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									  Act 1 of 2006 Workshop
          Taxpayer Relief Act:
What Should Your School District Do Next?

                 Presented by:

          Jeffrey T. Sultanik, Esquire
         Bonnie A. Sheehan, Esquire

                August 1, 2006
         Major Components
•   Adopted June 27, 2006.
•   Applies to all school districts.
•   Designed to reduce real estate taxes
    through state-wide sharing of gaming
•   Requires front-end voter referenda on
    tax shifting.
            Major Components
• Requires back-end voter     • Allows public to
  referenda on future real      participate in local tax
  estate tax increases          decisions.
  above an “index”.           • Requires state
• New budget timeline and       reimbursement to school
  process.                      districts for income tax
• Establishes formula for       loss due to residents
  the distribution of state     working in Philadelphia.
  funds raised through
  gambling proceeds.
       First Step under Act 1:
    Local Tax Study Commission
•   By September 14, 2006, school boards must
    appoint a Local Tax Study Commission.
•   Purpose of LTSC is to make a
    recommendation on the tax rate for the Spring
    2007 front-end referendum question on
    shifting taxes from property to income tax.
•   LTSC must study existing taxes and how tax
    policies could be improved by funding tax
    relief through the levy of income taxes.
    Composition of Membership
• 5, 7 or 9 residents or taxpayers of the district.
• 1 member may be a school board member.
• Must reflect the diversity of the district by:
         – Age
         – Occupation
         – Socio-economic status
• No officer or employee of the district, or any of
  their “relatives” .
• Act 1 does not define “relative”.
  Considerations for the Board
• School districts should be proactive.
• Identify the categories of people the
  school board wants to see represented on
  the Commission.
• Start now by reviewing demographic data
  from PDE, Dept. of Revenue or the
        Demographic Data
For example, in the Souderton Area
 School District:
– 40.3% of PA returns show income of $50k or more.
– 27.6% of PA returns show income of $15k - $50k.
– 32% of PA returns show income of $0 - $15k.
– Of the 15,000 housing units, just over 75% were
– Of the residents over 25, 13% have bachelors
– 1.5% lack a high school diploma.
  How does a school board select
     commission members?
• Board has discretion over the manner of
  selection, so long as it complies with Act.
• Possible options for school boards:
  – Announce at public meeting;
  – Advertise in local newspapers;
  – Post on district website;
  – Conduct interviews; and/or
  – Contact individuals directly.
         Establishing the LTSC
• Board should adopt a resolution
  establishing the LTSC, its functions,
  operational procedures, a budget and
  resources of the commission.
• Among the procedures:
     • How the commission will vote
     • When meetings will take place
     • Public participation/public comment
     • Access to the superintendent, business manager
       and solicitor
     • Budget and expenditures
What is the LTSC required to do?

LTSC must study 4 items:
  1. Historic and present rates of district
     revenue from current taxes.
  2. The percentage of total district
     revenues provided by current taxes.
What is the LTSC required to do?
3. The age, income, employment and
   property use characteristics of the
   existing tax base.
4. Projected district revenue from current
   taxes, including possible new taxes
   authorized under Act 1 (new EIT or
    LTSC - Time to Completion
•       Commission must hold at least one
        public hearing.
•       Commission must make a nonbinding
        recommendation to school board within
        90 days of appointment:
    –    If appointed Sept. 14 2006, report due by
         December 13, 2006.
    –    If appointed earlier than Sept. 14, the report
         will be due earlier.
Local Tax Study Commission
– Commission must make a nonbinding
  recommendation to school board
  whether to levy an EIT or PIT for the
  next fiscal year.
– Recommendation must be presented
  at a public school board meeting.
– School board votes to accept or reject
 Local Tax Study Commission
• Sunshine Law applies to
• School board must make
  recommendation available to public.
• All “records” of the LTSC must be
  turned over to the Board and retained
  for review.
• Board should define “records”.
          Help for the LTSC
•   Information is available on the Web for
    school boards and LTSC to review.
•   PDE, Department of Revenue and
    Census data.
•   School boards may consider using a
    financial firm to provide support and
    analyze the school district’s data.
Resources for the LTSC
• “historic and present rates ….” PDE has numbers
  by District by year (but only 10 years back)

• “The percentage of total revenue ….”

