act 72 issues and decisions for pennsylvania school districts presented by: david sallack, managing...

Act 72 Issues and Decisions for Pennsylvania School Districtspresented by: David Sallack, Managing DirectorPublic Financial Management, Inc. Harrisburg, Pennsylvania(717) 232-2723

EPLC

January 13, 2005

2

What is Act 72 all About?

• Provides for school district property tax reduction funded through a combination of locally raised income taxes and gaming revenue allocated by the state

• Facilitates a tax reduction and tax shift but does not directly provide additional revenue to school districts to fund academic programs

• Every qualified owner occupied home and farm will receive a school property tax reduction but this reduction could be off set by an increase in an income based tax

• Districts which participate in Act 72 will have limits on the ability to raise tax rates without seeking voter approval

• Citizens can have periodic opportunities to consider raising the initial local income based taxes to provide for further property tax reduction

3

Summary of Major Provisions of Act 72

1. Allocates, by formula, a portion of Pennsylvania gaming revenue to school districts to provide for property tax reduction – dollars allocated by formula, exact amount uncertain at this time

2. Requires district to impose a minimum of .1% EIT to qualify to receive gaming revenue allocation – school board can adopt by resolution

3. Allows higher EIT or PIT (over .1%) to be imposed by front end referendum to provide for additional property tax reduction up to constitutional maximum

4. Uses the homestead and farmstead exclusion to achieve property tax reduction

5. Total property tax reduction to qualifying homesteads or farmsteads is the sum of state gaming money and new locally generate income based taxes

6. After opting into the new tax and receiving gaming revenue allocation, requires school board to seek voter approval through a back end referendum for tax rate increases over an annually determined “index”

7. Provides for exemption from back end referendum for certain budgeted expenditures with either court or PDE approval

8. New state money is for property tax reduction only and does not increase or decrease directly the state money available to the district for education.

4

Allocation of Total Gaming Funds

•Gaming Legislation Authorizes Three Types of Slots Venues– Category 1 – “Racinos” Seven or eight race tracks

– Category 2 – “Stand-alone” Four or five

– Category 3 – Resort hotels – two

•Proposed machine total is 61,000. Makes Pennsylvania second only to Nevada (for now)

Revenue Generator One Time Revenue Recurring Revenues

Licenses $550 - $650 million

Casino Operations 48% of revenues

Property Tax Relief 34% of revenues

Economic Development 5% of revenues

Host County/Contig. Juris. 2% of revenues

Horse Racing Dev. Fund 9% of revenues

Host Municipality 2% of revenues

5

Gaming Revenue for Property Tax Relief

• Initial sale of licenses estimated $550 to $650 million and 34% of gross revenue (estimated $3 billion total annual revenue when slots fully implemented) is dedicated to property tax relief.

• Total property tax relief distribution pays for:

– State allocation by district

– Allocation to districts for Philadelphia wage tax credit

– Philadelphia wage tax reduction

– Philadelphia senior citizen property tax reduction

• Act 72 creates two funds to hold revenues from gaming:

– Property Tax Relief Fund

– Property Tax Relief Reserve Fund

• In order to make the first allocation to schools for property tax relief the Secretary of Budget must certify that:

– Property Tax Relief Fund has at least $500 million

– Property Tax Relief Reserve Fund has $400 million

6

What are the board and community options in

relation to Act 72?

7

Act 72 - Board Decision Path

School Board

May 30, 2005Board declines gaming revenue and does not schedule a referendum

End Process

May 30, 2005Board adopts a .1% EIT

Nov. 2007Potential referendum to increase EIT or PIT meet min. homestead

May 30,2005Board adopts resolution

to have front end referendum Nov 2005 on

EIT or PIT tax

Nov. 2005Public approves

referendum

Nov. 2005Public does not

approve referendum

Board imposes.1% EIT byresolution

May 30, 2005Board adopts resolution

to have Nov. 2007 referendum

on EIT or PIT. Includes only districts which do not

now impose EIT

Nov. 2007Public approves

referendum

Nov. 2007Public doesnot approvereferendum

Board imposes.1% EIT byresolution

A

B

C

D

8

Potential District Actions in relation to Act 72

Action Timeline Pro Con

A Do not adopt

qualifying .1% EIT tax

(decline gaming revenue)

