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2019 Spring School District Budget Report

Introduction to 2019 Spring Budget Report

Both this budget report and the 2018 Fall Budget Report utilize an array of data sources to compile a thorough exploration of school districts’ financial condition. Actual data are supplemented and complimented with responses addressing the issues and concerns Pennsylvania districts are reporting as they look to the future needs of their district. Our results reaffirm the fact that a staggering amount of fiscal stress exists throughout Pennsylvania’s school districts that continues to have significant impact on our public education system.
As part of our analysis of school districts’ financial condition, the budget survey asked respondents to indicate the assessed (perceived) level of fiscal stress over (1) the past three fiscal years and (2) over the next three fiscal years. Illustrated in Figure 1 below is the resulting distribution of school districts by their responses to future fiscal stress. Out of the 239 respondents, 51.9% (124 districts) indicated a level of fiscal stress greater than six (6) and the median school district value was 6.3. In comparison, the median school district level of fiscal stress over the prior three fiscal years was 5.0, with 160 districts indicating a higher level of fiscal stress in the next three fiscal years compared to the prior three fiscal years. For those 160 districts, the average difference between their two responses was 2.02. As consistently indicated by respondents in our previous budget surveys, the three most common and substantial areas of cost growth ranked by school districts have been mandated costs for special education, charter school tuition and pensions. As these reports show, balancing the growth in mandated costs has resulted in significant levels of increased fiscal stress in many districts.

Figure 1. Self-Assessed Level of Fiscal Stress in Future Fiscal Years

In light of this fact, business managers, as the financial leaders responsible for the health and effective operation of their district, must review year-over-year changes in their budgets (especially for change in mandated costs) and how these changes fit into broader long-term trends. On a statewide basis, the trend in operating expenditures have continued to climb, primarily fueled by the growing mandated costs for special education, charter school tuition and pensions. Using the recently released 2017-18 annual financial reporting data updated by PDE, Figure 2 illustrates this year-over-year comparison by breaking down the total statewide annual change in operating expenditures ($996.61 million) over 2016-17. Of the $996.61 million increase in total operating expenditures, mandated costs for charter school tuition and pension were 53.37% ($531.88 million) of the increase in operating expenditures. Spending on salaries, healthcare, unemployment compensation, workers’ compensation, and social security collectively increased by $308.4 million or 30.9% of the change in total operating. This statewide annual change advances the broader long-term trends and impacts occurring in school districts due to these mandated costs. The annual changes in charter school tuition, which grew by 10.18% to $1.8 billion over the prior 2016-17 fiscal year, pensions, which grew by 10.76% to $3.7 billion, and special education, which grew by 4.26% for a total of $4.6 billion, continue school districts’ reliance on local revenues and the need to make programmatic changes just to balance the budget.

Figure 2. Breakdown by Major Objects of Total Operating Expenditure Growth

In our last two budget reports, we analyzed the cumulative change in mandated costs for special education, charter school tuition and pensions in comparison to the change in supporting state revenues and the impact this net difference has had on districts. In order to accurately measure the cumulative change in the three mandated costs collectively, we individually calculated change for pension (object 230) and charter school tuition (object 562) costs and then calculated change in special education costs by adjusting total special education expenditures (function 1200) by excluding costs reported as special education pension (function 1200 – object 230), special education charter school tuition (function 1200 – object 562) and federal special education expenditures (revenue 6832). This adjustment provides assurance that our collective total mandated costs does not include overlapping expenditures reported both by function and object. We also calculated change over the same time period in the four major state revenue streams to school districts that support these three areas of mandated costs (basic education funding, special education funding, pension reimbursement, and charter tuition reimbursement).
Using the annual financial reporting data recently updated by PDE, mandated costs for special education, charter school tuition and pensions collectively grew statewide by $4.67 billion from 2010-11 to 2017-18 while supporting state revenue grew by $2.24 billion. The difference between the mandated costs and state revenue, $2.43 billion, was the local share of these mandated costs. Figure 3 illustrates the statewide cumulative change from 2010-11 to 2017-18 in each of the three areas of mandated costs and the four areas of supporting state revenue.

