News

December 15, 2007

Districts face tax decisions

Changes in pension payments may cause problems for school boards that had promised to limit tax hikes.

By Mark Guydish mguydish@timesleader.com
Education Reporter
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It emerged from a tangled knot of state agencies and laws, both on the books and in the works: School districts were told Thursday they would save money because their contributions to the teacher pension fund would drop next year, then told they wouldn’t actually save the money.

That could be a problem for school boards that already had promised to limit tax increases.

“It’s bizarre,” said Dallas School District business manager Grant Palfey. “They should either dictate the change or deal with the consequences.”

On Thursday, the Pennsylvania School Employee Retirement System – the agency that runs the pension fund – set next year’s contribution from districts at 4.76 percent, down from this year’s 7.13 percent. That’s the amount districts put into the fund, and is calculated as a percentage of teacher pay.

But, in announcing the new rate, the retirement system pointed out the state Department of Education has recommended districts ignore the drop and prepare next year’s budget under the assumption the rate won’t change.

The issue can be traced to 2001 when the state Legislature boosted teacher pensions by 25 percent, insisting it would cost taxpayers nothing because the pension fund investments were earning high returns in the booming stock market.

When the market bubble burst, the Pennsylvania School Employee Retirement System determined the increased benefits would require a huge increase in the amount districts contribute.

The state decided to spread the increase over several years, to the 2012-13 school year. But, last summer, the state Auditor General warned the system was still under-funded and the contribution rate could spike to 20 percent in 2012.

The fund investments have since improved, which prompted Thursday’s announcement of a lower contribution rate.

But, the state Legislature is taking a second stab at solving the problem. To avoid the 2012-13 spike – now estimated at about a 12-percent increase – a bill is pending in Harrisburg that would set a “floor,” keeping the rate higher in an effort to make that 2012 increase smaller.

This wouldn’t be a problem, except for Act 1, the 2006 law that promises to use money from legalized gambling to lower homeowner property taxes. As part of the deal, the state requires districts to limit tax increases. To exceed the limit, districts must either get voter approval or appeal to the state.

Since voter approval would have to come in the primary election, districts must start preparing budgets months earlier than they used to, putting out a preliminary budget in February instead of May.

School boards can avoid the early budgeting problems by passing a resolution promising to keep tax increases below the state limit. Several local districts, including Dallas, did that. The problem, Palfey of Dallas said, is that they did it before the pension contribution issue came up.

Unless something changes, districts can choose to either plan budgets using the higher rate recommended by the Department of Education or the lower rate mandated by retirement system. It’s not a matter of abstract numbers: It can affect tax rates.

In Dallas’s case, the board’s promise not to exceed the state limit means taxes can’t go up more than 12.9 mills. Palfey estimates the difference between using the new low rate versus the higher rate is equal to about 3 mills. A mill is a $1 tax for every $1,000 in assessed property value.

The district is in the process of building a $42 million high school, and Palfey said under the lower contribution rate, taxes would probably rise between 4 mills and 10 mills. If he uses the newer rate, the tax increase range would be 7 mills to 12.9 mills.

Palfey speculated the state is hemming and hawing, leaving the decision up to districts, because no one wants to take responsibility for the consequences of that 2001 pension increase.

“If (the district contribution rate) spikes to 13 percent in 2012, they just don’t want to hear the backlash,” he said. “They don’t want to tackle the issue, and it’s very frustrating.”

School boards can avoid the early budgeting problems by passing a resolution promising to keep tax increases below the state limit. Several local districts, including Dallas, did that. The problem is that they did it before the pension contribution issue came up.

Mark Guydish, a Times Leader staff writer, can be reached at 829-7161.

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