN A $1.1164 TAX RATE WITH $3.3 MILLION IN ADDITIONAL FUNDING TO SUPPORT TEACHERS.

Voting “against" the Penny Swap will result in a $1.1164 tax rate with no additional funding for teachers.

How can Eanes ISD afford to drop the tax rate?

For years, Eanes ISD has been dedicated to operating as fiscally responsible as possible and paying down debt quickly. As the District accelerates repayment of its debt, it has accrued substantial savings on interest payments. Eanes ISD is now at the point where it has paid off enough debt so it can drop the I&S rate, and simultaneously access additional “Golden Pennies.”

Another contributing factor relates to the increased assessed valuation in the Eanes ISD community.

How will the Penny Swap affect taxes for homeowners?

The Penny Swap adds more funds to the district’s operating budget by swapping two cents from the district’s I&S tax rate to the district’s M&O tax rate, reducing the I&S rate from $0.14 to $0.12 per $100 valuation. The district’s overall current tax rate of $1.13 would drop to $1.1164 per $100 valuation.

If a homeowner’s tax payment is frozen, they may not see a decrease - the amount of their tax payment, by State law, will stay at the frozen dollar amount unless the lower tax rate results in a lower payment. See “How will this affect homeowners over 65 who have their taxes frozen?” (below).

How will the Penny Swap affect taxes for businesses?

Eanes ISD is committed to ensuring that all tax payers in the district receive the benefit of the tax compression provided under HB-3. Commercial property owners will see a decrease in their school tax rate from the 2019/20 rate of $1.13/$100 to $1.1164/$100.

How will this affect homeowners over 65 who have their taxes frozen?

If a homeowner’s tax payment is frozen, they may not see a decrease - the amount of their tax payment, by State law, will stay at the frozen dollar amount unless the lower tax rate results in a lower payment. (If a homeowner has had their taxes frozen recently, depending on how high their appraised value increased, they could see a decrease.)

What is Tax Rate Compression?

Under the new Texas School Finance System adopted in 2019, local taxpayers are entitled to see a tax rate compression based on the growth of their local tax base. Districts that see higher growth rates have greater compression (reduction of tax rate) than those that have lower growth rates. Because Eanes ISD had a 2020 Taxable Assessed Value (TAV) growth of less than 4.5%, tax payers will see a smaller tax compression: from $1.13/$100 in 2019-20 to $1.1164/$100 in 2020-21.

How will the tax rate not increase if the Golden Pennies are approved?

When homeowners receive their county property tax bills, they see a single rate ($1.13 last year and $1.1164 this year). But, the total tax rate is actually made up of two separate components. There is an M&O tax rate which is used for school operations. This is the money that is used to operate the District, about 86% of this money goes towards payroll and the other 14% goes towards utilities, bus fuel, supplies, and other operating costs. This is the largest part of the tax rate and all recapture is paid from M&O funds. The other part is the I&S tax rate which can only be used to pay the principal and interest on the District’s voter approved debt. None of that money can be used for salaries or other operations. Since 2017, the District’s I&S rate has been 14 cents, one of the lowest rates in the area.

Eanes ISD has been working diligently to pay down debt and as a result, the District will see a significant reduction in its required debt service payments beginning in 2023. If the two additional Golden Pennies are approved by voters, the Board of Trustees has directed the District to lower the I&S rate by two pennies and use the I&S fund balance (which can also only be used for debt payments) to make up the shortfall for the next two years. So, the M&O rate will go up by 2 unrecaptured Golden Pennies and the I&S rate will go down by two pennies, ensuring that taxpayers will not see an increase in their total tax rate.

How is Eanes ISD funded?

Eanes ISD is funded primarily through local school property taxes, supplemented with money from the state, based on a per-student formula that takes into account special circumstances, such as limited English proficiency, special education, etc. How much a district can tax is dictated by the State, and because Eanes ISD is a recapture, or Robin Hood, district, the State receives a large portion of local tax dollars.

Further, as local tax revenue per student goes up, the State’s portion of funding goes down.

What is M&O versus I&S taxes?

The Maintenance and Operations fund (M&O, also known as General Fund) is used to pay for the day-to-day operations of the district, including payroll, programming, maintenance, security, supplies, etc. Recapture (Robin Hood) is paid from the General Fund, reducing the dollars available for district operations.

The Interest and Sinking fund (I&S, also known as Debt Service Fund) pays for the district’s debt, taken on through the sale of bonds for capital improvement projects such as school renovations, technology and school buses. I&S funds can only be used to repay bonds – they cannot be used for operational expenses such as salaries.

How much has Eanes ISD sent to the State in recapture?

The district has sent more than $1.1 billion of local tax receipts back to the state through the current Texas school funding formula requiring property-wealthy districts like Eanes ISD to pay back (called recapture) any amount of property taxes collected over and above an equalized wealth level established by the legislature. In the 2019/20 fiscal year, Eanes ISD residents paid more operations tax dollars to recapture ($96 million) than they kept ($62 million) to fund the district’s operating budget.

How would the addition of two additional golden pennies impact our recapture rate?

Adopting the additional Golden Pennies would result in the Eanes ISD recapture percentage decreasing. We are currently budgeted to collect approximately $162 million in M&O taxes without the golden pennies. Unfortunately, we are also budgeted to send 61.5% ($99.6 million) of that back to the state in recapture. So out of the $162 million collected for school operations, the District actually can use $62.4 million. This is actually less tax money available for local operations than we had the previous year ($63.2 million).

The money collected from Golden Pennies is not recaptured, so adding the additional $3.3 million will NOT increase our recapture bill. What it will do is increase the amount of operations tax dollars that we keep locally from $62.4 million to $65.7 million. Because we would keep more money locally without increasing the recapture payment, the recapture percent would actually go down from 61.5% to 60.3%.