• “The age, income ….”

• “Projected revenues of taxes ….”
     LTSC - Areas to Examine:
       Types of income tax
What type of income tax to recommend:

1.   Earned Income Tax (Earned Income and Net
     Profits Tax)
       –   Defined by statute (72 P.S. §7303(a)(1) and (2)), it includes
           wages, bonuses, tips and any other payment for services
           rendered. It also includes the net income from a business.
           This is a subset of income taxed by the PIT. It generally
           excludes passive income.

2.   Personal Income Tax
       –   Defined by statute (72 P.S. §7303) it taxes the same classes
           of income as the Pennsylvania Income Tax, for which a return
           is filed each year.
    LTSC - Areas to Examine:
      Types of income tax
Personal Income Tax (continued)
      – Includes: Compensation (salaries, wages,
        commissions, etc); Net profits; Net gains; Net
        income from rents, royalties, etc; Dividends; Interest
        from certain obligations; Gambling and lotteries
        (other than PA State Lottery); Net gains or income
        derived through estates or trusts.
      – Until the PA Department of Revenue approves
        regulations concerning the collection of a personal
        income tax by school districts, a school board may
        not impose a PIT.
       LTSC - Areas to Examine:
             Rate of Tax
• Homestead Exemption
  – Must fund 50% of maximum exemption.
  – Must not fund more than 100% of exemption.
  – Despite above, not required to impose more
    than a 1% EIT for purposes of funding the
• Calculating the Homestead Exemption:
  – ½ of the median assessed value of
    homestead property in the District.
      LTSC - Areas to Examine:
        Amount of Exemption
Amount of Individual Exemption
  •    There is no mandated means of calculating the
       individual exemptions under Act 1.
  •    Definitions in Act 1 are referenced to Act 50
       which in turn references the PA Constitution.
  •    PA Constitution, which is the mechanism
       authorizing Homestead exemptions, does so
       “based on the assessed value of the property”.
  •    Stay tuned and discuss this issue with your
      LTSC - Areas to Examine:
          Preexisting EIT
Choices if the district already has an EIT:
  – A district may impose a supplemental EIT to
    fund property tax relief. The taxpayer will
    simply see an increase in the tax rate of the
  – A district may impose a PIT to fund the
    exclusion, but will also have to convert the
    existing EIT (in a revenue neutral manner) to
    a PIT.
  Commission’s recommendation
   should include the following:
1. EIT vs. PIT          3. Specific
2. Income tax rate to      referendum
   be presented to         question to be
   the voters              presented to the
                        4. Reason for the
           Board Action:
         Procedural Issues
– If LTSC fails to report within 90 days, the
  Board is required to discharge the
– Once the 90 day period has elapsed, the
  Board then has until March 13, 2007 to decide
  to accept or reject the recommendation.
             Board Action:
           Procedural Issues
Prior to adopting the 2007 Front-End
Referendum Resolution, school board must:
• Public Vote – Must take a public vote to
   accept or reject the recommendation.
• Public Notice – Must provide public notice in
   accordance with the LTEA.
• Public Hearing – Must conduct at least one
   public hearing.
          Accept or Reject?
If the decision of the Board is to:
  1. Accept - Board must pass a resolution and
     submit the referendum question to county
     election officials.
  2. Reject (2007 only) - Board must make its
     own referendum question to present to
     county election officials.
  3. Reject (in 2009 and beyond), Board is free
     to either present a referendum question or
     do nothing.
Front-End Referendum Choices:
1. Convert an EIT to a PIT to fund both
   the property tax relief and operating
2. Increase an existing EIT to fund both
   property tax relief and operating costs.
3. Create a new EIT to fund property tax
4. Create a new PIT to fund property tax
       Front-End Referendum
•   Act 1 presents only three choices for the
    wording of the front-end referendum.
•   There are circumstances that the
    referendum language fails to address,
    like districts that currently have no
    preexisting EIT.
•   It is not clear under Act 1 what should be
    done to address these situations.
•   Discuss this issue with your solicitor.
       Front-End Referendum
•   Likely, districts will modify the
    “mandatory” language and submit the
    modified resolution to the county board
    of elections for approval.
•   It appears that only one referendum
    question may be put on the ballot in the
    2007 primary.
        Front End Referendum
               Option 1
• Do you favor imposing an additional X%
  earned income tax? The revenue
  generated from the increased tax rate will
  be used to reduce taxes on qualified
  residential properties by (insert amount of
  reduction). The current earned income tax
  rate is Z%.
        Front End Referendum
               Option 2
•   Do you favor imposing a personal
    income tax at X%? The revenue
    generated from the tax will be used to
    reduce taxes on qualified residential
    properties by (insert amount of
        Front End Referendum
               Option 3
•   Do you favor converting the school
    district's current earned income tax to a
    personal income tax at X%? The
    revenue generated from the personal
    income tax will be used to reduce taxes
    on qualified residential property by (insert
