FUNDING PUBLIC EDUCATION Bucks County Schools Intermediate Unit #22 Thursday, April 27th, 2017 Dave Matyas Business Administrator Central Bucks School District 4/27/2017

Typical Role of the Business Administrator Depending on District Size, Oversight of Most Non Academic Areas: Building and Grounds Transportation Food Service Warehousing Community School Business Office Administration Financial Reporting/Accounting/Audits Budgeting Taxes (Real Estate, Earned Income, Real Estate Transfer, etc) Payroll Accounts Payable Investment Management Child Accounting Purchasing Insurance 4/27/2017

Develop the Annual Budget Fiscal/Budget Year is from July 1 to June 30. Funds of a School District General Fund Food Service Fund Capital Construction Fund Technology Fund Transportation Debt Service All school districts except Philly are on a July to June fiscal year A fund can be thought of as a separate checking accounts. Most school districts expenses (95%) are transacted thru the general fund (accounts payable, payroll, investments) The other funds are set up to specifically track revenues and expenses for a specialized area of the budget. There is no requirement to use all of these funds. Fund Balance is something you will hear a lot about. It is essentially a savings account / rainy day fund. It is typically money set aside for emergencies or to fund a portion of a future year budget to defer a tax increase. It can be a good source of investment income for a district. Fund Balance is limited by laws to a range of 8-12%. Small school districts can have a fund balance of 12% of the general fund budget. Larger districts are limited to 8% of the general fund budget. 4/27/2017

Act 1 of 2006 Act 1 is a law limiting real estate tax increases to an inflation formula Developed by averaging the State Average Weekly Wage (SAWW) and Employment Cost Index (ECI) to approximate the base rate of inflation over the past 18 months Act 1 also allows exceptions to Act 1 to allow for greater inflation growth due to factors outside the control of a school board The Act 1 index is published in September SAWW developed by the pennsylvania department of labor and industry. ECI is developed by the federal bureau of labor and statistics 4/27/2017

Act 1 Exceptions After Act 25 of 2011 Emergencies/natural disasters – approved by courts Threats/bomb scares/terrorism –approved by courts Court orders – special ed. awards, assessments School Improvement Plans Required by NCLB Enrollment growth greater than 7.5% Health Care for contract prior to 2006 State/local revenue growth below the base index Construction debt prior to 2006 Special Education Contribution to PSERS greater than base index 4/27/2017

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(Costs are split equally between the state and school districts) Pennsylvania School Employees Retirement System (PSERS) Employer Retirement Contributions - 100 Year Term (Costs are split equally between the state and school districts) 32.57% less 24.04% payments for past unfunded liability 8.53% Actual funding needs of retirement system Historically, the employer contribution rate has been about 11%, 5.5% school district + 5.5% state For 2017-18, the budgeted PSERS contribution rate will move from 30.03% to 32.57% = 8.46% Increase 4/27/2017

2017-18 Budget Timeline Under Act 1 Under Act 1 of 2006 school districts need to prepare preliminary budgets by January of each year. The problem is that this timeline does match up with the state budget development timeline. School districts will not have an indication of what state funding levels might be until the Governor’s budget address in February. May want to move up final budget adoption to May to give us and tax collectors more time to work on real estate tax installment payments and calculating Act 1 discounts to homeowners. 4/27/2017

School District Expenditures by Major Categories Salaries and benefits make up 70% of the budget. If you also include transportation, IU and MBIT payments, and principal and interest payments - the total percent of budgeted expenditures equals 91.6%. In most years, the school board has control over about 10% of the total budget because contracts for salaries and benefits and debt payments have been decided. But during a negotiation year with teachers the board may have control over 50 -60 % of the budget. 4/27/2017

Local, State, Federal, and Other Revenue School districts receive revenue from four major components, local sources of revenue, state sources of revenue, federal sources, and other sources. As you can see, local revenues make up the majority of district revenues. The state only provides 17% of our revenue due to our relative wealth compared to other school districts. You can see we don’t receive much federal revenue. State funding made up 18.1% of the revenue sources in 2003-04. One year later it makes up 17% 4/27/2017

Major Sources of Local Revenues Real Estate Taxes Real Estate Transfer (0.50%) Interim Real Estate Taxes Delinquent Real Estate Taxes Earned Income Tax (0.50%) Investment Income 4/27/2017