do not schedule a

referendum

May 30, 2005 •Retain tax system control

•Not subject to Act 72

•Turn down gaming

revenue

•No property tax decrease

•No option to reconsider

•Political implications

B. Adopt qualifying .1%

EIT tax, take no action on

front end referendum

May 30, 2005 •District qualifies for

gaming revenue at earliest

date

•Subject to Act 72 2006/07

•May be required to have

referendum in Nov 2007

to increase EIT or PIT

•Lack of information on

process or revenue

C. Opt to have front end

referendum for higher EIT

or PIT in 2005

May 30, 2005/November

2005

•Qualifies for gaming

revenue

•Delays final EIT rate

decision for more

information

•Subject to Act 72 2006/07

•Commits district when

information and process is

unclear

•Could have future

referendum

9

Potential District Actions in relation to Act 72

Action Timeline Pro Con

D. Districts without EIT

currently, defer action on

Act 72 commitment until

2007. Board adopts

resolution 2005 to have

front end referendum

2007. Specific option for

districts which do not now

have EIT

May 2005 Board Action

Nov. 2007 Referendum


revenue if referendum

approved

•Delays commitment until

process and dollars are

better known

•Allows longer district

planning period

•Subject to Act 72 in

2006-07

•Local pressure to get

property tax reduction

sooner

E. Adopt qualifying .1%

EIT 2005 use front end

referendum in 2005 or

2007 to set EIT or PIT at

levels to achieve 50% to

100% of maximum

homestead

May 2005 Board Action

Nov 2005 Referendum

or

Nov 2007 Referendum


revenue immediately

•Minimum commitment

allows time to monitor

process, gather data and

plan

•Subject to Act 72 2006-

07

•Local pressure to get

more property tax

reduction sooner

10

How does the State determine the amount of slot

revenue a district will receive?

11

Allocation of Gaming Revenue to Schools

Available gaming revenue as certified by Secretary of Budget is

allocated to each district which qualifies. Allocation based on a

“Property Tax Reduction Index”

Property Tax Reduction Index Concept

• Every district is ranked on four dimensions of relative wealth and tax effort

•The rankings for every district for the four dimensions are summed

•The sum of the ratings is divided by 1000 to produce an index for each district

•The Property Tax Reduction Index gives a greater share of property tax reduction to low income, low wealth, high tax effort districts

•The index is adjusted so that no district would get amount of state gaming allocation which would provide for less than a 15% reduction in residential property taxes nor more than a 50% decrease

12

Allocation of Gaming Revenue to Schools

Components of Property Tax Reduction Index

1. 2002 Personal Income/2003-04 ADM

• Lowest income per student gets highest ranking i.e. 501

2. 2004-05 MV/PI Aid Ratio

• Highest aid ratio (least wealthy) gets highest rank

3. 2002-03 Equalized Mills (Total school taxes/market value)

• Highest tax effort gets highest rank

4. 2002-03 School Tax Ratio (Total school taxes/personal income)

• Highest tax effort gets highest rank

State Allocation= District Index x ADM x (Dollar Amount Set by State)

13

Allocation of Gaming Revenue to Allegheny County Schools

$500 Million $500 MillionSchool District State Funds School District State Funds

ALLEGHENY VALLEY $322,458 NORTH ALLEGHENY $1,857,509AVONWORTH $207,087 NORTH HILLS $1,173,449BALDWIN WHITEHALL $1,393,077 NORTHGATE $608,291BETHEL PARK $1,427,802 PENN HILLS TWP. $1,956,537BRENTWOOD BORO $524,696 PINE-RICHLAND $977,413CARLYNTON $455,473 PITTSBURGH $12,035,441CHARTIERS VALLEY $747,743 PLUM BOROUGH $1,337,221CLAIRTON CITY $379,976 QUAKER VALLEY $562,552CORNELL $190,585 RIVERVIEW $293,353DEER LAKES $761,427 SHALER AREA $1,642,927DUQUESNE CITY $308,797 SOUTH ALLEGHENY $610,432EAST ALLEGHENY $788,937 SOUTH FAYETTE TWP. $527,563ELIZABETH FORWARD $1,075,829 SOUTH PARK $723,885FOX CHAPEL AREA $1,231,971 STEEL VALLEY $807,086GATEWAY $1,198,343 STO ROX $761,883HAMPTON TOWNSHIP $697,312 UPPER ST. CLAIR TWP. $1,164,221HIGHLANDS $1,055,193 WEST ALLEGHENY $924,290KEYSTONE OAKS $688,468 WEST JEFFERSON HILLS $920,751MCKEESPORT AREA $1,960,027 WEST MIFFLIN AREA $1,236,561MONTOUR $768,816 WILKINSBURG BORO $696,611MOON AREA $783,404 WOODLAND HILLS $1,802,306MOUNT LEBANON $1,427,922

14

What are the local income taxes that a district can impose under Act 72?

15

Personal Income Tax vs. Earned Income Tax

Earned Income Tax (EIT): Levied by the Locality, taxes the following for services rendered:

• Salaries/Wages

• Commissions/Bonuses/Incentive Payments

• Fees

• Tips

Personal Income Tax (PIT): Levied by the Commonwealth, Pennsylvania taxes eight classes of income:

• Compensation

• Net Profits

• Net Property Income

• Net Income from Rents, Royalties, Patents & Copyrights

• Dividends

• Gambling & Lottery Winnings

• Interest

• Net Income through Estates or Trusts

16

Allegheny County Tax Base Comparison

School District 2002 EIT Base 2002 PIT Base $ Difference % Difference School District 2002 EIT Base 2002 PIT Base $ Difference % Difference

