I. IF YOUR DISTRICT OPTED OUT OF ACT 72:
If your district was among the 390 who elected to opt out of Act 72, your present school operations have not been affected in a significant way, and there are no significantly different timetables or expectations as compared to those applicable in years past.
● BUDGET DEADLINES
If you opted out of Act 72, you do not need to begin the budget preparation and adoption process early, and your may stick to the typical June 30/July 1 fiscal year end budget adoption process which prevailed in years past.
● REFERENDUM/TAX REQUIREMENTS
If your district opted out of Act 72 participation, you are not required to hold a referendum in the November, 2005 election or to raise your personal income tax by any increment at present. At the same time, any tax increases levied by the school district are not subject to the limitations in amount and corresponding requirements for a public referendum imposed by Act 72.
● HOMESTEAD EXEMPTIONS
One requirement does remain in place despite your district’s decision to opt out. There is a deadline of December 31 each year for each school district to send out to the owner of each parcel of residential real estate an annual notice relating to the homestead exclusion. The annual notice is comprised of an application for homestead exclusion, instructions for completing the form and a statement of the deadline set for the submission of homestead exclusion applications, namely March 1. This is in addition to the homestead exclusion notice which was sent out in October of 2004. In sending out its annual notices to residential property owners, a school district may limit its mailing to those landowners who are not currently approved for a homestead exclusion or whose exclusion is set to expire.
● ADDITIONAL LEGISLATION
While there are no significant Act 72-related responsibilities at present applied to those school districts which opted out of participation, it is likely that more will be heard from Harrisburg on the matter of the 80% of school districts who opted-out. The Pennsylvania Legislature goes back in session on September 26, 2005, and Governor Rendell has stated on several occasions that he intends to put Act 72 back on the front burner. The Pittsburgh Post-Gazette reported on September 16, 2005 that the Governor indicated he would be call a special session of the state legislature to address the large majority of school districts who opted out of Act 72. In his public comments, the Governor has suggested that he is considering forcing all of the declining school districts to participate in Act 72, and before the legislative recess bills were introduced which would accomplish that end. There has also been mention by the Governor of a possible resolution wherein the school districts which opted out of Act 72 would be compelled to participate, but may not be required to adopt the earned income tax increase (or referendum to increase) which was otherwise a precondition for opting into Act 72 in May of 2005. The mandate that school districts submit any tax increases which exceed the annual inflation rate to a public referendum—the “back-end referendum”—would likely remain part of the framework, according to the Governor’s comments.
We expect this issue will be hotly contested within the next few months, and we will devote additional space to it in future editions of this newsletter. If you have specific questions in the interim regarding the status or requirements imposed upon a school district which declined to opt into Act 72, please contact one of our school law attorneys.
II. IF YOUR DISTRICT OPTED INTO ACT 72
If your district was among those which opted to participate in the Act 72 framework as it was offered in the spring, there are several relevant deadlines of which you should be aware, as they alter the typical calendar of school operations.
● FRONT-END REFERENDUM
If your school district opted into Act 72 and elected to conduct a front-end referendum in the November, 2005 general election on the question of the earned income tax and net profits tax increase, the deadline for submitting the question to county officials for placement on the ballot was September 9, 2005, or 60 days prior to the election.
If the referendum levying the additional tax is approved at the general election, the school district then qualifies to participate in the receipt of allocations from the fund established to hold the gambling revenues. If the referendum fails, the school district must itself impose a .1% increase in the earned income tax and the net profits tax, which increase takes effect on the first day of the fiscal year in which a district receives an allocation from the fund.
● HOMESTEAD EXCLUSION
There is a deadline of December 31 each year for each school district to send out to the owner of each parcel of residential real estate an annual notice relating to the homestead exclusion. The annual notice is comprised of an application for homestead exclusion, instructions for completing the form and a statement of the deadline set for the submission of homestead exclusion applications, namely March 1. This is in addition to the homestead exclusion notice which was sent out in October of 2004. In sending out its annual notices to residential property owners, a school district may limit its mailing to those landowners who are not currently approved for a homestead exclusion or whose exclusion is set to expire.