Looking forward to 2017-18 State/Federal Funding of Public Schools State Subsidies Basic Education Funding ( Proposed Increase by Gov. Wolf ) Special Education ( Proposed Increase by Gov. Wolf ) Transportation (Proposed 11% decrease by Gov. Wolf ) Accountability Block Grant ($0 Under Gov. Wolf’s Proposal) Federal Funding For Schools Title 2 (Program eliminated according to the President’s “skinny” budget) This is federal funding typically used for teacher training. 4/27/2017

Spending From the State-Wide View Point Lets Take a Look at What has Been Happening to Public School Funding Over The Years 4/27/2017

CBSD Revenue Comparison 1974-75 to 2017-18 4/30/2018 CBSD Revenue Comparison 1974-75 to 2017-18 2017-18 Local Revenue 70% State/Fed. Revenue 30% 1975 CBSD received 30% of its revenues from state and federal sources in 1975. In 2006-07 the percentage drops to 17%. How does this impact CBSD? If state revenues were held constant at 30% of CBSD’s budgeted revenues from 1975 to the present. The average homeowner in CB would pay $720 less on their RE tax bill. Compare that to the average RE tax reduction under Act 72 of $225 per house (assuming gambling generates $500,000,000 per year). The impact of decreased state support is about 20 Mills. If state support remained constant through the years, the average assessed house in CB would be paying about $ 800 dollars less in RE taxes. 4/27/2017

The Economy How is the national and state economy impacting local school revenues? Earned income tax revenues are improving (improving employment) Increase in in real estate transfer taxes (improving real estate market) Increase in real estate assessed values (new construction) Increase in interest earnings on investments (driven by the federal reserve) Less families applying for free/reduced price lunches 4/27/2017

FUNDING PUBLIC EDUCATION Questions? 4/27/2017

Real Estate Tax Reform for 2017-18 2017-04-03 CBS Impact on CBSD 04/03/2017

Real Estate Tax Reform The state house and senate are preparing to introduce legislation that will eliminate school property taxes except those that would pay for existing principal and interest payments on construction debt. Implementation would be July 1, 2017 ? To replace most school district real estate taxes, the state would need to shift the burden on to other tax sources. Based upon past legislative bills, it is estimated that: The state Personal Income Tax (PIT) would increase from 3.07% to 4.95% The sales and use tax (SUT) would increase from 6% to 7% and include most food and clothing as well as services such as legal, mental health, architects, etc. Under the tax shift, school districts would receive state subsidies equal to the amount of real estate tax they received during 2016-17 less the grandfathered real estate taxes for construction debt. 2017-04-03 CBS Impact on CBSD 04/03/2017

Real Estate Tax Reform School districts would receive yearly increases equal to the lessor of the State Average Weekly Wage or the increases for (SUT, PIT and hotel occupancy taxes averaged together ) With voter approval via a referendum, school districts would have limited ability to raise some taxes by increasing the local Earned Income Tax (EIT) or Personal Income Tax (PIT). School districts can’t issue any future debt without voter referendum The state would look at school district debt payments each year No incentive to have declining debt payments under this proposal 2017-04-03 CBS Impact on CBSD 04/03/2017

Implications of Real Estate Tax Reform Local tax dollars won’t stay local any longer Most of the new taxes will flow to just 6 counties 2017-04-03 CBS Impact on CBSD 04/03/2017

Implications of Real Estate Tax Reform continued The new equitable basic state education funding formula would be essentially eliminated Tax shift from businesses to individuals According to a 2012 analysis by the state Independent Fiscal Office (IFO) businesses pay about $3B in real estate taxes statewide By reducing real estate taxes, business will shift about $2B of their real estate tax burden on to individual tax payers statewide Eliminates most of the local control and funding authority How will hiring decisions be made? How will contracts be negotiated? 2017-04-03 CBS Impact on CBSD 04/03/2017

Implications of Real Estate Tax Reform continued Real estate tax write-offs on federal taxes will be significantly reduced giving greater revenues to the federal government from Pennsylvania. Will this also impact the value of housing in Pennsylvania? A recession will have a much larger impact on school district finances without the stability of real estate taxes School districts can’t layoff teachers for economic reasons Where will some of the new tax dollars go? $250,000,000 to the Transportation Assistance Fund Will other competing interest also siphon away some education dollars in the future? 2017-04-03 CBS Impact on CBSD 04/03/2017