    amount of reduction) and to replace the
    revenue from the school district's current
    earned income tax. The current earned
    income tax rate is Z%.
    Calculating the Minimum and
        Maximum Tax Rates
• The rate of the EIT or PIT may not exceed
  the rate required to provide the maximum
  homestead exclusion.
• This means that the rate may not exceed
  one-half of the median assessed value of
  homestead property in the district.
• Districts may not increase millage on real
  property to pay for the exclusions.
    Calculating the Minimum and
        Maximum Tax Rates
• School boards are not required to impose
  an EIT greater than 1% for this purpose.
• The rates of the proposed EIT and PIT are
  to be rounded to the nearest 0.1%.
• Districts must make sure not to round-up
  in violation of the constitutional limits.
      County Election Officials
• School boards must submit the resolution to
  county election officials no later than 60 days
  prior to the primary election in 2007.
• County officials must confer with the school
  board to draft a non-legal interpretive statement
  to accompany the referendum question.
• County officials must prepare a statement in
  plain English which indicates the purpose,
  limitations and effects of the ballot question.
          “Read my lips…”
• The Board may not
  impose any new
  taxes or raise any
  EIT without a
  separate front-end
  Establishing the Baseline for
      Property Tax Relief:
– Statute establishes a baseline from the “first full
  fiscal year the taxes are levied and collected”.
– Baseline dollar amount will always go to fund
  property tax relief.
– District may use income taxes over and above
  the baseline to fund operational costs
– Thus, as income among the District residents
  grows, the amount of the revenue available to the
  District for operational costs also grows.
– It is the calculation of the baseline that may be
  open to interpretation.
    Establishing the Baseline for
        Property Tax Relief:
–   In year one (fiscal year 2007-2008), all but 2%
    of revenue received by a school district
    directly attributable to an Act 1 EIT or PIT
    taxes must be used to fund property tax relief.
–    In the second fiscal year (2008-2009) and
    every year after, the district must apply the
    sum attributable to the imposition of the tax in
    the first full fiscal year in which the tax is
    levied and collected for property tax relief.
       Calculating the Baseline:
Two possibilities for calculating the baseline:
   1. The total of the money actually received
   during the 2007-2008 fiscal year.
     - There are delays in receiving taxes that are levied,
     especially income taxes.
     - Employers withhold the taxes and turn them over
     to the tax collector quarterly, with a 30-day grace
     - In the first full year that the tax is imposed, the
     maximum amount that can be received is
     approximately 75%, due to quarterly withholdings.
 Calculating the Baseline:
  - Historically, there is a delay in compliance with
  new taxes that further reduces estimated revenue
  bringing receipts down to approximately 70% in
  year one.
2. The total money ever collected on income
earned during the 2007-2008 fiscal year or
100% of the total receipts derived from tax
payer earnings.
               OPTION 1:
• 2007-2008 will be the first full year in
  which the tax is both levied and collected.
• However, due to delay in withholding,
  there will be additional tax receipts
  collected in the following year (and
  beyond) on income earned during 2007-
• These additional tax revenues may be
  applied to district operations (like Act 72).
                Option 2:
• 2007-2008 figure above, but include all
  taxes received later that can be attributed
  to income from 2007-2008. This revenue,
  however, was not “collected” in the first
  fiscal year. Further, the “baseline” will be
  ever adjusted as delinquent taxes are
Stay tuned and consult with your Solictor on
this important issue.
         Gaming Money
•   Until there is $400 million in the state fund,
    the state will not make any allocations to
    school districts for property tax relief.
•   No payments includes no reimbursement of
    Sterling Act taxes.
•   Without any slot machines currently
    operating under license in Pennsylvania,
    news sources indicate that the fund is now in
    the red by over a million dollars.
          Gaming Money
– If the fund has between $400 million and
  $750 million, funds will be disbursed to
  reimburse a pro rata share of the income tax
  that would have gone to school districts from
  income earned in Philadelphia which the
  Sterling Act does not permit the local school
  districts to tax.
– There will also be a pro rata distribution for
  property tax relief.
           Gaming Money
– If the fund has $750 million or more, the
  Sterling Act reimbursement will be fully
  funded AND the districts will receive an
  allocation from the state fund (based upon
  the numerical ranking outlined in §515(a)(1)
  for the district’s share of property tax relief
   The Homestead Application
• Districts must notify residential property owners
  annually of the property tax relief program and
  the application process.
• Notice must be provided by Dec. 30 each year.
• Mailing may be limited to those not currently
  approved and those whose coverage expiring.
• Applications approved under Act 72 qualify.
• Once approved, a homeowner need not reapply
  for at least 3 years. The Board may extend that
  time longer by resolution.
 How the Calculations Might Look
• For purposes of this example, we have
  made certain assumptions both of facts
  and interpretation.

