Schools will need to borrow $300M
With the release of its five-year fiscal plan, which would cover operations through the 2016-2017 school year, the School District of Philadelphia has moved one step closer to obtaining the $300 million necessary to close its budget deficit and ensure operations for this school year and beyond.
The filing of the five-year plan is necessary for the district to receive bond issuance assurance from the state’s Public School Building Authority, which will convene a meeting on the matter later this month.
District Chief Recovery Officer Thomas Knudsen — the author of this final five-year fiscal plan, the recently approved district budget and the five-year reorganization blueprint which was publicized in the spring — said that district hasn’t yet received the funds, but all indications are that it will, as long as the School Reform Commission approves the five-year plan.
“We are confident that we will receive the funds, although there have been no guarantees,” said Knudsen, who noted that he is still putting together all of the required paperwork to complete that part of the transaction. “We need to indicate to the bond holders and demonstrate to them that within the limits we have right now — including the factors that we can control — that we can bring a balance between expenses and revenues.”
The $300 million in debt financing is an unpleasant outcome the district was forced to consider, especially after it received less than the estimated $97 million it was to get from the city in tax receipts from the Actual Value Initiative. The district had factored the full $97 million into its earlier budget forecast.
“In regard to City Council, the difficulty we have there is that we had been anticipating receiving $94 million on an annual basis, and that’s what the mayor had in his budget for us this year,” Knudsen explained. “Of course, we only got $54 million which caused us to rethink our options.”
Obtaining that $300 million will be costly. According to the five-year plan, the district will pay $22 million per year to finance the loan, increasing the district’s debt service by a considerable margin. Knudsen’s plan didn’t spell out how many years it would take for the district to repay the loan.
Although unpalatable, Knudsen said there were simply no other options.
“The last [budget] deficit financing was done in 2001, and generally, deficit financing is not something the financial markets want to support,” Knudsen said. “[Bond holders and investors] are looking for structural balance, where revenues equal expenses.
“Debt financing is something you have to do when the circumstances work against you.”
In the five-year plan, Knudsen outlined the painful austerity measures already undertaken by the district, including closing dozens of low-performing, underutilized or unsafe schools; trimming more than $264 million in various personnel cuts; managing to cut $67 million from the central office’s budget and recouping a further $42 million in deep cuts to school security and police personnel, maintenance staff reductions and the elimination of several support staff positions.
Knudsen’s five-year plan highlighted the recently-completed negotiations with the Service Employee’s International Union local 32BJ — a contract that led to a union giveback of more than $100 million — as a model of how the district can bargain in good faith while fostering a sense of ownership among employees.
That agreement requires SEIU 32BJ members to donate a certain percentage of their wages to the district, with most employees paying in roughly $20 per pay period.
“We recommend asking more of our employees to come to the table and contribute directly to the educational program of the school district, as the members of our largest blue collar union did this summer,” Knudsen wrote in his letter that accompanied the five-year plan, which noted that employee contributions will amount to roughly 10 percent of the district’s budget. “We know this will mean real sacrifices for hard working professionals who are already being asked to do more with less, under difficult conditions.
“We do this because without such assistance, this financial plan cannot succeed, as the bulk of our expenses are in personnel costs.”
An unanticipated hit to the district’s finances came in the form of the hyper-expansion of cyber charter schools, which receive the same per-pupil funding as traditional public schools – with an estimated 38 percent of that money coming from local tax revenues. These cyber-charters also operate without the infrastructure overhead of maintaining several hundred buildings.
“These charters, which are authorized by the Commonwealth, not the SRC, are able to scale up quickly…other districts across the region and country have developed successful models for district-run cyber schools that are much less expensive for districts’ bottom-lines than charter schools,” the five-year report read. “The school district expects to develop this in-house online option for students and anticipates that it will reduce the number of students migrating to cyber charter schools versus the current projections for cyber charter growth, in which cyber charter seats are projected to grow from about 5,900 in fiscal year 2013 to 10,750 in fiscal year 2017.
“In this manner, it is projected that a district-run cyber school would save $14 million over the five-year planning period.”
Although this five-year plan is not a budget, almost all of the recommendations and numbers included therein are nearly identical, but the five-year plan goes several steps further in identifying other revenue streams the district could utilize.
Those streams include the collection of $48 million in delinquent local tax revenues and an additional $150 million, attributable to a liquor-by-the-drink tax and a so-called “unearned income” tax which targets the interest accrued on investments. The plan also calls for the district to recover $28 million from the sale of unused district facilities identified in the Facilities Master Plan.
Knudsen and the SRC believe this level of transparency – releasing to the public the blueprint, budget and this five-year financial plan – coupled with the series of recently-completed community meetings will show the district is sincere in delivering to students the best education possible.
“Everybody in district management understands the difficulties that our financial situation poses. I would say in terms of academic achievement, [Chief Academic Officer] Penny Nixon and [incoming superintendent] Dr. Hite are go to attempt, and I hope succeed in, providing the very best education they can under these limitations,” Knudsen said, “with the understanding that we will be going to all of our service partners in the state and city to seek more revenue.
