Issue: Tax Reform, Act 1 of 2006

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Act 1 NEWSLETTER
Vol. 1, No. 16, Jan. 23, 2007

IN THIS ISSUE: A different look at Act 1's provisions regarding back-end referendum exceptions; remaining neutral on the May "front-end" question; clarification of the previous Act 1 newsletter on notices and resolutions surrounding the front-end question; earlier than expected 2008-09 preliminary budgets?

SUMMARY : By now, everyone is aware of Act 1's limitations on school district tax increases, as well as the 10 exceptions to this limitation, known collectively as the "back-end referendum exceptions." Up until very recently, PSBA and others viewed these exceptions as a means by which districts could balance their preliminary budgets if an increase in taxes by the allowable Act 1 index was not sufficient and the cause of the imbalance was one of the costs listed in the 10 exceptions.

ANALYSIS : A recent conversation with PDE revealed that an exception would be granted by the agency even if the preliminary budget could be balanced with an increase in taxes limited to the index. In this case, the department simply would approve a dollar amount of exception for which the district was eligible, as opposed to both the dollar amount and the necessary tax rate increase to get there. Should a district find, in April, May or June, that the numbers used to calculate the preliminary budget in November, December and January painted an overly optimistic picture of district expenses, it could utilize some or all of the dollars approved by PDE as a referendum exception in March - apparently without any further permission or application to PDE to do so.

The one requirement would be for boards to indicate on a PDE-issued Certification of Utilization of Referendum Exceptions how much of their "allowable" exception was used. This document, which will be issued to districts that are granted one or more PDE exceptions, states the amount needed to balance the preliminary budget (if needed) and the total amount of the exceptions approved by PDE. It also has a place for districts to indicate how much of their allowable exception dollars they are using.

For further information about the back-end referendum exceptions themselves, as well as information on how to apply for an exception, visit the following link on PDE's Web site: http://www.pde.state.pa.us/proptax/cwp/view.asp?a=3&q=116301 .

Interestingly, this sets up a potentially conflicting situation where districts could be blamed for obtaining far more exceptions and dollars than they use. Act 1 requires PDE to submit a report by April 21 to legislative leaders citing the school districts that seek any exception, the specific exceptions and the dollar amount sought, the district's ruling and, if the exception was approved, the dollar amount of the expenditure and the tax rate increase needed to fund the exception. This report also must be published on PDE's Web site.

Notice that the report makes no distinction between the dollar amount of the exceptions actually sought and granted and the dollar amount of the exceptions actually used. Consequently, it will appear that every district used every dollar that was approved. This is one of many locations along the Act 1 implementation road where circumstances allow the act to make districts look bad.

The potential for Act 1 to place school districts in an unfair light is just one of the reasons PSBA is urging that districts undertake attempts to explain the Act to its constituents. It also is the reason the association strongly urges school districts not to take a public stand on the May front-end referendum question. If a school board recommends its voters to vote "no," and most of the front-end questions fail, boards become an easy scapegoat for the "failure" of Act 1. If boards advise a "yes" vote and most of the front-end questions fail, boards will be accused of not doing enough to ensure passage. Any board involvement in a campaign for or against the front-end referendum question also can affect the chances of individual board members running for re-election in 2007.

The best course is to stay neutral and to simply explain what the front-end question is for and why the board is putting it on the ballot and explain the consequences of a "yes" or "no" vote to taxpayers in your district.

The previous Act 1 newsletter regarding the notice and resolution requirements surrounding the board's choice of the front-end referendum question has generated a number of interesting questions and comments.

As a general comment, all of the information contained in these newsletters as well as the sample notices and resolutions contained on PSBA's Act 1 Resource Site is given out only as recommendations. Many board members, administrators and solicitors already have figured out different ways to implement the provisions of Act 1 and often times their interpretation differs from what PSBA says. The fact of the matter is that, for most districts, all of this is new, and the words of Act 1 are not, in many cases, easily understood or even subject to just one interpretation. Much of what boards are now doing to implement the act is based on several different interpretations that may or may not be what the legislature had in mind when writing the act. The best any of us can do at this point is to put forth a reasonable opinion on what we think the best practices are.

With that in mind, four issues seem to be at the center of the comments we have received. The first is the scheduling of the public hearing on the resolution authorizing the front-end question. While PSBA's recommendation was to conduct the hearing at some point after the first advertisement of the notice of intent to adopt the resolution appeared in the newspaper, many of you responded that you would rather hold the hearing before any advertisement was made in order to get additional public input on what the question should be. The fact is that either choice is legal under Act 1, since the only caveat is that the public hearing must be conducted before the resolution is adopted.

It comes down to how the board wants to use the public hearing. If it is seeking additional input about the question, then doing it earlier, before any advertising takes place, is appropriate. If the board simply wants to use the hearing to inform the public of its choice, then the hearing can take place later in the process.

The second issue concerns the implementation of the Act 1 income tax (if the voters approve it). A number of solicitors called and asked why the board should be advertising the intent to adopt a resolution enacting the Act 1 income tax when the law says that the tax is self-executing and therefore does not need a resolution for its enactment. Recall that PSBA advised advertising notice of intent to adopt this resolution along with the notice of intent to adopt the resolution authorizing the front-end question. PSBA's interpretation is that while the tax itself may be self-executing, there still are a number of details that will need to be communicated to the public about the tax, for example, how it will be collected and whether or not there are any credits against the tax for taxes paid to other municipalities or states. These additional bits of information could be contained in a resolution authorizing the levying of the tax.

The third issue concerns the timing of the advertising. PSBA's advice is that the first advertisement be made no later than three weeks before anticipated final adoption of the resolution. Additionally, PSBA advised that at least five days elapse between advertisements and that the three advertisements appear in three separate calendar weeks. PSBA does not mean to give the impression that these requirements constitute what is legally required, only that a school district avoids any question about the timing of the advertisements if they follow these steps.

Finally, there were some questions on how many votes are needed to adopt the resolution authorizing the ballot question. PSBA's opinion is that adoption of this resolution needs a majority board vote, not simply a majority of those present, because it is similar in nature to levying the new EIT tax, which would be self-executing if approved by the voters. Everything else is probably a simple majority.

The entire Act 1 preliminary budget timeline for 2008 could be made even earlier than anticipated if a bill introduced by Rep. Ron Buxton (D-Dauphin) is enacted. Buxton's proposal would move the date of Pennsylvania's primary election back to March 4, 2008, so that Pennsylvania could be a part of "Super Tuesday" and play a more important role in presidential politics. If the bill were to become law, it would mean that districts' 2008-09 preliminary budgets would have to be adopted by Dec. 5, 2007, and that they would have to be made available to the public by Nov. 26, 2007. The idea for an earlier presidential primary came out of a gubernatorial task force on election reform that was convened by the governor before Act 1 became law.