Governor’s proposal for basic education

The 2019-20 proposed state budget for Pennsylvania would spend $6.5 billion on basic education.  This year, basic education consists of $5.5 billion distributed to districts under the “hold harmless” method and $538 million–all new basic education money from the 2015-16 fiscal year forward–distributed to districts under the student-weighted formula adopted by Act 35 of 2016.

Under the proposed budget, the share of student-weighted dollars would increase to $704 million and a separate $241 million block grant program called Ready to Learn would be moved into the basic education portion of the budget.

The Act 35 formula uses average daily membership, household income and local tax effort to compute a student-weighted value which then determines the share each district receives from the $704 million.  As proposed, about a half-dozen districts would see a decrease in 2019-20.

All 43 districts in Allegheny County would see a boost in Act 35 dollars over this year; close to $10 million in additional money would de divided with the total in the county rising from $33.8 million to $43.2 million (28 percent).  Steel Valley School District would see Act 35 money increase from $615,166 to $988,375 (61 percent).  Woodland Hills School District would see an increase of close to $200,000, from $1.9 million to $2.1 million (10 percent).

Using these two districts and the Act 35 components for this fiscal year and next shows that Steel Valley’s student-weighted average daily membership and local tax effort indices increased.  As a result, its student-weighted value increased 23 percent.  Woodland Hills saw all three of its indices fall and would see student-weighted value fall 16 percent but it will still get more money.

Of course, the budget is still a proposal, and it will offer the opportunity for discussion on what taxpayers are getting in return for the increase in spending.  PSSA results are not encouraging. Besides basic education there is another $6.6 billion in spending and growth of 3.61 percent, which is greater than the overall percentage change in the general fund (2.8 percent).

 

Voters in Penn Hills to get a say on school taxes?

A recent blog noted that the Penn Hills School District was placed into financial recovery and will have a state-appointed coordinator that will help the district with its finances.  However, the normal timeline of school district budgeting must go on.  And with requirements under Act 1 of 2006 the budget process has an important deadline coming on Feb. 20.  That’s when districts have to adopt a preliminary budget for the 2019-20 school year.

For Penn Hills, the preliminary budget includes a tax increase of 1.92 mills, which would raise the rate from 28.66 mills to 30.58 mills.  The district’s Act 1 index would only allow an increase up to 29.58 mills (0.9 mills) without an exception granted by the Department of Education or by approval through a referendum in the district.

Penn Hills wants to be granted exceptions for special education and pension costs.  But the state representative from Penn Hills has made a direct request to the secretary of education to deny the exceptions and either “require the school district to reduce the tax-rate increase to no more than the index, or require it to submit a referendum question for voter approval in the next election.”

Since the 2007-08 school year–when Act 1 requirements on tax increases first went into effect–there has been one voter referendum on a school tax increase.  School districts across Allegheny County exceeded their Act 1 index with permission from the Department of Education via an exception 68 times in the last 12 years.  Penn Hills did it for the last three years with increases of 6, 5 and 4 percent year over year.

From 2013-14 to this year the taxes on a median value home in Penn Hills ($68,500) have increased $343 after accounting for homestead property tax relief for school taxes from gaming money (that’s gone up $13).  With the placement of the district into financial recovery and another above-index tax increase, maybe putting the decision in the hands of the voters would give an indication of their feelings about the situation.

How is the national economy doing?

January jobs data were just released and it contained some remarkable data.  Bear in mind that the deep recession of 2009-2010 entered into a recovery phase in mid-2010 but payroll employment in the private sector did not return to the pre-recession level until early 2014.

Over the eight years from 2008 through 2016, private employment rose an average of 922,000 per year, owing to the deep and lengthy recession and the abnormally weak recovery. Job gains measured over the previous 12 months in 2015 and early 2016 were fairly robust but had tapered off by the second half of 2016.  They remained tepid until 2018 when they began to accelerate again and by January of this year had grown almost 2.7 million compared to January 2018.

It is important to note that in 2017 a strange phenomenon occurred. While manufacturing jobs posted gains every month but one, some service sectors had weak or no gains. By December 2017, manufacturing jobs were 190,000 above the December 2016 level. And with continued expansion in 2018 and this January they are 260,000 above the 12-month earlier level and 450,000 above the January 2017 level.

