Shell Game: State Bureaucracy Torpedos Transparency; Enabling School Boards to Abandon Fiduciary Trust?

The overall results of the Pennsylvania Performance Audit for the School Districts’ General Fund Balances, completed in January 2023, should raise concerns over these common yet questionable practices that are placing an excess burden on taxpayers across Pennsylvania.  This was a small sampling of districts across the state: only 12 of 500.  Hopefully, this audit will be used by legislators to review Act 1 of 2006 and close the loophole. (See the full report).

According to the Pennsylvania Public School Code (PSC), a district may raise taxes if the estimated ending unreserved, undesignated fund balance, as reported in the annual General Fund budget, is below 8% of the estimated budgeted expenditures. If the district meets this threshold, then it may raise taxes to the limits set by the annual inflationary index as calculated by the Pennsylvania Department of Education (PDE). If a district wants to increase taxes beyond the limit, the law allows the district to either seek voter approval through referendum or go directly to the PDE for an exception to increase taxes without voter approval. Strangely, the districts never consider seeking voter approval through a referendum.  Beyond this, the PDE approves most exceptions allowing districts to accumulate millions of dollars for multiple years in the General Fund while giving the perception in their preliminary and final adopted budgets that the district needed tax revenue to balance the budget. Applying for the exception was used as a budgeting tool, rather than a rare attempt to meet a fiscal shortfall.

Act 1 was intended to give voters more control when a school district needed to raise property taxes beyond limits set by law. The intention was to avoid increasing taxes if the district has available funds. Yet, school districts were raising taxes through exceptions granted by the state, while continuing to have sufficient funds in the General Fund to cover any budget shortfalls. The common school district budgeting practices include adopting policies and/or procedures to reduce the unassigned General Fund balance to have the ability to increase taxes every year. In addition, the districts do this by designating and/or transferring funds in advance of budgeting season. This is the equivalent of moving funds from a checking account to a savings account.  The money is still there, but it is out of sight.

Eight of the 12 districts that were audited had adopted policy 620.  In most districts, policies are not written by school board members.  Policies are most likely written by the Pennsylvania School Board Association (PSBA), then customized by the school administration and solicitor, then presented to the board policy committee to review, make minor changes, then recommended to the full board for a first and second reading. Once on the agenda for a first/second read, the board rarely makes any changes to the policy as presented. Policy 620 for the 12 districts and other districts shows they are almost identical because they most likely used the PSBA template.  Which begs the questions: Who wrote Policy 620 that showed the districts how to circumvent Act 1? Why did it take 17 years to figure it out?  How long will it take to be corrected?  All 12 districts that were audited had sufficient unused funds that should have negated any need for a tax increase.

In the Summer 2022 edition of the Lehigh Valley Commentator, I wrote that Act 1 of 2006 was supposed to be the ‘cap’, yet unintended consequences made Act 1 the starting point for the tax increases. Increased special education costs, pension expenditures, and construction costs are exceptions to Act 1 allowing districts to raise taxes higher than the index. What school district doesn’t have out-of-control pension costs? Most exception requests are granted by the State which is why this makes the Act 1 index the starting point, not the cap. The Average Act 1, for the state, ten years ago was 2.2%, and steadily increased to 4.4% last year (Source).  For 2023, the average increase for the state is 5.3%.

This practice was the basis for the lawsuit against Lower Merion School District.  I stated in the Summer 2022 edition that if you dig into your school district, you will find the same.  Now I’m asking does your district have policy 620 titled “Fund Balance”?

The audit period covers July 2017 through June 2021 and goes on to state that it was common practice for school boards to transfer “surplus” funds in the General Fund to other Capital Funds that were not budgeted to be transferred.  Some districts budget these transfers as if they were expenses that needed to be budgeted, then raise taxes. Transferring excess surplus funds from the General Fund to other Capital Funds, whether budgeted or not budgeted, the practice is lawful if the Board approves the transfer. Despite holding millions of dollars in reserves, the districts want the flexibility to raise taxes annually by keeping the unreserved, undesignated, or unassigned fund balance below the legal threshold.

Absent legislative revision to the law, or at least stricter criteria when applying for referendum exceptions, school districts will continue the practice of committing, assigning, and transferring millions of surplus dollars while routinely increasing taxes. The districts indicated in their audit responses that they referred to the law and noted these were prudent legal business practices. Does that sound like the districts are open to changing their practices without an update to the law?

The findings include – Abington SD and Allegheny SD audits revealed that District policy 620 allows it to increase taxes while retaining millions of dollars of unspent funds for several years in its General Fund.

Bethlehem Area SD, Canon-McMillian SD, Hempfield SD, Lancaster SD, Lower Merion SD, Neshaminy SD, North Penn SD, and Northampton SD, all had sufficient funding and did not have to apply for referendum exceptions. The process of applying for unnecessary referendum exceptions wastes time and resources for the district and PDE. They presented preliminary budgets to taxpayers and PDE that suggested the districts had insufficient funds to balance the budgets while holding millions of dollars for anticipated expenses.

Not only did West Chester SD, North Penn SD, Penn Manor SD and North Allegheny SD present preliminary budgets to taxpayers and PDE that suggested the districts had insufficient funds to balance the budgets, but the districts also applied for referendum exceptions, raise taxes above the index unnecessarily, and the excess tax burden was compounded because the Board did not reverse the unneeded tax increase. Now that we know that Act 1 of 2006 needs to be updated, contact your state representative, and ask them when they plan on closing the loophole.  Silence is consent. If you say nothing, nothing will get done.  It’s time to make some noise.

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