Allegheny Institute for Public Policy Brief

The Allegheny Institute for Public Policy has released its latest policy brief. The brief, "Mt Lebanon Schools Becoming a Taxpayer Nightmare", takes a critical look at Mt Lebanon taxes and calls the coming tax increases a perfect storm. From the brief:

The projected budget scenario is not a sustainable situation. Note that over the period 2000 to 2015, the total level of real estate taxes collected based on budget forecast figures will rise over 100 percent. However, the earned income tax collections-a fairly good indicator of income growth-over the same period will have risen only 45 percent, assuming the budget forecast is anywhere close to accurate. In short, the expanding burden on property taxpayers is far outstripping the ability of taxpayers to pay.* As a result, the impact of the tax hikes will begin to have detrimental consequences for the housing market in Mt. Lebanon.

It's a point that I have made many times. It's a point that is shared by many residents in Mt Lebanon.

The brief concludes with this salient point:

In a word, a perfect storm is developing for some Mt. Lebanon property owners. And it is too late to do anything about it, unless the school board starts to make significant spending cuts, and soon.

The brief is right on target. It is the perfect storm and this Board needs to do what it can to get ahead of it.

When you layer the national tax issues on top of what is happening at the local level, things start to look even more troublesome. From the ABC News article, National Debt, Budget Deficit: A Scary Forecast for Taxpayers:

...now the problem of mounting national debt is worse than it ever has been before with potentially dire consequences for taxpayers, according to a report by the nonpartisan Peterson-Pew Commission on Budget Reform.

Two comments on this. First, looking at future obligations is the reason we do out-year budget forecasts. Anyone who says a five-year forecast (or longer) is worth less than the paper it is printed on clearly will have no success in running a business or government entity. You cannot make decisions today without thinking hard about what their impact will be years from now. Second, the alarm has been sounded at both the local and national level. Tax hikes and budget cuts will be coming from all sides. You could use quotes from the Allegheny Institute brief and they would aptly describe the national situation as well as they do the Mt Lebanon one.

Thanks for reading.

James

High School Project Act 34 Hearing Information

The District has posted on its website the relevant information regarding Act 34. I will post that text in full below, but first, you need to know two things.

First, any email comments you wish to make regarding Act 34 should be sent to the Board Secretary and NOT to the school board. Emails sent to the Board will not be submitted to the Pennsylvania Department of Education. Please email your comments to boardsecretary@mtlsd.net

For those without email access, written comments can also be mailed to the District at:

Mt Lebanon School District
Board Secretary
7 Horsman Drive
Mt Lebanon, PA 15228

Second, if you wish to reserve some time to speak at the meeting then you will need to stop by the District offices in order to get your name on the agenda.

The full text of the announcement is below:

MT LEBANON SCHOOL DISTRICT
NOTICE OF PUBLIC HEARING
TO ALL RESIDENTS OF THE MT LEBANON SCHOOL DISTRICT AND ALL OTHER INTERESTED PERSONS AND PARTIES TAKE NOTICE that the Board of School Directors of the Mt Lebanon School District has scheduled a public hearing in the AUDITORIUM (my edit: changed from Fine Arts Theatre) located at the High School, 7 Horsman Drive, Pittsburgh, Pennsylvania 15228, on February 22, 2010 at 7:00 o’clock P.M. The purpose of this hearing is to review the proposed renovation and addition to the High School and to receive public comments.

The public hearing is to be held pursuant to the requirements of the Pennsylvania Public School Code of 1949, approved March 10, 1949, as amended, including amendments made pursuant to Act No. 34 of the Session of 1973 of the General Assembly.

The Board has approved and adopted a maximum building construction cost of $44,977,920 and a maximum project cost of $113,274,765 for the renovation and addition to the High School Building.

Description of the project, including facts with respect to educational, physical, administrative, budgetary and fiscal matters related to the projects, will be available on January 28, 2010, and may be obtained weekdays between 8:00 A.M. and 4:00 P.M. at the Mt Lebanon School District Administration Office, 7 Horsman Drive, Pittsburgh, PA 15228. The booklet and the facts contained therein will also be available and presented at such public hearing.

All residents of the School District are invited to attend and may gain agenda time by signing to speak by 4:00 P.M., February 17, 2010 in the District Administration Offices. Written testimony may be submitted to the Board Secretary prior to the hearing. Testimony and questions by citizens who have signed to speak at the hearing shall be limited to four (4) minutes.

Written comments will also be received by the Board Secretary until 12:00 o’clock Noon on April 5, 2010 at the Administration Offices, 7 Horsman Drive, Pittsburgh, PA 15228.