ALLEGHENY VALLEY $178,389,217 $193,630,828 $15,241,611 8.54% NORTH ALLEGHENY $1,469,573,110 $1,594,149,936 $124,576,826 8.48%AVONWORTH $243,861,696 $268,391,840 $24,530,144 10.06% NORTH HILLS $753,958,525 $811,937,683 $57,979,158 7.69%BALDWIN WHITEHALL $591,000,607 $642,231,040 $51,230,433 8.67% NORTHGATE $166,779,488 $176,985,825 $10,206,337 6.12%BETHEL PARK $701,046,706 $755,920,679 $54,873,973 7.83% PENN HILLS TWP. $608,875,819 $644,548,119 $35,672,300 5.86%BRENTWOOD BORO $138,337,939 $146,906,225 $8,568,286 6.19% PINE-RICHLAND $553,406,587 $603,761,615 $50,355,028 9.10%CARLYNTON $230,624,433 $248,651,292 $18,026,859 7.82% PITTSBURGH $3,834,742,120 $4,301,367,759 $466,625,639 12.17%CHARTIERS VALLEY $561,603,915 $614,333,179 $52,729,264 9.39% PLUM BOROUGH $480,355,487 $509,893,339 $29,537,852 6.15%CLAIRTON CITY $77,441,412 $82,534,587 $5,093,175 6.58% QUAKER VALLEY $440,312,291 $555,754,543 $115,442,252 26.22%CORNELL $89,230,343 $105,483,534 $16,253,191 18.21% RIVERVIEW $191,596,775 $212,643,735 $21,046,960 10.99%DEER LAKES $220,863,785 $233,349,680 $12,485,895 5.65% SHALER AREA $677,563,843 $722,718,551 $45,154,708 6.66%DUQUESNE CITY $48,527,280 $50,797,091 $2,269,811 4.68% SOUTH ALLEGHENY $142,988,494 $150,747,994 $7,759,500 5.43%EAST ALLEGHENY $181,667,208 $194,826,294 $13,159,086 7.24% SOUTH FAYETTE TWP. $273,828,093 $292,219,423 $18,391,330 6.72%ELIZABETH FORWARD $290,138,065 $311,831,523 $21,693,458 7.48% SOUTH PARK $264,831,571 $277,746,905 $12,915,334 4.88%FOX CHAPEL AREA $950,903,107 $1,183,348,553 $232,445,446 24.44% STEEL VALLEY $204,853,737 $218,601,434 $13,747,697 6.71%GATEWAY $547,974,606 $591,547,635 $43,573,029 7.95% STO ROX $123,644,387 $130,094,079 $6,449,692 5.22%HAMPTON TOWNSHIP $504,518,944 $552,439,554 $47,920,610 9.50% UPPER ST. CLAIR TWP. $715,018,816 $823,857,155 $108,838,339 15.22%HIGHLANDS $274,769,467 $294,468,925 $19,699,458 7.17% WEST ALLEGHENY $390,168,060 $404,639,356 $14,471,296 3.71%KEYSTONE OAKS $353,048,789 $376,900,527 $23,851,738 6.76% WEST JEFFERSON HILLS $352,217,437 $380,288,289 $28,070,852 7.97%MCKEESPORT AREA $356,327,286 $379,840,539 $23,513,253 6.60% WEST MIFFLIN AREA $306,687,043 $325,356,008 $18,668,965 6.09%MONTOUR $517,615,414 $552,630,434 $35,015,020 6.76% WILKINSBURG BORO $197,741,767 $207,492,258 $9,750,491 4.93%MOON AREA $570,991,616 $605,939,006 $34,947,390 6.12% WOODLAND HILLS $709,509,742 $771,417,680 $61,907,938 8.73%MOUNT LEBANON $898,103,794 $1,026,912,941 $128,809,147 14.34%Source: PDE

Allegheny County

17

EIT/PIT Tax Base Change (2000-2002)

School District EIT Base Change PIT Base Change School District EIT Base Change PIT Base Change

