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Tcr.~ Air.~s & ~'red,~t _.: Property tax aids and credits are state funds paid to local governments (public schools, cities, counties, towns and special districts) to reduce the local costs of service delivery, to defray the costs of state mandates, or to generally reduce local property taxes. These payments reduce local propertytax burdens by substituting state funds for revenues that would othervvise need to be raised through the local property tax. Some payments to individuals, like property tax refunds (PTR) for homeowners and renters, are also included in this category because they reduce property tax burdens. Most aids and credits are based on complex formulas written into law. To administer those formulas, the Department of Revenue collects local assessment and levy information, calculates levy limits, forecasts aid payments required, and makes most property tax aid payments to the local govemments. In the case of school-related aids, the Department of Education makes the payments to local districts. Property tax aids and credits are financed entirely from the state's general fund. `:Property flax A s';8~ Cre s Funding -' * ` ~ fn millions.. .. ......:. Percent FY 2002-03. FY 2004-05 Chance General Fund 3,389 2,633 -22% The Governor's general fund budget for this area totals $2.6 billion - a 22 percent decrease over the current biennium. The budget recommendation seeks to reform the amount and way that state aid is • distributed to local govemments. With falling state resources, reductions in aids and credits -nearly 11 percent of forecast spending -- will be required to bring the overall budget into balance. Key Elements of the Budget Recommendations The Governor's budget reduces state aid to a sustainable level and permanently reforms how money is distributed to local units of govemment. Too much of current funding is based on historic funding formulas that do not take into account local resources or local needs. The Governor expects that reductions in city and county aids will be followed by lower local spending, not higher property taxes. To ensure that state aid reductions are not passed along to property taxpayers, all reductions are capped so that no unit of government is disproportionately impacted. The governor also recommends continued levy limits so that changes are made to spending, not local taxes. Reductions in local budgets are sign'rficantly Tower than those experienced by state agencies and should not become an excuse.for higher property taxes. A summary of the local aids package is as follows: Reductions to local units of government are phased in to recognize local circumstances. First year reductions are one-third of the total since current budgets are already set. Second year reductions are higher, but can be more reasonably incorporated into local budgets. • Local governments that have held the line on property tax increases receive lower reductions in their state aids. Those counties and cities with levy plus aid increases of less than 2% per year will not be penalized for passing along the impact of state led property tax reductions. • Specific formula reform options will be released later to address LGA and county needs/capacity formula. These options will be released early enough for legislative action yet this session. Governor's 2004-05 Budget 14