MT LEBANON SCHOOL DISTRICT
Janice Klein, Secretary
Mt Lebanon Board of School Directors

PSBA Analysis of Governor Rendell Education Budget

I received an email today from PSBA's Office of Governmental and Member Relation in regards to the Governor Rendell's budget announcement yesterday. The information below is available on the PSBA website. Full text of the announcement is below:

Rendell presents $29 billion state budget for 2010-11

This week Gov. Edward Rendell presented his $29 billion 2010-11state budget plan to the General Assembly that contains a 6.42% increase in the basic education subsidy and holds most other education programs at level funding or decreased amounts. The governor also proposed a plan to address the expected spike in employer contributions to the pension system, and to create a new reserve fund to be used when the federal stimulus money has ended. In addition, Rendell once again pitched his proposal for a system of statewide healthcare for school employees.

Under the governor's proposal, the Basic Education Subsidy would receive $5.8 billion, an increase of $354.8 million, or 6.42%, over 2009-10. In doing so, Rendell called for the third-year investment in his school funding formula that was developed in response to the state Costing-out Study. The funding formula establishes an adequacy target for each school district and compares the target to each district's actual spending in order to determine the district's adequacy gap. The formula calculates the state share needed to help close that gap in each district.

Most, but not all, other programs under the education portion of the budget plan are level-funded or have a decrease in funding. Here are some of the programs, their proposed funding amounts and how that compares to the current budget:

• Special Education: $1 billion (level)
• School Employees Retirement: $399.7 million (19.51% increase)
• Accountability Block Grants: $271.4 million (level)
• Reimbursement of Charter Schools: $226.9 million (level)
• Early Intervention: $186.1 million (7.23% increase)
• Pre-K Counts: $85.9 million (.55% decrease)
• Career and Technical Education: $62 million (level)
• Educational Assistance Program: $55.3 million (6.43% decrease)
• PA Assessment: $37.6 million (1% decrease)
• School Improvement Grants: $11.3 million (1% decrease)
• Science: It's Elementary: $13.5 million (1% decrease)
• Dual Enrollment Programs: $8 million (level)
• High School Reform: $3.6 million (1% decrease)

The governor acknowledged the impending crisis in the employer contribution rates for the state and school employees pensions systems (SERS and PSERS) that will occur in 2012-13. For PSERS, the state contribution is projected to increase from $758 million in 2011-12 to $1.88 billion in 2012-13. that represents a single-year increase of $1.13 billion. School district contribution costs will spike from $658 million to $1.86 billion.

Rendell has offered a plan that contains two components. The first is "fresh start" that would reamortize liabilities over 30 years. In conjunction with that effort, the state would require an incremental phase-in to higher contributions. Under the plan, in 2010-11, the commonwealth and school district employers would begin to fund the step-up in pension costs by increasing employer contribution rates to PSERS by 1% of payroll. According to the governor's office, this represents an additional employer investment of $200 million, or 24%, over 2009-10 levels. Thereafter, contribution amounts would be scheduled to increase annually by a maximum of 3% of payroll. Any increase of benefits, such as cost-of-living adjustments, would add to the unfunded liability and therefore require additional employer contributions.

The governor noted that no new revenue is required to balance the 2010-11 budget. However, he cautioned that in fiscal year 2012, federal funding totaling more than $2.3 billion will disappear. To address future budgetary challenges, Rendell proposed the creation of a new Stimulus Transition Reserve Fund. All new revenues generated during 2010-11 would be deposited into the new fund to help balance the 2011-12 budget.

To do so, Rendell is calling for a reduction in the Sales and Use Tax rate from 6% to 4%, and the elimination of 74 exemptions for items that currently are not subject to sales tax. The 1% vendor sales tax discount would be eliminated, and tobacco taxes would be extended to include cigars and smokeless tobacco. In addition, the state would institute a new severance tax on natural gas extraction.

The important thing to note here is that the Governor has outlined his plan to address the PSERs funding crisis. He proposes to increase the employer contribution by 1% of payroll in 2010-2011 with increases of up to 3% of payroll thereafter until the pension is fully funded. This stepped approach to funding PSERS would have the effect of pushing out the year that PSERS is fully funded.

This is the accounting magic I wrote about on Tuesday morning. The above approach is not currently allowed but if it is adopted by the Legislature then you can bet it will become legal.

Thanks for reading.

James

Commonwealth's Revenue Shortfall Silver Lining

In preparation for Governor Rendell's budget speech today, I spent some time looking up recent articles on the state of the Commonwealth's finances. It looks like we are ahead of where we were last year (in reference to the budget deficit) but revenues still continue to decline monthly on a year over year analysis.