Implications of Real Estate Tax Reform continued Does not address the factors driving school expenses PSERS Charter schools Special education Health care The state Independent Fiscal Office estimates a $14B tax shift will need to occur. Real estate tax reform probably helps senior citizens Real estate tax reform probably helps businesses Everyone else will pay more than they currently are Real estate tax reform is likely to have more of a negative impact on lower income families (Sales and Personal Income taxes are regressive) 2017-04-03 CBS Impact on CBSD 04/03/2017

2017-04-03 CBS Impact on CBSD 04/03/2017

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Local Revenue Detail 4/27/2017 Local revenues consist mainly of real estate taxes, public utility taxes, earned income taxes, and interest earnings. As you can see Real Estate Taxes and Earned Income Taxes together account for 90% of local Revenues. 4/27/2017

State Revenue Detail 4/27/2017 State sources of revenue include: Basic Instructional Subsidy, Special Education Subsidy, Transportation reimbursement, and building project reimbursements. We will be receiving $458,201 more in basic instructional subsidy from the state. This is a 3.4% increase We will be receiving $91,625 in additional special education subsidy as well. This is a 1.4%increase The accountability grant is a new state revenue source driving out $578,716 to CBSD. These three revenue sources represent the equivalent of about 2.9 mills of additional state subsidy. 4/27/2017

The Economy Dow’s Jones Industrial Average 10 Worst Years 4/30/2018 Dow’s Jones Industrial Average 10 Worst Years DATE CLOSE NET CHANGE % CHANGE 1931 77.90 -86.68 -52.7% 1907 58.75 -35.60 -37.7% 2008 8,776.39 -4,488.43 -33.8% 1930 164.58 -83.90 -33.8% 1920 71.95 -35.28 -32.9% 1937 120.85 -59.05 -32.8% 1974 616.24 -234.62 -27.6% 1903 49.11 -15.18 -23.6% 1932 59.93 -17.97 -23.1% 1917 74.38 -20.62 -21.7% 4/27/2017

Special Ed. Aid to Bucks County 4/27/2017

4/30/2018 2011-12 State of Pennsylvania General Operating Fund Expenditures (all funds in Billions) Was 35% for 2010-11 This slide gives you an idea of the different programs that are subsidized by the state general fund budget. Medicaid and welfare programs make up about 37% of general fund expenses with k-12 education making up about 33% of the budget. In a later slide we’ll show how state support for public education has been slipping over the last 30 years. Total increases for basic subsidy and special education subsidy total about $196 million. Most of the growth in subsidies will not have any impact on CBSD as the governor is targeting $100 million on pre K and full day Kindergarten along with subsidies for technology, science, and dual enrollment in college courses for high school students totaling about $191 million (CBSD does not qualify for any special subsidies of course. Total of $27.3 Billion 4/27/2017

Basic State Aid to Bucks County 4/27/2017

Retirement System Problem 4/30/2018 Retirement System Problem Back in 1999/2000 the state retirement system was over funded – meaning the system had more money than its future liabilities. So Governor Ridge increased teachers retirement benefits by 25% and required teachers to also increase their contributions to the retirement plan by 25%. He also made this same deal for state legislators only it was 50%. The in 2000/2001 the dot com bust happened and stock values dropped. This now left the retirement system underfunded. Since 2001 the legislature has failed to address the problem by increasing the employer contribution rate slightly each year to fix the under funding. Now we have another major stock market correction that has made the problem worse. So now instead of having a 12% employers contribution rate to fix the problem, it may grow to 33% depending on how the stock market performs over the next few years. The problem that really upsets school boards and administrators is that we are powerless to fix the problem – that has to come from Harrisburg leadership (governor). School boards had no role in creating this problem, but they will be expected to pay the bill. Which generates tremendous frustration. 4/27/2017

