N.B.

This letter has been updated to reflect decisions by the Board of School Directors through February 10, 2014
Don Gordon Patton Township, PA via statecollegewatchdog.com Dear Don, On May 20, 2014, every registered voter in the State College Area School District will have an opportunity to vote on the funding for the upcoming high school modernization project. Thank you for offering a forum on statecollegewatchdog for school board members to address funding questions for the high school project in particular and the SCASD in general. Please be clear that what follows is my informed opinion and in no way represents the Board of School Directors or the SCASD. The District is guided solely by decisions we make collectively as a board, during a properly advertised public venue attended by a majority of our nine directors. In a letter to the editor (Centre Daily Times, 13-Nov-2013) you asked the following:
When will the school board use a simple chart or calculator to show on one page the projected year-byyear, 2015-to-2020 tax increases in mills and percent for the Act 1 tax increases; the considerable PSERS exception to Act 1 tax increases; and the proposed high school referendum tax increases and culminating with the total school property tax increase for each of those years?

Because our board believes that the people we serve have a right to know how their tax dollars are spent, all taxpayers have access to this information on the districts website at http://www.scasd.org/domain/81. Accepting your desire for public discourse at face value, I am disappointed that the response I submitted to your website in November continues to be ignored. Honestly, it is impossible for anyone, anywhere, to accommodate your request with the fidelity you expect. Let me explain that conclusion in a point-by-point response: 1. The Act 1 index is determined on a year-by-year basis by the Pennsylvania Department of Education (PDE). Its the average of two employment indices The Statewide Average Weekly Wage (SAWW), and the Bureau of Labor Statistics Employment Cost Index (ECI). The Act 1 index is now averaged over three years to reduce volatility. No one knows what the index will be after 2015. The best we can do is an educated guess. 2. The high school project remains in tentative form (preliminary schematic design). Costs are trending over budget, but the expense has been capped at $115 million. Adjustments to the design to maintain the budget cap will continue until bids are opened sometime next spring. 3. The Board established a referendum amount of $85 million on February 10. Permission authorizing the board to incur this debt is the request that will appear on the ballot on May 20. The financial instruments and funding schedule for the high school project have been

determined only in a general sense. Assuming that the May referendum is successful, the districts business administrator has made it clear that property tax revenue for the project will be added to taxpayers bills only when it is necessary to do so. This will depend on the bid and construction schedule as well as general economic conditions at that time. The districts crystal ball isnt any clearer than yours; you cant expect someone to know what is unknowable. 4. There is a $47 billion pension liability facing the commonwealth; the SCASD share exceeds $275 million over 30 years. As you know, I have written extensively about this topic and you can find expanded versions of these essays on Scribd under the name JPawelczyk (http://www.scribd.com/JPawelczyk). While we can guestimate the annual PSERS requirement, please remember that the amount of the PSERS exception to the Act 1 index is calculated annually, that it must be approved by PDE, and that it may change if the legislature chooses to do so. Indeed, the Governors 2014-2015 budget proposal includes such a provision. With that said, you should be aware that for the past four years the District has successfully paid both its growing pension contribution and all other obligations while keeping property tax increases below their historical rate of growth. So what are the costs, all in? Respectfully, school boards and administrations are in a similar plight as meteorologists: Armed with the best knowledge, the best we can provide are educated estimates. Even so, I think we are converging on reasonably accurate projections of the districts finances through this decade. Heres how I frame the issue: 1. I create a low side and high side projection. For the low side I assume the 1.7% property tax growth that Mr. Brown is using in the districts budget models. For the high side I assume that property taxes will grow at their 10-year historical average of 3.02% for the rest of the decade. Thats certainly higher than Mr. Browns published budget projections, but I prefer to err on the high side to protect essential district functions as the pension crisis worsens (which I believe it will). 2. Looking forward, the board has already approved an Act 1 resolution stating that the 20142015 property tax increase will not exceed 2.1%. Multiplying this value by 1.7% every year over the rest of the decade yields a low side tax projection increasing by approximately 11% by 2020, or 4.29 mills. For the high side, the maximum 2014-2015 increase and 3.02% compounded over five years yields a cumulative tax increase of approximately 18% by 2020, or 7.16 mills. 3. Assuming that $85 million in new bonds are funded for 30 years with an interest rate of 5.30% (current rates are trending well below this 25-year average) produces a cost of approximately 2.72 mills for taxpayers (the exact number varies 2.72-2.78 mills depending on assumptions in the finance model). As I indicated earlier, the district plans to phase in that cost, and the exact phase-in strategy is not determined yet, but it will certainly be in place before 2020. I have included an estimate that approximates Mr. Browns budget projections. His approach assumes that continued assessed value growth will reduce the mills required to fund the additional debt for the high school by 1.5% every year. Again, his presentations are available on the districts website.

