Economics Driving TESD’s Budget Woes . . . EIT to Be Explored

Ray Clarke attended the TESD Budget Workshop last night and provides the following commentary.  I am fascinated that the school district is bringing EIT out of hiding.   There is much misunderstanding about Earned Income Tax – we need an open and thorough airing of EIT.  I would suggest that the TESD and township partner for the discussion, have an outside expert give a presentation (like Easttown Twp did for its residents).  The presentation should be taped and then shown repeatedly on both the school district and township cable networks.  Some people hear ‘tax’ in the Earned Income and then simply shut-down. 

Whether it is the township or the school district we are talking about — we are currently facing tremendous economic hardship and all revenue sources must be explored.  Personally, I don’t want to pay more taxes and my personal household will suffer with EIT (my husband works for Unisys) however, . . .  there is also a reality to the situation.  I applaud the School Board for recognizing the need to explore Earned Income Tax and would hope that the Tredyffrin’s supervisors would be likewise motivatedit’s called exploring options.  Both the township and the school district have been faced with major deficits in their budgets that have required cuts in personnel, services, programming in an attempt to close the gap.  But to what end can we continue to make these cuts?  At what point do we weigh the quality of life that all enjoy in this community vs. increase in taxes?  I do not see how continuing to say, no new taxes  is a long-term solution to the problem.  Comments?

A quick report from the Budget workshop. Only 25 or so residents tonight, probably reflecting that there was little discussion of program changes. The occasion was used mostly to lay out a framework, stake out some board member positions, and set up the important April 12 Finance Committee meeting where the next level of expense reductions will be discussed.

However there were some really significant outcomes, worthy of full attention.

The basic parameters being positioned to balance the budget are:
– Implement the $4 million of expense reductions already discussed
– Tax to the full 2.9% cap
– Use $2 million of fund balance
– Find at least $0.7 million of 2010/11 reductions from $1.5 million of mostly non-educational strategies
Round numbers, subject to tweaking up or down.

The principal dissent came from Dr Brake, who is not thrilled with the proposed changes to the Middle School program. He seems to be the only one on the other side of this.

Dan Waters and Kevin Mahoney lost few opportunities to highlight the fact that these 2010/11 actions leave the structural problem untouched (shades of Tredyffrin’s “structural deficit”!). And they are right: 50% of the $4 million is one year only, and of course the fund balance use can’t continue for ever. The deficit for 2011/12 after the above programs would still be $7.5 million (8.2 – 0.7).

So, the administration is going to do the following:
– Deepen the study of the $2.6 million of class size, CHS period changes, etc. that – practically – can not be implemented until 2011/12. (Strategies 47-56, approximately.) If all were implemented, the deficit would be down to $4.9 million.
– Study the implementation of an income tax. Taxing to a likely 2% Act 1 property tax cap next year would still leave the district $3 million short, so this – to me – seems inescapable.

Some EIT information that’s new to me, and definitely has a major impact on the revenues for TESD: Kevin Mahoney stated that there is the potential to reclaim not only taxes paid to neighboring municipalities, but also to Philadelphia (which would apparently get reimbursed from gaming revenues).

Kevin Grewell has posted a lot of helpful EIT information here. Important features confirmed tonight appear to be that this would be implemented under Act 511, which is coordinated with the Townships. Resident tax is split between School District and the townships, non-resident money is collected by the Township (which turns out to be looking at fire department funding).

Debbie Bookstaber (from the last TSC) asked that the study include a comparison of an EIT and a PIT.

The Board took pains to emphasize that program changes must be fully vetted, particularly in the Education Committee, and subject to public input. Back to that April 12th meeting. Also, decisions will need to be made soon on the health insurance funding and bond issuance as part of the $4 million 2010/11 programs – the former in particular being highly susceptible to assumptions. I’d like to be convinced that all aspects of utilization risk have been thought through

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19 Responses

  1. To be fair (and accurate) the Tax Study Commission did evaluate the EIT vs. the PIT. I urge anyone interested to READ THE REPORT. The Commission looked at both and discussed the pros and cons, and conlcluded that the PIT is more fair. The reasons are enumerated in the Tax Study Commission Report.