“We have demonstrated they we are operating lean now, and hope they consider giving us more revenues,” Knudsen continued. “With that, enhancement to the [academic] program would be possible.”
The “food fight” over Mayor Michael Nutter’s Actual Value Initiative intensified Thursday with the mayor and state Sen. Anthony Williams firing back at opponents of the initiative, which appears stuck in City Council.
“Our message is pretty straight forward and pretty simple. At this point, we have a property assessment system that has been broken for … generations,” Nutter said. “Many Philadelphians … because of a flawed system have been paying much more than they should be in taxes. At the same time many individuals have been paying a lot less than they should, essentially being subsidized by the poorest individuals in the city. In the end, all taxpayers are losers.”
AVI would change the way the city assesses real estate, moving from assessments based on a fraction of property value to the full market value.
“No more fractions. No more complications. You should not need a math degree to be able to figure out what your taxes are,” said the mayor.
Williams was a little more outspoken in his defense of the plan, chastising members of the city’s delegation in Harrisburg for breaking ranks in Harrisburg.
“I’ve watched some public officials tear to shreds the validity of AVI, so I found it very important to go public,” he said, accusing opponents of “fear mongering” and adding that the divisions among local lawmakers could ultimately dissuade the state legislature and governor from taking action on several state bills needed to implement AVI.
“Harrisburg is watching us. Those bills were moving through the state legislature quite effectively, the governor was prepared to sign them until Philadelphia decided to have its own food fight,” he said.
Williams declined to call out legislative colleagues for their opposition.
But, two weeks ago a group of state legislators — joined by Councilmen Bill Green and Mark Squilla — announced their opposition to AVI, calling on the administration to delay implementation for another year. At that time, state Sen. Larry Farnese announced that he was introducing legislation in Harrisburg that would give Council the option to wait another year.
Waiting is not an option, Nutter said this week.
“Once the new values are in, we have to use them,” Nutter said, adding that not to was “asking for litigation.”
Critics cite three reasons for their opposition. First is the fact that new assessment figures will not be available until July, after City Council is expected to vote on a budget based on Nutter’s AVI figures. Second, because Nutter’s proposal includes an additional $94 million in revenue for the school district, critics charge the mayor with trying to push through a tax hike by another name. And, finally, many worry that AVI will mean higher taxes for their constituents.
Nutter countered all three arguments at his press conference.
Implementing property tax reform this year is needed, the mayor said, because the system has been “broken” for generations. The additional revenue is not a tax increase, he argued, simply a way to “capture” the increase in property values since the last reassessment in 2004. And, while admitting that taxes will go up for some, they will come down for others.
Ultimately, the fate of AVI lies in the hands of City Council, which has been debating the issue for months. Members are now looking at 14 budget related proposals.
Council leaders have been reluctant to discuss what direction those talks have taken.
“I never say what a majority of members are interested in until they do it,” Council President Darrell Clarke told reporters after this week’s Council session.
He did say that Council seems committed to providing some added funding for the school district, but would not say if it would meet the district’s request for $94 million.
“The biggest question centers on where that money is going and how it’s going to be spent and what levels of accountability can be put into place,” he said.
A proposal by Clarke would provide about $85 million. Several council members have said they would like Council to have more input on how district money is spent.
“Whatever process is established in this particular funding cycle for the school district, we would like to see a little more dialogue.”
Majority Leader Curtis Jones compared Council’s approach to that of a pilot preparing his plane for takeoff. Members are looking at several options and will decide which one to take on after factoring in a variety of conditions.
“We are a plane that has to have several runways — and we’re running out of time to take off,” he said.
Jones would not be drawn into a discussion of which of options might be gaining traction, calling all of the proposals as “alternate Plan A’s.”
“We want to be prepared for any eventuality,” he said.
Council seems prepared to put its muscle where its mouth is, this week approving a resolution urging the School Reform Commission to go back to the negotiating table with SEIU 32BJ in an effort to avoid the layoff of 2,700 union employees in a district effort to balance its budget, which is includes a $218 million deficit.
Much of Council’s negotiations are now going on behind the scenes.
This week members met in small groups — to avoid violating the state’s Sunshine Law — in private meetings to discuss their options.
“Our process, particularly at this point, is a process that requires significant conversations within the body,” Clarke said. “Trying to do that in an extremely public way is probably not conducive to us getting a budget.”
A public hearing has been scheduled for 3 p.m. Tuesday and Council will meet for its regularly scheduled meeting Thursday.
Technically the deadline for budget approval is June 1. But, Council has often recessed, rather than adjourned, its last meeting in May allowing a vote beyond the deadline.
Clarke said Council would have a budget passed by July 1, the start of the city’s fiscal year. He noted that many of the proposals before Council also require some action by the state legislature, which would need to approve, for example, a homestead exemption.
In other news, Council unanimously agreed to change the name of the Criminal Justice Center to the Justice Juanita Kidd Stout Center for Criminal Justice. A chorus of civic leaders urged Council to rename the court building in Stout’s honor. A long serving municipal court judge, she was the nation’s first female Black judge and the state and nation’s first Black Supreme Court Justice.