Figure 3. Cumulative $ Change in Mandated Costs and Supporting State Revenue

It is important to understand that school districts during these years have had to rely on local revenues, particularly property taxes, to cover these changes in mandated costs and balance their budgets. As evidenced by the fiscal forecasting of school districts by Hartman and Shrom (2019), the level of fiscal stress will only worsen for most districts as this process repeats annually. According to their study, approximately 300 school districts by the end of the 2021-22 fiscal year are projected to experience a significant level of fiscal stress, as measured by their relative magnitude of projected surplus/deficit to operating expenditures.
The amount of fiscal stress a school district will face is largely dependant on what share of these mandated costs school districts will have to cover locally (i.e. after state revenue increases are applied) and the ability of each school district to balance the budget by the raising of local revenue. The forcast by Hartman and Shrom suggests, based on current trends, that this will result in an additional $2.8 billion needed to be generated at the local level by the end of the 2021-22 fiscal year.


The Board Authority Concept and 2019-20 School District Budgets

In addition to fiscal stress related to these growing mandated costs, a school district's ability to cover these changes in their budget through changes in property taxes, for example, is restricted by the Act 1 Index. The index establishes for each school disitrict a maximum increase in tax rate that it can levy without the approval by voter referendum or an exception granted by the Department of Education. Changes in mandated costs for special education, charter school tuition and pensions frequently outpace the taxing authority permitted by law, creating substanially more pressure in school district budgets. In order to better understand how the growth in mandated costs impact the overall level of fiscal stress statewide, we can compare school districts' ability to cover cost growth by measuring each districts' "board authority." 

Board authority is the degree to which a change in property tax revenue at the maximum Act 1 index covers change in a school district’s total budget. For example, suppose a school district has a $60,000,000 total budget in Year 1, relies on property taxes to fund 42.80% of its budget (“property tax ratio”), and has an Act 1 index of 2.4% in the upcoming fiscal year (Year 2). As a result, the school district's board authority in the upcoming Year 2 budget is 1.03% of its total Year 1 budget (42.80% x 2.4%). In other words, a maximum increase in property taxes under the index would provide the district's total budget with an additional 1.03% in Year 2. However, because the range of property tax ratio between school districts varies significantly (from 8% to 85%) so too does the range of board authority as illustrated in Figure 4.


Now suppose mandated costs for pension, charter schools, and special education have collectively risen for this school district. In our most recent Budget Survey Report, we found that between 2010-11 and 2017-18, the statewide average change in these mandated costs grew annually by 2.75% of total budget (we excluded over-lapping functions and objects). For this school district, this annual change equals $852,500 in additional mandated costs for the upcoming fiscal year. Considering their board authority of 1.31% in total budget, this school district could generate $405,945 in additional property taxes without receiving exceptions or needing approval by voter referendum. Illustrated below in Figure 5 is our example of board authority and mandated costs.

While this example comparing board authority and mandated costs illustrates why state support is necessary each year, the math, unfortunately, could get scarier. In addition to the limits that Act 1 places on school districts, local economics play a key role in the property tax base for which the Act 1 Index does not take into consideration. Each year during the 2011-12 through 2018-19 fiscal years, approximately 112 school districts on average observed a decrease in total real estate assessed value to some degree. Figure 6 below illustrates the # of districts each year from 2011-12 to 2018-19.


For the current 2018-19 fiscal year, school districts' general fund budgets submitted to PDE last year reveal that 98 school districts, or a staggering 20%, observed a decrease in assessed value that averaged -0.69% of their property tax base (or -0.23% of their total budget) while their average Act 1 Index was 3.31%. For these districts, 21.56% of their 2018-19 board authority would have to be used just to stay revenue neutral. For many of these 98 school districts, continued decline in assessed value annually creates additional fiscal stress during the budget process. Figure 7 below illustrates the distribution of all school districts by the number of years (2011-12 to 2018-19) of assessed value decline.


While the budget survey results detailed in the next section of this report will provide qualitative evidence of the heightened concern school business officials have for the financial health of their school districts, the data measuring fiscal stress presented thus far illustrates how mandated costs and board authority affect budgetary decision-making, how property tax assessed value becomes a significant component of a school district's board authority and why a greater and greater need for state support exists each year. As for school districts' board authority in developing their 2019-20 budgets, the median school district board authority for 2019-20 is 1.191% of total 2018-19 budget with a range from 0.222% to 1.962%. Figure 8 below illustrates the number of districts by level of board authority in their 2019-20 budgets.

Budget Survey Results

School District Case Studies