    Now, the report is not lengthy, and some might wish for more detailed explanations, but I assure you a great deal of background material and documentation went into the Commission’s deliberations. I saw it – I heard it presented and disussed, I was there.

    As a board member, I did not sit on the Commission but I did attend the meetings – there were several public Tax Study Commission meetings. John, did you attend any?

    I did and there was a lot of discussion of both EIT and PIT. It is not fair to say that analysis of the two taxes was not part of the Tax Study Commission. The Tax Study Commission had a very specific role to play defined by Act 1, and they dischsrged those duties.

    On a going forward basis, more study would be needed to determine whether the school district should levy an income tax, and whether it should be an EIT or a PIT.

    • 2010 IS NOT 2007! Beat you to it, John and Ray.

      To expand on Kevin’s mention of the public Tax Study meetings in ’06-’07, from TTDems.com:

      “17 November, 2006: At the public hearing last night, the Pennsylvania School Boards Association presented “The Act 1 of 2006: Homeowners Property Tax Relief Act” as being an opportunity to shift part of the school tax burden from the current property tax to an income-based tax.”

      “About 200 people attended the session tonight, and every citizen who spoke before the Tax Study Commission, asked them to keep the current property tax system and not to recommend switching to a Personal Income Tax or an Earned Income Tax.”

      “Citizens speaking before the Tax Study Commission tonight repeatedly asked them to not make any recommendation to switch systems.”

      This was followed by a vote on 5/15/07, the results of which were reported in the TE School District minutes:

      “Eighty-eight percent of Tredyffrin and Easttown voters voted “No” on the Act 1 income tax referendum question.”

      While 2010 is not 2007, not sure things have changed enough to overcome an 88%! vote against an income tax. There is a legitimate, long-standing resistance to an income tax in this community.

      • Mike is right on. I have said elsewhere on this blog that there is a very serious question as to whether an income tax is politically feasible in our community.

        It would take a lot of public discussion and education to overcome the negative public perception of income taxes.

        In the Act 1 process, there were a few citizens in favor of income tax, because they wanted and needed some relief from property tax. But the overwhelming majority of people we heard from were opposed to ANY kind of income tax, whether EIT or PIT.

        An often heard comment “We just don’t trust any government entity with another new tax!”

  2. Thanks, Pattye for passsing along Ray’s accurate summary of last night’s Budget Workshop meeting. I attended as well and was struck by the careful, measured approach of the Board and their questions to Dr. Waters and Art Mc Donnell.

    Several moments stand out:

    One was Kevin Mahoney raising the value of further study on an income-basd tax under Act 511. Of all people on the SB, he has been consistent over the years in keeping expenses down and holding the line on taxes. But he must have come to the conclusion that property tax hikes will not provide the kind of revenue the District will need in future years. Looking at page 25 of the Budget Workshop packet (see http://www.tesd.net/budget/10mar15workshop_pres.pdf ) you cannot help but be alarmed at the ballooning deficits projected over the next 5 years – largely based on the District’s increase in the PSERS contribution. It goes from $2.7 million in 2010-11 to $18.5 million in 2012-13 to an astronomical $31.4 million in 2014-15.

    This assumes that the State does not increase its contribution to PSERS – the teachers’ pension obligation – which cannot be allowed to happen or every school district in PA will be deep in the red.

    However, cost-cutting and small tax increases limited under Act 1 will not allow our school district to maintain its high standards. As Dr. Waters said, times have changed and the District must change the way it does business. But most in T/E do not want to see a decline in the quality of education provided. Given essentially flat revenue streams from property taxes going forward, new revenue sources must be examined – especially in light of the replacement of Sterling Act credit with gambling revenue and the ability of an EIT to be collected at the county level .

    The matter will go to referendum and the voters will decide. But there is a lot of education needed beforehand. We should expect a full and fair airing of all the facts.

    Debbie Bookstaber asked Art Mc Donnell whether a PIT could be considered under Act 511 – a personal income tax that taxes all income, earned and unearned with social security and pension income exempt. She sees this as a fairer tax if an income-based tax were adopted. Mc Donnell did not know but will provide more information at the April 12 Finance Committee meeting.

    The second moment that stood out for me – again – is the actual cost of the 2.9% tax increase to the average homeowner – it’s a measly $128 next year. Even if your home is assessed at four times the average assessed value, your tax bite will amount to $512.