Finally, Councilman Brian O’Neill introduced a bill that would give grandchildren of firefighters and police officers at 10-point advantage on the exams required to secure departmental jobs. A similar break is already given to children of both.
In approving the School District of Philadelphia fiscal year 2012–2013 budget, the School Reform Commission may have closed a bumpy chapter in its history — and potentially created new dramas as well.
SRC members voted unanimously to approve the budget. The budget details operating revenues of $2.33 billion, operating expenditures of $2.55 billion and the use of $43 million in reserves.
In other words, the adopted school budget for next year confirms Chief Recovery Officer Thomas Knudsen’s findings that the school district will face a budget deficit of $218 million.
The budget also assumes it will receive $94.5 million from the city’s controversial Actual Value Initiative. City Council has held a series of debates in regard to the merits of AVI, and no decision has been made yet on if the district gets those funds.
“The greatest uncertainty is the $94.5 million. We have acknowledged that we have it in the budget at $94.5 million,” Knudsen said in a meeting preceding last Thursday’s public budget announcement. “And we hope that we receive that amount from City Council. So yes, there was a lot of uncertainty, but at this point in time, you put a pen in hand and stake in ground and say these are the conditions we know about, these are the factors we know about … so what we have had, I think, is a very complete, concise presentation of a complicated enterprise.”
According to the budget, school district revenues represent 81 percent of the budgeted revenues for the next fiscal year, and that the district actually expects revenue to increase by 3.8 percent; but AVI looms large over the entire budget, with numerous references made to the new tax structure.
“The most important single change in revenues in the $94.5 million increase in real estate tax revenues proposed by Mayor Nutter as a result of capturing the growth in property values through the Actual Value Initiative,” read the budgetary explanation. “Pursuant to Mayor Nutter’s proposed five-year financial plan, an additional $94.5 million in value will be captured based on new, more accurate assessments.”
School Reform Commission Chairman Pedro Ramos said that, politically, it would be a “catastrophe” if City Council couldn’t make the AVI funds a reality, but believes Council will do the right thing when it comes time.
“I believe ultimately, City Council will recognize, and I believe already recognizes, how critical it is for the school district to get the $94 million,” Ramos said, noting that SRC officials have taken transparency to a new level by posting each individual school’s budget online. “What the consequences are of the $94 million; our intention isn’t to make any threats or projections or get ahead of it, because we think each of these school budgets is a compelling case in itself that will resonate with council members, and I believe they will ultimately deliver on the mayor’s proposal.”
Ramos and Knudsen both said the district can finance the expected $218 million gap, but wouldn’t be able to do so without the AVI funds. The budget also highlights the shrink in grants and funding the city — and thus, the school district — has endured over the past several years, including lost revenue from a recent State Tax Equalization Board ruling and the slashing of public education funding in Governor Tom Corbett’s proposed budget.
“At this point, we have shown what we have in terms of revenues, and that means we will finance that amount of money,” Knudsen said, referring to the district’s plans on filling next year’s budget gap. “We will sell bonds to do that; this is not a course of action any one of us wants to take, but in this circumstance, we have little choice.
“We are effectively maxing out our credit cards,” Knudsen continued. “We have the capacity to raise around that amount of money, but we don’t have the capacity to go much beyond that, I believe.”
According the budget, the school district is also bracing for a huge reduction in Title I revenues. Title I is a federal grant given to school districts throughout the country, and although the amount Philadelphia’s school district will receive hasn’t been determined, SRC officials expect it to be drastically lower than what the district is accustomed to receiving.
And since the district has to decrease Title I spending (due to the anticipated funding reduction), the budget claims that certain areas will be targeted, including kindergarten and Head Start programs without Title I grants, the district will also be forced to eliminate supplementary counselors and eliminate almost the entire lineup for summer programs. As is, the district only funds summertime credit recovery classes for seniors only.
The district’s budget also dispelled long-held public notions that the SRC is attempting to isolate charter schools and decrease the funding they receive. While the district’s five-year reorganization plan calls for an overall reduction of $149 million to charter school funding, its budget for 2012–2013 calls for a $44.2 million increase in charter school funding. However, the school district, in utilizing a formula from the state, will actually decrease the per-pupil payments for children in both regular and special education classes.
“The charter school per student amount is calculated using the previous year’s budget data,” read the budgetary explanation. “Thus, because the district-operated schools made severe cuts in fiscal year 2011–2012, in fiscal year 2012–2013, charter schools’ per student payments will be significantly lower.”
The school district’s budget also examined and expanded on the rising cost of labor and the attached benefits. According to the district, while the overall number of school district employees has actually decreased over the past three years, benefit and pension pay-ins have steadily risen.
The contracts for the five unions that represent school district employees — including the Philadelphia Federation of Teachers, which is the largest with more than 10,000 members — is up in August of next year, and while the SRC plans on an open and honest negotiation with the PFT, it is also cognizant of the current bargaining environment.
“You can’t say you’re just about education or just about the kids, when adults refuse to do more or give something up,” Ramos said, noting that this approved budget contains no concessions for unions. “We all share the circumstances in which the district finds itself. At some point, labor will realize there is no silver bullet nor magic out there, and that we both have to work together to increase revenue over the long term, and provide more stable and predictable funding, like AVI, and manage expenses to what we can afford.
