Judge: District Exaggerated Shortfall, Improperly Raised Taxes

AUGUST 31, 2016  | by JAMES PAUL

Lower Merion School District must revoke a portion of its most recent tax hike, according to a Montgomery County court. In his ruling, Judge Joseph A. Smyth said the district misled taxpayers by projecting large budget shortfalls despite squirreling away millions of dollars in reserve.

Kathy Boccella of Philly.com has the full report:

Between 2010 and 2015, the 8,300-student Lower Merion district - which, with a $259 million spending plan, is one of the wealthiest public school systems in the Philadelphia area - predicted large annual budget deficits, yet had millions stashed away in its reserves, Smyth said in his ruling.

For instance, in 2009-10, the district projected a $4.7 million budget hole but ended the year with a $9.5 million overage. In 2011-12, it anticipated a $5.1 million gap but wound up with $15.5 million to the plus side.

How did the school district manage to continually raise taxes above the Act 1 index? By overstating special education and pension costs:

According to the judge's findings, the district got away with raising taxes above the Act 1 index of 2.4 percent by telling state officials the money was needed to cover soaring special-education and employee pension costs, two of the biggest expenses for most public school districts.

However, audits of Lower Merion's budgets show it had year-end surpluses ranging from hundreds of thousands to millions of dollars for special education. The district also had $15.3 million tucked away in a retirement fund that was never used for pensions; instead, those benefits were paid from the general fund, according to the findings.

Because the Pennsylvania School Code does not permit a district of Lower Merion's size to store more than 8 percent of its money in reserve funds, the district transferred its surpluses to other accounts, the court found.

The last paragraph, above, is crucial—and has implications for all Pennsylvania school districts. If school board directors can so easily shift funding between various reserve funds (assigned, committed, and unassigned) then there is essentially no distinction between them. This undercuts the argument made by many school directors, as well as the Pennsylvania School Boards Association, that districts should only be judged on their unassigned fund balances.

By law, districts can only raise taxes if their unassigned funds are less than 8-12 percent of total expenses. From the CF fund balance database, you’ll notice many districts keep their unassigned funds stocked to the maximum legal amount, while holding millions earmarked as assigned or committed.

At the end of the 2014-15 school year, roughly 100 school districts had larger total reserve balances (as a percentage of spending) than did Lower Merion. Could this suggest administrators in other districts also mischaracterize their financial hardships?

Back to Lower Merion, whose school board wasted no time sensationalizing the judge’s ruling:  

The ruling could eliminate $4 million targeted for special education and retirement benefits in the coming year, according to the board, which added, "If the court's decision stands, the financial health of LMSD and districts across the state is in jeopardy.

In a separate letter to parents, the board said the decision "could significantly impact the quality of school programs," and warned it might have to impose personal income taxes to make up for shortfalls.

Of course, money is fungible. If the directors at Lower Merion decide to cut funding for disabled students and elderly teachers, that will be by choice. Much like they chose to systematically mislead the very taxpayers financing their schools.


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Facing Likely Deficit, Lawmakers Should Reduce Spending

AUGUST 31, 2016  | by BOB DICK

Fiscal responsibility is at a premium across the country, and Pennsylvania is no exception.

In June, lawmakers passed a budget that increased spending by $1.6 billion. Weeks later, they passed a revenue package, which included a $650 million tax increase to pay for more spending.

Yet, the budget still remains unbalanced. We have already mentioned how how the fiscal plan relies on a $200 million loan and other questionable revenue assumptions. 

Now, a new analysis from the Independent Fiscal Office (IFO) explains that some of the revenue Gov. Wolf and lawmakers are counting on to balance the budget may not materialize.

Below is a look at the projected deficit using the IFO’s numbers, contrasted with the General Assembly’s estimates.

2016-17 Budget Picture (in thousands)
  Official Estimates (July 2016) IFO Estimates (August 2016)
Beginning Balance $1,991 $1,991
Total Base Revenue $31,559,653 $31,553,400
One-time/New Revenue $1,216,850 $957,000
Less Tax Refunds ($1,300,000) ($1,300,000)
Prior Year Lapses $57,400 $57,400
Funds Available $31,535,894 $31,269,791
Total Spending $31,533,732 $31,533,732
Balance $2,162 ($263,941)
Sources: Independent Fiscal Office; Senate 2016-17 General Fund Financial Statement

The table contains various assumptions, which explain the differences among estimates:

  • The legislature’s base revenue figure (the amount of revenue expected before any policy changes & based on economic growth) is $6 million higher than the IFO’s estimate.
  • The most significant difference is between the "One-time/New Revenue" estimates. Lawmakers estimate policy changes will raise approximately $1.2 billion. The IFO, using more reasonable assumptions, projects the changes will raise just $957 million. Here are the major assumptions explaining the disparity:
    • The IFO deducts $95 million to pay for the expenses of the Commonwealth Financing Authority (CFA) from sales tax revenue. The legislature moved this line-item out of the General Fund Budget and created a new fund via the fiscal code. Legislative leaders have said they want to pass a gambling expansion to generate $100 million to cover CFA spending, but this is far from certain. 
    • IFO assumes Act 39 (wine modernization) will raise $73 million in 2016-17. The legislature predicts an increase of $149 million, a $76 million difference.
    • IFO projections of tobacco tax revenue (includes taxes on cigarettes, e-cigarettes, loose & roll-your-own tobacco) are approximately $38 million less the official projections.
    • $75 million from the Philadelphia casino is not included in the IFO’s official revenue estimate—they do not expect that to occur during the current fiscal year. 

So what’s the major takeaway from the IFO’s estimates? Lawmakers must figure out how to eliminate a $264 million deficit this year. Liquor modernization, tobacco taxes, and gaming may bring in enough revenue to balance the budget, but in the likelihood it doesn’t, lawmakers should be ready to reduce spending to match revenues.


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Public Remains Supportive of School Choice

AUGUST 30, 2016  | by JAMES PAUL

That’s the upshot of the 10th annual public opinion survey from Education Next, which covers a range of topics including school choice, school spending, personnel policy, testing, and accountability. The entire poll results are worth reading—check out the interactive results from 2016, as well as trends over the last decade—but here are a few key findings.

On the topic of school choice:

  • Tax credit scholarships are favored 53-29 by the general public, 64-17 by African Americans, and 60-25 by parents. Tax credit scholarships, including Pennsylvania’s Educational Improvement and Opportunity Scholarship Tax Credits, are the most popular school choice mechanism.
  • The general public supports charter schools by a 51-28 margin, including 45-33 among Democrats.
  • Support for both means-tested and universal vouchers is slightly greater among Democrats than Republicans. Hispanics support universal vouchers 57-24.

Regarding school spending:

  • The general public underestimates the average amount spent on children in public schools, which mirrors the experience in Pennsylvania. When asked to estimate the per-pupil cost, respondents guessed $8,500. The actual average is more than $12,000.
  • The general public estimates the average yearly teacher salary is roughly $40,000, which is 30 percent below the actual average teacher salary ($58,000) reported by the National Education Association. Even teacher respondents underestimate average teacher salaries—they guessed $45,000.

Finally, on personnel policy:

  • 60 percent of the public supports “basing part of the salaries of teachers on how much their students learn,” also known as merit pay. Only 20 percent of teachers are supportive of merit pay.
  • Support for teacher tenure has declined by 10 percentage points since 2013, with the general public opposing teacher tenure 54-28.
  • By a margin of 44-35, the public opposes agency fees—which require non-union members to nonetheless pay roughly 80 percent of full-member dues to the union.
  • The public is split, 33-32, on whether unions have a negative effect on public schools.

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Pittsburgh-Area Family Punished for Choosing Charter School

AUGUST 29, 2016  | by JAMES PAUL

Fauna Shaffer Butera, mother of two young boys just miles to the northwest of Pittsburgh, opted to enroll her sons in Young Scholars Charter School. She was shocked to learn of the transportation option afforded by her school district of residence.

Northgate School District offered Fauna bus passes for her five and seven year old, which would require the following route:

Her children would have to walk over a block in Avalon to get the PAT bus on California Avenue at 6:30 a.m. and take it to downtown Pittsburgh, where they would cross a busy intersection to the Wood Street T Station and get on the T.

Once the children get off at the Killarney Station, they first have to cross the T tracks and then navigate on a foot path through a tunnel, which cars come through one at a time because it's so narrow.

After the tunnel, the children have to walk nearly a mile up a hill in a neighborhood with no sidewalks until they reach Young Scholars Charter School at the top.

Here's the full story from WPXI news:


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Obamacare is Failing, But States can Bring Hope

AUGUST 29, 2016  | by ELIZABETH STELLE

Obamacare is struggling for survival. Despite victories in the courts, state exchanges are in trouble, and Medicaid expansion has been more costly than expected—with no evidence of improved health outcomes.

