Council hearings on the School District: What we might expect
Today, City Council is expected to hear testimony from the School District of Philadelphia, which controls $2.3 billion of public money for the public schools, almost 40% of which ($889 million) is financed by the City.
When legislative costing out study pegs the underfunding of Philadelphia schools at a billion dollars a year, it’s not surprising to see a grim outlook for school finances. A state-sponsored “multiple provider model” (including charters, alternative education schools, and privatized schools run by Education Management Organizations and non-profits) has dramatically increased the burden on schools, particularly around management fees, gaps in charter reimbursements, and a transportation policy that forces the School District to assume all bussing and transpass payments for private and parochial schools as well as public schools.
The hardest thing to understand about the public schools and why $2.3 billion isn’t enough, is the size of the District:
• 281 different schools
• 167,000+ students – the next largest district, Pittsburgh, has less than 30,000 students
• 62 high schools
• 61 charter schools, the second largest “district” in the state
• 25,000 employees – 10,000 of whom are teachers
• 35,000 kids in K-6 on buses, and 55,000 kids in grades 7-12 using transpasses
• 86,000 free lunches served daily
• 70+ languages spoken in the District
• Average age of buildings – 70 years old
And the District continues to grow in expenses. The District’s Five Year Plan projects growth in expenses at $700 million, almost 30%. The problem is that enrollment is expected to “decline” by 10,000 some students over the next five years as well. In this situation, the District is contemplating difficult decisions around closing and consolidations of schools (four are underway in West Philadelphia alone), reduced services, across the board pay freezes, and other options.
So what are some recommendations that parents have brought to the table? Here are a handful that we hope might be raised today:
1. The District has to cost out its priority initiatives: It seems obvious, but somehow it’s not done. For example, parents have requested for years that the District cost out and implement a plan for reducing class size District-wide, or how much it costs to put an art and music teacher in every school, or a full-time nurse. Without these cost studies, the District’s budget has largely stayed the same year to year with the District fiddling with the areas it can to minimize damage but not seriously restructure its financial priorities.
2. The District has to limit contracts: This isn’t just about EMOs. The Philadelphia public schools have more contracts for more services than just about any district in the country. We’ve got CBOs running security, contracts for cleaning, curriculum, professional development, testing, etc. Even the state run school board, technically a “volunteer” five member board, costs the District $2.55 million including $1.68 million in its own contracts. If there’s one thing the District has proven with all these contracts, it’s that it’s a poor oversight manager. If it doesn’t run it, it doesn’t really watch it. Meanwhile, the District’s internal capacity is gutted since contracts are used more for internal cost savings than efficiency or for the value they bring the District.
3. Control charters: I’m not against charters; I founded one several years ago as part of Asian Americans United. But there’s no doubt that if there’s no control or parameters or guidelines, and most of all, no consequences, then there’s no limit to charter growth. Until this year, the District had only closed one charter school and that was by default (since the school never opened). We need our state legislators to exert some sense of control on these entities. They are a reality on the school landscape, but they cost a lot and they’re erratic performers according to a number of studies.
4. The City needs a plan to boost local revenue for schools: With the District’s projected expenses at 31%, This doesn’t have to be taxes, but it should be a strong look at enforcement of existing taxes (liquor by the drink, use & occupancy, and school income tax), linking any discussion of property tax reassessment to impact on school funding (including abatements), and the City’s consideration of assuming services the District provides. For example, I just found out that somehow the School District runs a number of swimming pools. I have kids; I love swimming pools, but when someone complained to me that the District was closing the Marcus Foster pool, I had to wonder why it was on our payroll in the first place.
5. Go back to the Parking Authority: If anyone were to tell me that an entity that generates $200 million in revenues, boots, tows, and runs red light cameras, only had enough profits generated to turn over $1.2 million to schools, it would have to be a laugh. The PPA’s agreement to fully fund the City and give a minimal payment to the schools was a political compromise, but it wasn’t based on any serious review of the agency’s finances. The longer the City and State tolerate the waste in this agency, the more financial burden they assume for the schools.
For more information, check out Parents United for Public Education’s website which gives more thoughts on the budget and the City and state responsibilities to the schools.
The School District’s budget plan (552 pages) is online here.
The District’s Five Year Plan is online here.
City Council’s budget plan is online here. School District info is on pp. 65-69.
This hobbyhorse is so comfortable
Why not increase property tax revenue? As far as I know, I'm the only fan of raising property taxes on YPP. But, I think there is a strong case for it, so I'll quote myself:
I should add, I am a fan of the carrot-and-stick here. One quibble I have with the Goode-sponsored bill to divert additional property tax revenue to the schools is that it didn't (or couldn't) use additional funds as a lever to either boost oversight or funding from the PPA or anything else.
