1 Spring Ford Area School District Montgomery & Chester Counties Act 1- Pennsylvania Taxpayer Relief Act Financial Advisory Presentation to the Tax Study Commission Edward Murray Managing Director

2 ACT 1 TAX SHIFTING DECISION Winners and Losers Winners –Elderly homeowners with no EIT (or PIT) –Lower income homeowners –Farmers – probably –Philadelphia workers Losers –Elderly with significant PIT (if PIT adopted) –Renters –Homeowners who do not file application –Higher income homeowners (Note: likely includes many 2-wage earner families) –Students?

3 Act 1 – Legislative Intent & Potential Benefits Distribute part of slot money to schools for homeowner tax reduction—especially elderly Force 2007 tax shifting referendum – increase earned income tax (EIT) or adopt a personal income tax (PIT)—to be used for homeowner tax reduction Subject districts to voter referenda on future real estate tax increases and building projects Restrain teacher salary increases—double- edged sword

4 Act 1 – Practical Effects After Implementation No new money for education/students Voter referenda on future real estate tax increases and building projects – diminished school board ability to do what is best for students / adverse education impact Complicated process for Department of Education review and approval of tax increases

5 How are Real Estate Taxes reduced? State revenues to school districts are derived from a 34% tax on slot machine revenues Local revenues – if voters approve tax shifting referendum – are derived from new or increased EIT, or conversion to PIT State revenues + local revenues are used to offset real estate taxes (called homestead / farmstead exclusion )

6 Where Does Slot Money Come From? 55% Slot Machine Tax (up to 55%) 4% divided between county and municipality where casino located (2% to municipality with minimum $10,000,000; maximum 50% of budget, except no limit Philadelphia and Pittsburgh) 5% to tourism promotion fund 12% to horse racing 34% to schools for home and farm owner tax reduction

7 Act 1 Important Definitions of Terms Homestead exclusion Farmstead exclusion Maximum homestead exclusion Act 1 tax Referendum Index / Enhanced Index Property tax reduction allocation Philadelphia tax credit reimbursement

8 Homestead Exclusion A “homestead property” is an owner occupied residential property, approved as such by the county assessment office. The homestead exclusion program allows a school district to exclude from real estate tax a fixed dollar amount of assessed value of a homestead, not in excess of ½ of the median assessed value of homesteads in the school district as approved by the county assessment office. The amount excluded from tax is the homestead exclusion amount. When implemented, every homestead real estate owner receives the same dollar amount tax reduction.

9 Act 1 Tax – New Local Income Tax The tax authorized by Act 1 is an increased income tax, and in all cases limited to the amount necessary to fund the maximum homestead exclusion. The tax may be in one of two forms: –An additional EIT –Personal income tax, taxing investment and other so-called “unearned” income

10 Basic Tax And Slot Money Options 2007 Board Decisions Option 1 – tax shifting – referendum on new or increased EIT / what rate? Option 2 – tax shifting – referendum on converting EIT to PIT or new income tax in form of PIT / what rate? Option 3 – decline slot money (must still choose tax shifting option 1 or 2) (decline by board resolution within 30 days after May 1 PDE notice of amount; ineligible next year, but must hold November voter referendum) 2007 Voter Decision Option 1 - approve proposed income tax (to obtain RE tax reduction) Option 2 – not approve

11 New Income Tax and “Front End” Referendum Options 2007 Board Tax Shifting Decisions Maximum EIT or PIT rate – rate that will fund maximum exclusion, namely assessment reduction of 50% of median assessment Minimum EIT or PIT rate – must propose rate that is at least the lower of: (continued)

12 1.The rate that will fund at least 50% of maximum exclusion (25% of median district assessment) (if median = $157,000; 25% of median = $39,250); or 2.The EIT rate that will raise the total SD EIT rate to 1%, or the PIT rate that will produce the same revenue as a 1% EIT – New Income Tax and “Front End” Referendum Options

13 Decision-making Considerations Tax shifting individual impacts Potential adverse impact on School District wide desirability & property values PIT issues

14 Community Input & Communication Important Points: There are both winners and losers Not just RE tax reduction—also higher EIT or PIT Tax relief not as great as advertised— and some individuals will have tax increase Numbers analysis important! Communication and community input of essence!

15 SCHOOL BOARD ACTION / MAY 2007 REFERENDUM

16 Referendum Question Option 1 EIT question: “Do you favor imposing an additional __% earned income tax? The revenue generated from the increased tax rate will be used to reduce taxes on qualified residential properties by $_______. The current earned income tax rate is __%.” Comments –In last sentence – modify last sentence to address combined municipal / SD rate –Use first year tax reduction amount? Or second year reduction amount ? –Legal advice on alternatives –Non-legal interpretative statement prepare in consultation with county election officials Note: Only one ballot question is allowed.