ALLEGHENY VALLEY 7.62% 3.82% NORTH ALLEGHENY -0.43% -5.67%AVONWORTH 6.41% 0.57% NORTH HILLS 1.87% -1.11%BALDWIN WHITEHALL 3.87% 0.64% NORTHGATE 1.49% -0.53%BETHEL PARK 1.15% -2.56% PENN HILLS TWP. 0.18% -2.34%BRENTWOOD BORO -7.04% -8.35% PINE-RICHLAND 7.24% 4.13%CARLYNTON 1.22% -1.71% PITTSBURGH 1.39% -5.48%CHARTIERS VALLEY 5.59% 2.59% PLUM BOROUGH 1.99% -0.92%CLAIRTON CITY -0.73% -3.00% QUAKER VALLEY -2.98% -12.43%CORNELL -4.11% -0.75% RIVERVIEW 9.95% 5.56%DEER LAKES 4.23% 2.60% SHALER AREA 2.47% -0.54%DUQUESNE CITY 5.49% 3.42% SOUTH ALLEGHENY 1.61% 0.05%EAST ALLEGHENY 1.64% -0.23% SOUTH FAYETTE TWP. 5.22% 1.29%ELIZABETH FORWARD 3.80% 1.67% SOUTH PARK 3.56% 2.36%FOX CHAPEL AREA 1.76% -6.58% STEEL VALLEY 0.69% -1.21%GATEWAY 3.68% 0.38% STO ROX 1.76% -0.49%HAMPTON TOWNSHIP 4.67% 0.97% UPPER ST. CLAIR TWP. 1.23% -8.07%HIGHLANDS 1.63% -0.33% WEST ALLEGHENY 3.99% 2.59%KEYSTONE OAKS 3.96% 0.15% WEST JEFFERSON HILLS 2.56% -0.98%MCKEESPORT AREA 1.36% -1.27% WEST MIFFLIN AREA 2.85% 1.41%MONTOUR 6.46% 3.13% WILKINSBURG BORO -0.61% -2.77%MOON AREA 5.19% 1.85% WOODLAND HILLS 0.87% -3.45%MOUNT LEBANON 1.26% -7.30%Source: PDE

EIT/PIT Base Changes from 2000-2002Allegheny County

18

How will Act 72 impact taxpayers?

19

Table 1

a. State Gaming Distribution 764,060$

b. Sterling Tax Credit 472,496$

c. Earned Income Tax @ 0.10% (1st Year Collections) 244,800$ *

d. Total Available for Homestead/Farmstead Exclusion a + b + c 1,481,356$

At 100% At 50% Application Rate Application Rate

e. Homestead/Farmstead Properties (From SD Information) 4,048 2,024

f. Amount per Approved Homestead/Farmstead d / e 366$ 732$

* Projected 2006/2007 EIT Base: 326,400,000$ Additional EIT at 75% Collections x 0.10% x 75.%Earned Income Tax @ 0.10% (1st Year Collections) 244,800$

ACT 72 MODELABC School District

2006/2007 ESTIMATED HOMESTEAD/FARMSTEAD EXCLUSION CALCULATION @ 0.10% INCOME TAX

AT $500 MILLION OF STATE GAMING DISTRIBUTION

Homestead Exclusion (Assessment Reduction) $17,247 $34,495

21

Table 2

g. Minimum Homestead Exclusion*

Amount Per Homestead: (25% of Median Assessed Value x Millage Rate) 1,126$ 0.25 x $213,148 = $53,287 x 21.12 = $1,126

Total $ Required: (Amount Per Homestead x Eligible Homestead Properties) 4,556,396$ $1,126 x 4,048 = $4,556,396

Additional (Total $ Required - State Gaming & Sterling - Income Tax Revenue from 0.10%) 1,939,336$ Income Tax Required: $4,556,396 - $2,372,260 - $244,800 = $1,939,336

Additional Income Tax Rate Increase (over the 0.60%) Needed To Collect $1,939,336 (Unrounded .76%)** 0.80% ***

Actual Projected Collections in 1st Year of Additional Income Tax (due to rounding) 2,037,519$

Per Act 72, 2.00% of Collections is Withheld for School District Operations 1,996,769$

Actual Minimum Homestead: 1,140$

(Actual Projected Collections + State Gaming & Sterling + Revenue from 0.10%)/ Eligible Homesteads)$1,996,769 + $2,372,260 + $244,800 = $4,613,829 / 4,048 = $1,140

*For these calculations, the 2005/2006 millage rate and the projected 2008/2009 income tax base were used.**Per Act 72, rate is rounded up to the nearest 0.10%***Total School District EIT rate is 1.4%


CALCULATION OF MINIMUM HOMESTEAD/FARMSTEAD EXCLUSION AND INCOME TAX RATE


Since Homestead amount (f) from previous page is less than Minimum Homestead (g), A NOVEMBER 2007 REFERENDUM IS REQUIRED

22

Table 3

h. Maximum Homestead Exclusion*

Amount Per Homestead: (50% of Median Assessed Value x Millage Rate) 2,251$ 0.50 x $213,148 = $106,574 x 21.12 = $2,251

Total $ Required: (Amount Per Homestead x Eligible Homestead Properties) 9,112,792$ $2,251 x 4,048 = $9,112,792

Additional (Total $ Required - State Gaming & Sterling - EIT Revenue from 0.10%) 5,052,064$ Income Tax Required: $9,112,792 - $3,815,929 - $244,800 = $5,052,064

Additional Income Tax Rate Increase (over the 0.60%) Needed To Collect $5,052,064 (Unrounded 1.98%)** 1.90% ***

Actual Projected Collections in 1st Year of Additional EIT (due to rounding) 4,839,108$

Per Act 72, 2.00% of Collections is Withheld for School District Operations 4,742,326$

Actual Maximum Homestead: 2,175$

(Actual Projected Collections + State Gaming & Sterling + Revenue from 0.10%)/ Eligible Homesteads)$4,742,326 + $3,815,929 + $244,800 = $8,803,055 / 4,048 = $2,175