In 2015, the Congressional Budget Office (CBO) projected 21 million Americans would purchase insurance on the exchange. Currently, only 9.6 million (439,000 in PA) receive their insurance via state exchanges. Considering ever-increasing premiums, eye-popping deductibles and dwindling choices, underwhelming enrollment is no surprise. Are smaller and sicker than expected population combined with the end of reinsurance in 2017, one of three insurance bail-out provisions, convinced insurers like United HealthCare and Atena chose to exit Pennsylvania's exchange—leaving tens of thousands of consumers in the lurch.

Potential exchange customers in southeast Pennsylvania will have just one insurer from which to "shop". Several states, like Alabama and Wyoming, have only one insurer for their entire population.

Unsurprisingly, dwindling competition is bringing higher premiums. Pennsylvania insurers requested rate hikes up to 48% this year. In Tennessee, insurance companies secured in premium hikes of 62%.

The exchanges are failing, and that’s only half of the bad news.

The expansion of Medicaid is responsible for most of the drop in the uninsured rate since Obamacare's implementation. Yet there is little evidence Medicaid is improving health outcomes. And it’s proving more expensive than expected.

Brian Blaise from Mercatus explains in the Philadelphia Inquirer:

Taxpayers spent an average of $6,366 on Medicaid expansion enrollees in 2015. That's 49 percent more than the $4,281 amount that HHS projected in last year's report. With 9 million Medicaid expansion enrollees in 2015, this amounts to a $19 billion mistake and a substantial additional burden on federal taxpayers.

Earlier studies show Medicaid coverage leads to more consumption of health care, but there’s no evidence of improved health outcomes.

Thankfully, a recent article from Paul Howard in Real Clear Politics lays out key steps Pennsylvania can take to lower healthcare costs and actually improve health.

First, Howard identifies reference pricing. The California Public Employees Retirement System used reference pricing to save millions on hip and knee replacements. Here’s how it works: employers set a price for a procedure and provide employees with a list of providers who accept that price.

Another reform is direct primary care. Patients pay a monthly or yearly membership fee that includes preventative and primary care needs. Patients have predictable healthcare costs, and doctors can spend less time billing insurers and more time with their patients. Fourteen states have passed laws to protect this form of care from Obamacare regulations. Pennsylvania should do the same.

Finally, price transparency is essential to a well-functioning market that rewards quality. Today’s secret insurer contracts and inflated cash prices make it difficult for patients to make well-informed decisions. Creating a public, statewide database of the rates insurers pay for various procedures is one way to give patients the ability to shop. Other private websites, like Healthcare Bluebook, are already disseminating price information.

A future with lower health care costs and higher quality care is possible if we’re willing to learn from the failure of Obamacare and finally give patients more control of their health care decisions.


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Podcast: How Money Walks Out of Pennsylvania

AUGUST 24, 2016  | by DOUGLAS BAKER

Last year, nearly 42,000 Pennsylvanians left the state to pursue their dreams elsewhere—that's one person every 12 and a half minutes. Why is money walking out of Pennsylvania?

That’s the topic of the second episode of Commonwealth Insight, our new, bi-weekly podcast featuring state and national entrepreneurs, policy makers, and thought leaders tackling issues critical to Pennsylvania's economic future.

First, we talk with Travis Brown, Forbes contributor and author of How Money Walks, who says Pennsylvanians are “voting with their feet and taking their wallets” to states like Florida, North Carolina, and Arizona because of our state’s tax burden.

He explains that states compete with each other to attract investment and residents:

Just like the Steeler Nation would look competitively across state lines and do the scouting and reporting to see how we can be better and better next year against the New England Patriots, every competitor would look to the North and say: How can we attract these residents and how do we keep the residents we have?

Travis says there are three major policy areas Pennsylvania can change to be more competitive: regulation, taxation, and litigation.

To reverse out-migration and make Pennsylvania attractive to families and businesses, we must avoid higher taxes, more government spending, and greater regulation.

We also talk with Bob Dick, senior policy analyst for the Commonwealth Foundation, about how the Pennsylvania state budget works—and doesn’t work. Bob says state spending is growing beyond its citizens' ability to fund it, resulting in tax hikes that kill jobs and slow private sector growth. The politically unpopular, but fiscally responsible, solution is to control spending.

