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Friday, January 27, 2023

State Auditor General DeFoor questions annual property tax increases for 12 school districts

HARRISBURG — Auditor General Timothy L. DeFoor released an audit on Wednesday of 12 school districts, including North Penn and two others in Montgomery County, for a legal standard practice where districts are raising local property taxes while holding millions of dollars in their general funds.

“These districts represent a cross-section of Pennsylvania — from wealthier to poorer tax bases and urban, suburban and rural communities,” DeFoor said in a press release.

Pennsylvania Auditor General Timothy DeFoor talks during a news conference on May 6.
Pennsylvania Auditor General Timothy DeFoor talks during a news conference on May 6.

“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,” he 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. District cited in Montgomery County include the Abington School District, Lower Merion School District and the North Penn School District.

Other districts outside of Montgomery County include the Bethlehem Area School District in Northampton and Lehigh counties; Cannon-McMillian School District in Washington County; Hempfield School District in Lancaster County; Neshaminy School District in Bucks County; North Allegheny School District in Allegheny County; Northampton Area School District in Northampton County; Penn Manor School District and School District of Lancaster in Lancaster County; and West Chester Area School District in Chester and Delaware counties.

The audit evaluated whether each district appropriately used the Pennsylvania Department of Education, PDE, referendum exception method to raise local taxes, and whether each district ensured its general fund balances were properly designated as committed, assigned, and used in a timely manner for intended purposes, according to DeFoor’s office.

“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.”

Each year, North Penn’s school board and staff discuss the tax rates and budgets extensively, in a series of regular and special budget meetings ahead of formal budget adoption in June.

After adopting a $300 million 2022-23 budget in June 2022, the school board voted in October to move unspent funds and surplus revenue from the prior year into capital reserves meant to fund infrastructure repairs throughout the district. Staff reported that doing so could help raise North Penn’s bond rating ahead of borrowings needed for North Penn High School renovations currently being planned.

As of June 30 2021 North Penn reported having roughly $42.2 million in that general fund reserve, with the late 2022 transfer adding roughly $6 million more, and board members saying at that time that North Penn remained among the lowest tax rates in the county.

The Pennsylvania School Code and the Taxpayer Relief Act (Act 1) dictate how school districts can raise taxes and sets limits for those increases. If a district must raise taxes above the limits set in law, they are required to ask voters for permission through referendum or apply to PDE for a referendum exception. A referendum exception allows school districts to raise taxes above the inflationary index without voter input. PDE’s referendum exception applications are based on what a district has budgeted to cover expenses, versus actual cash on hand.

“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 the following recommendations to for the General Assembly to help school districts fund education and protect taxpayers:

• add a provision to Act 1 that requires districts to use committed and assigned General Fund balances and the prior fiscal year’s surplus funds prior to requesting a referendum exception to raise taxes above the index;

• revise the Pennsylvania School Code’s terminology used in the determination of the mandated threshold for raising taxes from unreserved, undesignated to unrestricted to include committed and assigned funds in the calculation to prevent school districts from retaining millions of dollars in General Fund commitments and assignments while increasing taxes;

• determine if there should be parameters around budgeting practices and transferring operating surpluses while increasing taxes. For instance, requiring that all transfers from the General Fund be considered unassigned funds and included as interfund transfers on a General Fund budget prior to being transferred to other Governmental Funds.

The audit team recommended that PDE review and revise the process of approving referendum exceptions if the district has committed and assigned fund balances; if school districts have adequate funding for the related expenditures, are transferring excess surpluses, and are not using designated funds timely or to balance the preliminary budget prior to requesting to increase taxes above the index for the very same type of expenditure; and to consider revising the PDE Property Tax Referendum Exception Guidelines accordingly.

A full version of the audit is available at paauditor.gov. North Penn’s school board next meets at 7 p.m. on Feb. 7 with the finance committee meeting just before at 6 p.m., both at the district Educational Services Center, 401 E. Hancock Street; for more information visit www.NPenn.org.

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