*For these calculations, the 2005/2006 millage rate and the projected 2008/2009 income tax base were used.**Per Act 72, rate is rounded down to the nearest 0.10%***Total School District EIT rate is 2.5%


CALCULATION OF MAXIMUM HOMESTEAD/FARMSTEAD EXCLUSION AND INCOME TAX RATE


23

Total EIT Rate to Achieve the Minimum & Maximum Property Tax Reduction

@ Min Homestead @ Max HomesteadAdditional Total $ Reduction Additional Total $ Reduction

School District EIT Rate EIT Rate Per Homestead EIT Rate EIT Rate Per HomesteadAbington 1.00% 1.60% $873 2.30% 2.90% $1,656Cheltenham Township 1.50% 2.10% $1,258 3.40% 4.00% $2,420Hatboro-Horsham 1.00% 1.60% $870 2.20% 2.80% $1,634Lower Moreland Township 0.80% 1.40% $1,140 1.90% 2.50% $2,175Methacton 1.00% 1.60% $928 2.10% 2.70% $1,714Norristown Area 1.10% 1.70% $694 2.50% 3.10% $1,337Perkiomen Valley 1.20% 1.80% $1,023 2.50% 3.10% $1,907Pottsgrove 1.00% 1.60% $811 2.40% 3.00% $1,577Pottstown 0.90% 1.50% $574 2.20% 2.80% $1,061Souderton Area 1.20% 1.80% $985 2.40% 3.00% $1,775Springfield Township 1.10% 1.70% $1,082 2.40% 3.00% $2,028Upper Dublin 0.70% 1.30% $777 1.60% 2.20% $1,424Upper Merion Area 0.50% 0.60% $486 1.00% 1.10% $858Upper Moreland Township 0.50% 1.10% $405 1.30% 1.90% $765Upper Perkiomen* 0.80% 1.40% $575 1.80% 2.40% $1,041Wissahickon 0.70% 1.30% $818 1.70% 2.30% $1,581*Montgomery County portion

Montgomery County

24

YEAR 1@ 0.10% EIT Income $110,000 Income $75,000 Income $40,000

Homestead Exclusion

Additional EIT of 0.1%

Difference: (Savings)/Cost

YEAR 5@ Minimum Homestead Income $127,520 Income $86,946 Income $46,371

Homestead Exclusion



YEAR 5@ Maximum Homestead Income $127,520 Income $86,946 Income $46,371

Homestead Exclusion



($467)

$1,388


IMPACT OF TAX REFORM ON HOMEOWNERS (Using EIT Base)

ASSUMING A 50% APPLICATION RATE IN YEAR 1 AND A 100% APPLICATION RATE BY YEAR 5AT $500 MILLION OF STATE GAMING DISTRIBUTION

$40

($427)

($1,001)

($467)

$110

($357)

($467)

$75

($392)

($1,001)

$946 $505

($2,001) ($2,001) ($2,001)

$387 ($54) ($496)

($1,001)

$3,031 $2,066 $1,102

$1,030 $65 ($899)

25

YEAR 1Income $110,000 Income $75,000 Income $40,000

Homestead Exclusion

Farmstead Exclusion ($467) ($467) ($467)




Homestead Exclusion

Farmstead Exclusion ($1,001) ($1,001) ($1,001)




Homestead Exclusion

Farmstead Exclusion ($2,001) ($2,001) ($2,001)



$3,031 $2,066 $1,102

($971) ($1,936) ($2,900)

($1,001)

$946 $505

($2,001) ($2,001) ($2,001)

($614) ($1,055) ($1,496)

($1,001)

($467)

$110

($823)

($467)

$75

($858)

($467)

$1,388


IMPACT OF TAX REFORM ON FARMSTEADS (Using EIT Base)


$40

($893)

($1,001)

26

YEAR 1Income $110,000 Income $75,000 Income $40,000

Homestead Exclusion




Homestead Exclusion




Homestead Exclusion



$3,031 $2,066 $1,102

$3,031 $2,066 $1,102

$0

$946 $505

$0 $0 $0

$1,388 $946 $505

$0

$0

$110

$110

$0

$75

$75

$0

$1,388


IMPACT OF TAX REFORM ON RENTERS (Using EIT Base)


$40

$40

$0

For Rent

Rent

For Rent

Rent

For Rent

Rent

27

YEAR 1 YEAR 5 YEAR 5@ Minimum Homestead @ Maximum Homestead

Additional EIT 0.10% Additional EIT 1.09% Additional EIT 2.38%Homestead $467 Homestead $1,001 Homestead $2,001

Household Household HouseholdIncome Difference Income Difference Income Difference

