TAX NEWS - June 2010

Pennsylvania Tax: Tax dollars as rollover minutes

York County school officials say they aren't overtaxing residents, but a York Dispatch analysis of financial reports shows many indeed are squirreling away surplus cash while continuing to hike property tax rates.

In some cases that's due to a budgeting process that forces school boards to rely on estimates that end up being way off; but in others it appears districts are intentionally skirting a state law intended to prevent this.

The 2003 state law limits a school district to a fund balance -- an account where surplus money is set aside for unforeseen circumstances and one-time expenses -- of no more than 8 percent of its total budget at the time that budget is adopted.

Exceed that amount, and a school district isn't allowed to raise taxes.

It's a commonsense law intended to protect property owners from excessive taxation.

And it's not working very well.

Based on school districts' final financial figures for the 2008-09 school year, the most recent available, eight were able to grow their surpluses in excess of 8 percent. All but one also increased taxes.

In fact, since the 2005-06 school year, when property tax reform began putting a cap on annual tax increases, the average York County school district padded its surplus by about $1.5 million.

Part of the problem is that tax reform has pushed up the timetable for school districts to draw up their budgets, meaning they have to do so without knowing for sure how much state funding they will get. They also don't get the final, audited figures from the budget year they are in until months after the next year's budget has been adopted.

It's a flawed process, made even worse because the state Legislature is consistently late passing its own budget.

We understand the difficulty, but why aren't these districts fixing their mistakes?

Once they receive their final audits and realize they collected more than was needed, that money should be returned to the taxpayers. Anything over the 8 percent limit should be used to balance the next budget, off-setting any tax increase -- if one is even needed.

But that likely wouldn't help when you have some districts stashing surplus money in "designated accounts" -- or accounts with a specific use in mind. Remember fund balances are intended for unexpected, or one-time expenses.

Once the budget is adopted and the tax rate set, the 8 percent restriction no longer applies -- a district can increase its designated surplus as much as it wants until the start of the next budget year.

"It's a peculiar situation," said Fred Botterbusch Jr., president of Dallastown's school board and former president of the Pennsylvania School Boards Association.

Indeed. Take for instance:

In 2008-09, West York had $7 million in its surplus designated for specific upcoming expenses. Combined with the $5.6 million in general surplus funds, the district had about $12.8 million in its overall fund balance, an amount equivalent to more than 30 percent of the district's $40 million 2008-09 budget.

Such accounting maneuvers may be legal, but they certainly violate the spirit of the 2003 law. The Legislature should revisit the issue and amend this law to close the loophole.

Districts should not be treating residents' tax dollars like roll-over minutes.