“Right now, we’re spending money we don’t have.”
Councilman Mark Squilla has emerged as one of the more influential of the six new members of City Council — a critical voice during the recent budget battle, and one that helped convince Council to delay the Actual Value Initiative — a controversial property tax reform measure.
“It was a good learning experience,” said the freshman councilman, who represents the city’s 1st Councilmanic District. “We learned how to compromise and come up with different solutions from maybe something the administration thought would work.”
Squilla is a member of what council members jokingly call the “serious six.” The six members who took their seats in January and were immediately swept up in an epic budget battle, the perfect storm of tax reform, education crisis and politics.
Looking back — nearly everyone agrees that the new members rose to the task.
“They’ve earned their title,” said Majority Leader Curtis Jones, at the end of Council’s spring session. “They were here to stand up for their core convictions.”
According to Squilla, the group has been energized by a common desire to change the status quo.
“Everybody is really serious about making a difference,” he said. “That energizes some of the other council members that have been there for a long time. We have the willingness to make tough decisions.”
None were as visible at Squilla during the debate, though he downplays his role.
“I didn’t think we were getting all the information that was necessary,” he said. “Once some of the other members started seeing that, they also started saying ‘wait a second.’”
His colleague Councilman David Oh put it this way: “What he did, in an effort, I think, to get more information faster was say, ‘hey look if you don’t get it to us, this is what is going to happen — we’re going to delay it.’”
While Squilla stood squarely in opposition to the mayor’s proposal, and frequently said he thought the move to AVI was premature, comparing it to diving into a pool when you couldn’t see the bottom. His criticism of the administration, Mayor Michael Nutter, in particular was muted — unlike that of some other council members.
“I know that people tried to get a fight between Council and the administration, but even though we disagreed on a lot of things [Council] was still able to work with the administration,” Squilla said, crediting Council President Darrell Clarke with his deft handling of the tensions.
“We’ve always been able to be straightforward with each other,” Nutter said. “He seems to be a guy that wants to get things done. He’s not looking to do something else or anything. He seems like he has principles and things that he cares about.”
Ultimately, Squilla was so persuasive that Council voted to delay AVI for another year.
His philosophy, Squilla said, is one of making things happen.
“My philosophy as a whole is to get things done. I hate when people tell me things can’t be done,” he said. The goal of Council should be ‘let’s get it done.’”
Surprisingly that even applies to AVI — provided it’s done right.
“Let’s get it done,” he said, his voice rising. “We can help the mayor do something that nobody else was able to do, but it speaks well for Council. Let’s get it done. It’s a hard thing to do. Let’s not pass it off because it’s going to make some people mad.”
Squilla, who replaced long-serving Councilman Frank DiCicco, has no prior experience in holding elected office but was, since 2008, president of the Whitman Council, and boasts of two decades of community service on his résumé. When DiCicco announced that he would not be seeking re-election he endorsed Squilla. He also collected Nutter’s endorsement during his bid for Council.
Though AVI is likely to dominate Council’s agenda well into 2013, Squilla hopes to get some things done in his district and to tackle other issues faced by the city — jobs and crime. He doesn’t have all the answers, but is open to suggestions.
“Let’s try some new things, even if they don’t work, we’re trying,” he said.
Squilla also hopes that Council exerts a greater influence over the school district by keeping a firm grip on the purse strings.
“Without education, our city is going to fail. We have to make sure that they’re accountable and the only way we can do that is withhold money,” he said. “We have no other say.”
A graduate of St John Neumann High School and La Salle University, Squilla has been married for 22 years to Brigid, a nurse anesthetist. The councilman’s three daughters and son currently attend high school and college in the Philadelphia area.
He’s optimistic about the city’s future.
“I think we have the potential to really move forward,” he said. “The changes we need to make over the next three or four years are very, very important because if we cannot make positive changes — improve our schools, decrease crime — the people who have given the City of Philadelphia a chance will move. This is our time to make it work.”
Though City Council is recessed for the summer, Councilwoman Cindy Bass was hard at work this week, squeezing meetings with reporters in between sit-downs with Parks Commissioner Susan Slawson and a line of others gathered at the door of her fifth floor office.
“We have a lot to do,” she said. “But, I’m excited about it. I just think that there is a lot more that our city could be.”
Bass replaced former 8th District Councilwoman Donna Reed Miller after Miller’s retirement in January. She was one of six freshmen who have helped radically remake a body that was notoriously similar year after year. Bass is only woman in the “serious six,” as the group of six freshmen has been nicknamed by Majority Leader Curtis Jones. The nickname started as kind of joke but after the spring session — marked by strenuous budget talks — it’s not a joke anymore, he said.
“They’ve earned their title,” Jones said. “They were here to stand up for their core convictions.”
There is a definite bond among the freshman, and a feeling that change is needed.
“The six new freshman have added some energy and life into [council],” Bass said. “We do lunch on a regular basis. We do operate closely together, and I think that goes a long way in getting things done.”
