What you need to know about property taxes in your district
As boards now begin to look at 2016-17 budgets, Act 1, which regulates school district property taxes in Pennsylvania, comes into play. Key dates are fast approaching.
The following question-and-answer guide provides a primer on the property tax system in Pennsylvania and Act 1 of 2006:
What is Act 1?
Passed in the Special Session of the Legislature in 2006, Act 1 requires school districts to seek voter approval for tax increases greater than “the Act 1 Index.'' Districts can get exceptions from this requirement if rate increases are needed to cover specific types of costs.
What is the index and how is it determined?
The Act 1 Index is the state's measure for determining property tax increases justified by wage inflation. Each district's index is calculated separately for each fiscal year, and consists of two parts: the base index, and the district adjustment. The statewide base index is the average of 1) The percentage changes in wages statewide, and 2) the percentage changes in school employee compensation costs nationwide. Thus, the base index reflects a rough measure of the rate of change in compensation costs. A district's adjusted index is the base Index plus an adjustment for lower wealth districts. The adjustment is based on a district's relative wealth, with the lowest wealth districts receiving the largest upward adjustments to the base Index.
How does the process work?
Prior to the start of each fiscal year, which for most school districts runs from July 1 to June 30, districts must decide whether to “take the pledge” not to adopt a final budget that includes tax hikes greater than the district's adjusted Act 1 Index, or to proceed to develop a budget that may require such increases. A district following the latter course may either:
- Adopt a final budget with rate increases less than or equal to the Act 1 index
- Seek voter approval through a referendum of a rate increase greater than the Act 1 index
- Receive an exception from the Pennsylvania Department of Education that permits the district to adopt without voter approval a final budget containing a rate increase greater than the Act 1 index.
A district that either seeks voter approval or an exception must first adopt a preliminary budget and submit it to the Department of Education.
If a district seeks voter approval for a rate increase during the spring primary election and is successful, it may adopt a final budget in June with the approved rate increase. If the district is not successful, it may adopt a final budget in June with a rate increase that is less than or equal to the district's adjusted Act 1 Index, plus any additional amount approved for an exception.
What are the key dates?
By the end of January districts will need to either: (a) adopt a resolution stating they will not adopt a final budget with a rate increase greater than the Act 1 index (“take the pledge”), or (b) make public a draft of a preliminary budget. Districts not “taking the pledge” must submit an adopted preliminary budget, and an application for an exception to the Department of Education by late February. Those needing voter approval must submit ballot questions to their county Board of Elections by late March for the primary election held April 26. Approved final budgets must be submitted to the Department of Education by July 1.
What are the exceptions school districts might request in order to raise property taxes above the index without a referendum?
Since the passage of Act 25 of 2011, districts can be granted an exception to the requirement for voter approval of tax rate increases greater than their indices if the extra rate increase is needed to cover:
- The local share of existing debt, or a portion of the local share of new debt
- Increases in the local share of special education costs greater than the district's adjusted index
- Increases in those pension costs attributable to increases in the required employer contribution rate. The increase in pension costs attributable to increases in salaries does not qualify a district for an exception.
If granted an exception, how much higher above the index can taxes be raised?
As much as necessary to cover the cost increases that qualified the district for the exception.
If a district is granted an exception, can it still hold a referendum to raise taxes even higher?
Yes. When the Department of Education grants a district an exception, it is in effect increasing the district's index. No other rules or processes are altered by the exception.
If a district is granted an exception, must it raise taxes by that amount in its final budget?
No. When the Department of Education grants a district an exception, it is only providing the district with the option to raise rates by that amount above its index without voter approval. The district is in no way obligated to do so. Many districts that have been granted exceptions end up adopting final budgets without raising taxes by the full amount allowed.
How does the referendum process work?
Act 1 specifies that the ballot question must ask if they approve raising taxes by a specified percentage above the district's index plus the amount of the exception (if any). The district must also work with the county Board of Elections to write a non-technical interpretive statement that explains why the district is seeking the increase and what may happen if the increase is denied. Public funds may not be expended to seek to persuade voters how to vote on the referendum. All activity related to persuading voters must be conducted by other interested parties, without the use of school district resources. If a district holds a referendum and it does not pass, it does not forfeit any exceptions that were granted by PDE.
How likely is a district to be granted an exception to raise its Index?
All but a few districts that apply for an exception to the referendum requirement are granted one. The determination is based on relatively simple mathematical calculations. Far fewer than half of all districts are approved for exceptions in any given year. Typically, a little less than two-thirds of the districts approved for an exception actually end up raising rates by more than their index, anyway.
Why have so few districts held referendums?
Many districts have probably felt the odds were unlikely in recent years of voters approving a tax increase beyond inflation. However, with polls showing disapproval of recent public education funding cuts, and parents, students, and community members seeing the effects of the state cuts on their districts, more districts might be inclined to ask for referendums, and taxpayers might be more willing to consider increases higher than inflation.
Learn more at www.psea.org/act1