Given the much higher productivity levels in manufacturing compared to retail and leisure jobs, as well as many other service sectors, the gains in manufacturing employment are a major reason for the pickup in real GDP growth.

One more statistic is worth noting in connection with improved employee incomes: For the first time in the period since 2006, when aggregate weekly payrolls for all private sector employees have been officially reported, 2018 saw the annual increase top 5 percent with a reading of 5.22 percent. And in January 2019, the 12-month rise since January 2018 hit a stunning 5.7 percent — a far better reading than the last precession annual increase in 2007 or the average of the 2010-to-2016 recovery period, each at just over 4 percent.

The strong recent gains reflect growing employment, longer average work weeks and pay hikes — a powerful and desirable combination. And it is happening despite the fact that the recovery is now entering its ninth year and defies all the punditry and naysayers telling us it cannot happen.

But far improved regulatory policies, tax cuts and a shift toward bolstering the manufacturing sector have paid huge dividends. And with room to go still in raising labor force participation, who knows how long this can be sustained. Likely until politicians and their followers who cannot stand prosperity decide to try to kill it.

Penn Hills placed in financial recovery status

This past week the Pennsylvania secretary of education placed two school districts that were in financial watch status under Act 141 of 2012 into financial recovery, which is a step above watch status.  One was the Scranton School District (enrollment over 10,000 students) and the other was the Penn Hills School District in Allegheny County (enrollment over 4,000 students).

A letter from the Penn Hills superintendent to the community states that district officials and state consultants “have not been able to make appreciable gains with regard to debt management.”  Based on district documents the aggregate debt service from seven bond issues is expected to be $9.2 million at the end of this current fiscal year (roughly 13 percent of current spending).  The total will rise in the next five years to $12 million and stay around $10 million for most of the next decade.

There is more to it than that, however.  The declaration of recovery status points out that Penn Hills has met other Act 141 criteria, including a decreasing fund balance, a deficit in three consecutive years and has a delinquent tax collection rate of more than 10 percent.

The troubling part of the superintendent’s letter is where she expressed the opinion that “Penn Hills will not get out of this huge hole without some type of sizable, and renewable nontraditional revenue source and/or some type of debt forgiveness option.”  Sounds like a bailout request, maybe from the state, and one that would not increase the property taxes in the district (the current millage rate is 28.6646 mills and has increased each year since 2013-14).

Four other districts in recovery status since 2012 haven’t been granted new taxing power or a debt-forgiveness package.  Why would Penn Hills somehow be treated differently?

Allegheny County’s 2019 taxable values

Based on the 2019 County Assessment Roll the total value of taxable real estate in Allegheny County is $80.2 billion.  This total was comprised of $55.2 billion in residential and $24.9 billion commercial and is a 1.7 percent increase over the 2018 value of $78.9 billion.

Municipalities that increased well in excess of the year-over-year change countywide included Marshall (8 percent), Sharpsburg (7.9 percent), Ohio (6.3 percent) and Robinson (5.4 percent).  Two Mon Valley communities, West Homestead and West Elizabeth, fell the greatest at 2.9 percent and 3.6 percent, respectively.

The City of Pittsburgh’s taxable value grew by over $400 million to stand at $19.3 billion, a 2.3 percent increase.  In the seven communities with at least $2 billion in taxable value, only Monroeville saw its taxable value decrease from 2018 ($2.2 billion to $2.1 billion, a 1.9 percent drop).  Ross had the greatest year-over-year increase at 3.3 percent.

Overall, 88 municipalities saw their taxable assessed value increase in 2019 while 40 experienced a decrease.

With no countywide reassessment in sight the changes in value, either positive or negative, arise from new construction, improvements, demolition and appeals.  It is worth mentioning that the state should mandate a regular cycle of reassessments in order to bring predictability to the process.  Every year of delay just stretches out the problems associated with going a long time between updates to all values.

Fate of Beaver County reassessment in hands of court

In the last decade the Pennsylvania Supreme Court has been involved in two countywide reassessment cases, one it actually heard and decided on (Allegheny) and one it decided not to entertain (Washington).  That led to revaluations in 2013 and 2017 for both counties.

Now it will be Beaver County’s turn.  Having lost in Common Pleas and Commonwealth courts, the board of commissioners approved a motion to authorize its law department to appeal the Commonwealth Court decision.  If the state’s highest court upholds the decision the county will conduct its first reassessment since 1982.

