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Act 72 Issues and Decisions for Pennsylvania School Districts presented by: David Sallack, Managing Director Public Financial Management, Inc. Harrisburg,

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Presentation on theme: "Act 72 Issues and Decisions for Pennsylvania School Districts presented by: David Sallack, Managing Director Public Financial Management, Inc. Harrisburg,"— Presentation transcript:

1 Act 72 Issues and Decisions for Pennsylvania School Districts presented by: David Sallack, Managing Director Public Financial Management, Inc. Harrisburg, Pennsylvania (717) 232-2723 EPLC January 13, 2005

2 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 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 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 GeneratorOne Time RevenueRecurring Revenues Licenses$550 - $650 million Casino Operations48% of revenues Property Tax Relief34% of revenues Economic Development5% of revenues Host County/Contig. Juris.2% of revenues Horse Racing Dev. Fund9% of revenues Host Municipality2% of revenues

5 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 6 What are the board and community options in relation to Act 72?

7 7 Act 72 - Board Decision Path School Board May 30, 2005 Board declines gaming revenue and does not schedule a referendum End Process May 30, 2005 Board adopts a.1% EIT Nov. 2007 Potential referendum to increase EIT or PIT meet min. homestead May 30,2005 Board adopts resolution to have front end referendum Nov 2005 on EIT or PIT tax Nov. 2005 Public approves referendum Nov. 2005 Public does not approve referendum Board imposes.1% EIT by resolution May 30, 2005 Board adopts resolution to have Nov. 2007 referendum on EIT or PIT. Includes only districts which do not now impose EIT Nov. 2007 Public approves referendum Nov. 2007 Public does not approve referendum Board imposes.1% EIT by resolution A B C D

8 8 Potential District Actions in relation to Act 72 ActionTimelineProCon 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 9 Potential District Actions in relation to Act 72 ActionTimelineProCon 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 Qualifies for gaming 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 Qualifies for gaming 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 10 How does the State determine the amount of slot revenue a district will receive?

11 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 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 13 Allocation of Gaming Revenue to Allegheny County Schools

14 14 What are the local income taxes that a district can impose under Act 72?

15 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 16 Allegheny County Tax Base Comparison

17 17 EIT/PIT Tax Base Change (2000-2002)

18 18 How will Act 72 impact taxpayers?

19 19 Homestead Exclusion (Assessment Reduction) $17,247 $34,495

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23 23 Total EIT Rate to Achieve the Minimum & Maximum Property Tax Reduction

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28 28 How will Act 72 impact the financial operation of the school district?

29 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 30 Operation of Back end Referendum Provisions 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 31 Operation of Back end Referendum Provisions 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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34 34 Key Issues for Districts under Act 72 IssueDiscussion 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 35 Key Issues for Districts under Act 72 IssueDiscussion 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 36 Key Issues for Districts under Act 72 IssueDiscussion 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 37 Key Issues for Districts under Act 72 IssueDiscussion 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 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 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.


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