Issue: Tax Reform, Act 1 of 2006

Home / Issues & Advocacy / Issues & Research / Issues / Tax Reform, Act 1

Act 1 NEWSLETTER
Vol. 1, No. 8, Sept. 25, 2006

IN THIS ISSUE: IN THIS ISSUE: Getting ready to start preparing the preliminary budget and some about the rate of the income tax to be proposed to voters next spring.

SUMMARY : Act 1 introduces the term "preliminary budget," a different entity than the proposed budgets and final budgets with which school boards and administrators are used to dealing. Under Act 1, each board of school directors must adopt a preliminary budget. This document must contain estimated revenues, expenditures and any proposed tax rates and must be prepared on a standard form provided by PDE. The preliminary budget must be adopted no later than 90 days before the election that immediately precedes the start of the district's fiscal year - for 2007, that date is Feb. 14. There are some important dates that occur before then, however. The board must print the preliminary budget proposal and make it available for public inspection at least 20 days prior to its adoption (Jan. 25, 2007) and must give public notice of its intent to adopt the document at least 10 days prior to its adoption (Feb. 5, 2007). Districts may hold a public hearing on the preliminary budget.

Act 1 presents an option for those who may want to avoid the early adoption schedule associated with the preliminary budget. If a school board adopts a resolution that it will not raise the rate of any tax for the following year above the index, it will be subject to the budget adoption requirements of Section 687 of the School Code; in other words, the requirements that boards have used traditionally. This includes a preliminary and a final budget adopted in the May/June timeline. The resolution must be adopted no later than 110 days before the election immediately preceding the start of the school district's fiscal year (Jan. 25, 2007). Districts that wish to adopt such resolutions must make the following unconditional certifications:

• That the board will not increase any tax higher than their school district index
• That the board will comply with the procedures set forth in section 687 of the School Code
• That the board certifies that increasing any tax at a rate that is less than or equal to the index will be sufficient to balance its final budget

Boards adopting these resolutions must submit information on a proposed tax increase and a copy of its resolution to PDE no later than five days after the resolution has been adopted. A board that adopts a resolution under this section is ineligible to seek back-end referendum exceptions and is not subject to the requirements to adopt a preliminary budget by Feb. 14 or the requirements for public inspection and public notice of intent to adopt the preliminary budget that occur prior to that date. Should PDE determine that the board's proposed tax increase exceeds the school district's index, the district would be subject to the requirements regarding public inspection and public notice of intent to adopt the preliminary budget and would become eligible to seek one or more back-end referendum exceptions.

ANALYSIS: The early budget adoption process presents many challenges to school boards, business managers and superintendents. The deadlines provided in Act 1 occur before much of the information that is needed to make an accurate spending plan is available. Additionally, the imposition of an artificial cap on tax increases (the 3.4% index) will test the ability of the school district's management team to prioritize projects in such a manner as to prevent the necessity of a back-end referendum question. While approval of a referendum question would allow the district to increase taxes more than the index, most school districts that PSBA has talked to state that they want to avoid placing a tax limit question on the ballot next spring. Indeed, under Act 72, only one school district placed a back-end referendum question on the ballot this past May, where it was defeated by a 7-1 margin.

Because Act 72 districts already have gone through the early preliminary budget adoption process, business managers and board members from districts that opted into that act are good resources to use to help predict some of the difficulties that lie ahead. Most of these, however, are obvious: getting vendors to make accurate projections further out than usual; trying to assign a number for state subsidy before the governor even makes his budget presentation; making accurate projections about school related issues, such as enrollment; and ensuring that community colleges, intermediate units and vocational-technical schools with which the district is aligned present timely information about their budgets. Therefore, a premium is placed on prior year information and the ability to take that information and use it to make projections about the upcoming fiscal year.

The option to adopt a resolution limiting the school district's tax increases to the index should only be entered into by districts with their eyes wide open. Because the timing of that decision is similar to that for the showing of the preliminary budget to the public (Jan. 25, 2007), the same difficulties exist, but with the additional proviso that the district will not be able to seek back-end referendum exceptions, an option that is available to districts who do not adopt a tax-limiting resolution. Needless to say, a board that is thinking about adopting this self-limiting resolution must be satisfied that it can balance the budget with an increase in tax of only the index. Boards should have conversations with the district business manager and superintendent before making this decision so that everybody can voice their opinion as to whether this is the right decision to make.