4. Adding (2) and (3) yields a low side estimate approaching 7 mills by 2020 for the total additional property tax cost, and a high side estimate approaching 10 mills. Again, this estimate includes everything: district operations, pensions and the high school. The gist of your letter was that we consider all budget threats. Although you forgot one, which Ill address below, 7-10 mills is my best guess estimate of the total increase in school property taxes by the end of the decade. 5. What does this mean for a taxpayer? Take the assessed value of your home from your tax bill (assessed value is about 28% of market value), divide by 1000, and multiply by the values in the last row of the table below. Thats a rough estimate of how much more youll be paying in school property taxes in 2020 compared to today if the May 20 referendum is successful.
For example, if my homes assessed value is $104,500, I would expect to be paying $714-$1,007 more in taxes in 2020. About $265 of that amount will be debt service for the high school. For the average homeowner, their taxes in 2020 will total about $487-692 per year more than they do now, with about $181 of that amount funding the high school, or 50 cents per day.

The second table is an example using the average assessed value in Centre County of $71,300, which corresponds to a market value of approximately $250,000. 6. Remember, the referendum is for the high school only. You can determine your share using the districts online tax estimator at http://www.scasd.org/statehighfuture. Or, call, write or email me. Using publicly accessible information I can generate a property tax forecast for anyone in minute or so. In response to your request, I have provided both a summary table and a graph over time below that fits on a single sheet of paper. Furthermore, I added a table with a property tax forecast for an average homeowner. Although Act 120s cap on the annual PSERS increase has reduced some of the ambiguity in budget forecasting, if the legislature defers pension payments again, as they did in 2010, then the PSERS payment could change for the better in the short term, and for the worse in the long term. I have deliberately assumed a worst case scenario that all pension costs are paid with property tax revenue. In reality, other local revenue funds more than 20% of pension costs, on average. We wont know the phasing of high school debt financing until the construction schedule is set, and we wont know the actual finance cost until the bonds are sold. So, the year-to-year increases in the table and graph will probably change but the high and low boundaries in 2020 should be reasonably accurate. I have purposefully excluded percent tax increase because (1) that metric makes no sense unless its referenced to something, (2) the effects of compounding confuse more than they enlighten, and (3) we wont know the details of high school debt financing until the construction schedule is set and the bonds are sold. What I can tell you is that the board and administration are very cognizant of the burden were putting on property owners and were trying to avoid any large, single-year jumps. I currently project the 2015-2016 year as the worst single year increase because much of the high school funding could be phased in at that time.

