Judge: District Exaggerated Shortfall, Improperly Raised Taxes

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.