Issue: Tax Reform, Act 1 of 2006

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Act 1 NEWSLETTER
Vol. 1, No. 2, August 1, 2006

IN THIS ISSUE : The Act 1 requirements for a Local Tax Study Commission (LTSC), how it is appointed, its duties and the school board's requirements

SUMMARY : Act 1 requires all school districts to place a question on next spring's primary election ballot asking voters if they want to increase or implement a school district Earned Income and Net Profits Tax (EIT), implement an EIT or a Personal Income Tax (PIT) or shift the current EIT to a PIT, all for the purpose of generating revenues that can be used to replace a portion of the district's property tax revenues. This shift in taxes would then allow school districts to reduce property tax rates for those who own eligible homestead or farmstead property.

This referendum question, known as the "front-end" referendum, must contain a rate or an increase in the rate of taxation that is sufficient to generate enough revenues to allow the school district to provide property tax relief that is equal to at least 50% of the maximum permissible homestead/farmstead exclusion. (The maximum permissible homestead/farmstead exclusion in any school district is equal to 50% of the median assessed value of eligible homestead/farmstead property in the district.) However, a district is not required to propose an EIT rate greater than 1%.

Act 1 requires all school boards to appoint a Local Tax Study Commission by Sept. 14, 2006, to make a nonbinding recommendation to school boards about this front-end referendum question.

Makeup and Staffing of LTSC
Act 1 authorizes boards to appoint an LTSC of five, seven or nine members who are resident individuals or taxpayers of the school district. The appointees must reflect the socioeconomic, age and occupational diversity of the district to the extent possible. One member of the LTSC may be a member of the school board; however, no school district officials, employees or their relatives can be appointed.

School districts must provide necessary and reasonable support staff and must reimburse commission members for necessary and reasonable expenses incurred in the discharge of their duties. Receipts are required for all reimbursable expenses.

Duties of LTSC
The LTSC must study the existing taxes levied, assessed and collected by the school district and the effect of any county or municipal taxes imposed concurrently with the school district. The LTSC must determine how the tax policies of the school district could be improved by the levy, assessment and collection of any tax authorized by Act 1 (earned or personal income taxes). The study must include all of the following:

• Historic and present rates of and revenue from taxes currently levied, assessed and collected.
• The percentage of total revenues provided by taxes currently levied, assessed and collected.
• The age, income, employment and property use characteristics of the existing tax base.
• Projected revenues of taxes currently levied, assessed and collected, including taxes authorized and taxes not levied under Act 1.

Within 90 days of its appointment (deadline Dec. 13, 2006), the LTSC must make a nonbinding recommendation to the school board regarding the imposition and the rate of an EIT or PIT to be placed on the question at the May 2007 election. If the question is approved, the tax and the rate appearing on the question are levied beginning in the 2007-08 fiscal year. Prior to making this recommendation, the LTSC must hold at least one public hearing. The commission's recommendation must be presented at a public meeting of the school board, and the board must make the commission's recommendation available to interested persons upon request. If the LTSC fails to make a recommendation within 90 days of its appointment, the school board must discharge it. The school board must accept or reject the recommendation of the LTSC before it adopts a resolution notifying the public of its intent to place a front-end referendum question on the ballot. The deadline for the board to adopt this resolution is March 13, 2007, although the practical deadline will be earlier because of advertising requirements. (See the analysis below.)

Public Inspection of Records
All records of the LTSC, including receipts, tapes, minutes of meetings and written communications, must be turned over to the school board and made available for public inspection during the regular hours of the school district.

ANALYSIS : Because Act 1 represents the third attempt at property tax reform in the last eight years (Act 50 and Act 72 were the others) and because of questions surrounding its potential benefits, it is bound to cause confusion and, perhaps, skepticism among the public. Consequently, school districts should be extremely sensitive to the public relations aspects of all Act 1 decisions, beginning with the appointment of the LTSC.

One way to start off in the right direction may be for districts to solicit for potential commission members, rather than appoint them with little or no input from the community. While Act 1 does not require the board to conduct such activities, they may create a sense of good will in the community and will give the board a barometer to measure the local interest and sentiment surrounding the new law.

Solicitation of potential commission members can be done in a number of ways, through advertising, by application or through a well-placed news release in the local newspaper or on the local radio or TV station. Districts also can solicit community organizations for specific types of potential commission members. For example, a district that contains a large farming community may want to solicit the local grange or the county agricultural extension office. Local chambers of commerce may be good sources to find representatives of the business community or residents that have background knowledge of tax issues. Examining lists of citizens that consistently attend school board meetings and express their interest in school board issues may be another recruiting avenue. Since the law calls for socioeconomic diversity as well as occupational diversity, consider retired persons, renters, two-income households and individuals with significant investment income and other individuals who represent the kinds of residents who live in your district. Districts located in the Philadelphia area also should consider someone who works in the city.