Not too surprisingly, the commissioners noted they were simply carrying out the wishes of their constituents, many of whom are probably scared that a change in assessed value will automatically lead to a tax increase.  Going from a base year that is 37 years old to a new one is going to mean a big jump in dollar amounts.  Add to that the fact that the county uses a predetermined ratio of 50 percent and would likely go to 100 percent of a more recent year if the court confirms the decisions of the lower courts.  That would lead to even more change in a property’s assessment.

But as we have pointed out before, state law on millage hikes following a reassessment, (which in Beaver County’s case would be Act 93 of 2010) requires taxing bodies to adjust millage rates to a revenue-neutral amount.  That way, taxpayers can gauge the change in value of their property to what has happened for each of the three taxing bodies (county, municipal and school) to determine what will happen with their taxes.

If the Supreme Court decides by April, at that point it will have been a decade since the Allegheny County decision.  And in that time the General Assembly has not shown any interest in moving to a regular cycle of reassessments to make the process more predictable and understandable.

Odd conclusion from performance audit

This past week the state Auditor General’s office released its mandated quadrennial performance audit of the Port Authority of Allegheny County. The audit covered the period from Jan. 1, 2016, to Dec. 31, 2017.

The audit focused on the mass transit agency’s hiring procedures (in the time period 330 new hires were added to bring the total headcount to 2,533 at the end of 2017) and how new service requests are processed. It also measured performance of bus and light rail operations measured by

1. on time performance,
2. percentage of time vehicles are in service,
3. and passengers per revenue hour

The audit looked at four peer agencies (Cleveland, Baltimore, Minneapolis and St. Louis) that have been used previously by the Port Authority and the Pennsylvania Department of Transportation to measure performance. On time arrival for buses, which the Port Authority defines as a vehicle arriving from one minute ahead to five minutes behind the time listed on the schedule (but defined differently by peer agencies) was found to be improving but still lagging at 67 percent in the two-year span.

In 2016, vehicle in service time was 85 percent for buses (the peer average was 90 percent) which the authority attributed to the locations of two bus garages and language in the collective bargaining agreement with the Amalgamated Transit Union on meal breaks. On passengers per revenue hour, the Port Authority ranked second behind Baltimore with 33.8 on buses and third behind St. Louis and Minneapolis on light rail with 47.7 passengers per hour. To improve where lacking, the audit recommends a renegotiation of the collective bargaining provisions when the current labor contract expires (2020) and possibly looking at different locations for garages to reduce time out of service.

In presenting the findings the Auditor General stated that fares should not rise and that “it’s critical that Harrisburg make greater investments.” In the fiscal years since the end of FY 2013-14, state operating assistance for the Port Authority has risen from $177.6 million to $224.9 million (26 percent) due to Act 89. That is a significant increase.  But due to the Authority’s costs, even if the Auditor General put a specific number to his suggestion it would probably not be enough.

What is interesting is that the audit did not measure cost-effectiveness in comparison with the peer agencies that were utilized in other parts of the audit. 2017 numbers from the National Transit Database on bus expenses per revenue hour, a statistic highlighted in a Policy Brief this year, show that the Port Authority is higher (by 30 percent) than the other agencies. So why would the opinion that more money, specifically from the state, be made rather than asking why the Port Authority was higher on such a critical indicator?

Long road ahead in school funding case

A trial in the case of William Penn School District v. Pennsylvania Department of Education has been tentatively scheduled for the summer of 2020.  A lawsuit over K-12 school funding provided by the state was filed by six school districts and several statewide associations in 2014.

As we noted in a Policy Brief last year, Commonwealth Court dismissed the case in April 2015 upon which it was appealed to the state Supreme Court.  Last fall that court ordered the case back to Commonwealth Court for plaintiffs “to substantiate and elucidate the classification at issue and to establish the nature of the right to education, if any” which could possibly set up a judicial-legislative conflict over determining state subsidies for K-12 education.

According to the docket sheet for the case, fact discovery is to be completed by October 2019, responses, motions and replies by March 2020 and then the trial scheduled for sometime in the summer of that year.

