[EdTalks] SC School Funding 101 Part 2: How Act 388 Changed Everything

In 2006, a law was passed that promised property tax relief to homeowners but ended up costing South Carolina schools over a billion dollars annually. This is the story of Act 388 South Carolina, a complex piece of legislation that fundamentally reshaped how public education is funded in the state, creating enormous challenges that school districts grapple with to this day. Why did a well-intentioned tax swap create such a massive financial gap, and what does it mean for teacher pay, school construction, and your community?

In this deep dive, Catherine Schumacher (Public Education Partners) is joined by Derek Lewis, Executive Director of Greenville First Steps and a former Greenville County Schools trustee, to unpack the complicated legacy of Act 388. They break down how the shift from stable property taxes to a less reliable sales tax has left districts like Greenville County short by over $93 million a year. This episode provides a masterclass in South Carolina school funding explained, exploring everything from the initial "lunchroom trade" gone wrong to the ripple effects on local budgets. You'll learn how school boards are forced to make tough decisions on millage rates, often with incomplete information from the state legislature, and how unfunded mandates South Carolina—like new paid parental leave policies—add millions in costs without providing the money to cover them. We also demystify the purpose of a school district fund balance, explaining why this crucial financial tool isn't a "piggy bank" but a vital safeguard that protects districts during economic downturns and saves taxpayer money in the long run by securing better credit ratings. Finally, we explore potential solutions to fix the flaws of Act 388, including a discussion on implementing impact fees for new construction SC to ensure that rapid community growth helps pay for the new schools it requires.

Introduction

Catherine Schumacher: If you've paid any attention to debate over school funding here in South Carolina, you've certainly heard something about Act 388. But what is Act 388, and why has it had such an enormous impact on how we fund our public schools in South Carolina, which is differently than just about any other state in the entire country?

Catherine Schumacher: I'm Catherine Schumacher with Public Education Partners, and today's episode of Simple Civics Ed Talks unpacks Act 388, a bill that was passed in 2006 that over the last 20 years has made it especially challenging to adequately fund public education in South Carolina. I'm joined by Derek Lewis, Executive Director of Greenville First Steps and a former Greenville County Schools trustee.

Derek Lewis: Hi, Catherine. Welcome back. Thanks for being my partner in crime as we dive into the exciting topic of education finance.

Catherine Schumacher: Education funding can be funny. Maybe that's what we'll title this podcast series.

Derek Lewis: I love it. I think that when I got on the board, definitely the school board budget was not the thing that I thought I was going to be spending most of my time talking about. But it does drive so much of what we do.

Catherine Schumacher: Well, it's the most important. Fiscal oversight is one of the chief roles of the board of trustees. It's the heart of that response. And it's a really important job, too, I think, especially in Greenville, where you have taxing authority, which is not the case everywhere.

Derek Lewis: One of the things that also really struck me is anything you want to accomplish in an organization, your budget is going to set those priorities. And so when I got on the board, one of the things I really wanted to do is increase teacher pay and make sure that our teacher pay was the highest in the state. And we got so far with that. And every time we did, something was sacrificed for that. There just isn't an unending amount of money, which is where I think we get to this idea of Act 388 and what it does to maybe affect or limit the resources that are available.

Catherine Schumacher: That's right. So today's episode is the Act 388 deep dive. And in our overview last time, we talked about Act 388 a lot because it really does shape so much of what happens at the local level. And it really influences and restricts in some ways the amount of flexibility that the local school board has to figure out how to make the numbers work.

What is Act 388? A Shift from Property Tax to Sales Tax

Catherine Schumacher: So just to start at the top, a quick refresher, Act 388 was passed in 2006. And the idea was pitched as a way to give property tax relief to homeowners. So that was the real purpose. It took away the school operating portion of property taxes on owner-occupied homes. So the house that you live in, the taxes that you pay on that do not pay for school operations. They do help pay a tiny little fraction for capital expenses, but that's a really small part, relatively speaking, of the school budget.

