Act 1 of 2006 Workshop Taxpayer Relief Act: What Should Your School District Do Next? Presented by: Jeffrey T. Sultanik, Esquire email@example.com Bonnie A. Sheehan, Esquire firstname.lastname@example.org 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 revenues. • 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 Census. 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 owner-occupied. – Of the residents over 25, 13% have bachelors degrees. – 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 PIT). 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 recommendation. Local Tax Study Commission • Sunshine Law applies to Commission. • 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 ….” http://www.pde.state.pa.us/k12_finances/cwp/view. asp?a=3&Q=50949 • “The age, income ….” http://nces.ed.gov/surveys/sdds/about.asp • “Projected revenues of taxes ….” http://www.revenue.state.pa.us/revenue/cwp/view. asp?A=246&Q=250358 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 exemption. • 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 Solicitor. 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 EIT. – 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 voters 4. Reason for the recommendation Board Action: Procedural Issues – If LTSC fails to report within 90 days, the Board is required to discharge the commission. – 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 costs. 2. Increase an existing EIT to fund both property tax relief and operating costs. 3. Create a new EIT to fund property tax relief. 4. Create a new PIT to fund property tax relief. 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 reduction). 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 BUT: • 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 referendum. 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 period. - 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- 2008. • 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 received. 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 money. 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. Assumptions: 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 Calculations 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 CHANGES TO THE BUDGETING PROCEDURES AND TIMELINE 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 approval. 2. Raise an existing EIT without voter approval. Index • 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 Referendum: • Emergencies • Court Orders • Threats • Tax revenue and • Debts state funding maintenance • Special Education • Certain health care • NCLB costs • Actual instructional • PSERS increases expense maintenance greater than Index Emergencies • 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 Threats • 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 district. • Requires court approval. • Example: – Responding to a threat of terrorism Debt 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 – Elementary/Secondary. – Activities designed primarily for students having special needs. – Support classes from all students pre-K, K, elementary and secondary students that have been identified as exceptional. 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 Maintenance • 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 Maintenance • 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 primary. • 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 owners. 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 optional. 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 one. 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 free. – As a money making tool a TRAN is less profitable the longer the revenue stream is stretched. Practical Considerations • Impact on labor negotiations. • Moving up the IU and Vo-Tech budget timelines. • 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 debt. 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. Contact: Jeffrey T. Sultanik, Esquire 215.661.9407 email@example.com Bonnie A. Sheehan, Esquire 215.661.9418 firstname.lastname@example.org Disclaimers • 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 have.
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