All six were baptized by fire during this year’s budget talks, which was dominated by debate over the city’s eventual move to AVI — Mayor Michael Nutter’s Actual Value Initiative — that will base property taxes on market value rather than the traditional fractional value.
Bass supports the move to AVI.
“It’s something that’s time has come,” she said. “For too long in Philadelphia … who you knew downtown determined whether or not you got a favorable tax rate. It’s been unfair for a long time.”
Debate over the issue splintered Council for months, as members worked to come up with an approach that could garner the nine votes needed to move legislation. Ultimately, AVI was delayed by Council because members were worried that the administration could not provide the data they needed to make a prudent decision.
Council President Darrell Clarke noted at Council’s last session that it was the most difficult budget season he’d seen in his 12 years on Council and quipped that after six months in the trenches, new members could no longer call themselves freshmen.
“You’ll learn that after your first six months you’re no longer a freshman,” he said, going on to praise the group for their contribution to Council’s work, and adding that Council has a whole deserved to be praised. “I just want to say thank you. You guys were awesome.”
Council’s delay of AVI means the issue is not going away any time soon.
But, with a bit of room to breathe, Bass hopes to begin moving forward with plans for her district. Her staff is putting together a report on the district that Bass hopes to use to guide her strategy as she moves forward.
“Our strategy so far has just been to stop the bleeding,” she said. “We do need to have a more strategic approach — so we’re sort of taking a step back now and thinking about things strategically.”
One of her first priorities is to change a perception that shrouded the 8th District under Miller — that its Council representative was inaccessible.
It was a charge that prompted Bass to start a weekly “Coffee with the Councilwoman” meeting that allows her constituents to meet her face to face.
“I hear about everything from drug sales in the neighborhood, a lot of people needing work, and then there are the bigger issues, policy issues from downtown,” she said.
Bass hoped to open a district office — something critics have pointed out she said she’d do but hasn’t — but said her office doesn’t have the money at the moment.
“We don’t have the budget for one and won’t for some time,” she said.
Bass also plans to work on some of the issues she campaigned on — improving business corridors and putting together an educational task force, working to cut crime and bringing jobs to her district.
“There is no shortage of things to be done,” she said.
With the possibility of a work stoppage that had the potential to disrupt school operations in the fall – and perhaps render thousands of workers unemployed in the process – the School District of Philadelphia and local 32BJ of the Service Employees International Union reached a contract agreement that extends through August 2016.
In the end, district officials and union leadership recognized they need each other, especially in the face of the School Reform Commission’s attempts to close a budget gap for the coming school year that is approaching $300 million — and its requests for givebacks from its second-largest union.
The union represents 2,700 non-teaching district employees.
“This was a difficult process, but we came together because we are committed to our kids and our schools. The members of 32BJ SEIU recognize the dire crisis of public education, locally and nationally, and are stepping up to the plate to make real, difficult contributions for the good of Philadelphia’s public school students,” said SRC Chairman Pedro Ramos. “We appreciate their partnership, and especially look forward to working with them to find new, more effective ways to improve the climate in our schools with new cleaning standards and practices.”
The district, through austerity measures imposed by Chief Reform Officer Thomas Knudsen’s five-year Blueprint for Transforming Philadelphia’s Public Schools, had intended to save $156 through cuts to its personnel budget, which effectively restructured both the benefits program and wage costs.
The union seems to have acquiesced to the district’s demands, as this new contract will include more than $100 million in contributions going from the union to the district. The union has agreed to a number of concessions, including member pay-ins to the district ranging from $5 to $45, depending on each member’s income. According to the union, most of its members earn less than $40,000 annually.
The most significant concession made by the union could be its decision to forego planned wage increases and raises, while freezing all new salaries during the life of the contract. Further, the contract doesn’t provide for layoffs as the district looks to further streamline operations and shutter several obsolete, dangerous or failing schools.
There is also an infrastructure-related component included in the new contract, as it calls for the district to implement national standards of school cleanliness while giving principals more authority to partner with building engineers in regard to the upkeep and maintenance of their schools.
“It was a difficult process, but we are committed to work together over the next four years to support the fight for public education and to ensure the safety of our children,” said George Ricchezza, District 1201 Leader for 32BJ SEIU. “We are proud to be a part of the system, and we want to work with the district to try to close the budget shortfall.
“I am pleased to say that thousands of hard-working men and women who provide Philadelphia school children with a safe, clean, learning environment will still have a paycheck to help them pay the bills and support their families,” Ricchezza continued. “These are very real sacrifices for our children and schools — most blue collar school workers live in communities already reeling from high unemployment. Their salaries alone contribute almost 100 million per year to Philadelphia’s economy.”
Philadelphia Mayor Michael Nutter, who has both fought for funding through the establishment of the Actual Value Initiative and for the district to implement stiff measures to get a handle on its budget, is pleased by the consummation.
“I am pleased that the union reached an agreement with the School District. I commend the members of SEIU Local 32BJ for placing first the interests of students. By making necessary changes that bring us closer to fiscal stability at the School District, the membership has done its part in working toward the implementation of a very difficult shared sacrifice plan,” Nutter said in a statement released by his office moments after the deal was announced. “But much more work needs to be done by all of the education stakeholders, if the School Reform Commission is to move toward fiscal stability and its plans to improve public education for all Philadelphia children.”