• Individual calculations should be reviewed
  with your financial advisor and solicitor.
State Gaming Distribution of 400 million
Millage Rate is 23 mils
Median Assessed Value is $150,000
Number of Approved Homesteads is 10,000
Total District EI/NP $1,092,921,600
Total District PI $1,235,001,408
  Calculated Max Exclusion per Homestead*        $1,725
   Dollars Required to Fund Max Exclusion** $17,250,000
                Less: State Gaming Dollars $1,559,363
         Less: Projected Sterling Tax Credit  $250,000
  Additional Amount of Income Tax Required $15,440,637
*    Half of median assessed value times the RE tax millage rate
**   Maximum exclusion times the number of approved homesteads
Calculations (continued)
EI/NPT Rate Req. to Generate Amount                               1.41%
               Round down to nearest 0.1%                         1.40%
       Current EIT Rate (school district only)                    0.50%
             TOTAL Projected EIT Rate***                          1.90%
            TOTAL Projected PIT Rate****                          1.69%
*** If municipality collects .5% total EIT rate would be 2.40%
**** If municipality collects .5% total PIT rate would be 2.14%
Amount Available for Homestead Exclusion:
  Amount collected with 97% collection rate $ 14,977,418
        State Gaming $ and Sterling Credit $ 1,809,363
      Less: 2% for District Operations***** $    299,548
                                      Total $ 16,487,233
              Exclusion actually funded $          1,649
***** At least in Year 1 districts may withhold 2% of EIT for operations
         Part II

