Midwest school bond, finance referendums face headwinds

On Thursday, southeast North Dakota residents voted down a $14.84 million bond referendum for the Oakes Public School District. The district is about 114 miles from Fargo, near the border with South Dakota.

The general obligation bonds were to go toward HVAC and window replacements, Americans with Disabilities Act-compliant restrooms, underground sewer pipes replacements and electrical and plumbing upgrades, according to the special election notice.

The town of Oakes has a population of 1,798 and a median household income of $64,931, according to Census data, about 9% below the state median. The district enrolls 480 K-12 students.

OakesND.com

This spring will bring a bevy of school bond and operational funding referendums throughout the Midwest. With inflation still elevated and property tax fatigue high in many Midwest states, it is an open question how many referendums will pass.

In Oakes, Superintendent Anna Sell said the referendum failed, on a 558-410 vote, because the town was also proposing a property tax hike to replace roads and sewers, and there was a heavy "burden facing those in the city that could not afford one tax hike, let alone two hikes." Also, she said, 61% of local property taxes come from agricultural land owners, and "the extreme burden placed on our ag land owners to carry the majority of the debt load" was too much.

"I am seeing that — and in other school-related literature that I read, as well — there is the potential for some fatigue," said Belvia Gray, an Indiana-based principal and municipal advisor at the consulting and advisory firm Baker Tilly. "There are some states where pretty much to get any large-scale capital improvement done, they have to go through a referendum. And so a lot of times what I have seen is that if they're going to go to referendum, oftentimes they want it to be for a larger project," given the time and expense of the referendum process.

"Part of it is seeing a larger number out there," she added. "I think that may be part of the fatigue for taxpayers."

In Oakes, the high school is 100 years old. The elementary school is 65 years old. There are broken sewer pipes in the high school and failing sewer lines in the elementary school. They lost their high school's chiller last May to a terminal breakdown, Sell said.

"We cannot make the critical fixes without a referendum," she said. "Our facilities committee will be meeting next week and will make recommendations to the board for next steps."

The downside of waiting to do a larger project, or several projects at once, Gray said, is that when districts hold off on these referendums, the deferred maintenance costs keep going up — "and then it just kind of snowballs."

In 2022, U.S. school districts floated 2,146 bond referendums requesting a collective $123 billion. Three in four passed, according to Education Week — or 1,644 issues worth $96 billion total. That was a lower share than in the previous six years.

In 2023, school districts proposed 2,192 bond issues worth $106.2 billion total, according to data from SchoolBondFinder.com. About 76% passed, or 1,669 bond issues, little changed from 2022's share. 

This year is already shaping up to be "a big year," said Rachel Wisnefski, SchoolBondFinder's chief revenue officer, with $9.59 billion of bonds passed in the first two and a half months of 2024 and the major months for referendums, May and November, still ahead. By comparison, in 2020, the last presidential election year, schools passed $62.3 billion of bonds.

In the Midwest, Illinois, Wisconsin, Michigan and Ohio have seen the largest volume so far, according to a SchoolBondFinder.com map.

"There's going to be a lot more school construction [this year], and I think it's either going to be new construction or it's going to be renovation and reconstruction," said Vivian Altman, head of public finance at Janney. "Because of code upgrades, modernization needs; certainly technology improvements require electrical improvements, as well. Even if there are areas where enrollments are fluctuating, overall I think improvements need to be made."

While the increase in bond referendums suggests more school districts are trying to go to market lately, the lower share of approvals suggests taxpayers may be voting them down more often. 

"I think that people got spoiled because we were in such a low interest rate environment for so long," said David Erdman, a Wisconsin-based managing director at Baker Tilly. "So rates have gone up and there's a little bit of sticker shock… But people shouldn't be shy about accessing the capital markets. Yes, rates are higher than they were a couple years ago, but long-term rates are quite attractive."

As for which factors determine passage in the Midwest, it's a complex picture. Some studies point to socioeconomic data and population growth; others point to a given area's share of seniors. 

Kaneland Community Unit School District serves a 140-square-mile territory in Kane County, Illinois, about 52 miles west of downtown Chicago.

The district's $57.5 million bond referendum failed last April. The bonds would have financed an addition to the high school.

Overall, said Superintendent Dr. Todd Leden, enrollment has declined over the past decade, and district officials believe that likely corresponds to a drop in the share of young families in the communities they serve.

The district's current enrollment of 3,922 students is projected to remain flat for the 2024-25 school year. It had 4,600 students in 2014-2015, according to its audited financials.

"Feedback indicated that we need greater staff and parent information and support," Leden said of why the referendum failed. "Feedback also indicated that financials including the economic landscape were a challenge for some community members."
Leden added that the district needs to give community members a fuller understanding of how outstanding district bonds will be incorporated with new bonds in any future referendum. The administration is considering a November 2024 referendum but is now consulting with stakeholders and reviewing survey data. In the meantime, projects will "need to be prioritized" more carefully given the district's capital project needs.