According to The Pennsylvania Budget and Policy Center (a non-partisan think tank) January revenues to the State came in $120 million below expectations with 85% of that drop due to lower than expected revenues from income taxes and sales taxes. This is an issue because it was just in December that the Governor suggested the 2009-2010 budget gap might be $450 million. With the unexpected slump in revenues, Rendell's projection will most likely prove to be off the mark. From the article linked above:

Sales tax collections, which are normally the highest of the fiscal year in January (due to holiday shopping), missed their monthly target by $50 million, or 5.9%. For the fiscal year, sales tax collections are $231 million, or 4.6%, lower than expected. Sales tax collections have fallen short of estimate every month of 2009-10 – indicative of a slower-than-expected economy and weaker-than-anticipated consumer confidence.

The problem here is not just on the revenue side. Expenses are proving to be a problem as well. The Commonwealth has had to borrow $2.25 billion from the Federal Government in order to pay unemployment compensation. From the article above:

Pennsylvania's efforts to keep its nearly 560,000 unemployed workers' heads above water is causing the ship of state itself to sink deeper in a sea of debt. The state's Unemployment Compensation and Rainy Day funds, intended for down times, ran out of money in March.

But wait, it's not all gloom and doom. The fact that the State budget is so far in the hole means that the likelihood of an immediate solution to the PSERS pension crisis increases. Think about it for a second. For every school district in the state that has to raise taxes to pay for PSERS, the Commonwealth needs to come up with half that. With 501 school districts across the state, the Commonwealth share of this contribution spike will be enormous. Plus:

The Senate has contracted with Price Waterhouse to review the pension issue, not only to value the assets that are there, but to make specific recommendations

Nothing a little accounting magic can't cure...again (Pennsylvania did the accounting trick previously in 2002/2003 I believe).

When doing a little searching I also came across an article from the PSEA with the headline, "PSERS is Sound". From the article:

Warnings of a “spike” in the employer contribution rate in 2012-2013 are proving to be overrated. Originally projected to rise to 27.73%, projections in September 2007 now put the increase at less than 12%.

This had to be written in late 2007/early 2008. The PSERS Rate Spike is now projected to be up to 10.59 in 2012. Then it jumps to 29.22 in 2013 and 32.09 for 2014 before it starts to level off.

Again, the sheer magnitude of this spike means that the State is more likely to act. The question is, given the increases outlined in the chart above, will it act for 2010-2011 or will it wait for a future year? With no money to spend, the State will be forced to address the pension issue through accounting measures thereby masking the true cost of the pension plan. Let's hope that the Commonwealth doesn't simply stop at masking the problem but instead go all the way with a much needed reform to the unsustainable pension system.

I am not a fan of accounting "magic" to make liabilities disappear, however, in this case I may have to make an exception. Let's all just wait and see what the Governor says today.

Thanks for reading.

James

The Blitz is On

There sure is a big effort out there to get all the facts to folks regarding the High School project. From PTA newsletters that went out last week to District mailings, to other director blogs, the blitz is on. I figure I would add my two cents. You see, the devil is in the details and it is not always about what someone says, it is sometimes about what they are NOT saying.

All of the information that went out in the last week or two is not incorrect. It's focus, however, has been solely on the cost of the High School Project. Now, when you look at your budget and try to figure out what you can afford, do you just look at the cost of a car you are going to buy? Or do you take a look at your entire budget, including all KNOWN future expenses and then figure out how that car is going to fit into your budget given what you already now? My guess is that you don't just look at the car in a vacuum. You will look at all your expenses in order to figure out what your budget should be for your car. And then you will make your car purchase accordingly.

With that in mind, I post for your information the new and improved (from 2/3/2010) Mt Lebanon School District Forecast of Budgeted Expenditures.


Click on image for larger view

You may remember that I linked to the 2009 version of this in my whitepaper last month. I had already asked for an update at the time and after a few false starts (the version from the 1/28 Audit/Finance Committee meeting had some errors in it), this is the final version we will see for 2010.

Let me make a points about this forecast:

1) It's a forecast and is based on the best information available at the time
2) 2.5% increase in salaries (historical average is 2.79)
3) High School Debt will be a total of $113 million (actual debt will be a number less than this and will depend on where bids for the project end up)
4) Healthcare will increase at 5%/yr
5) PSERS increases will go according to the PSERS Projected Schedule
6) Earned Income Tax receipts increase at 2.5% in 2010-2011 and 3% thereafter (the Municipality is forecasting flat EIT)
6) State Subsidies increase at 2% per year (right now we are looking at 0% increase)
7) Investment rates going up to 3.25% (historically this is a good number but right now we are under 1%)
8) There are no increases in the 2010-2011 preliminary budget outside of PSERS, High School Debt Service, and salaries. Increases in future years for the "other" items are kept at a very low rate.
9) There are no program changes included in the budget. Dr Steinhauer said at the Audit/Finance meeting that he would find funding for these changes in other parts of the budget.