         Budgeting Changes
Changes to District Procedures
    •   Accelerated budget process (except with
        certification to remain within Index).
    •   School districts must not raise any single tax
        more than the Index without voter approval in a
        back-end referendum.
    •   District may not:
        1. Impose any tax (including an EIT) that was
           not in-place in 2005-2006 without voter
        2. Raise an existing EIT without voter approval.
•   The Index for most districts is the
    average of the increase in the statewide
    average weekly wage (“SAWW”) and the
    employment cost index (“ECI”).
•   PDE will calculate the index no later than
    Sept. 1 each year.
•   Index has ranged from 2.67% to 4.32%
    over the past 10 years.
     “But I liked it the old way”
Submitting a certification
     • A school board that determines that its budget will
       not require a tax increase greater than the Index
       may adopt a resolution and avoid the accelerated
       budget timeline.
     • If PDE agrees, the traditional budget timelines
       apply under 24 P.S. §6-687.
     • A school board that adopts the resolution is not
       eligible to seek referendum exceptions or to go to
       referendum to exceed the Index.
  Submitting a Certification
– Once the District has passed a resolution to
  stay within the index, it must send that
  resolution, along with supporting documents,
  to PDE within 5 days.
– Upon receipt of the resolution and supporting
  documents, PDE will review and determine if
  the District is correct.
– PDE will notify the District of its decision
  within 10 days.
          Back-End Referendum:
        Limitations on Tax Increases
•       If the gross budget calls for a real estate
        tax increase greater than the Index, the
        district must:
    –     Reduce the budget.
    –     Seek exceptions for growth in spending to
          bring the budget within the Index.
    –     Choose to submit the tax increase to a
          back-end referendum.
       Back-End Referendum:
     Limitations on Tax Increases
If a referendum is required, taxes can be raised in
   excess of the Index or a new tax levied only:
       1.    If there is back-end referendum in
             the primary; and
       2.    the referendum question is approved
             by voters.
If the referendum question is not approved, the
   school board cannot exceed the index or
   approve any new taxes.
      Back-End Referendum:
    Limitations on Tax Increases
• Public funds cannot be used to urge voters to
  vote for or against a referendum question.
• Public funds can be used to provide factual
  information about a referendum question.
• A non-legal interpretative statement must be
  prepared by the county election officials in
  consultation with the school board.
• The statement must include information about
  the expenditure and the consequences of the
  referendum being disapproved by voters.
       10 Exceptions to Back end
•   Emergencies            • Court Orders
•   Threats                • Tax revenue and
•   Debts                    state funding
•   Special Education
                           • Certain health care
•   NCLB
•   Actual instructional
                           • PSERS increases
    expense maintenance
                             greater than Index
• To pay the costs incurred in responding to
  an emergency or disaster that is declared
  by the Governor.
• Requires court approval.
• Example:
  – Natural Disasters
             Court Orders
• To pay the costs incurred in implementing
  a court order or an administrative order
  from a Federal or State Agency.
• Requires court approval.
• Examples:
  – Arbitration Award
  – Special Education Award
  – Assessment Appeal
• To pay the costs incurred in responding to
  conditions that pose an immediate threat
  of serious physical harm or injury to the
  students, staff or residents of the school
• Requires court approval.
• Example:
  – Responding to a threat of terrorism
To Pay Interest and Principal on Debt:
  1. Pre-existing debt incurred prior to 6/27/06 and
     under Act 72.
  2. Electoral debt
  3. 60%/average sq. ft. under certain circumstances
  4. $250,000 on new non-academic construction
  5. Refinancing or refunding of certain debts