300,000 ($167) 347,782 $2,784 347,782 $6,264285,000 ($182) 330,393 $2,594 330,393 $5,851270,000 ($197) 313,004 $2,405 313,004 $5,438255,000 ($212) 295,615 $2,216 295,615 $5,024240,000 ($227) 278,226 $2,027 278,226 $4,611225,000 ($242) 260,837 $1,838 260,837 $4,198210,000 ($257) 243,448 $1,648 243,448 $3,785195,000 ($272) 226,058 $1,459 226,058 $3,371180,000 ($287) 208,669 $1,270 208,669 $2,958165,000 ($302) 191,280 $1,081 191,280 $2,545150,000 ($317) 173,891 $892 173,891 $2,132135,000 ($332) 156,502 $702 156,502 $1,718120,000 ($347) 139,113 $513 139,113 $1,305105,000 ($362) 121,724 $324 121,724 $892

90,000 ($377) 104,335 $135 104,335 $47975,000 ($392) 86,946 ($54) 86,946 $6560,000 ($407) 69,556 ($244) 69,556 ($348)45,000 ($422) 52,167 ($433) 52,167 ($761)30,000 ($437) 34,778 ($622) 34,778 ($1,175)15,000 ($452) 17,389 ($811) 17,389 ($1,588)

0 ($467) 0 ($1,001) 0 ($2,001)

CHANGE IN SCHOOL TAXES DUE TO TAX REFORM

ASSUMING A 50% APPLICATION RATE IN YEAR 1 AND A 100% APPLICATION RATE BY YEAR 5


IMPACT OF TAX REFORM ON HOMEOWNERS (Using EIT Base)AT $500 MILLION OF STATE GAMING DISTRIBUTION

28

How will Act 72 impact the financial operation of

the school district?

29

Operation of Back end Referendum Provisions

Districts which impose at least a .1% EIT and receive state slot allocation are

subsequently required to submit tax rate increases which exceed the annual

index to voter approval at primary election preceding the budget year,

unless certain exceptions apply

• Index is determined annually by PDE based on the average of the

percentage increase in the Statewide Average Weekly Wage (SAWW) and the

average percentage increase in the Employment Cost Index (ECI)

• Example SAWW average equal 4% and ECI equals 2%, index equals 3%

• History of index: 1999=3.19%, 2000=3.28%, 2001=3.43%, 2002=3.12%,

2003=3.66%, 2004=2.84%, 2005=2.79%

• Index applies to upcoming fiscal year i.e. Index announced Sept. 2005 would

apply to 2006-2007 school district budget

The Annual Index

30


Exceptions to Back end Referendum

• Districts can exclude a portion of the tax increase from the index trigger if the tax increase is needed to meet certain costs or conditions.

– Exception claims by a district require either court approval or approval of PDE

– If exceptions are approved, district tax increase can exceed index without going to referendum

• Exceptions which require approval by Court of Common Pleas. District must post notice of intent to file and notice of any hearing

1. Respond to the cost of emergency or disaster

2. Costs related to compliance with a court order

3. Costs related to resolving conditions which could result in serious harm or injury

• Court determines if district qualifies for exception, the dollar value of the exception and the tax levy needed to address the exception. Tax levy is removed when condition is resolved.

Exceptions requiring court approval

31


Exceptions which require PDE review and approval. PDE has roughly 10 days to review and approve or decline exception. District must notify public of intent to file for exception.

1. Cost related to debt incurred prior to the effective date of the Act or approved by voters

2. Pay for debt related to a portion the cost of new “academic school buildings”

3. Special education cost increases which exceed 10% in one year, exception amount is the amount over the 10% increase

4. Costs of school improvement plan under NCLB which are not covered by state accountability block grants

5. Maintenance of local tax revenue or AIE per student for rapidly growing districts. Requires a 7.5% increase in ADM in the last three years to qualify

6. Costs related to the maintenance of the total dollar value of property taxes, earned income taxes, basic education funding and special education funding at a percentage increase over the prior year equal to the index

7. Payment of cost of health benefits contained in existing contracts, if the percentage increase in costs between years is greater than the index. Exception is set at the dollar value by which the percentage increase in health care costs exceeds the index

8. Funding of PSERS rate increases which drive up district cost more that 7.5% in a year. The exception equals the dollar amount by which the percentage increase in the PSERS contribution exceeds the index.

Exceptions which Require PDE Approval

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Table 1

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

RevenuesLocal Real Estate 23,828,960 14.99 27,399,755 7.06 29,333,591 10.60 32,443,949 16.29 37,728,531 Earned Income Tax 3,174,435 7.38 3,408,673 4.39 3,558,272 8.56 3,862,750 7.33 4,145,953 Other Local Revenue 4,979,659 6.15 5,285,708 57.70 8,335,552 1.81 8,486,252 -20.09 6,781,482

State 8,390,457 14.69 9,622,676 3.04 9,914,856 7.42 10,650,882 9.64 11,677,941 Federal 331,019 60.58 531,546 12.11 595,942 -7.18 553,130 26.55 700,000 Other 469,039 -99.95 219 -100.00 - - 1,000,000

Total Revenues 41,173,569 12.33 46,248,577 11.87 51,738,213 8.23 55,996,963 10.78 62,033,907

Expenditures 41,894,900 6.53 44,631,083 11.98 49,976,048 10.38 55,162,705 16.08 64,033,907