    Yes, times are tough for a lot of people in T/E – but we’re not talking a lot of money here. For a family in a home assessed at almost $ 1million, they will absorb an increase of only $43 a month…..with the average taxpayer adding only $11 a month.

    That is hardly a burden for most people. And don’t worry. The pain is being spread around. All administrators have taken on additional responsibilities and had their salaries frozen. There will be a reduction of at least 12 teachers under Administration recommendations. Every principal is expected to cut costs below budget this year. Changes that must be approved by the PA Dept of Education, including increasing teachers’ teaching load, increasing class size and consolidating the location of the ESL programs are complicated and cannot be implemented next year. These changes will save more money as well, but a what cost to student learning?

    In short, residents and taxpayers need to do a lot of homework to understand the complexity of the budget problems facing by our School District. You cannot wheel into a meeting and comment intelligently on budget fixes. And your opportunities to weigh in are limited now. The April 12 Finance Committee meeting will be the next and perhaps last chance to affect SB decisions as they are fast approaching the deadline to prepare a preliminary budget to be presented iand voted on in May, with the final budget to be voted on on June 14.

  3. why, why, why is it always “look at more revenue sources”? perhaps you can provide me with more revenue sources so i can just keep paying,

  4. Why did districts like Upper Merion or Great Valley ( Willistown / East Whiteland) choose the EIT over the PIT?

    What makes Tredyffrin and Easttown so socially or economically different that a PIT would be better?

    • Upper Merion does not have an EIT.

    • As the Tax Study Commission report points out, there are a lot of residents in Tredyyfrin and Easttown who are affluent and have a lot of “unearned” income. (I am substantially quoting the TSC report below)

      (EIT) – “Earned Income” includes gross salaries, gross wages, net income from the operation of a business, commissions and bonuses. (PIT) – “Personal Income”, includes all classes of income included in earned income, AND also gains from the disposition of property (including stock transfers), rents, royalties, patents, copyrights, dividends, interest income, gambling winnings, and net gains from estates and trusts.”

      “Neither earned nor personal income includes retirement or pension income, whichis excluded under both the EIT and the PIT.”

      A lot of people who are very affluent don’t have any “earned” income. An EIT is less fair since many folks with lots of unearned income (dividents and interest on investments, etc.) would not pay any tax under the EIT, even though they have far more ability to pay it. EIT would therefore impact working people many of whom are lower income or middle class, and are less able to afford it.

      Also, since the PIT taxes a much broader class of income, it takes a lower rate to achive the needed revenue. An EIT raising the same revenue would have to be at a higher rate to get the same results.

      As the TSC report points out (this is an Act 1 scenario, not Act 511 – the following quote talks about the rates necessary to fund the homestead exclusions under Act 1)

      “In order to fund the minimum exclusion the PIT requires a rate of .6%. The EIT requires a rate of .8%. For the maximum exclusion to be funded, the PIT rate would be 1%, but the EIT would require a 1.6% tax rate.”

      Now, Act 1 requires a voter referendum to enact the income tax, and the money from that tax can ONLY be used for property tax reduction via funding the “Homestead Exclusion”. It is a tax SHIFTING scheme and DOES NOT ADD ANY NET REVENUE TO THE SCHOOL DISTRICT.

      This, and Act 1 tax cannot be used to solve the budget shortfall.

      So we are talking about Act 511, the Local Tax Enabling Act. I don’t believe a voter referendum is needed under Act 511 to institute an income tax. It could be just passed by the board. Act 511, so far as I know, is limited to a 1% EIT. I am not sure a PIT cn even be enacted by the school district under Act 511. I think the only way a PIT could be implemented is under Act 1, but that won’t solve the budget problem.

      Whether a PIT can be enacted under Act 511 needs to be researched. I don’t think so. So we might be limited to an EIT. If a PIT is available, I for one think it is more fair.

      Another problem with the EIT under Act 511 is that if the school board were to enact it (the 1% EIT) the township could enact the same tax, in which case it has to be shared equally between the township and the school district, so each would only get 1/2 of 1%.