  –   Requires PDE approval.
          Special Education:
     Increases beyond the Index
• Expenses for special education if increase
  exceeds the Index.
• Requires PDE approval.
• Includes items budgeted for special education
  under Function 1200 – Special Programs –
  – Activities designed primarily for students having special
  – Support classes from all students pre-K, K, elementary
    and secondary students that have been identified as
        No Child Left Behind
• To pay expenses incurred in the
  implementation of a corrective action plan
  required under no Child Left Behind,
  where the expenses of the plan exceed
  certain Commonwealth funding effects
• Requires PDE approval.
  – Example:
     • Cost of School Improvement Plan
     • Implementation of School Choice
  Tax Revenue and State Funding
• To maintain revenues derived from real property
  taxes, earned income taxes, basic education
  funding allocations an special education funding
  allocations, adjusted by the index.
• Requires PDE approval.
  – Examples:
     • If state freezes funding, school districts will not be thrown into
       backend referendum.
     • If tax base is eroding, school districts will not be thrown into
       backend referendum.
Actual Instructional Expenses and
• To pay costs necessary to maintain the
  actual instruction expense per ADM, adjusted
  by the index or to maintain per student local
  tax revenues, adjusted by the Index.
• Eligible district must have experienced
  growth exceeding 7.5% in the prior 3 years or
  have the increase in actual instructional
  expense be less than the Index.
• Requires PDE approval.
    Certain Health Care Costs
• To pay health care expenses that are
  attributable to a collective bargaining agreement
  if the increased cost exceeds the index.
• Applies only to collective bargaining agreements
  in effect on January 1, 2006.
• Requires PDE approval.
  – Example:
     • School districts may mitigate health care increases
       that exceed the index
      PSERS Contributions
• To make payments on behalf of active
  members of the Public School Employees’
  Retirement System where the increase in
  the school district’s share of payments
  exceeds the Index.
• Requires PDE approval.
       Prior Approval Required
• Certain exceptions require approval by the Court of
  Common Pleas.
      • Must give notice of intent to file a petition seeking an
        exception and notice of hearing when granted.
      • Exception must be filed no later than 75 days prior to the
        primary election.
      • Court decision must be issued no later than 55 days prior to
• All other exceptions require PDE approval
      • Exception must be filed no later than 75 days prior to the
        primary election.
      • PDE ruling 55 days prior to primary.
          Cash Flow Issues
School Districts are being moved away from
 “cash up front” to the “lay away plan”:
  – Income tax is collected in small pieces
    throughout the year.
  – Act 1 also provides for installment payments
    of real estate taxes by approved Homestead
       Installment Payments
• Act 1 permits a school district to authorize
  installment payments, to assign
  installment claims and to increase the
  compensation of tax collectors.
• District may allow taxpayers to make no
  more than monthly payments and no less
  than three equal installment payments.
• The ability to authorize installments is
       Installment Payments
• No installment payments are permitted for
  delinquent taxes.
• Only those taxpayers who are eligible for
  property tax relief may pay in installments.
• If a district wants to authorize installment
  payments, it must pass a resolution no
  later than June 30, 2007.
• The resolution must meet with the
  requirements of the Act.
       Installment Payments
• To defray the cash-flow issues inherent in
  the situation, the District may:
  – Contract with a tax bureau for collections.
  – Assign the installment payments.
  – Accept credit cards.
       Installment Payments
• Tax Revenue Anticipation Notes (TRAN):
  – Used by districts, somewhat, to dampen the
    effect of cash flow issues.
  – Used primarily to generate revenue for the
    District through arbitrage, where the money is
    borrowed at one rate and invested at a higher
     Installment Payments
– When faced with a cash flow crisis, to do
  TRAN financing is probably still cheaper than
  selling the A/R since – on top of any other
  profit to the buyer – the buyer would also be
  discounting the price to include the taxable
  interest rate where the district can finance tax
– As a money making tool a TRAN is less
  profitable the longer the revenue stream is
     Practical Considerations
• Impact on labor negotiations.
• Moving up the IU and Vo-Tech budget
• Evaluations of staffing needs (including
  course scheduling) will be moved from the
  end of the year to the beginning.
• A mechanism will need to be developed
  for early notification of retirements
  (perhaps as early as October 1).
     Practical Considerations
• Change in timing of course selections.
• Establish a 3-5 year plan for expenditures
  and financial forecasting.
• Better and earlier communication with
  public on programming needs.
• Budget reduction considerations.
• Planning for construction and electoral
     Other Considerations
– Act 72 is repealed
  • Do not attempt to collect the previously approved
    EIT under Act 72.
– It will be necessary to renegotiate the
  Berkheimer agreements.
– Find and have the phone number available for
  seniors who call the district looking for
  Property Tax and Rent Rebate information.
Jeffrey T. Sultanik, Esquire
Bonnie A. Sheehan, Esquire
• The foregoing has not been reviewed by your financial
  advisor or solicitor.
• A school district should consult with and receive
  recommendations from its financial advisor before
  proceeding with a plan of financing.
• Act 1 is a new law and the options set forth herein are
  untested. It is possible that Act 1 may be interpreted
  inconsistent with our interpretation.
• A school district should consult with and receive legal
  advice from its solicitor.
• Market conditions and investor response to Act 1 may
  influence the financing options the school district may

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