Schools should protect taxpayers, not fund balances

Just because something is legal doesn’t make it right.

A report released Wednesday by Pennsylvania Auditor General Timothy L. DeFoor shows that 12 school districts, including North Penn, West Chester, Abington and Lower Merion, have been raising local property taxes while holding millions of dollars in their general funds.

The practice is not illegal, but taxpayers in those districts and throughout Pennsylvania may find fault with it. The property tax burden in this state is crushing for many homeowners, and the notion that schools can legally use that money to boost their district bank accounts is hard to swallow.

The action is a legal standard practice used by districts to increase their fund balances and get favorable bond ratings for borrowings. But DeFoor said it is only legal because of loopholes in the state’s Act 1 of 2006 that governs tax increases.

“These districts have found a way to use the law to their advantage so they could always raise property taxes. It’s basically a ‘shell game’ that allowed these 12 school districts to collectively raise taxes 37 times during the four years we reviewed, which increased their respective General Fund accounts to $390 million,” DeFoor said.

The districts were selected based on criterion that included a district with approved referendum exceptions and substantial fund balances for fiscal years ending 2018 through 2021.

“Some startling trends began to appear to our auditors, like moving money around to make sure a district would always meet the threshold to raise taxes,” DeFoor said. “They also applied for a referendum exception as a regular budgeting tool, rather than an extreme measure as the law intends. Each of the 12 districts had sufficient unused funds that should have negated some of the 37 tax increases.”

In most cases, like North Penn and West Chester, the districts have been transparent about their process of using a healthy fund balance to get the most favorable interest rates for major projects like an upcoming high school renovation. The practice is touted as good money management.

But taxpayers may see things differently.

In Lower Merion, a group of taxpayers sued the district in 2016 as a class action seeking to prevent a 4.4% tax increase, claiming that the increase came despite the district having amassed tens of millions of dollars in budget surpluses over several years. A Montgomery County judge ordered the district to rescind the 4.4% tax increase and reduce it to 2.4%, and the district appealed. Last summer, six years after the suit was filed, the district reached a settlement and agreed to refund a portion of property taxes back to taxpayers.

“School districts told us they must develop their budgets this way because they never know how much funding they will receive from the state,” DeFoor said. “But at the end of the day, it’s the taxpayers, especially those on a fixed income, that are shouldering the burden. If this is standard operating procedure for these urban, suburban and rural districts, it’s not a stretch to say that it’s common practice across the state.”

The audit team made several recommendations to the General Assembly to close what they consider loopholes in Act 1. Also recommended is that PDE review and revise the process of approving referendum exceptions and consider revising the PDE Property Tax Referendum Exception Guidelines accordingly.

The unwieldy requirement that holds local districts to unrealistic budgeting deadlines while the state legislature negotiates their budget down to the wire on June 30 is reason for reform. But at the heart of the issue is stockpiling funds that should rightfully belong to taxpayers. Public school districts should not be in the business of wealth management, treating tax payments as a means to lower interest rates on borrowing for new and expanded schools. As an alternative, perhaps school boards could lower their sights and reduce the scope of projects.

Raising taxes with money in the bank is not illegal, thanks to the loopholes in the flawed Act 1, but it is not a good look when people are struggling to pay their bills or when those on fixed incomes face losing their homes. None of these districts is doing anything illegal. That doesn’t make it right.