      Also, under any income tax, our residents who pay the city wage tax in Philadelphia get a credit (Sterling Act) for that and since that is around 4% they would not pay the 1% EIT here at home. Act 1 does have some provision for recovery of the Sterling credit money, through gaming money, but I don’t think Act 511 has any such provision. So while some money would come back from workers who pay an EIT in other townships, it is an open question whether we could recover the Sterling credits – and there are a lot of residents in our district who work in Philadelphia – another question that needs research.

    • Willistown has one — great valley is not part of it.

      • Great Valley is not a municipality. East Whiteland is the municipality that encompasses most, if not all of the Great Valley Corporate Center. East Whiteland does collect EIT.

        • Thanks — but I was replying to this question (Mike had already said that Upper Merion did not have one)

          >>Why did districts like Upper Merion or Great Valley ( Willistown / East Whiteland) choose the EIT over the PIT?

          What makes Tredyffrin and Easttown so socially or economically different that a PIT would be better?<<

          I'm prepared to be wrong, but it is my understanding that Great Valley — the school district — does not participate in the East Whiteland /Willistown tax. Willistown is also a municipality — like Tredyffrin. They levy it and the school district does not participate. I also think that much of Great Valley Corporate Center is in Tredyffrin.

  5. Pattye

    Thanks for raising the issue of the EIT. It definitely needs to be explored in an objective, non-political manner. Since many residents are already paying this tax to other municipalities and we are one of a minority not to impose it, we definitely need to explore it. This would be more palatable if it could be coupled with a reduction of the property tax.

    The EIT is a 511 tax. Although the PIT is a fairer tax spread across a broader base, the residents of Tredyffrin already rejected this proposal at the polls. I do not believe that the school district would be reimbursed the Sterling Tax monies from Philadelphia or the EIT dollars already paid to other municipalities since Act 1 only applies to the EIT. This needs to be confirmed.

    Carole

  6. john —

    i am not blaming one party or another in asking my question. there are both r and d on the t/e school board.

    you are the first post i have seen on here to even say look at BOTH cutting costs and revenue. i am willing to look at revenue as long as we look at costs first or as intently. it just always seems that everyone goes to the revenue side first.

    yes, the union contract is a huge amount of the costs (along with some admin contracts) and we are stuck with it for now. but to really control costs means to be put between a rock and a hard place next time the contract is up: stand up for a more fair deal and risk a strike or give in. that’s a no win situation for the board, for the kids or for taxpayers.

  7. I would support a PIT, but I would definitely vote against an EIT in a referendum. Too many of T/E residents get a large amount of income that is not “earned” and it is NOT fair to tax working families more than those who received “unearned” income.

    • T/E Mom – You would be opposed to EIT even if the net effect is that half or more of your neighbors would pay no additional tax out of pocket with implementation, but would support with PIT which would be a new/additional tax for everyone???

      EIT is not the most equitable when compared to PIT in a vacuum. But once we consider the dollars already being collected by other municipalities from TT residents that would immediately come home to Tredyffrin the aggregate equitability shifts to favor EIT.

      I do not think that most of the people opposed to EIT now, or those who opposed Act 1 in 2007 truly understood/understand the issue or its net effect.

  8. The discussion and questions here show how important the commissioned TESD analysis is. Let’s hope it is comprehensive, objective and quantitative. Mimi’s township numbers came from a third party study – perhaps this could be used and updated were necessary.

    Janet above hits on something very important. The reason that we are having this discussion is because of a massive transfer of wealth from taxpayers to those they employ.

    Hopefully the upcoming contract negotiations will start from an analysis of the relative changes over the past decade in the value of salary, benefits and pension. One data point: a simple analysis of the present value of thirty years pension at 85% of a final salary of, say, $100,000 discounted at 4.5% is $1.4 million. The only good news is that there will be people paying (higher rates of) income tax to support those with fixed contribution plans reduced to relying on social security!

    The community will have to do a thorough analysis of how much the quality of the education depends on the compensation of the unions, and make hard choices between short term pain and solvency.

  9. Correct me if I am wrong, but act 1 has nothing to do with not being able to reach our revenue needs as was stated somewhere above. The school board has voted not to tax past the act 1 limit. They COULD HAVE voted to take exceptions on any of the last several years they have not and raised taxes to meet the revenue needs.