Although you didnt mention this point in your letter, lets not forget the remaining elementary projects. Because the district now allocates at least $2 million per year for capital projects other than the high school, I see the remaining elementary school renewals as budget strengths rather than budget threats. Four years ago, there was no capital funding plan for these schools and other smaller capital projects. Now there is, and there is additional debt capacity that becomes available in the late 2020s to fund middle schools or other larger projects without raising property taxes. Again, my projections of high side estimates include tax increases that are consistent with historical trends. You have often raised the concern that this method of estimating doesnt account for the PSERS increase, but on this point we disagree. By managing the pension crisis responsibly, over the time spanning 2011-2012 to 2014-2015 the district will have increased its net PSERS contributions by $3.7 million per year while keeping property tax increases below their historical average. You have called this improbable. Judging by actual performance, the district has proven that its possible. Most people fail to recognize that the school districts payroll today is smaller than it was four years ago, and it is projected to remain so for at least another two years. In the early 2000s the budget grew because the district hired staff with very little concern about pension liabilities. With student enrollment slowly decreasing, less staff are replaced when they retire, which frees up some budget to ensure that the pension liability can be met. In other words, the district is doing what it should: reallocating resources to meet its obligations. At the same time, the Districts student:teacher ratio remains among the top 10% in the state. This is consistent with Dr. ODonnells attritional model. As the student population declines, less staff are needed to maintain educational quality and more budget can be directed to fund pensions and other benefits. To recap, let me say it another way: Using worst case projections, you can expect that property taxes in 2020 will be about 25% higher than they are now, and this community will have a modern high school that will serve students well for most of the century. Or, property taxes will be 15-20% higher and this community will still need to replace an Edsel-era high school that is progressively failing. The choice is yours on May 20. Whether youre party or independent, everyone gets one vote. Unfortunately, if you look at election turnouts in Centre County, most people dont exercise this most basic civic responsibility. The stakes are high; were talking about the educational future of our kids. Don, a hundred years ago, someone thought enough of your generation that they invested in you through your public school. Although the demands on public education systems are very different today, our responsibility to pay it forward hasnt changed. I sincerely hope that youll encourage high turnouts and a positive response for this very necessary project. Thanks again for the opportunity to respond. Sincerely, Jim Pawelczyk

School Property Tax Projections

(updated March 2014) School Property Tax bill = (Mills x Assessed Value) / 1000

Property tax forecasts in mills

High school referendum tax Pension cost estimate 1.86 2.29 2.94 3.61 4.03 4.38 4.61 4.82 All other operating costs low growth 35.87 36.46 36.62 36.63 36.89 37.23 37.71 38.22 historical growth 35.87 36.46 36.62 37.15 37.96 38.87 39.95 41.09 TOTAL high school + pension + operating costs low growth 37.73 38.75 39.56 42.01 43.58 44.23 44.90 45.58 historical growth 37.73 38.75 39.56 42.53 44.64 45.87 47.14 48.45

Year

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020

1.78 2.65 2.62 2.58 2.54

Notes: 1. Mills are referenced to the value of a mill in 2013-2014. However, the value of a mill will be different in 2020. Therefore, these tables are certain to look different in the future as the tax base, and the value of a mill, changes. 2. As the high school cost is spread across the growing tax base, the district projects that assessed value growth will reduce the referendum tax by 1.5% per year. Thats why the mills for the high school (the referendum tax) decrease slightly over time.

Notes:

Forecast for average homeowner

1. This table is based on the TOTAL school property taxes average assessed value in high school + pension + High school Pension Centre County of operating costs Year Referendum cost $71,300, which equals a tax estimate low historical market value of about growth growth $250,000. Use mills and 2012-2013 $133 $2,690 $2,690 your homes assessed 2013-2014 $164 $2,763 $2,763 value to calculate your 2014-2015 $210 $2,821 $2,821 personal tax impact. 2015-2016 $127 $257 $2,995 $3,033 2. The pension estimate is 2016-2017 $189 $287 $3,107 $3,183 2017-2018 $186 $313 $3,154 $3,271 for reference only; in 2018-2019 $184 $329 $3,201 $3,361 reality, not all pension 2019-2020 $181 $344 $3,250 $3,454 costs are paid with property tax revenue. Nevertheless, increases in employer benefit costs will continue to impact the budget for the rest of the decade. 3. The May 20th referendum vote affects only your tax bill for the high school (the second column). In other words, on May 20 an average homeowner is voting only for $188 of the $3461 they might pay in 2020. The remainder of school property taxes are decided by the board within its statutory taxing authority.