Act 1 Exceptions Eliminated by Act 25 of 2011

The final 2011-2012 Pennsylvania Budget signed into law by Governor Corbett contained significant reductions in education spending.  The impact of these major spending reductions was not lost on the Legislature. Anticipating that school districts might attempt to restore some of the State funding loss by raising local tax rates, the Legislature also passed Senate Bill 330, signed by Governor Corbett on June 30, 2011, now known as Act 25 of 2011.  Act 25 limits a school district’s ability to impose tax increases without a voter referendum. 

In 2006, the Pennsylvania Legislature enacted the Taxpayer Protection Act, commonly known as Act 1, which limited a school district’s ability to raise taxes above a certain threshold index established by the Pennsylvania Department of Education (“PDE”).  Under Act 1, if a school district desired to raise taxes above the index, voter approval by referendum was required.  However, Act 1 created ten (10) exceptions, known as back-end referendum exceptions.  School districts could raise taxes above index levels by identifying one of the ten exceptions and obtaining PDE, rather than voter, approval. 

Act 25 of 2011 now eliminates the vast majority of the back-end referendum exceptions.  The exceptions eliminated by Act 25 of 2011 include:

  • Costs related to responding to or recovering from a disaster or other emergency;
  • Costs to implement a court order;
  • Costs attributed to principal and interest on indebtedness for up to 60 percent of construction;
  • Costs incurred in the implementation of No Child Left Behind school improvement plans;
  • Costs incurred to respond to immediate threats or serious physical harm to students; and
  • Costs incurred in providing health care benefits to a collective bargaining unit.

Act 25 of 2011 only retains the following exceptions with the noted modifications:

  • Special Education:  Act 25 now requires that the special education costs be netted against state special education payments.  An exception to the index will only be granted to cover the portion of a special education cost increase that exceeds the district’s special education state funding.
  • Electoral Debt:  Current Act 1 language is retained related to payment of interest and principal on any voter-approved debt or the refinancing of that debt.
  • Grandfathered Debt:  Current Act 1 language is retained related to payment of existing outstanding debt or refinancing of that debt.
  • Pension:  The Act 1 exception for increases in retirement payments that rise faster than the index has been significantly modified.  First, the exception cannot be used to cover any increases in pension costs above the 2011-2012 wage base, even if a school district hires new employees and the total salary costs exceed the 2011-2012 levels.  Second, the exception only applies to a school district’s share of payments to the PSERS’ system if the increase in the amount of the estimated payments between the current year and the upcoming year, as determined by PDE, is greater than the index.  Third, it also freezes the district’s share of payments for the upcoming year as determined by PDE to the lesser of the school district’s estimated total compensation for the upcoming year OR total compensation for the 2011-2012 school year.

Clearly, with the elimination of the majority of Act 1 exceptions, the ability to generate local revenue without a voter referendum is now much more limited.  Since the remaining permitted exceptions are generally based upon factors outside the control of the school district, it is important for the school district to control its current and future projected cost increases as much as possible during the budget formation process or in contract negotiations.  If you should have any questions that require any guidance regarding this matter, please feel free to contact Alfred Maiello at acm@mbm-law.net or 412.242.4400.

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