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

2. 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

3. 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

4. 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

5. 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

6. 4/27/2017

7. (Costs are split equally between the state and school districts)
Pennsylvania School Employees Retirement System (PSERS) Employer Retirement Contributions 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 , the budgeted PSERS contribution rate will move from 30.03% to 32.57%
= 8.46% Increase
4/27/2017

8. 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

9. 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 % of the budget.
4/27/2017

10. 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 One year later it makes up 17%
4/27/2017

11. 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

12. 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

13. 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

14. CBSD Revenue Comparison 1974-75 to 2017-18
4/30/2018
CBSD Revenue Comparison to
Local Revenue 70%
State/Fed.
Revenue 30%
1975
CBSD received 30% of its revenues from state and federal sources in In 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

15. 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

16. FUNDING PUBLIC EDUCATION
Questions?
4/27/2017

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

18. 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 less the grandfathered real estate taxes for construction debt.
CBS Impact on CBSD
04/03/2017

19. 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
CBS Impact on CBSD
04/03/2017

20. 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
CBS Impact on CBSD
04/03/2017

21. 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?
CBS Impact on CBSD
04/03/2017

22. 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?
CBS Impact on CBSD
04/03/2017

23. 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)
CBS Impact on CBSD
04/03/2017

24. CBS Impact on CBSD
04/03/2017

25. 4/27/2017

26. 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

27. 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

28. 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 % %
, , % % % % % % % %
4/27/2017

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

30. 4/30/2018
State of Pennsylvania General Operating Fund Expenditures (all funds in Billions)
Was 35% for
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

31. Basic State Aid to Bucks County
4/27/2017

32. 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

33. 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, , ,077
3. NEW YORK STATE COMM. 138, , ,938
4. FLORIDA 114, , ,929
5. TEXAS TEACHERS 95, , ,896
6. NEW YORK STATE TEACHERS 88, , ,555
7. WISCONSIN INVESTMENT BD. 72, , ,835
8. NEW JERSEY 70,826, 82,780, -11,954,
9. NORTH CAROLINA 65, , ,460
10. OHIO STATE TEACHERS 62, , ,700
11. OHIO PUBLIC EMPLOYEES 57, , ,183
12. Pennsylvania School Employees 54, , ,012
4/27/2017

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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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 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
, 06-07, and adjusted by the Act 72 Inflation Index
4/27/2017

42. 4/30/2018
CBSD, 1.5% Increase = $206,637
CBSD, 2.0% Increase = $281,404
CBSD, 2.0% Increase = $299,376
CBSD, 2.94% Increase = $449,189
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
4/27/2017

43. CBSD, 1.76% Increase = $112,295
CBSD, 2.0 % Increase = $130,253
CBSD, 2.2 % Increase = $146,176
Same comments for the special education subsidy.
4/27/2017

44. 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

45. 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

46. 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

47. 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

48. Tax Reform in Four Easy Steps
4/27/2017

49. 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

50. 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

51. 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

52. 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

53. 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

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

55. 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

56. 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

57. FUNDING PUBLIC EDUCATION
Questions?
4/27/2017