Click here or listen below, and stay tuned for more by subscribing on iTunes, SoundCloudGoogle PlayStitcher, or via RSS.


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Welfare to Work Helped Reduce Poverty

AUGUST 22, 2016  | by ELIZABETH STELLE

Ending the Cycle of Welfare

Twenty years ago President Clinton signed a law creating Temporary Aid to Needy Families (TANF), better known as sweeping welfare reform grounded in work requirements.

In 1996, 531,000 adults and children collected cash payments. Today the program enrolls just 167,018. That's proof work is our most powerful anti-poverty tool.

Both poor and non-poor Americans agree that welfare programs should be linked with work requirements. According to a recent survey from AEI:

Large majorities (81 percent of those in poverty and 91 percent of the non poor) favor a work requirement in return for welfare benefits.

Unfortunately, President Obama gave states the option to downplay work requirements in 2012. To its credit, Pennsylvania took the opposite approach and enacted a requirement that participants apply for three jobs each week to maintain benefits.

There's lots of room for improvement when it comes to the vast alphabet-soup of welfare programs, but the shift to work requirements was a dramatic step forward. Scott Winship from the Manhattan Institute puts it this way:

The question is what would have happened in the absence of the welfare reform that we actually implemented . . . Absent welfare reform, would single mothers have increased their employment rates and earnings? . . . policymakers should reject the increasingly conventional view that extreme poverty has dramatically increased and the view that welfare reform did more harm than good.

While work requirements have been a success for TANF, other major safety-net programs have dramatically expanded since 1996. Medicaid serves one in five Pennsylvanians, up from 12 percent in 2003 (the earliest data available). Food Stamps serve about 14 percent of Pennsylvanians compared to six percent in 2003.

Yet Pennsylvania is making progress. Last year, the state took another small step in the right direction by changing the structure of childcare subsidies. Now, families will gradually be responsible for higher co-pays as their earnings rise, instead of the subsidy cliff that could cause a co-pay to jump by $6,000 for earning $1 more.

Welfare reform showed government that a job is the greatest anti-poverty tool at one's disposal, and we should be quick to apply that principle to every welfare program.


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Understanding Your School District’s Labor Contract

AUGUST 17, 2016  | by JAMES PAUL, JESSICA BARNETT

CF reviewed labor contracts in each of Pennsylvania’s 500 school districts and uncovered several interesting findings. These contracts, known as collective bargaining agreements, are negotiated behind closed doors between local teachers’ unions and school boards. They include routine information about salaries and benefits, but the contracts also outline maintenance of membership clauses, fair share fees, and ghost teacher arrangements.

Click here for a searchable database of labor contract provisions for each district.

Most notably:

  • Teachers in 62 percent of districts are trapped in their unions by maintenance of membership clauses, which stipulate teachers may only exit a union during a specific time period—often just days—near the expiration of a contract.
  • Nearly 4 in 5 school districts require non-union members to pay fair share fees to the union. These teachers are forced to pay more than 80 percent of traditional dues to the union, even though they have chosen not to be members.
  • More than 9 in 10 labor contracts include release time language, allowing school employees to attend union conventions, serve as union delegates, or conduct union business. Release time also establishes the basis for ghost teachers, whereby school employees accrue seniority, receive taxpayer-funded salary, and amass pension benefits, all while conducting full-time work for the union, a private organization. Read more about ghost teachers.

These provisions tilt the playing field toward teachers’ unions at the expense of students, teachers, and taxpayers alike.

Read our policy brief for an overview of surprising provisions in collective bargaining agreements, and check out this searchable database to learn about your school district’s labor contract.


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The Power of Educational Choice

AUGUST 16, 2016  | by JAMES PAUL

The story of Malachi Kuhn is a moving example of how lives are changed by educational choice. Malachi’s education savings account (ESA) helped him to literally stand on his own.

Patrick Gibbons chronicles Malachi’s experience on RedefinED Online:

For nearly three years, starting before his third birthday, Malachi lived in an orphanage in Adama, in central Ethiopia. Born with spina bifida, a birth defect that causes leg weakness and limits mobility, he had to crawl across the orphanage’s concrete floors.

The orphans shared clothes from a communal closet and he rarely wore shoes causing his feet to become covered with callouses. At night he slept in a crib in a shared room with five other orphans. They ate communal meals prepared by their caretakers over a wood-burning fireplace. With his doctor more than an hour away in Addis Ababa, the capital, he rarely had access to much-needed medical attention.