    Several years ago, these projections were on paper. This is not a surprise. But while we are in a jam.. we reach a cautious moment where we don’t want to raise taxes now due to the economy is poor. Not to mention that at any given time more then 50% of the school board in office, ran on a platform of not raising taxes, so they need to protect their position.

    So what now? A agree, raising taxes to a point needed to balance is not the time.. NOW is not the time to look for millions of dollars in closure. I am 100% in favor of using fund balance at this time. Fund Balance is OUR tax money we already paid. So use it.

    That being said, can we all hear Pat Wood???? Be careful because once you use fund balance, it’s gone. Fund Balance is important, and I don’t want to suggest we use all of it. But until we regroup, the economy stabilizes and other sources of revenue can be ironed out (that won’t happen over night) we utilize our already taxed money.

    But let’s not forget page 25 of the budget meeting slides in that 3-4 years from now we are in a world of hurting. So perhaps some of the next people who run for school board will run on a standpoint of fixing long term revenue generation, not nominal, under inflation tax adjustments.

    • Nice to hear from Carole Rubley.

      Folks, Carole was always very pro-education and concerned about the taxpayers as well. I wanted to get that out because while I was on the board (Legislative Chariman) I was a frequent critic of some of the laws and regulations coming out of Harrisburg.

      Some of the solutions must ultimately come out of the state legislature. The PSERS problem must be dealt with, or every school district in the state will go deep into the red in a couple of years. A hard look at relief from some of the other mandates, as well as increased state funding would also be a big help.

      As for local solutions, a look at an Act 511 EIT is going to have to be part of the process. I do not know at this time whether I would favor an income tax, but I see the need to look at it very seriously. As was said avbove, 2010 is very different than 2007.

  10. EIT – PIT – Property Tax – Gaming Revenues — -all discussions of revenue. Fund balance is absolutely fine if that’s the choice, but there are certainly HUGE and recurring repercussions from using your savings account to pay your utliity bills.
    I am going to refer to several postings over the past month about our property tax burden. Compared to other municipalities and districts, it’s well below market expectations. And regressive as some claim it to be, it is still less than 1% of your market value. Kate is right about the “increase” being small, but people don’t pay the increase — they pay the tax. And let’s face it — the burden of the property tax is on people who have lived here for decades who paid $80,000 for their homes — and who now have taxes of $4-5,000 a year on them. The fact that they will sell their house eventually for $450,000 with no debt eludes the discussion. We are talking about depression survivors who had mortgage burning parties, vs. new age parents who paid the $700,000 – $1.400,000 for their homes and don’t think that $10,000 in taxes (which are escrowed so not as painful) is a problem (especially compared to tuition at local independent schools).
    We have a fundament shift of priorities as our population continues to evolve. I think we all agree that we want the best schools — it’s the reason many of us moved here. But for people who have lived here a long time, and are done with schools, it’s hard to understand all the bells and whistles that come with a public education. People IN the system know the value of the programs, the diversity of student style, the payback in college tuition for taking AP courses at the high school. But my father thinks white boards are an incredible waste of money — “what’s the matter with blackboards that you all used?” I cannot answer his question except to use a phrase oft shared by Frank Allen, a school board member in the 80s — “we are raising children for their future, not our past.”

    I don’t believe we should spend any money on current expenses that we have not taxed for — the fund balance grew and several capital projects were completely funded with the results of transfer tax bonuses. Tax rates went up more in the 90s because they mirrored expense increases. It’s in the post Act 1 days that expenses have not tracked taxing rates — so now TESD is one of the least expensive districts in terms of percent of property value put towards education. It can sound like tough love, but if you want to live here, it’s going to cost you your fair share. If we want excellence in education, it’s going to cost us competitive wages and supply costs. White boards vs. black boards….power point vs. pencil and paper. No one wants to pay more — but ultimately the people who are benefiting from the school excellence are all property owners and all families with students in school. SO — does an EIT or a PIT address that ? The district can go in debt to pay bills, or people can tap into the equity in their homes to do it. Post depression families simply have to accept the value of the homes they inhabit — not what they paid for it. No one wants to see anyone driven from their home for matters of cost, but when it comes to our schools, we really will only ever get what we pay for.

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