Catherine Schumacher: Operating expenses are the biggest part of the school district budget. Here in Greenville, it's 90 percent basically of the whole budget. I think it's $900 million this year, if I'm remembering correctly. So in order to make up that lost revenue, the state said, hey, let's make a penny tax. A sales tax will increase the sales tax by one cent, and they pledged to put that money to use it to reimburse school districts.

Catherine Schumacher: And if there wasn't enough money generated, then the legislature would make up the difference with funding from the general fund, which is the big pot of money that the legislature has to play with. It's income tax and all the taxes go into that general fund. And so the idea was that the schools weren't going to lose money. It was just going to shift the origin story, where that money came from, and that it would remove that burden from local homeowners. All of that sounds great. So you're just shifting money around a little bit. Derek, you nerd out on Act 388. So it sounded great, but what actually happened?

The Financial Fallout: How the Funding Swap Created a Billion-Dollar Gap

Derek Lewis: I don't know what your life was like in elementary school, but as I think about Act 388, it makes me think of lunchroom cafeteria trade deals where you would come with your lunchbox and you would have six great things and maybe some carrots and a pudding cup were in there. And your friends will be like, well, I want the pudding cup and I'm going to trade you this thing from my lunchbox and that is of equal value.

Catherine Schumacher: No one does that in Greenville County Schools because our food is so amazing.

Derek Lewis: No, it absolutely still happens because of the number of lunches I've packed in my life. But it would be like if your friend was like, I'm going to trade you this pudding cup and ended up actually giving you raisins because the raisins are better for you. Sure, they are, but that's not the deal that we made.

Derek Lewis: And I think that's what happened, particularly with the larger school districts in the areas of the state where there is growth, is they said, we're going to take the stable source of income, which is your property values, which are stable. As your community grows, your property values grow. Everything grows in pace with that. So the more neighborhoods we build, the more school services we need, the more property taxes we would collect. And it would offset it.

Derek Lewis: We took that and we said, okay, we're not going to give you that. Instead, we're going to give you sales tax money. Then we're going to exempt a bunch of stuff from sales taxes. So your high growth families aren't going to pay sales tax on the new car that they buy. And so then we're going to say, and then when the recession hits and we don't have enough money to actually cover those property taxes with sales taxes, the General Assembly will cover you, except they don't have any money to cover you.

Derek Lewis: And so it just has been this, yes, we're going to do this instead of that, but that didn't work. And now the problem is we've already raised sales taxes. So in order to return the cost back to property taxes, you would have to increase everyone's property taxes. And the cutoff of, well, we'll cut your sales taxes, they don't think it's a fair trade.

Catherine Schumacher: And the numbers, I think it's important for everyone to understand, the impact of that shift is huge. So the gap right now in South Carolina, if we went back in time and used that same funding model, the gap is now a billion dollars a year in South Carolina and $93 million for Greenville County schools alone. So since Act 388 was enacted, it has cost Greenville County schools more than $568 million in funding. And that's a lot of money for teacher salaries and health benefits and school. All of the things. That's a huge hole you have to figure out how to solve. And there's been more and more unfunded mandates coming down from the legislature that carry costs that haven't been funded that the local districts have to cover.

Derek Lewis: That $93 million is almost the same amount of money we pay to manage, build, and expand every school in the district for a year.

Catherine Schumacher: That's great context.

Derek Lewis: So you look at your entire school facility operating budget is not being covered by the General Assembly. And those are the kind of things that that $93 million is a lot of resources that now we're having to raise locally to cover costs that we would have covered with property taxes.

The Local Challenge: How School Boards Set Millage Rates and Budgets

Catherine Schumacher: Right. So local school districts do have levers that they can use to close that gap, but not all districts have access to the same level of wealth and opportunity. But talk a little bit about what the process of setting local millage here in Greenville is, that responsibility that a school board has.

Derek Lewis: So usually the way that it works in our district is because the General Assembly doesn't approve their budgets until so late in the year.