Largest State Retirement Systems ($ Millions) 4/30/2018 Largest State Retirement Systems ($ Millions) 2008* 2007* CHANGE NAV 1. CALPERS $213,519 $253,551 $-40,032 2. CALSTRS 147,021 176,098 -29,077 3. NEW YORK STATE COMM. 138,425 164,363 -25,938 4. FLORIDA 114,510 138,439 -23,929 5. TEXAS TEACHERS 95,982 114,878 -18,896 6. NEW YORK STATE TEACHERS 88,487 106,042 -17,555 7. WISCONSIN INVESTMENT BD. 72,493 89,328 -16,835 8. NEW JERSEY 70,826, 82,780, -11,954, 9. NORTH CAROLINA 65,924 77,384 -11,460 10. OHIO STATE TEACHERS 62,611 78,311 -15,700 11. OHIO PUBLIC EMPLOYEES 57,940 84,123 -26,183 12. Pennsylvania School Employees 54,666 68,678 -14,012 4/27/2017

Expenditures By Major Functional Area This chart shows the break down of expenses in the district by major functional areas. 4/27/2017

Long Term Planning Fund Balance $11.25M Technology $1.5M Debt Service Recurring Technology $1.5M Debt Service $650K Recurring Capital Projects $1.0M Recurring Transportation $1.3M Self Insurance $750K 4/27/2017

Typical Budget Timeline Summer Develop District Level Goals Strengthen the District’s Educational Programs Align Curriculum with Pennsylvania Standard Assessments Use Portfolios to Engage in Continuous School Improvement Support the Phase 2 Implementation of the Strategic Plan Extend Second Chance Learning at the Middle School Level Expand the Availability and Use of Technology Promote Positive Relationships Between the School and Community Respond to the Enrollment Growth of School Age Children Strengthen the Financial Base of the District 4/27/2017

Typical Budget Timeline (Continued) Late September through Mid-January Site Managers given direction and provide budgetary information. Principals Department Managers Methods of Budgeting Zero-based budgeting Per pupil allocations 4/27/2017

Typical Budget Timeline (Continued) February through March Personnel Needs are Evaluated Enrollment Projections New Programmatic Needs Staffing of New Facilities Personnel Costs are Determined Salaries Health Benefits Employee Turnover (Retirement) Other Personnel Costs 4/27/2017

Typical Budget Timeline (Continued) February through March (Continued) Budget Appropriations are Totaled Preliminary Estimates of State Funding Levels Estimated Local Revenues are Determined First Look at Revenue / Expenditure Gap Budget is Evaluated and Adjusted by Administration Draft Budget Document is Prepared for review by Board committees (Finance, Facility, H.R., Technology) 4/27/2017

Typical Budget Timeline (Continued) April through June Public Budget Hearings are Held Additional Adjustments Considered Health Care Expenses, Debt, Real Estate Assessments Preliminary Budget Adoption Occurs 30-Day Period Needed between Preliminary Adoption and Final Adoption Adjustments can be made Between Preliminary & Final Final Budget Adoption (must occur on or before June 30th) Real Estate Tax Bills are Printed and Distributed in Early July 4/27/2017

CBSD History of State Subsidy Per Student (Basic Subsidy, Special Education, Transportation, Medical, Accountability Grant) Election Year Election Year Election Year Election Year The green bars show the amount of state subsidy we receive per student. We chose to look at basic, special ed, transportation, medical, and Accountability Grant revenues because they are received on a consistent basis each year. You can see that the green bars have been fluctuating up and down from year to year. You might think that state subsidy per student would increase by at least 2% next year. But, after we apply a projected enrollment increase of 500 students, the percent increase per students is around 1%. We used 1994-95 as a conservative base and adjusted for inflation, the red line shows that we should be receiving $200 more per student. If the subsidy did keep pace with inflation we would be able to reduce our current millage by 5 mills 2005-06, 06-07, and 07-08 adjusted by the Act 72 Inflation Index 4/27/2017

4/30/2018 2005-06 CBSD, 1.5% Increase = $206,637 2006-07 CBSD, 2.0% Increase = $281,404 2007-08 CBSD, 2.0% Increase = $299,376 2008-09 CBSD, 2.94% Increase = $449,189 2009-10 CBSD, 3.88% Increase = $610,205 Kutztown As you can see we received a 1.5% increase in the current year budget so I guess we shouldn’t complain with a 2% increase. But, we need to remember that the state is telling us that the inflation factor under tax reform is 3.9%. So our state subsidy is not keeping up with inflation. The Accountability Block Grant Subsidy was included with the BEF for 2009-10 4/27/2017