One downside to actively soliciting participation is that your efforts may not produce the types of diversity required by the law. An additional downside is that you may receive indications of interest from those who have a political agenda that may prove to be harmful to the entire process. Keep in mind that the final decision on who serves on the LTSC - and the number of members - is up to the board; that means that the board should do all it can to ensure diversity.

Districts should require individuals who show an interest in participating to complete a personal information form. In addition to the usual "directory" type information (name, address, e-mail address, etc.), the form should include questions that indicate the person's age range, their type of occupation, whether or not they own a home or rent and any other question that will ascertain a person's socioeconomic, occupational or age status. Since these are the types of diversity required, districts will be within their rights to ask these questions.

Once information about interested individuals is obtained, boards should think about placing the names of each person into one or more groups that represent the makeup of the community before the selection process commences. Examples of such groups would be retired, blue collar, white collar, renters, homeowners, those under 30 years of age, those between 30 and 60 and those over 60. This process will make the final selection easier and run more smoothly.

Examples of various types of solicitations for commission members will be available on PSBA's Act 1 Web page, which is on the Members Only portion of the PSBA Web site, on August 1.

Other Issues to Consider:

As stated earlier, the deadline to appoint an LTSC is Sept. 14, 2006; however, appointments can be made sooner than that. If that is the case, remember that the commission has 90 days from the time it is appointed to make its recommendation. Obviously, districts should appoint a commission at an August or early September board meeting.

While the act prohibits "relatives" of school employees or officials from serving, the term "relative" is not defined in Act 1. It is suggested that districts use the broadest interpretation possible to avoid potential conflicts.

Although the commission may not include more than nine voting members, nothing in the act prohibits others from being present as resources, to listen and to comment. The superintendent and business manager/administrator of the district should participate in all commission meetings as resources. Districts also must provide for the reimbursement of any reasonable expenses of commission members in performing their duties. In this regard, school boards should consider providing legal counsel for the commission, as well as a financial advisor, to provide impact information to the commission.

The act makes no mention of any operating procedures for the commission. PSBA suggests that, at the very least, the commission elect a chairperson to run the meetings, a vice-chairperson to run meetings when the chairperson cannot attend, and a secretary to ensure that meeting notices are properly given and advertised, to maintain commission records and minutes, and to turn over these records and minutes to the school board after the commission makes its recommendation.

Boards may want to submit a list of bylaws or operating procedures to the commission at its initial meeting for discussion and amendment. Meeting agendas, dates and times should be arranged with the help of school administration and should take into account the requirements that the commission issue a recommendation within 90 days of its appointment and that it have at least one public hearing before it makes its recommendation to the board. Districts also may suggest to the commission that it receive some training on the provisions of Act 1 and on public school financing.

While there is no mention in Act 1 of whether or not the commission is subject to the Sunshine Act, PSBA believes that the act applies. The LTSC appears to fall under the Sunshine Act's definition of an "agency" and its mission under the act's definition of "agency business." Accordingly, the commission's meetings must be advertised and open to the public. Also, commission members must vote in public, minutes must be kept and time must be given to public comment. This latter consideration has as much to do with good public relations practice and public outreach as it does with fulfilling the requirements of the Sunshine Act. Boards should consider giving the commission's secretary some basic training on the Sunshine Act. To the extent possible, the board secretary should work closely with the commission's secretary in making sure that the provisions of the Sunshine Act are followed.

Required Actions Subsequent to LTSC Recommendation
As mentioned previously, the LTSC has 90 days from the date of its appointment to make a recommendation (no later than Dec. 13, 2006). If a commission fails to make a timely report, the school board must discharge it from its duties.

Assuming the commission makes a timely report, PSBA recommends that the board take action in December or January to discharge it and thank the commission for its work. This will show that the board appreciates their work and makes it clear to the public that the commission's work is finished. At that time, the board should ask that the commission turn over all records, as required by law.

By March 13, 2007, the board must act on the commission's recommendation and adopt a resolution authorizing the specific front-end referendum question language, regardless of whether it agrees with the commission's recommendation. Prior to final approval, the board must hold at least one public hearing concerning the resolution and to advertise once a week for three consecutive weeks in a newspaper of general circulation its intent to adopt the resolution. As a practical matter, because of these advertising requirements, the deadline for a school board decision on the front-end referendum resolution will be earlier than the March date. For this reason, the board should, no later than January 2007, give preliminary approval and authorization of advertising the front-end referendum resolution.

As always, districts should work closely with their solicitors, in this case, to establish a timetable that meets the Act 1 requirements for all steps.

This analysis is based on information received by PSBA, various school solicitors and staff.