Now, when I said above that the whole picture isn't getting shown, this is why. This five-year forecast includes ALL expenses such as PSERS and base budget increases. The information released by the District only shows High School expenses. My frustration for some time has been that there has not been enough focus on the ENTIRE picture instead of on just the High School. So when you see people say that the high school might mean a 14% increase in taxes (from this years 24.11 mills) and that's the "Bottom Line", it kind of misses the point entirely. The Bottom Line isn't just a single expense. The Bottom Line is the forecast we received last Thursday. And that Bottom Line is ugly! From 2009-2010 to 2014-2015 the millage is projected/estimated to rise from 24.11 to 33.31, a 38.15% increase in taxes.

There are some opportunities for improvements to this forecast. Here are just a few:
1) Bids for the HS project might come in under $113.3. This would reduce our debt service
2) There could be a solution to the PSERS Funding Crisis
3) Salaries could come in less than the net 2.5% increases projected
4) There may be opportunities for base budget reductions in staffing and/or programs.
5) Retirements could be a big expense reducer especially in 2010-2011 (the 2.5% salary number is net of retirements)

There are also some risks to this forecast:
1) Salaries could come in greater than the 2.5% increases projected (come on, we just started negotiations. I couldn't put salaries in one or the other!)
2) EIT growth could be less than 3% (Municipality is projecting flat revenues from EIT)
3) State reimbursements may not be 2% (no increase seems to be the case for 2010-2011 at least)
4) Interest rates on the second float of bonds unknown (to be floated in 2013-2014 three years away)
6) Funding for our OPEB liabilities (approx $600,000) is not taken into account for years after 2012-2013.

Retirements going forward will have a huge impact on the 2010-2011 budget and beyond. We will have a good idea later in February and a great idea in March about what our numbers will be for this year.

Now this forecast is not a worst case scenario. Granted there are a few areas that we are likely to improve (let's all hope HS bids come in low) but there are some significant risks as well. The greatest chance we have of seeing these numbers come down is if there is something done at the Commonwealth level to address PSERS. There are long-term solutions in front of the Legislature right now but there are no short-term ones. Something can still be done, but please contact Senator John Pippy and Representative Matt Smith and let them know that they have a role in this. They know it already, but it is always good when they hear it from their constituents.

That's all for now. I am working on something with regards to the reassessments. I will probably address it at the February Audit/Finance Committee meeting. If you are a property owner then you most likely received a letter in the mail this week regarding your property. I expect there will be a number of questions regarding this in the coming weeks and months.

Thanks for reading.

James

Almanac Editorial

In this week's Almanac the editor weighs in on Mt Lebanon's High School Project. Excerpts are below with some comments:

$113 million is a whole lot of money. A whole lot of taxpayers' dollars. One hundred and thirteen million dollars could build more than 226 new homes valued at $500,000, or 452 $250,000 residences.

That is a way to think about it that I hadn't come across before. Of course, finding $113 million to build homes that were then occupied by buyers would, in the long run, return a net benefit to our tax revenues.

Considered basically landlocked when it comes to new development, the tax base in Mt. Lebanon is not expected to expand as it is in neighboring communities like South Fayette, Peters, North Strabane and Cecil townships. No expanding development, no growing tax base.

The fact about the stagnant tax base is a big one. We do not have a lot of space for more development. We will have a new hotel downtown at some point and their is the possibility that we get some development done in a few years with air rights over the T stop. Outside of that, there is not much more happening.

Food, utilities, clothing, you name it, are increasing faster than most people can keep up. It's a shame to think some residents are going to do without the absolute necessities of life to pay their school taxes.

More likely, those that would otherwise have to do without, will simply move someplace where they won't be forced to do without.

Want more proof that higher taxes lead to people simply up and leave? Check out this study done by the New Jersey Chamber of Commerce at www.nj.com:

The study – the first on interstate wealth migration in the country — noted the state actually saw an influx of $98 billion in the five years preceding 2004. The exodus of wealth, then, local experts and economists concluded, was a reaction to a series of changes in the state’s tax structure — including increases in the income, sales, property and “millionaire” taxes.

“This study makes it crystal clear that New Jersey’s tax policies are resulting in a significant decline in the state’s wealth,” said Dennis Bone, chairman of the New Jersey Chamber of Commerce and president of Verizon New Jersey.

Please see the article for more interesting information on the study and the effects that tax policy has had on the wealth of New Jersey as a whole.

Thanks for reading.

James