His caregivers did their best with what little resources they had, but Malachi was only surviving. It seemed impossible that he would one day stand on his own — much less walk, or go to school.

All of that changed last year, when Malachi arrived in Florida where he now lives with two adoptive parents, and, with the help of a revolutionary scholarship program, has begun pursuing an education.

After speaking to other parents with special needs children, Kamden and Mitchell Kuhn learned about Florida’s education savings account program, which helps parents customize a unique schooling experience for their child.

They applied for the Gardiner Scholarship and enrolled him in Ruskin Christian School. Kamden Kuhn said the nearby public school was good, but she didn’t want her son pulled out of class time for therapy. She wanted Malachi to have the same amount of class time as the other students. The Kuhns used funds left over after paying his tuition to purchase after-school physical, occupational and behavioral therapy.

His mother said the therapists provided instruction and therapy through play.

“I’m not the best educator for my son,” Kuhn said. “But this allows me to shop around for the best educators and best therapists. I can decide what is best, because I know him best.”

Malachi is thriving in an educational environment that is perfectly suited to his needs:

“He made so much progress in the first nine months,” Kuhn recalled. He quickly started to learn to speak English and to stand upright with the aid of a walker. Now stronger than ever, he uses a forearm cane to walk.

“Ms. Stacy helped me learn to walk, and Ms. Colleen helped me get in control,” Malachi said of his physical and occupational therapists. In a telephone interview, he said phonics is his favorite subject because he loves learning letters and how to put them together to make words.

Malachi’s story is inspiring. It also provides a call to action for Pennsylvania to move forward with ESA legislation. Every child in the commonwealth deserves educational opportunity, especially those with learning disabilities or special needs. Read more about ESAs here.  


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More Victims of Devastating New Tax Speak Out

AUGUST 15, 2016  | by ELIZABETH STELLE

Amy Crivella was addicted to cigarettes. She tried everything—gum, patches, going cold turkey—but nothing worked. Then, she tried e-cigarettes, or vaping, and she didn’t need a cigarette for the first time in 17 years.

The mom of two closed her bakery and took out a loan to open East Coast Vapes in Cranberry Township near Pittsburgh. Amy estimates her business has helped about 700 people reduce smoking or quit cigarettes altogether since she opened her doors almost a year ago.

“I didn’t choose to do this to make a buck,” she says. “If I can pay my bills, I’m happy. We’re helping the grandmas and the grandpas quit smoking. We’re not looking for a handout.”

But Amy’s business and her family’s livelihood are in danger. Tucked away in this year’s budget is a retroactive 40 percent wholesale tax on e-cigarettes that goes into effect on October 1. This means Amy will have to send Harrisburg a check for 40 percent of the wholesale value of her entire inventory—including the inventory she purchased well before this tax was even considered.

Not only will the tax force Amy to lay off all three of her employees, but it may financially ruin her.

I don’t know if I’m going to make it. I don’t even have the option to close. I signed a five-year lease, and I’m personally responsible for those payments. I’m going to lose everything. My parents helped me take out that loan. The bank will go after their house if I don’t make my payments. I don’t know what I’m going to do.

Unfortunately, Amy has learned how dangerous big government can be:

I didn’t know too much before, and the more I learn the more scared I get. I didn’t even know what a lobbyist was until about four months ago. I should never fear my government, and I fear them right now. We hired them to stand up for the little people, and I feel like a punching bag. They don’t care that we pay $16 million in other taxes every year.

This fall, lawmakers have a choice: They can shut down businesses across the state for a mere (in relation to the rest of the budget) $13 million in projected revenue from the tax, or they can spare people like Amy from losing their livelihoods.

For starters, lawmakers should support a move spearheaded by Rep. Jeff Wheeland (R- Williamsport) to replace the 40 percent tax with a 5-cents-per-milliliter tax, similar to what exists in North Carolina and Louisiana.

If additional savings are needed, lawmakers should cut hundreds of millions in corporate welfare tax credits and optimize state health care spending. Pennsylvania could save $153 million a year if state workers contributed to their health care at the same rate as private sector workers. Common sense solutions to savings and revenue exist that don't unfairly punish businesses like Amy's.

Like other vape entrepreneurs, Amy plans to empty her inventory to avoid the 40 percent floor tax. In the meantime, she hopes lawmakers will act quickly to repeal or replace the tax instead of sending families like hers to financial ruin.


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