Difference (721,331) 1,617,494 1,762,165 834,258 (2,000,000)

Fund Balance 3,500,729 5,118,223 6,880,388 7,714,646 5,714,646

Table 2

% Millage Increase 4.55% 10.01% 0.93% 5.01% 9.82%% Allowable Increase (Index) 3.43% 3.12% 3.66% 2.84% 2.79%% Difference -1.12% -6.89% 2.73% -2.17% -7.03%

Millage Rate 15.64 17.20 17.36 18.23 20.02Allowable Millage Rate 15.47 16.12 17.83 17.85 18.74Millage Difference (0.17) (1.08) 0.47 (0.38) (1.28)

1 Mill = 1,524,078 1,593,009 1,689,723 1,779,701 1,884,542

$ Difference (256,164) (1,715,970) 793,359 (670,905) (2,414,820)

Would have needed referendum?* YES YES NO YES YES

*Unless other PDE exceptions for referendum could have been met or fund balance was used.


5 YEAR REVENUE & EXPENDITURE HISTORY

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Table 6BASE YEAR YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

RevenuesLocal Gross Real Estate (1) 20,484,638 1.00 20,689,484 1.00 20,896,379 1.00 21,105,343 1.00 21,316,396 1.00 21,529,560 Less: Homestead (2) - (1,481,356) (1,481,356) (4,613,829) (4,613,829) (4,613,829) EIT - 0.50% 1,600,000 2.00 1,632,000 2.00 1,664,640 2.00 1,697,933 2.00 1,731,891 2.00 1,766,529 EIT - 0.10% - 244,800 332,928 339,587 346,378 353,306 EIT -Additional (2) - - - 2,037,519 2,771,026 2,826,447 Other Local Revenue 1,419,523 1.00 1,433,718 1.00 1,448,055 1.00 1,462,536 1.00 1,477,161 1.00 1,491,933

State - Non-Gaming 3,615,265 2.50 3,705,647 2.50 3,798,288 2.50 3,893,245 2.50 3,990,576 2.50 4,090,341 State - Gaming & Sterling - 1,236,556 1,236,556 2,372,260 2,372,260 2,372,260 Federal 49,841 0.00 49,841 0.00 49,841 0.00 49,841 0.00 49,841 0.00 49,841 Other - 0.00 - 0.00 - 0.00 - 0.00 - 0.00 -

Total Revenues 27,169,267 27,510,690 27,945,331 28,344,435 29,441,702 29,866,388

Expenditures 27,169,990 5.70 28,718,679 5.21 30,214,923 4.76 31,653,153 4.64 33,121,859 4.50 34,612,343 Fund Balance - - - - - -

Difference (723) (1,207,989) (2,269,591) (3,308,718) (3,680,157) (4,745,955)

Table 71 Mill = 969,770 979,467 989,262 999,155 1,009,146 1,019,238 Millage Rate NeededTo Balance the Budget 21.12 22.36 23.42 24.43 24.77 25.78

Exception (3) N/A 0.30 0.07 0.06 0.00 0.00

Table 8% Increase in Index (4) N/A 3.17% 3.17% 3.17% 3.17% 3.17%

Millage Rate at Index (5) N/A 21.79 22.79 23.58 24.40 25.17Exception N/A 0.30 0.07 0.06 0.00 0.00Actual Millage Rate 21.12 22.09 22.86 23.65 24.40 25.17

% Increase in Actual Millage 5.61% 4.58% 3.49% 3.44% 3.17% 3.17%

Does the Actual Millage Rate NO NO NO NO NOBalance the Budget?

Table 9: Millage DifferenceIf NO, Actual vs. Needed -0.27 -0.56 -0.79 -0.37 -0.61If YES, Actual vs. Allowable 0.00 0.00 0.00 0.00 0.00$ Value of Millage Rate Difference (260,599) (550,815) (787,969) (378,241) (622,120)

(1) Includes the change in revenue as a result of the annual change in total assessed value.(2) In Year 3 through Year 5, assumes the minimum homestead exclusion.(3) Estimated PDE exception for increased existing local effort debt service and PSERS contribution.(4) The 5-year historical average of the Index.(5) Increases the prior year's actual millage rate by the 5-year avg. of the Index (unless the millage rate needed to balance the budget is less than the allowable millage).

If "NO" above: A referendum is needed unless additional exceptions are approved or fund balance is used, if available.


5 YEAR REVENUE & EXPENDITURE PROJECTION UNDER ACT 72

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(AT $500 MILLION OF STATE GAMING DISTRIBUTION)

34

Key Issues for Districts under Act 72

Issue Discussion

Act 72 Board Decisions

Does the district want to study the issue of

accepting the state gaming funds and

operating under Act 72?

Basic board decision required by May 2005.

No formal study process required however

accepting gaming money could be a one

shot option.

Rejecting Act 72

What happens if the district declines the

state property tax reduction funding?

