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Recent PSBA Testimony - Turzai/Rechley/Nickol Property Tax Reform Proposal

Turzai/Rechley/Nickol Property Tax Reform Proposal
Presented to the House Subcommittee on Property Tax Reduction
May 23, 2006

Thank you for inviting PSBA to comment on the Turzai-Reichley-Nickol property tax reform proposal.

The proposal, as written, has some merit. PSBA particularly supports the increases in state taxes to help reduce school district property taxes as well as the ability of school districts to enact or convert to a Personal Income Tax sooner than was allowed under SSHB 39. In addition, the association has consistently called for increased eligibility for the Senior Citizens Property Tax and Rent Rebate Assistance program.

What concerns our members most as we enter into June is whether or not any proposal or any part of a proposal will affect school district budgets for the 2006-07 school year for which districts are developing budgets as we speak. The Turzai-Reichley-Nickol proposal would do just that by capping increases in taxes for school districts at the index for the next fiscal year, which is a little more than a month away. Additionally, the timeline that the proposal sets up is unworkable, since many of the deadlines for districts to meet have already passed, including those for submitting proposed tax increases to PDE, and applying for back-end referendum exceptions.

PSBA worked with the members of the SSHB 39 conference committee and the governor's office on a feasible timetable for implementation of that bill. In that bill, the applicable deadlines for school districts were moved up 92 days from the dates set in Act 72. All of the parties were well aware that even this agreed-upon timetable would quickly be rendered useless unless the bill was approved in early May. Even then, had the bill been voted on and signed on May 3, the date the House adjourned, school districts would have had to begun taking action by May 8. The turnaround time was very quick and while boards were prepared to act, many of them were less than enthusiastic about going back and, in many cases, re-approving their preliminary budgets.

While the proposal before us would not require re-approval of a district's preliminary budget, we nevertheless believe that it would be unfair and unrealistic to impose legislation that would have such a drastic effect on school district budgets for the 2006-07 school year at this point in time. School districts are deep into the budgeting process and less than 40 days from the start of the new fiscal year. Almost every school district has approved a preliminary budget and those that have not will have to do so in eight days. More importantly, all the planning, financing, hiring and other activities that typically occurs at budget season has been done or is close to being done, by all districts. For the legislature to now tell school districts that their tax increases have to be limited to the index would require districts to undo all of that work, construct new preliminary budgets, perhaps cut additional programs to fit the index, determine the back-end referendum exceptions for which they may be eligible and the dollar amount that they might get from each, and then calculate whether or not they would need to go to the courts for additional authority for tax increases if the dollars from the index increase and the exceptions still do not allow them to balance their budgets.

In short, it would make the arduous process of developing and shaping a budget into more of a guessing game than it is now. There are no guarantees that districts will be deemed eligible for the back-end referendum exceptions for which they may think they are eligible. More importantly, there are no guarantees that the courts or PDE will allow them the dollar amount that they believe they need. Also, there is no way for districts to know how courts will react to their petitions for additional tax increases, should they need to utilize that option. Overarching all of this is the uncertainty of what the state budget will bring. Finally, it is worth remembering that trying to shoehorn a proposal into the current fiscal year that affects the proposed 2006-07 school budgets will affect other institutions as well as just school districts. The Pennsylvania Department of Education and the courts would also be forced to scramble to meet deadlines and adopt standards required by the bill.

As if all of that were not bad enough, implementing tax limits this year for 2006-07 has the potential to cost school districts significant dollars in interest earnings as well. Because the time needed to both obtain exceptions and get court approval would likely run past the June 30 budget deadline, there would need to be a provision in the proposal to allow school districts to re-open their budgets after that date once the court has ruled on school district petitions to accommodate the additional taxing authority and accompanying revenue. The delay past June 30 will cause districts to mail out their property tax bills later than usual, thus delaying payments and affecting their interest earnings.

From a broader perspective, PSBA believes that neither this proposal nor SSHB 39 nor Act 72 addresses the underlying causes of increasing property taxes - increasing program costs for school districts - and consequently will not result in comprehensive property tax reform. The association believes that reducing property taxes in a meaningful and permanent way requires three things: first, reducing school districts' dependency on property taxes for the bulk of the local financial contribution for public education, second, increasing state spending on public education, particularly for those programs that cause districts to increase their property taxes and third, changing or eliminating mandated state programs that tend to add to the costs of school district operations. While no one bill can adequately address all three of those issues, we believe that one can be introduced that gets us on the right track.

Most of the tax relief proposals that we've seen in the last few years - Act 72, SSHB 39, even Act 50 - have at least begun to address reducing school districts' dependence on the property tax by providing an alternate form of revenue, whether it be through a local tax shift from property taxes to an income tax, gaming dollars or some other mechanism. Proposals could go even further to reduce the dependency on property taxes by authorizing school districts to implement other types of taxes that might allow even further property tax reductions.

Dealing with the revenue side of the ledger, while necessary, only begins to scratch the surface of what is possible. PSBA believes that the General Assembly needs to look at what issues are causing school districts to increase taxes and address them directly. Preliminary results from a recent survey done by PSBA show that districts, in the aggregate, could reduce their millage increases, on average, by more than half if they did not have to take into account increases in special education costs, increases in health care costs, payments to cyber and charter schools and pension increases. By providing additional funding to schools for these programs, the commonwealth would increase its share of education funding, help school districts to deal with increasing costs and provide for further reduce property tax reductions.

Regarding state mandates, not only do districts have to deal with the increased costs associated with the Prevailing Wage Act, charter and cyber school payments, the Separations Act, bidding thresholds, and other costly requirements, but the provisions of many of the statutes that cost districts money have gone for years, sometimes decades, without being changed. The Prevailing Wage Act is a good example. The $25,000 project cost threshold at which the requirement to pay prevailing wages kicks in has gone unchanged since the law was enacted in 1961. There are virtually no school construction projects that cost $25,000 or less anymore.

How can school districts be accused of overspending when there are so many laws, and outdated provisions of those laws that bleed money from districts every year? Small wonder that PSBA is such an ardent opponent of back-end referendum on school districts. When combined with the funding deficiencies and host of mandates foisted onto our districts, this provision has great potential to lessen the quality of public education in the commonwealth. And lest anyone believe that citizens will vote for school district referendums, the limited experience we have in this state says otherwise. In the recent election, only one Act 72 back-end referendum question was on the ballot in Pennsylvania and it failed by a 7-1 margin. Other referenda questions on the ballot over the last few years have failed by anywhere from 5-1 to 9-1- in other words, the votes have not even been close.

PSBA believes that a fresh approach to property tax reform is needed. The association is working on drafting legislation that would provide property tax reform with dollars generated by increases in the state's Sales and Personal Income taxes and a local tax shift, if voters approve. It further reduces the dependency on property taxes by giving districts other taxing options and using revenue generated to reduce property taxes. At the same time, it would use gaming revenues to fund those school district programs where costs increase the fastest. Districts would be required to reduce property taxes using a portion of those dollars as well.

The proposal would also create a Task Force on School District Costs, much like that created in SSHB 39, to take a look at how the commonwealth can best help school districts reduce costs. We firmly believe that by addressing all of these elements: reducing the dependency on property taxes, increasing state spending for costly school programs and eliminating or modernizing state mandates that we can have the greatest impact on property taxes for homeowners in this commonwealth.