A new report highlights the difficulties faced by public officials worried about the impact of property tax reform on gentrifying neighborhoods, which are likely to bear the brunt of the city’s planned Actual Value Initiative.
“Gentrification is a big concern in a lot of neighborhoods,” said Emily Dowdall, one of the report’s authors. The report noted that “some of the most dramatic tax increases … are likely to come in neighborhoods where wealthier residents have been moving into new or rehabilitated properties.”
In those neighborhoods, property values have been pushed up by rising prices — which will probably mean higher taxes for long-time residents.
Other cities, most notably Chicago, have avoided the same problem with tax exemptions or caps for long-time residents. In Chicago legislators created an exemption for long-time homeowners — those who owned their property for more than 10 years — with an income of less than $75,000.
But, according to Dowdall, Pennsylvania law prohibits the same sort of thing here because it does not allow local lawmakers to create an exemption tied to income. The report notes that the state legislature has made an exception to the state law in Allegheny County, so there is a precedent for a similar exemption in Philadelphia.
Other cities — like Baltimore, Md., and Washington, D.C., — have implemented what are called circuit breakers, programs that trigger certain tax breaks below an income threshold. Philadelphia already has a program for low-income seniors, which freezes their tax bills. Expanding those kinds of program in Philadelphia would be difficult until state law is changed.
One of the most common ways other cities have dealt with reform is to enact a homestead exemption.
Plans in Philadelphia already include a $30,000 exemption that would allow property owners to subtract $30,000 from the value of their home for tax purposes.
The report, released Wednesday by the Pew Charitable Trust’s Philadelphia Research Initiative, reviewed the history of the Actual Value Initiative in Philadelphia, the city’s difficulty in reform and how other cities have handled similar reform measures.
It did not include predictions about the overall impact on property tax bills.
“The bill will depend on the new rates,” Dowdall said. “And city council will have to set a new rate. The rate will be affected by the total amount of the budget, and any relief programs that council enacts.”
That uncertainty has fueled opposition to reform.
Administration officials declined to estimate how overall property taxes would be affected when Mayor Michael Nutter unveiled the plan in March. They would say only that taxes for some would go up and for some would go down. That uncertainty remains. It is part of the reason the shift to AVI has faced such fierce opposition in city council.
However, council has promised to implement AVI in time for the next budget.
Property taxes in Philadelphia are lower than property taxes in other cities, with an average per capita of $726 a year, compared to $970 in Los Angeles, Calif., $1,181 for Chicago, $1,191 for Pittsburgh and $1,631 for Baltimore.
Of those cities, Philadelphia has the highest rate of homeowners –at 54 percent.
By way of comparison, only 34 percent of Angelinos own their own homes, 44 percent in Chicago, 48 percent in Baltimore and 49 percent in Pittsburgh.
According to the report, property taxes generate about 14 percent of the city’s revenue compared to the wage and net profits tax, which generates about 42 percent of city revenue. Of that total, 56 percent of property tax revenue comes from residential property.
The Actual Value Initiative – the new method the city is using to calculate your property taxes – is here to stay, according to Mayor Michael Nutter.
Unsaid by the mayor, though, is how the new valuation system will affect the majority of Philadelphia homeowners. Until this week, when the numbers were finally released, we were told that some property owners would see their taxes go up, but most would stay about the same, and some might even see a reduction in their tax burden.
OK, that part is true. If you own one of the giant office buildings in Center City, your taxes are likely to go down. If you own a small business in a burgeoning community, or worse, you are a longtime homeowner in one of the city’s quickly gentrifying areas, get ready for the pain.
If you’re one of the homeowners who already got their adjusted property tax bill in the mail this week, I’m not telling you anything you don’t already know. In fact, you’re probably crying your eyes out as you read this, or drinking with both hands.
Some folks will see their taxes go up 300, 500, even 1000 percent. I’m not kidding — one thousand percent.
Look at your property tax bill from last year. Now multiply that by 500 or 1000 percent. Imagine that little old lady in your neighborhood who has owned her home for 30 or 40 years, raised her children there, and now lives alone on a fixed income. What happens when her tax bill goes up by more money than she’s ever seen in her life?
How about that young couple on your block just starting out, trying to make it on substandard wages, who had just enough money to afford their first home? Imagine their horror when they open that envelope. Heck, you don’t have to imagine their horror. Imagine your own.
While AVI is not intended to move good people out of their homes, that is surely the effect a massive tax hike will have. And while gentrification is a touchy, emotional subject; everyone wants to live in a nice neighborhood that’s on the rise, not one on the way down. Those new $500,000 homes next door to a row of $50,000 homes are attractive, and moneyed neighbors bring new business and new life into old areas. Through no fault of their own, they also increase the chances that the rising property values will force their neighbors to seek shelter elsewhere, perhaps in another city.