Real Estate Tax Revenue and School Districts
Tcarmody, I agree with you about real estate taxes being artificially low in Philadelphia. I have also raised this issue before; so you are not alone. The other 500 school districts in Pennsylvania routinely have annually real estate millage increases, which almost always are higher than the CPI-U increase or rate of inflation. In Philadelphia there has not been a millage increase for years. This when coupled with the general under assessing of property values and the lack of a uniform reassessment results in the Philadelphia School District leaving millions of potential off the table. This is not to say that the state or the PPA should not kick in more money.
The 31 percent increase is over five years, and works out to an average increase of just under 7 percent per year (when factoring in the percentage increases each year), which vary from 6.04 to 7.81 percent per year. While this number should be brought down by looking at inefficiencies and unnecessary spending, a 7 percent increase is unfortunately not that out of line with historical increases faced by many PA school districts. In older districts, where the real estate tax base is not growing, certain costs such as health care, pensions, special education and building debt (for new construction or renovation of obsolete school buildings) and likely going to increase year after year at a rate that is greater than the CPI-U increase and what an increase in real estate taxes at the CPI-U rate will bring in terms of new revenue. This is due to the nature of these costs. This combined with some of the other the issues raised by Helen (that are unique to Philadelphia in terms of their magnitude as cost drivers) such as charter schools and free lunches is going to result in increases that exceed an annual CPI-U increase that is in the area of say 3.5 percent, which is the approximate average annual increase in the CPI-U for the last decade.
In terms of debt service, it should be paid by real estate tax revenue (standard practice if not law). This alone should result in a higher millage or real estate tax rate. Clearly there are serious budgetary issues in the Philadelphia School District's budget and five-year plan, part of the solution though is to fix the real estate tax issue in Philadelphia to generate more revenue. As Tcarmody noted, this could be used to leverage other funds from the PPA and other sources.
The solutions are to look for more revenue from a variety of sources; to cut out waste; and to look at creative solutions for funding and expenses that seek to change the current paradigm. Part of the costing out study addresses this. The key now is to not have that study sit on a shelf and gather dust, but to move towards implementing some of the goals in the study and good ideas raised elsewhere that will result in greater efficiencies and new revenue.
Ideally the real long-term solution is to remove real estate taxes from the equation, so as to not punish poorer districts or seniors on fixed income (in terms of the real estate tax burden). There have been bills in Harrisburg to do this by increasing the state income tax rate by about 20 percent and increasing the sales tax rate to 7 percent, with more services taxed for sales tax (e.g. legal and professional fees). These bills have gone no place though. As long as real estate taxes are an under utilized tool in the toolbox for the Philadelphia School District, why not use it more wisely to get more funding and to leverage funding from other sources, while we work to change the broader funding structures and mechanisms.
Why stop at property taxes?
Agreed that there needs to be some serious consideration about property taxes (which make up 60% of the local revenue to schools), but there are three other taxes that comprise a healthy 40% of local revenue:
use and occupancy: At over $100 million, this is the second largest stream of revenue to schools. Has there ever been discussion about how well this tax is thought out particularly in regard to non-profit use? As we know there are non-profits and then there's Independence Blue Cross and the University of Pennsylvania. A number of major non-profits are property owners. Is it possible to explore whether a non-profit that rents to a for-profit entity might have that address taxed? or whether they make payments in lieu of such?
liquor by the drink: This tax brings in some $40 million to the schools. When was the last time there was a headcount of the number of paying institutions? A number of neighborhoods – East Falls, Northern Liberties, Center City and parts of South Philadelphia have seen an incredible business revival in the ten years since the tax was enacted. Is that a potential pool of income untapped?
school income tax: When was the last time an aggressive measure was taken to enforce this tax? Stan Shapiro and others have also raised the possibility of creating a new personal income tax that would incorporate the school income tax and allow for better enforcement.
Agreed About Other Taxes for School District
Helen:
I agree with you about the other taxes. The Use and Occupancy tax should apply to the occupant, not the owner of the building. If the occupant is a for profit business, they should be paying the tax.
§19-1806(2)(b) The Board of Education of the School District of Philadelphia is authorized to impose a tax for general school purposes on the use or occupancy of real estate within the School District of Philadelphia during the tax year beginning July 1, 2001, July 1, 2002, July 1, 2003 and thereafter for the purpose of carrying on any business, trade, occupation, profession, vocation, or any other commercial or industrial activity. This tax is imposed on the user or occupier of real estate.
Non-profits are exempt under another section. The Use and Occupancy tax is good in that it circumvents the PA Uniformity Clause and effectively places a higher real estate tax on commercial businesses.
The question about non-profits
is whether they should be completely exempt. I have heard that it's possible to see if non-profits can make a payment (in lieu of taxes) for renting to for-profit agencies. I'm just thinking about that Penn building on 34th and Walnut) which has a food court, the Gap, etc. Technically, Penn wouldn't pay use & occupancy tax on that building (or the Barnes and Noble for example at 36th & Walnut, or Pod Restaurant), even though they generate profits that don't match the non-profit nature of the institution.