2005-06 CBSD, 1.76% Increase = $112,295 2006-07 CBSD, 2.0 % Increase = $130,253 2007-08 CBSD, 2.2 % Increase = $146,176 Same comments for the special education subsidy. 4/27/2017

May 5, 2007 Bucks County IU#22 Act 1 Overview Higher Income Taxes and Slot Machine Proceeds Reduce Residential Real Estate Taxes 4/27/2017

Act 1 - Overview Act 1 provides a vehicle for the community within a school district to opt into real estate tax reform by shifting some taxes from real estate to an income tax. The tax shift from real estate to an income based tax can be accomplished through raising the Earned Income Tax (EIT) or implementing an Equivalent Personal Income Tax (PIT). 4/27/2017

What is EIT The Earned income tax (EIT) is a tax on gross wages paid to the municipality and school district where you live – not where you work. The current earned income tax is 1% of gross wages. A half of 1% goes to CBSD and a half of 1% goes to the township or borough where you live. Pensions and social security are not taxable. 4/27/2017

How Tax Reform Works Only primary residential properties and Farms are eligible for a real estate tax credit. Apartments, vacation homes, and commercial properties are not eligible for real estate tax credits. Why? Apartments are considered to be commercial properties. And, commercial properties should not benefit from a tax reduction since the properties will not pay any additional wage taxes to help fund the real estate tax credits. The county Assessors Office determines what properties are eligible for a real estate tax credit (not the school district). 4/27/2017

Tax Reform in Four Easy Steps 4/27/2017

Step 1 In Central Bucks, the Median Assessed Value of a home for real estate taxing purposes is $36,800. Then … The tax study commission can recommend an assessment reduction ranging from 25% to 50% 4/27/2017

Step 2 The tax study commission recommended a 25% discount for the median assessed valued home…. On a home with an assessed value of $36,800, a 25% reduction is $9,200 of assessed value (taxable value). $9,200 x the district millage rate = the $ discount that people will see on their tax bill. $9,200 x 102 mills (.102) = $970. (after Act 1 formula rounding) This is the discount everyone would see on their tax bill even if their house has an assessed value of more than $36,800 4/27/2017

Step 3 (the tax shift) To reduce real estate taxes by $970, earned income taxes (EIT) need to be increased by 1%. CBSD levies a .5% EIT and the municipalities Levy a .5% Act 1 EIT increase of 1% Totals 2% as the new EIT (if the community votes in favor of it on May 15th) But, it’s the new 1% tax we are interested in… 4/27/2017

Step 4 We know a 1% increase in the EIT will yield about a $970 discount on residential real estate taxes. House #1 House #2 House #3 House #4 House #5 Salary = $60,000 $80,000 $100,000 $120,000 $140,000 Times the extra 1% EIT Extra EIT = $600 $800 $1,000 $1,200 $1,400 $970 -600 -800 -1,000 -1,200 -1,400 +370 -30 -230 -430 170 4/27/2017

Who Pays Less, More, and Not Sure? Retired senior citizens who own a home – Pay Less Renters with income – Pay More Everyone else who owns a home and has income ….? See previous step 4 In general, household in CBSD with incomes over $97,200 will pay more. Households with incomes below $97,200 will pay less. 4/27/2017

What This Means To Households Break Even Household Senior Citizen 4/27/2017

Referendum Question Per the Recommendation of the Tax Study Commission, the Act 1 Referendum Question Will Be: Do you favor imposing an additional 1% earned income tax? The revenue generated from the increased tax rate will be used to reduce taxes on qualified residential properties by $972. The current earned income tax rate is .5%. Yes No 4/27/2017

Property Tax and Rent Rebate Act 1 also uses slot machine proceeds and lottery proceeds to provide enhanced real estate tax or rent relief based on household income, primarily for senior citizens. Income (Excludes ½ of Social Security) Homeowner Renter $0 - $8,000 $650 $8,001 - $15,000 $500 $15,001 - $18,000 $300 - $18,001 - $35,000 $250 Gerald Zahorchak 9/15/2006 memo to superintendents 4/27/2017

FUNDING PUBLIC EDUCATION Questions? 4/27/2017