Catherine Schumacher: Usually in June.

Derek Lewis: And we're required by law to have our budget in place usually before they have finally approved their budget. So we're approving what we're going to do based on guesses for what they're going to do.

Catherine Schumacher: It's informed guesstimating, but it's based on expectations.

Derek Lewis: And so the tricky thing happens typically in April, which is in February, the superintendent will typically come to us and say, all right, based on all the things that we're currently doing, these are the things we should stop doing. These are the things we need to expand doing. These are the costs to run this organization for the next year. Respond to that. And typically, those have been presented as balanced budgets. So this is how much it's going to cost to do this thing. But the General Assembly is just starting to pass its laws, its provisos, its regulations.

Unfunded Mandates: The Hidden Costs Passed to Local Districts

Catherine Schumacher: Pay parental leave for teachers, all sorts of things that could come to a new reading requirement of a new reading system that the teachers are going to have to all be trained in. All of those sorts of things, they get passed just as the district is trying to figure out what are you going to have to pay for in the next academic year.

Derek Lewis: Paid parental leave actually is a great one. I'm glad you brought that up because that's a really good example of something that was super important. And I am so glad that the district was included. So if you remember what happened with paid leave was originally the state said all state employees get paid parental leave for four weeks. And then school district employees were like, oh, that's great.

Catherine Schumacher: Oh, but wait.

Derek Lewis: And then they found out they weren't considered state employees. And so the General Assembly fixed the glitch and said, you're right, you should be a state employee. The problem is when the General Assembly gives the DSS department in Greenville County paid leave, typically what happens is the other case managers just pick up the slack when that employee is off for four weeks. So they're not adding people. They're just making some people work harder for three or four weeks.

Catherine Schumacher: It doesn't work when a teacher goes out on maternity leave.

Derek Lewis: No, you can't. The second grade teacher is on leave. Somebody's got to be in that classroom.

Catherine Schumacher: So you have to hire a substitute. And that's an actual cost.

Derek Lewis: The district estimated that the first year of covering paid leave was about $5 million.

Catherine Schumacher: I think they ended up going to two maybe. But it was, because they had no idea because they never had to do it before.

Derek Lewis: And so you think about that is covering the sub, but that's also covering the benefits of that sub. And the paid leave. That paid employee is still getting paid. They're not unpaid. And so that was an example of that wasn't included in the budget, the first draft of the budget. But then in the second draft of the budget, we had to add that two to three million dollar expense. But the General Assembly didn't add money to cover it. They just said, this is something you should do, something really important you should do.

Catherine Schumacher: So that's a perfect example of one of the unfunded mandates. And you'll hear a lot when you pay attention to budget conversations, especially at the school district level. There's a lot of that because there are a lot of moving parts in school district oversight, management, employee benefits, all of those sorts of things that's really in the weeds of how do you take care of your people?

Derek Lewis: What happens is that then the district has to come back to us and say, all right, so we're getting X. It's now costing, Y, because all of these mandates that we weren't prepared for are now included in the budget. The difference is $4 million. And so then the board has to decide, well, are there $4 million worth of stuff we already were doing that we need to stop doing? Or do we need to go and take an additional millage increase to cover the, to make that whole?

Derek Lewis: And I think that's where the board every year has to wrestle with that. In some years, they have done it without millage increases, and some years they've done it with. In no years that I've seen the board work in the last 15 years have they said, well, we could get $15 million. Let's get $15 million. It has always been less than what the General Assembly has allowed.

Catherine Schumacher: And for me, I'm always I always kind of wish we would try to ask for more. But I understand that political pressure, too. It would be great to be able to give teachers a two thousand dollar raise every year. It would be great to hire all the... But you can't. And that's and, I think the political reality, it's important to balance that.