We noted in the 2017 Brief that the process will be “messy, drawn-out and expensive” and with the tentative schedule there is at least an idea of just how drawn out it will be. Parties to the case could spend months diving into the issue of the state and local funding mix and how that produces different per-pupil funding levels.  Even with the tentative date there has to be time for the court to deliberate and there possibly could be a return trip to the Supreme Court depending on the verdict.

If the Commonwealth Court decision comes in 2021, by that point six, possibly seven, years of newly appropriated basic education funding will likely have been distributed through the student weighted funding formula enacted by the General Assembly in Act 35 of 2016.  That formula has been pointed to by legislative defendants named in the case as proof the state has made strides in addressing the claims of petitioners.

With a decision that might eventually order equalized spending across 500 districts there would have to be significant reductions for districts that raise revenue above the state average, largely arising from local property taxes.

 

Pa. near the bottom on pension health

Changes are coming to pension benefits for newly-hired state employees in less than a month and for public school employees later in 2019 due to Act 5 of 2017.  That legislation was enacted to try and improve the health of the state’s two plans, the State Employees Retirement System (SERS) and the Public School Employees Retirement System (PSERS).  Those changes will create three new pension plans, all with a defined contribution component to them, for new hires.

An analysis by the Pew Charitable Trusts on state pension health shows that, when ranked by the aggregate funded ratio (assets divided by liabilities) for state-level pension plans, Pennsylvania is ranked 44th out of 50 with a 53 percent funded ratio for SERS and PSERS.  The U.S. average was 66 percent funded.  Neighboring New Jersey came in last with an aggregate funded ratio of 31 percent for seven state-level plans, with all but one in the 30 percent or lower funded range.

A look at Pennsylvania’s plans from 2000 forward shows that 2003, when assets were $80.2 billion and liabilities were $80.5 billion, was the last year that could be considered at equilibrium.  After that Pennsylvania’s annual required contribution (percent of the actuarially recommended payment that employers contributed) began to decline from over 100 percent to the 30 and 40 percent range and the gap began to widen.  This was traceable to state legislation passed in 2001 and 2003.

Wisconsin, with one state-level plan, the Wisconsin Retirement System, was ranked first in the Pew analysis.  Over its 16 year data snapshot the gap between assets and liabilities never occurred like it did in Pennsylvania.  Wisconsin regularly made 100 percent or more of its annual required contribution.

The system’s funded ratio is 99 percent, which, if projections hold and all goes according to plan, is a level SERS and PSERS will attain sometime in 2040.  In the meantime the legislative reforms will not eliminate the fiscal and budgetary pressures caused by huge unfunded liabilities in the current pension plans.

 

 

Where does Pa. rank on property taxes?

The state’s Independent Fiscal Office (IFO) just released “State and Local Taxes: A Comparison Across States” which utilizes data from the Census Bureau, Internal Revenue Service and Bureau of Economic Analysis to produce state rankings of various taxes-to-personal income, which the study defines as “tax burden.” Rankings are produced for income and sales taxes, corporate taxes, fuel taxes and so on.

The ranking of property tax burden places Pennsylvania 24th with a ratio of 2.94 percent. That is below the U.S. average (3.10 percent) and U.S. weighted average (3.20 percent) according to the study. The state-by-state tax burden ranks from a high of 5.55 percent in New Hampshire to a low of 1.46 percent in Alabama.

The Allegheny Institute produced a somewhat similar measurement of property taxes collected-to-dollar of personal income in 2007 for counties in Southwest Pennsylvania which showed variation from county to county, so there could be property tax burdens at the local level in Pennsylvania that are higher than the overall ratio in the more recent data.  In the measurement from a decade ago the collections ranged from $0.54 cents (Washington County) to $0.97 cents (Westmoreland County).

In terms of property taxes collected, Pennsylvania, in fiscal year 2015-16, collected $18.8 billion. Six states (California, New York, Texas, New Jersey, Illinois and Florida) collected more in that fiscal year.  But the tax burden was lower in California (2.81 percent, 28th overall) and Florida (2.69 percent, 31st overall). New Jersey, New York and Illinois ranked in the top 10.

In a recent Brief we wrote about a separate Tax Foundation analysis of the state’s tax system and that report produced an effective tax rate of property taxes paid as a percentage of owner-occupied housing value. In Pennsylvania the rate was 1.48 percent. The foundation’s report went much more in depth on the shortcomings of the state’s local tax system and made recommendations on assessments and collection methods whereas the IFO report does not.