In neighboring Wisconsin, schools must get voter approval to spend beyond a state revenue limit for operations.

Districts with declining enrollments are more likely to go to referendum and more likely to get them passed, according to a November 2023 report by Forward Analytics, a nonpartisan research organization created by the Wisconsin Counties Association. The report found that districts with four-year declines in enrollment were 1.3 times more likely to resort to referendums than those with rising enrollment. Voters approved 62% of those ballot measures, compared to 53% of those in growing districts.

Poorer districts are more likely to approve operating referendums in Wisconsin. The bottom 10% of districts by household income approved 74% of their referendums from 2005 to 2023, while the top 30% of districts by household income approved 62% of their referendums.

Wisconsin passed the school revenue limit law in 1993. By 2022, over 5% of statewide educational spending was funded through referendum dollars.

"The vast majority of districts now have some of their funding coming through these referendums," said WCA Director of Research and Analytics Dale Knapp. "This 'funding by referendum' is the unintended consequence of the [school revenue limit] law… The law did not account for so many districts seeing declining enrollment, which further exacerbates their revenue problems because the revenue limits are tied to student numbers."

The Milwaukee Public Schools district has a referendum April 2 in which it will seek to surpass state revenue limits by $252 million and raise property taxes. According to the Wisconsin Policy Forum, that measure is one of 91 school referendums on Wisconsin ballots next month. A year prior, there were 83.

Knapp said that for the first 15 years after the school revenue limit law passed, the relatively high property taxes in the state constrained referendum approval rates.

"That has changed since 2012," he said. "It has been fairly easy for districts to document their financial woes to voters… [There have been] cuts in some programs in some school districts. Despite relatively high property taxes, [voters] seem to be choosing to pay more to ensure their schools are adequately funded."

Not all states are hewing to those patterns, though. Indiana voters only approved seven out of 12 local school district referendums in November. Among the five failed referendums was a ballot measure for the School City of Hammond that asked voters if the district could extend a property tax increase approved in 2017. The increased property taxes would go toward teacher and staff salaries, educational programming, transportation costs and "health, equity, safety and security programs," the referendum said.

The school district said the state's Distressed Unit Appeal Board had warned it last August that the referendum's passage "was critical to the district's financial stability." After the referendum failed, the board put the district on a corrective action plan. The school board is exploring consolidation options and the district said it is drawing up a list of school closings.

Hammond had a median household income of $52,368 in 2022, according to Census data, 22% below the Indiana state median. Nearly 20% of its population is below the poverty line.

In 2023, Indiana residents saw an average property tax increase of 17%, Purdue University economics professor Larry DeBoer wrote in a monthly column. And while he predicted that property taxes on mid-range homes will only rise around 4% this year, taxpayers might be forgiven for keeping their wallets closed a bit tighter than they did pre-pandemic. 

"Indiana is a state where the rules for debt issuance have been a little more open," Baker Tilly's Gray said. "There were a few different mechanisms for debt issuance that didn't require projects to go to referendum… A lot of our schools in Indiana were able to issue long-term debt to take care of facilities, do a lot of safety and security-type projects. So if you look at Indiana… [many of those] needs have been addressed."

In Michigan, voters rejected four of five school bond referendums on local ballots in February, according to the state Treasurer's office. About 40 more such referendums are up for votes in the state this May.

In Minnesota, 66% of November's school bond referendums passed, per the Twin Cities Pioneer Press. That added up to $1.46 billion of capital projects. But 15 mostly small-town, rural districts fell short in their referendum bids.

In Missouri, more than 20 school districts have bond referendums or property tax increases on the April ballot, according to ABC 17 News in Columbia. The state requires a 57.14% super-majority to pass a bond referendum, per Ballotpedia. 

Missouri school districts have underperformed the national average in passage of bond referendums. Over the past decade, they had a mean passage rate of 72%, according to SchoolBondFinder.com. The likelihood of a bond referendum passing there drops as the share of the population over age 55 rises, a preliminary study by Saint Louis University doctoral student Jennifer Gontram found.

In Iowa, Underwood Community Schools' November referendum on $13.7 million of bonds failed to meet the state's 60% approval threshold for passage, with 53% in favor. The district has about 850 K-12 students, with a median household income of $92,188. It's at the far western edge of the state, closer to Omaha than Des Moines. 

The bonds were to finance HVAC and athletic facility improvements, building an early childhood center drop-off and paving the high school parking lot, the district's website said. That vote was one of several recent school referendum failures in the state.

Iowa has a median property tax rate of $1,569 per year for a $122,000 home, compared to a rate of $1,751 in Pottawattamie County, where Underwood is located.