A similar thing happened a few years ago in San Francisco. Many areas of the city, previously neglected, became hip, hot and happening. People began moving in, fixing up old houses and building new ones. Property values skyrocketed. Sounds great, right?
Except that poor people, people of color, seniors, and other residents on fixed incomes found themselves living in homes they could no longer afford. The mortgage stayed the same, but their property taxes shot through the roof. Slowly, gradually they all began to move out of San Francisco and across the Bay Bridge to Oakland, Richmond, and other less expensive areas. As they moved out, eager buyers with disposable income snapped up the homes. Now, the city by the bay is the most expensive place to live in the United States.
I have a good friend who runs a nonprofit organization in San Francisco who cynically calls the phenomenon “the city’s Negro Removal Program.” That may be a bit of hyperbole, but it’s also not that far from the truth. Census figures show far fewer people of color, and low income folks living in San Francisco now than ten years ago, while Oakland’s population rose exponentially.
Don’t get me wrong. This is not an indictment of the folks who see opportunity in certain neighborhoods, and take advantage of the chance to buy low and sell high. That’s the American way. They don’t set property tax rates, and they don’t collect those taxes — they pay them.
But for those who watch helplessly as they are literally priced out of house and home, not blaming the new neighbors is small consolation.
You have one chance here, fellow Philadelphians — and probably only one. There is something you can do.
Scream bloody murder.
Call your city council representative, call the mayor, call your elected representatives and tell them to write effective legislation to ease the burden on those who are facing the fight of their lives. Get together with your neighbors, pass out flyers, take action.
The house you save may be your own.
Daryl Gale is the city editor of the Philadelphia Tribune.
The $94 million lifesaver the School District of Philadelphia expected from the city through the controversial Actual Valuation Initiative rapidly deteriorated into a $40 million kick-in, as City Council members decided last week, via voice vote, to delay AVI until next year, at the earliest.
Now, the $54-million-question becomes, where will the district find the money to cover what it won’t receive from the city?
“The bottom line is, the district needs $94 million,” said School District of Philadelphia Spokesman Fernando Gallard. “That is a figure that will help us maintain budgets in our schools as they are now, which are at bare-bone budgets.”
Thomas Knudsen, the district’s Chief Recovery Officer and author of the district’s massive, five-year reorganization blueprint, previously intimated that if the district didn’t get the $94 million in AVI, then its budget will reflect that. Likewise, Knudsen and SRC officials repeatedly claimed that there simply isn’t anything left to cut, and operations district-wide are running bare-bone staffs.
In other words, the budget for the 2012/2013 school year reflected a $218 million deficit, inclusive of the $94 million from AVI; now, that deficit will at least be in the $268 million range. Knudsen previously hinted at catastrophic ramifications for the school district if it did not receive the full $94 million.
City Councilwoman Blondell Reynolds Brown — a former teacher and vice-president of Council’s education committee — wished more could have been done, but ultimately goes with the decision made by her peers.
“Throughout this process, and really since I have started in City Council, I have fought for increased funding for our schools. I would like to see more going to our students through AVI but ultimately it is a collective decision, and collectively we arrived at a lower number,” Brown said. “I understand the hesitancy to increase funding even further locally because we are seeing little to nothing from the State Capitol recently. Honestly, that is where we need to see the investment coming from, but we have learned regretfully as a legislative body that we cannot hold our breath for the Governor in Harrisburg."
City Councilwoman Jannie Blackwell – who chairs Council’s education committee and, like Brown, is herself a former public school teacher — was steadfast, not only about Council’s recent AVI decision by what she believes is the district’s appalling mismanagement; that way Blackwell sees it, it’s unconscionable for the district to repeatedly ask for money, only to repeatedly blow it.
“Even though I’m the chair of the education committee, I have a real problem with raising taxes without any accountability. School district officials haven’t told us how they will keep this money safe nor told us how it will affect learning,” Blackwell said. “I don’t like that only the seniors have summer school and I don’t like that they are closing all of these schools.
“They ask for all this money, but are laying off staff,” Blackwell continued. “So I’m not committed to vote for any of these taxes.”
Everyone from nurses to school security and non-teaching assistants to janitors were laid off by the district as it imposed severe austerity measures to close the multi-million budget gap; Blackwell said that the district’s browbeating of the Philadelphia Federation of Teachers only exemplifies its mismanagement style.
“Everyone says 'just do it,' and it sounds good, but it’s more important to do the right thing,” Blackwell said, noting that it’s still possible these tax measures will fail when the recall vote is held later this week. “My first obligation is to the people who elect me, and the people who elect me tell me they can’t afford it.
“Then the SRC said they wanted the PFT to give back $130 million,” Blackwell continued. “So they want to control collective bargaining as well. The union is the union, and the SRC has to deal with the people they hired.”
Blackwell confirmed the school district will receive about $40 million — $20 million from a new real estate tax and a $20 through a new Usage and Occupy business tax.
Although it appears Council favored those measures last week, Blackwell said the final vote on that is to come this week, and Blackwell still has misgivings about the new real estate tax, which she says many of her constituents simply cannot afford.