Catherine Schumacher: I think something else I just wanted to point out and people are going to be hearing about this probably is that in some parts of the state, particularly down on the coast, the value of local millage down on the coast. So if you think about if rental property is one of the key sources of revenue, operating revenue for districts. Think about all those vacation homes down in Charleston, Beaufort, down on the coast. So the value of that millage is worth a whole lot more down there.

Catherine Schumacher: And so they're doing really huge investments in teacher salaries down there and they can afford it without millage increases because each of those mills is worth a lot more. Those coastal, they're more expensive to live there, obviously. And I think increasing teacher salary is all great, but I think people need to understand that the coastal salary increases on teachers are just kind of going at a different level. And Greenville, I think we're 11th this year, but that grouping under the top three or so is really close together. So 11th might be like a $200 difference or something. But that's a real priority because we want to be competitive in our region around teacher salaries. And this millage question is a big part of it.

Debunking the Myths: The Critical Role of a School District's Fund Balance

Catherine Schumacher: I know one of the things you hear during the budget debate often is that, for the example you just brought, this $5 million, can't we find $5 million somewhere else? Or the fund balance. I think the conversation about fund balance is really important. And I've learned a lot about fund balance since starting PEP. So talk a little bit about that and why it's important and why at Greenville County Schools in particular, that fund balance isn't just a piggy bank.

Derek Lewis: So just to clarify, the fund balance is typically the money that we budgeted to spend in one year that maybe we didn't spend, and so we roll it over to a fund balance for the next year. With a billion-dollar organization, if we just have half of 1%, that's tens of millions of dollars that we're rolling over.

Derek Lewis: So one of the things that we talked about a lot on the board is, could we just, why don't we just take the money from fund balance to cover that millage increase? And sometimes the board has required the superintendent.

Catherine Schumacher: Sometimes that's happened.

Derek Lewis: But the problem with that is you're taking money that is one-time money and you're using it to fill a hole that's a recurring hole. So that three million dollars for paid leave for teachers to offset that, that's three million dollars a year forever. That's not three million dollars a year this year. So if you take $3 million from fund balance this year to cover that hole, well, now you have a $3 million hole next year.

Catherine Schumacher: It's kicking the can down the road.

Derek Lewis: And you're going to have to cover that hole again next year. And eventually, you're going to take so much from fund balance that it's going to affect your credit rating. So one of the things that we look for when we float our bonds is, can we get the best possible credit rating? Which is why it's actually been possible for us to build schools and pay off those bills faster than the terms of the bond. Because what we have been able to do is use the fund balance to increase our credit rating, which lowers the rates we borrow money from.

Catherine Schumacher: And if you pay it off quickly, that saves taxpayer dollars.

Derek Lewis: And so that's the one thing I would say is, yes, we could get rid of all that fund balance and it would probably give us a window of five years of not having to raise millage. But five years from now, we would have no fund balance. We would have increased credit. We would have increased rates of repayment on these bonds. And the next time a recession hits. There's going to be a shortfall. And I think that's what we saw in '08 that scared me the most was you looked at these districts. And the General Assembly came to schools in October and said, that budget you approved in July...

Catherine Schumacher: No longer good.

Derek Lewis: We now need you to cut 20%. And in most districts that didn't have a healthy fund balance, they laid teachers off. And we did not. We made it through the entire year covering that shortfall.

Catherine Schumacher: With the fund balance.

Derek Lewis: With the fund balance. And I think that's what a savings account is supposed to be for, is to help us when those moments of crisis hit. And because of it, we were able to keep teachers. If we had laid them off, we would have had them the next year and they would have gone somewhere else to work.

Catherine Schumacher: That's such a great example. There was another one even more recently, I think most listeners know that the Federal Department of Education put a hold on some money that school districts were expecting. And no one kind of knew when it was going to get released, if it was going to get released, if it was going to be canceled. And in Greenville, because that strong fund balance that has been a priority, the district knew that they were going to be able to cover those costs without having to borrow money. And incur interest expense. So having a strong fund balance is actually in the long term, it saves taxpayer dollars, which I think is a really important thing for folks to understand.