Non-Profits and Commercial Tenants
The commercial tenants in the U of P buildings should be paying the use and occupancy tax. The City should be assessing the parts of the building (and the portion of the land) used for commercial tenants separately from the rest of the building. Those "commercial" parts of the building and ground should be paying real estate tax. Penn would be liable for the real estate taxes for those buildings (for the portion and associated real estate taxes from the that are taxable) as Penn is the owner of the building. If Penn does triple net leases with the tenants or certain other types of leases, the tenants would be contractually liable for the tenant's share of the real estate taxes.
Hey Elp, I think it sounds
Hey Elp, I think it sounds like a pretty interesting idea.
I guess my main question is, given the current biz tax political environment, would that ever pass?
Clarification of the Word Should
Dan, if you are referring to my discussion of separating out the use and occupancy taxes and real estate taxes for buildings that are owned by non profits but have commercial tenants in the buildings and having the commercial tenants pay the use and occupancy tax and having the non-profits billed for real estate taxes for the commercial portions of buildings, that is already being done by the City. I was using the word "should" to mean that if the City is doing things the correct way and not using should in the "Wouldn't it be nice" or as a potential new law way. (I never thought I would work in a Brian Wilson quote into this discussion.) If you were talking of another idea, please let me know.
They "should" according to tax law ?
or are we all philosophically agreeing on the point that non-profit status shouldn't exempt you from paying any taxes with commercial tenants involved. I think the question for me (not being a tax lawyer) is
1) whether non-profits are exempt if they have commercial tenants
2) if they are not, then whether it's reasonable and possible for revenues to begin an aggressive collection, and
3) if they are exempt by law, whether there is some way the city is able to impose some sort of payment in lieu of taxes.
Oops a little late on the tax question
So my sense when I did some initial inquiries, is that there is not an aggressive collection or even a general survey on what that would look like. Some questions I got also were that if tenants change frequently, that can be a problem in terms of updating and records. My thought was that it seemed to make sense to target longer term leases, but again, that's taking the time to look those up, and enforce a collection.
I Am Not a Tax Attorney, Just a Policy Wonk
1. In Philadelphia under current law and practice, real properties have four assessments by the BRT: for taxable land, for taxable improvement (buildings), for exempt land and for exempt improvement. In most cases a property only has amounts other than zero in two of the categories. For example, a church that is you standard church would have an exempt land and an exempt building assessment. A property being used as a CVS would have a taxable land and a taxable improvement assessment. If a building at Penn is say used for classrooms and a ground floor for profit restaurant leased by McDonalds, it would have a taxable improvement assessment, and an exempt improvement assessment. It would also have a taxable land assessment and/or an exempt land assessment. The issue of the land is a bit complicated and is open to some interpretation in cases where there is a mixed non-profit and commercial building. It is partly dependent on the building configuration.
For the use and occupancy tax, under current law it applies to the tenant in the building, regardless of if a for profit or non profit owns the building. A for profit business should be paying the use and occupancy tax, a non profit is not charged the use and occupancy tax.
2. Aggressive collections are possible of the current taxes.
3. When Rendell was Mayor he implemented a PILOT/SILOT program, (Payment in Lieu of Taxes or Services in Lieu of Taxes program). This was an attempt to "encourage" certain large non profits to pay something or possibly face pressure or the threat of legal challenges to their non profit standing in terms of not being a purely public charity. This issue is complex and the state has been trying to differentiate non-profits into two classes, those that are purely public charities and those that do not meet these standards. The issue is complex, but the state really has not had much success in trying to break the non-profits into these two classes in practice.
Very helpful and interesting
Thanks Wonk! I will keep that in mind, esp. the PILOT/SILOT initiative.
30 Percent Increase
Hey Helen,
Is the 30 percent increase to keep the same basic program levels as now? If so, what is driving that increase?
incomplete sentence
Two things: I meant to say that the District's expenses are expected to grow by 31%, but City spending is projected at only 5.9% growth over the same time frame.
In re: to property tax, I assume the Nutter administration which is considering a major overhaul of property valuations, expects that this is the major area to boost school revenue. I just think that whatever plan the administration has put in place has to cost out the overall impact on schools and local city revenue. I thought there had been some assurances at one point that overall the 100% valuations wouldn't be a burden on residents which means it wouldn't necessarily benefit schools.
The District states that in the past five years, three areas have accounted for 98% of the increase in the District's expenses: charters (80% increase), debt service, now at $225 million (Vallas' gift); and benefits. Meanwhile district operations have grown 2%, which in keeping with inflation, would mean every place else is mostly declining.
The next five years will see growth in: special ed, utilities, charters, benefits and debt service again. But I will do more research on it to see if I can get more specific.