“I still have a problem with the majority of taxes in Mantua going up,” Blackwell said of the rising West Philadelphia neighborhood that includes a broad mix of university dwellings and low and mixed-income residents. “I’m not prepared to tell people who can’t afford it [to pay more taxes] when we don’t have assurances things will get better.
“It’s a real mess with no clarity, and I think people have a right to know how their hard-earned dollars are being spent.”
Blackwell also voiced outrage that the tax would have an adverse effect on the Mantua community, where a 2 percent real estate tax hike would add about a $1,000 in new taxes per household.
“It’s nice to go along with people in charge who say and act like [the new tax] is what we need, but if you’ve been around enough and are professional enough, you ask how [the SRC] is going to use the money. And if I can’t get hard and fast answers, I will not vote to raise any taxes,” Blackwell said. “I owe the electorate and the people that elected me that. And how can they pick Mantua, where we fought gentrification all of our lives? And now they want to raise taxes by at least $1,000 now, all of a sudden, under my watch? They can do it, but not with my vote.”
Gallard said the SRC remains hopeful that Council ultimately decides to bail out the district.
“We’ve mentioned before that we’ve built a [financial] firewall around our schools, and that the goal was not to go back to the schools and ask them to make further difficult decisions in their budget,” Gallard said. “We don’t want to go back. We’re hoping that in the next few days, City Council will provide us with the $94 million that we need, and we’re working with the mayor and hoping for the best at this point.
“They still have to do a final vote on this, so the time between when it was voted out of committee and the time they vote [as a body], there will be better news for students.”
Public testimony continued Thursday in City Council over Mayor Michael Nutter’s proposed actual value initiative, or AVI, a plan to radically overhaul property tax values in Philadelphia.
None of those who spoke during the hearing expressed total opposition to the plan; in fact they acknowledged that the current property tax assessment system is unbalanced and extremely flawed. The greatest concern was the fear that Council could vote on the issue before all of the property reassessments are completed — which won’t be until 2013.
“We’re not against AVI,” said James Foster, publisher of the Germantown Chronicle. “But we are concerned about how its passage will impact the economy of the city. I call this an awakening to the reality of neglect in the city. We have one of the best transit systems in the country and I would ask that Council members take a ride on a train, get a window seat going just outside the city and a window seat going back in. All of these trains go right through the hearts of your districts. You will see what’s left of the economic base that made Philadelphia great. Dilapidated buildings, abandoned houses, impromptu junkyards, and of course, empty blocks where buildings once stood. What do all of these properties have in common? They are paying no real estate taxes. They are paying no business taxes and are employing no residents of Philadelphia. Bad decisions drove people out before — and if this passes you will once again see another several hundred thousand leave in short order.”
Foster also said that Council and the Nutter administration should put more emphasis on collections of tax delinquent properties.
Last week, City Council approved to the new property tax system, but the final vote is pending. The proposal, which if passed along with the Use and Occupancy tax, would bring more than $85 million more for the financially limping school district. But public support for the new measures is shaky and residents are concerned that council is being pushed to pass the bills before all of the property assessments are in. The vocal residents who testified on Thursday, along with some members of Council are asking for a one-year delay in AVI, a proposal offered by City Councilman Mark Squilla.
“Our primary concern is the long term impact that raising the tax bills will have,” said Jeff Carpineta, president of the East Kensington Neighbors Association. “Some residents could find their tax bills going up from $800 dollars to $2,500 or $3,500 dollars. These residents could wind up making late payments on mortgages or in some cases even face foreclosures, decreasing the values of the communities and dumping more properties on the market. We’ll see more residents dislocated. If we don’t have a year to work this out, it could be a disaster.”
Residents stated their agreement that the current tax assessment system needs to be fixed. Mayor Nutter wants to fix Philadelphia’s broken property-tax system by reassessing all homes and businesses, and in the process, raise millions for the school district. Revamping the property-tax system will give city residents the most accurate assessments in years.
AVI would change the way the city assesses real estate, moving from assessments based on a fraction of property value to the full market value.
“No more fractions. No more complications. You should not need a math degree to be able to figure out what your taxes are,” said the mayor in a previous interview. “Once the new values are in, we have to use them.”
Councilmen Bill Green and Mark Squilla have announced their opposition to the proposal, calling on the administration to delay implementation for another year. And state Sen. Larry Farnese has also come on board, saying he was introducing legislation in Harrisburg that would give Council that option. Opponents say they’re being asked to vote on something before all of the information is available and assessment figures will not be available until July.
Over and over during Thursday’s hearing, residents and business people alike implored Council to delay the process for one year.
“Really, I’m very pessimistic about Philadelphia’s prospects for the future,” said real estate developer Richard Snowden. “The notion that this Council is even considering a property tax increase, coming on the heels of other recent large tax increases and a jump in virtually every fee the city imposes on businesses indicates a blatant disregard for the people of this city. Due to the unreasonable scale and lack of phasing of this policy I have alerted our employees, tenants and members for 2013 includes enormous rent increases which many simply cannot afford to pay. We’ll see layoffs and curtailments in restoration and rehabilitation of buildings — all so the city can get its thirty pieces of silver. Many small Mom and Pop businesses will simply close their doors.”