It appears that the gaming revenue will be

distributed to the districts that elect to

participate. Rejected funds by districts may

be used for other purposes. Political issues

may develop.

Size of Property Tax Reduction

How can a district determine the likely size

of a homestead exclusion resulting from the

tax change and gaming revenue?

Early in the process this will be difficult.

There are a number of variables regarding

tax base, participation in homestead and

actual size of state allocation. Detailed

analysis is needed.

35


Issue Discussion

New EIT Tax

If a district has never imposed an EIT how

can it determine what revenue would be

generated?

Until the tax is actually imposed district will

not have an exact number. Data available

from the Department of Revenue can

provide a good estimate if you know what

categories of income to include. Phila.

Wage taxes make estimates harder.

Impact of Act 72 on Taxpayers

How can a district demonstrate the impact

of any of the Act 72 tax changes on

individual tax payers?

It is impossible to analyze the impact for

every tax payer. The district can estimate

the impact on classes of tax payers based

on assumptions of homestead exclusion,

EIT or PIT rate, state allocation etc.

Not everyone will see a tax decrease

Will every tax payer in the district see a tax

reduction as a result of the district’s

participation in Act 72?

Every qualifying residential property will see

a property tax reduction. This will be offset

however by the increased EIT or PIT rate.

Some taxpayers will actually pay more

taxes depending on the tax rate and the

taxpayer’s income.

36


Issue Discussion

EIT vs PIT Tax

If the district has the choice of imposing an

EIT or PIT which should it select?

The EIT or PIT selection will have

implications both for tax yield and impact on

tax payers. The EIT focuses on salaries and

wages, PIT includes dividends and other

unearned income. Income characteristics of

a district will be critical in this decision.

Philadelphia Wage Tax

Act 72 provides that districts will receive

compensation for the Philadelphia Wage

Tax credit. How does a district compute the

value of this credit?

Until such data is collected from the

taxpayers it will be difficult. There is certain

data available from Philadelphia which can

aid in this estimate. Estimating this number

is important because it factors into tax

reductions.

State Gaming Revenue

Once a district takes action to enter into Act

72, what happens if the gaming revenue

allocation falls at some point?

It appears that amounts available to district’s

can fluctuate both from the state allocation

and the allocation formula. The district is

required to maintain the homestead

exclusion irrespective of the state allocation.

37


Issue Discussion

District Budget Cycle

How will Act 72 change the district’s budget

cycle?

Essentially the entire schedule will be moved

back. Preliminary budgets must be done in

February which will require the process to

begin much earlier and with much less

concrete information on revenue and

expenses.

Exemptions from Referendum

There are certain district expenditures which

can be excluded from the calculations to

determine whether a tax increase exceeds

the allowable limit. Can these amounts be

determined in advance?

The Act directs PDE to develop forms and

processes to make these determinations.

Since timeframes are very short it will be

advantageous for a district to have a method

of determining whether expenses qualify.

Referendum Communications

What can a district do to communicate with

the public on the need to approve a

referendum?

The district will have somewhere between 50

and 60 days to communicate on a

referendum. The law prohibits the use of

public funds to advocate for a position. The

district can communicate information.

38

Glossary of Terms – Act 72

• Homestead/Farmstead Exclusion – The means by which taxpayers will receive a reduction is school property tax obligations. The exclusion is expressed as a fixed dollar reduction in the assessed value of a qualified property. A taxpayer must apply to qualify as a homestead or farmstead.

• Earned Income Tax (EIT) – An income based tax currently available to school districts under Act 511. Maximum rate is 1% split equally between the district and municipality. Tax is applied to salaries, wages and net profits.

• Personal Income Tax (PIT) – A tax on total personal income which is the same base on which the Pennsylvania state income tax is applied. Tax base includes salaries, wages, net profits and unearned income including interest and dividends.

• Property Tax Reduction Index – A number which measures the relative wealth and tax effort of school districts and which determines a district’s relative share of gaming revenue.

• Index – The percentage which is used to determine the degree to which a district’s tax rate can increase without seeking a public referendum for approval. The index is the average of SAWW and ECI.

39

Glossary of Terms – Act 72

• Statewide Average Weekly Wage (SAWW) – The statewide measure of the change of average wages of workers year over year.

• Employment Cost Index (ECI) – The statewide measure of the change in the cost of employing elementary and secondary school workers including salary, wages and benefits year over year.

• Front End Referendum – A public referendum under Act 72 which is submitted by the school board to allow the public to consider to the imposition of new or increased income taxes.

• Back End Referendum – A pubic referendum under Act 72 which is submitted by the school board to allow the public to consider a tax rate increase above the annual index. Occurs at general municipal election.

• Referendum Exemption – A school board may apply to exempt some or all of a tax increase from the requirements for a back end referendum. Exceptions require court or Department of Education approval. Occurs at primary election.

act 72 issues and decisions for pennsylvania school districts presented by: david sallack, managing...

Documents

tax districts

school property tax

total property tax reduction

property tax reduction

new tax

property tax reduction

tax rates

tax shift