At a Glance: School District Responsibilities
Regarding the Local Tax Study Commissions
[(R) - Responsibility mandated by Act 1. (A) - Practice recommended by PSBA]

• Appoint 5, 7 or 9 members to serve on commission by 9/14/06 (R)
• Appoint members that reflect the socioeconomic, age and occupational diversity of the district to the extent possible (R)
• Appoint resident individuals or taxpayers of the district (R)
• May appoint one board member to the commission (R)
• May not appoint an official or employee of the school district nor a relative of an official or employee of the school district (R)

• Provide necessary and reasonable support staff to commission (R)
• Reimburse the members of the commission for necessary and reasonable expenses in the discharge of their duties (R)
• Require receipts for all reimbursable expenses incurred by commission members in the discharge of their duties (R)
• Have the superintendent and business manager/administrator attend all commission meetings to serve as a resource to the commission (A)
• Hire legal counsel for the commission (A)
• Provide commission members with a general background on Act 1 and on school finance (A)
• Provide basic training on the Sunshine Act to the commission's secretary (A)
• Provide a set of bylaws or operating procedures for the commission to discuss at their initial meeting (A)

• Receive the commission's recommendation at a public board meeting no later than 90 days after it has been appointed (R)
• Act to discharge the commission if no recommendation is made within 90 days of its appointment (R)
• Act to discharge the commission after its recommendation is made (A)
• Advertise and vote on a resolution authorizing the front-end referendum question for the May 2007 primary election (R)
• Make the commission's recommendation available to interested persons upon request (R)
• Make available for public inspection all records of the commission, including receipts, tapes, minutes of meetings and written communications during the regular business hours of the school district (R)

At a Glance: Local Tax Study Commission Duties and Responsibilities 
[All listed responsibilities are mandated by Act 1, except where noted]

• Elect a chairperson, vice chairperson and a secretary (not required by Act 1, but recommended by PSBA)
• Study the existing taxes levied, assessed and collected by the school district
• Study the effect of any county or municipal taxes imposed concurrently with the school district
• Determine how the tax policies of the school district could be improved by the levy, assessment and collection of an additional earned or personal income tax
• Consider all of the following:
• Historic and present rates of and revenue from taxes currently levied, assessed and collected
• The percentage of total revenues provided by taxes currently levied, assessed and collected
• The age, income, employment and property use characteristics of the existing tax base
• Projected revenue of taxes currently levied, assessed and collected, including taxes authorized by Act 1 but not yet levied

•  Make a nonbinding recommendation to the school board within 90 days of its appointment regarding the imposition of taxes authorized by Act 1
•  Hold at least one public hearing prior to making its recommendation to the school board
•  Turn over to the school board all commission records, including receipts, tapes, minutes of meetings and written communications

Questions and Answers
Local Tax Study Commissions

Q: Are school districts that participated in Act 72 required to set up local tax study commissions?
A: Yes. Because Act 1 repeals Act 72, all districts are now operating under the provisions of the new act, including appointing a Local Tax Study Commission.

Q: Does Act 1 contain any requirements or restrictions on whether districts can actively solicit for potential commission members?
A: No. Districts should actively seek out individuals who are interested in serving on the commission and be as imaginative as possible in doing so. Boards can consider the use of advertisements, news releases, applications and other means to solicit for potential commission members.

Q: Should boards screen individuals who apply to serve on the commission?
A: "Screening" may not be the right term, but there should be a process by which applicants are separated into the different groups that make up your community. This will be helpful to the board in achieving the diversity on the commission that Act 1 requires. Some boards are appointing a three-member board committee to receive applications and do the "screening" of all applicants before the entire board meets to appoint the commission.

Q: Is there any appeal available if the board does not accept the commission's recommendation?
A: No. Act 1 contains no such appeal provision.

Q: What will be the scope of the commission's recommendation for the 2007 front-end referendum resolution?
A: The list of potential questions includes whether an EIT should be increased, whether a district should convert its current EIT to a PIT, whether an EIT should be imposed, or whether a PIT should be imposed (38 school districts do not currently impose any income tax). However, Act 1 prohibits boards from submitting referenda questions on a Personal Income Tax until the Department of Revenue receives final approval of regulations governing the collection of that tax.

Q: When is final approval of such a regulation likely?
A: It is difficult to say at this point. The PA Department of Revenue has drafted regulations and is sharing them with PSBA and other stakeholder groups, but the regulatory review process is typically a slow one. In PSBA's opinion, the regulations would have to be finalized during the time that commissions are deliberating to have an impact. If the regulations are not finalized during those 90 days, commissions will have to either ignore the possibility of recommending any question on the May ballot that has to do with a PIT or make any PIT recommendation contingent on final approval of regulations by the time the board has to advertise the front-end referendum resolution.

Q: Will PSBA provide training to the members of our LTSC regarding their duties?
A: Yes. PSBA will provide such training and is now in the process of determining the best way to deliver it. Check the PSBA Act 1 Web page for details.

Q: If a district's board of directors is elected by region, should the members of the Local Tax Study Commission be chosen in the same manner?
A: There is no requirement in Act 1 for appointment to the commission to be made in this manner. However, to the extent that different groups live in the different regions of the district, this may be one way to ensure diversity on your LTSC.

Q: Can any board member attend meetings of the commission?
A: Yes. Since PSBA believes that commissions must abide by the provisions of the Sunshine Act, their meetings are open meetings; therefore, the public is invited to attend and to make public comment.