Fixing the Flaws: Proposed Solutions for Act 388's Unintended Consequences

Catherine Schumacher: And again, all of this comes back to Act 388 and the disruption that it caused to the funding mechanism for schools and that it made it less predictable for districts to figure out how to plan their budgets because everybody's planning their budgets at the same time and things get really shifted at the last minute. There has been conversation about addressing Act 388 and making some changes. So what are some things that, in a dream world, if we wanted to really talk about this, what could we encourage legislators to look at?

Derek Lewis: Well, so I think there's actually two unintended consequences of Act 388 that I think could be addressed that don't have to do with raising people's property taxes. I think one of them is our rental units. And so one of the things that happened with 388 is if you lived in an owner-occupied home, you didn't pay property taxes or it was refunded to you. But if you lived in a rental property, you did. And one of the great data that we looked at from the Greenville County Tax Assessor's website is a $150,000 owner occupied home would have $1,200 in property taxes, whereas that as a rental property has $4,000.

Catherine Schumacher: Because they're taxed at different rates.

Derek Lewis: Yes. So who's paying that $4,000? It's not the landlord. It's being passed on in rental.

Catherine Schumacher: And folks with rental property, rent is already expensive in Greenville. And a lot of times, renters don't have the spare dollars. So that pass through is really, it raises rents in a meaningful way.

Derek Lewis: I think one of the things I would look at is, we probably need, if we're going to keep Act 388, we probably need to offset rental incomes for apartments, not for our second and third beach homes, but for those apartment dwellers who are the people who probably most need a reduction in their cost of living so that they could actually buy more things with their sales tax money. And then we could actually generate the revenues that we want to get back.

Catherine Schumacher: It all ties in together. That's the thing about it gets into the affordable housing conversation. It's the thing about schools. When you get into school policymaking, it's a microcosm of everything else that's impacting the community.

Derek Lewis: I think the other one is the other half of that, which is we talked about the counties and the districts that see the most growth are the ones that are most affected by Act 388. Because when you look at Greenville County, and I think Fountain Inn High School is a great example. When we built Fountain Inn High School, we built a school that was too big for the population around it expecting growth to happen. And then growth happened so quickly that the school was actually full before we even had four grades of students attending the school. And that is because growth didn't cover the construction costs.

Derek Lewis: And what I think would have happened differently if Act 388 hadn't been there is all that new home construction, all those new apartment constructions would have generated revenue that would have allowed the district to go from this size school to maybe a school twice that size faster. So I think one of the things we should look at are impact fees for new construction.

Catherine Schumacher: And there's a lot of conversations happening about impact fees.

Derek Lewis: And so, just like that new construction is going to require more police, it's going to require more fire. In general, an entry level home, a starter home, for every two units you build, one of them is going to have a kid. So if you build 500 new units, then you're starting to talk about needing a new elementary school. And that's where I think people don't realize, I think that part of the tradeoff for Act 388 should have been impact fees on new home construction that goes directly to school construction, because that's the thing that's not being covered. And so our schools are now getting overcrowded, and we can't keep up with them because Act 388 prevents us from benefiting from all that new property that used to be a golf course and is now a 300-home neighborhood.

Catherine Schumacher: Exactly. Well, and I think we'll probably talk about impact fees on another episode. We're going to put some links in the show notes to some other resources for you guys to learn. If you want to continue to learn about Act 388 or if you missed something, we've done some white papers at Public Education Partners that will share the links to just that break some of this down further so you can see some of the numbers. Because it is really helpful to know this, especially if you're going to advocate. Having a real handle on this is incredibly helpful and it makes you a more effective advocate. So grateful to all of you. Grateful to Derek.

Derek Lewis: Grateful for you, Catherine.

Catherine Schumacher: Thanks for chatting about Act 388 and we'll look forward to having another conversation next time. Simple Civics Ed Talks is a joint project of Greater Good Greenville, Greenville First Steps, and Public Education Partners.