Remaining Local Tax Study Commission Issues

Ten days after the deadline to appoint a Local Tax Study Commission, there are still some districts that have not yet made the selections because not enough eligible individuals from the community have stepped forward to accept the challenge. PSBA's advice to these districts is to proceed with the volunteers you have, continue to find the necessary number of volunteers you need and write to your legislators about your situation. Most boards know by now that if legislators catch wind of an apparent "violation" of a school law, the board will be made out to be the villain. By being proactive and telling legislators about the local situation, you will be making clear that the district made an effort to follow the letter of the law, but cannot form the commission because of a lack of volunteers. Legislators may be less inclined to make an issue out of the situation if they hear about it from the district first. Similarly, a notice to local media saying that only so many people volunteered and that you are forging ahead but still are seeking volunteers might head off an unfavorable news item and get you some additional volunteers

Also, there is some confusion regarding the rate of taxation that must accompany next spring's front-end referendum question, some of which may have inadvertently been caused by PSBA.

There are two requirements regarding the rate of taxation for the income tax. The first is that it must be sufficient to provide enough revenue to the school district to provide property tax relief equal to the level of 50% of the maximum allowable tax relief in the district. Because the maximum level of property tax allowed is equal to 50% of the district's median assessed value of eligible homestead/farmstead property, the "minimum" is 25% of the median assessed value of eligible homestead/farmstead property in the district (50% of 50%).

The second requirement is that districts are not required to levy or increase an earned income tax by more than 1% or levy a personal income tax that generates more revenue than a 1% earned income tax.

Read together, the two provisions appear to allow the board to propose a tax rate that might not provide enough revenue for the district to be able to provide the minimum level of property tax relief that the statute requires. The confusion results from some interpretations that the district was limited to a 1% increase in the EIT. That is not the case. Certainly a district can keep its rate within the limits described above, but can exceed them if it feels that doing so would be in the best interests of their community.

In making its recommendation and final decision on the tax rate, the commission, and ultimately the school board, should consider the level of property tax relief that the rate would provide, how the income tax rate will compare with rates in surrounding school districts, the effect it would have on taxpayers and on the local economy and many other issues. The level of importance given to property tax relief or lower income taxes will be the key in deciding what rate the commission recommends and what rate is eventually chosen by the school board.

Questions and Answers: Preliminary budget development

Q: Why does Act 1 require such an early adoption timeline for preliminary budgets?
A: The early timeline is to accommodate the back-end referendum. In order to get a back-end referendum question on the ballot, the board has to establish, at some point before the primary election, a proposed tax for the next fiscal year. That way, if public approval is needed, there is time to place the question on the ballot. The early timeline also provides adequate time for the development of back-end referendum exception applications and time to consider those requests.

The reason there is an option for districts to by-pass the early preliminary budget adoption process is that several districts that traditionally raise taxes very little asked PSBA to advocate for language that allows districts to adopt their budgets on the more traditional March-April-May-June timeline if they make a commitment not to increase taxes over the index.

Q: Must a district have a public hearing on its preliminary budget?
A: Hearings on the preliminary budget are optional on the part of the school district. If a hearing is held, it must occur before the board adopts the preliminary budget, and it must be advertised in accordance with the Sunshine Act.

Q: If the revenue necessary to provide the minimum amount of property tax relief can only be generated by an earned or personal income tax of over 1%, could the board stop at 1% even though the revenue generated would provide less than the minimum amount of tax relief required by the Act?
A: Yes. Act 1 provides that the rate shall not be less than the rate required to provide an exclusion equal to 50% of the maximum allowable exclusion "provided that a school district shall not be required to propose an earned income and net profits tax under this section that is greater than 1% or a personal income tax that is greater than the equivalent of an earned income and net profit tax of 1%." Therefore, in our view, the board has some discretion to keep the rate of the income tax lower than the rate that is needed to provide the "minimum" level of tax relief.

Q: Can a board prepare its budget in the traditional May/June timeline if the front-end referendum at the 2007 referendum fails?
A: No, the only way that a board can use the traditional May/June budget development timeline is if it adopts a resolution by Jan. 25, 2007 stating that it will not increases any tax for the 2007-08 school year by more than the index and PDE affirms that the proposed tax hike is not greater than the index.

Q: Must a district pass a resolution every year certifying that it will not raise taxes above the index in order to be able to avoid the preliminary budget adoption provisions of Act 1?
A: Yes, the provisions of Act 1 regarding the resolution clearly reference raising taxes in the next fiscal year and the resolution must be adopted no later than 110 days before the election immediately preceding the start of the school district's fiscal year.

Q: What happens if the district's financial picture changes in the time between adoption of the preliminary budget and the final budget?
A: Adjustments can be made to the final budget, just as they always have been. The important change in Act 1 is that the district has to keep its tax increases at or below the index.