17 Minimum Permissible Tax Rate Minimum rate is the lower of: –50% minimum = EIT rate that will fund at least 50% of maximum exclusion (25% of median district assessment) (if median = $157,000; 25% of median = $39,250) –1% EIT minimum = EIT rate that will raise the total SD EIT rate to 1% –1% PIT minimum = PIT rate that will produce the equivalent revenue as a 1% EIT

18 Referendum Question Option 3 PIT conversion question: “Do you favor converting the school district’s current earned income tax to a personal income tax at __%? The revenue generated from the personal income tax will be used to reduce taxes on qualified residential property by $_____ and to replace the revenue from the school district’s current earned income tax. The current earned income tax rate is __%.”

19 Referendum Process Public funds to influence referendum - §333(M) back-end, real estate tax increase referendum provision, states: –“No public funds may be used to urge any elector to vote for or against a referendum….” –But may disseminate factual information –In any event – no prohibition on school board “position”

20 PIT CONSIDERATIONS Broader tax base – by taxing investment income Tax shifting from earned to investment income; no new revenue for SD PA Department of Revenue regulations Municipal EIT problem Should calculate impact on tax rate Rate impact generally small - but varies among SDs based on resident wealth and other factors – numbers analysis important Consider impact on different taxpayer groups

21 TAX SHIFTING / TAXPAYER IMPACT / NUMBERS ANALYSIS

22 Homestead Tax Reduction Many variables will affect homestead tax reduction amount: EIT or PIT rate approved by voters Total available slot money Number of homesteads approved by County Homestead tax reduction funded by: slot money; and optional tax shifting tax shifting phased in over 2 years Numbers analysis important

23 Year 1 Collection Factor Important Care must be taken in calculating the projected collection factor. If SD overstates the collection factor, SD will have Year 1 cash shortfall. Tax shift will in any event have a negative cash flow impact on SD – RE tax received early in year; EIT spread over entire year. Collection factor might be more or less than 70%. Factors impacting Year 1 collection factor include:  Employer remittance timing (July 31 payment)  Self-employed (Jan–June not due until April 15)  Employer compliance: multi-year process

24 Additional Slot Money Tax Reduction In addition to tax shifting, additional homestead tax reduction will flow from slot money and Philadelphia tax credits.

25 Tax Shifting PIT Conversion Impact Must use new revenue:  First, to reduce the tax rate that will replace the current EIT, so that conversion is “revenue neutral” when the rate is applied to the higher tax base  Second, to fund homestead tax reduction (using all new revenue derived from Year 1 conversion)  Exception – may apply 2% of new revenue derived from Year 1 rate to operations or general real estate tax reduction Conversion requires voter front-end referendum

26 FUTURE TAX RESTRICTIONS / NEW BUDGET PROCESS

27 Basic Rule SD may increase real estate tax rate by a % up to the inflation “index” SD may not increase real estate tax rate by % above index or adopt new tax unless: –Exception applies to tax increase; or –Primary election voter back-end referendum approval of tax increase or new tax “Use it – or lose it”

28 10 Back-end Referendum Exceptions 1.Emergency or disaster (court must approve) 2.Court order (court must approve) 3.Serious harm or injury (court must approve) 4.Debt grandfathered or approved by voters (other debt exceptions meaningless) (PDE) 5.Special education cost increase exceeding the index (PDE) 6.No Child Left Behind (just for “school improvement plan” after failure; does not cover basic AYP “proficiency costs”) (PDE) 7.Maintaining per student local tax revenue (PDE) 8.Maintaining certain tax and subsidy revenues (PDE) 9.Health benefits above index per pre-1/2/06 labor contract (PDE) 10.PSERS retirement plan cost increase exceeding the index (PDE)

29 Three Stated Debt Exceptions 1.Electoral debt 2.Academic construction debt 3.Current project grandfathered debt incurred before 6/27/06 expressly stated grandfather exception (9/3/04 for Act 72 SDs)

30 Bottom Line for Building Projects Substantial Future building projects will usually require referendum unless: –Funded by grandfathered debt –Funded by replacement debt (debt service in budget replaced by new debt service) –Funded by wrap-around debt (most principal deferred until after debt in budget paid off; pay higher rates on later maturities) –Funded by restructure of existing debt (lengthen term; with higher rates)

31 Act 1 Budget Challenges Building / renovation projects Unfunded mandates (cost increases forced on district by federal and state legislatures) –No Child Left Behind –Charter schools –Cyber charter schools –Act 1 compliance cost –Many others! Other uncontrollable costs that exceed index –Health benefits –Gasoline for school buses –Heating oil –Electric –Many others!

32 Governor Rendell Responds to Spending Caps for State Government “They sound good to the taxpayers, but… they just don’t work. They’re good in good economic times. They’re terrible chokes, albatrosses, in bad economic times.”