● BUDGET-MAKING REQUIREMENTS
Act 72 changed in a significant way the process for adoption of school district budgets, partly by pushing deadlines earlier into the current fiscal year. Beginning with the 2006-2007 fiscal year, districts must adopt budgets earlier largely in order to ensure that if the district’s proposed budget calls for a tax increase which exceeds the amount of the inflationary index calculated by PDE, the budget can be put to public referendum at the May primary election.
Specifically, by September 30, 2005 (and in subsequent years), PDE is required to inform school districts of the applicable index (the exceeding of which triggers the back-end referendum) and to inform school districts who have opted in as to the preliminary budget adoption compliance deadline dates. From there, a school district is required to adopt a preliminary budget 90 days before the general election, which translates to a deadline of February 15, 2006. The preliminary budget must include estimates of revenues and expenditures and proposed millage rates. That preliminary budget must be available for public inspection for a period of 20 days before its adoption, and thus in practical terms a school board must decide in January which budget it will put on display for the public.
If the preliminary budget contains a tax increase, the school district must file a report with PDE at least 85 days (that is, by February 20 in 2006) before the general election to find out whether the proposed tax increase does or does not exceed PDE’s index. PDE is required to respond to the school district’s report within 10 days of receiving it to inform the district whether it can merely give final approval to the proposed budget or whether it must take some other action as a result of the proposed tax increase.
If a school district’s preliminary budget exceeds the index set forth by PDE, the school district has three options. It can reduce the size of the tax increase to fit within the applicable index. Second, it can put on the ballot for the May primary election a back-end referendum seeking public approval of the budget with the proposed tax increase. Third, the school district can apply to PDE or the local Court of Common Pleas for an exception to the back-end referendum requirements.
Act 72 sets forth several exceptions to the back-end referendum requirement. The individual exceptions are too lengthy to reproduce in full here, but generally the school district must establish two things. First, the district must establish that the revenue raised by the tax increase permitted under the index is insufficient to produce a balanced budget because of one or more qualifying expenditures. Second, the school district has experienced one or more of the qualifying expenditures. The individual exceptions are submitted to either PDE or the local Court of Common Pleas depending on the particular qualifying expenditure claimed. The following descriptions of the qualifying expenditures are summaries intended to provide general background, and not intended as exhaustive discussion of particular exceptions. In general, the qualifying exceptions submitted to PDE are (1) costs incurred to pay interest and principal incurred under 53 Pa. C.S., Part VII, Subpart B, (2) costs incurred to pay interest and principal on electoral debt, (3) costs to pay principal and interest on indebtedness of up to 60% of the construction cost of certain elementary and secondary buildings (with several other provisos), (4) costs to pay interest and principal on indebtedness of up to $250,000 on nonacademic school construction (with provisos), (5) special education cost increases of greater than 10% (with provisos), (6) costs required to implement a NCLBA school improvement plan which were not offset by a state allocation, (7) costs necessary to maintain per-student local tax revenue (with provisos), (8) costs necessary for the maintenance of revenues generated from real property tax, earned income and net profits tax, personal income tax and general and special education funding allocations (with provisos), (9) costs incurred by increases in health care benefit cost increases attributable to a collective bargaining agreement (with provisos) and (10) costs incurred because of a greater than 7.5% increase in actual dollar contributions by a school district to PSERS (with provisos).
In turn, the local Court of Common Pleas is responsible to hear school district requests for exceptions involving (1) costs incurred in responding to or recovering from a disaster or emergency so declared by the governor, (2) costs incurred in implementing the order of a federal or state court or administrative order from a federal or state agency and (3) costs incurred in responding to conditions which pose an immediate threat of harm or injury to students, staff or residents.
School districts are provided by the statute the right to receive notice concerning whether the exception applied for has been approved no later than 55 days prior to the primary election so that school districts whose exception applications are unsuccessful can choose whether to seek budget approval through a back-end referendum. Nevertheless, this means that if a district subject to Act 72’s timelines discovers that a tax increase likely to exceed PDE’s index is part of the preliminary budget, the district should immediately consider and pursue its options to seek an exception from PDE in order to ensure that there is sufficient time to pursue both an exception and a referendum, if necessary, or to make other budgetary decisions.
It is easy to see how the operational changes brought about by Act 72 will force school boards and administrators to adjust their practices in significant ways to meet the new timelines and procedures.