What can Pittsburgh Public Schools do to dig out of a $39 million budget hole? | News | Pittsburgh | Pittsburgh City Paper

What can Pittsburgh Public Schools do to dig out of a $39 million budget hole?

What can Pittsburgh Public Schools do to dig out of a $39 million budget hole?
CP photo: Jared Wickerham
Arsenal middle school in Lawrenceville
News of a proposal to close several schools within the Pittsburgh Public School district recently led to some chaos among parents, advocates, and lawmakers. The blowback was so strong that PPS board members voted the next day to shelve the plan for the time being.

But the realities of what brought up the proposed closures remain: PPS is facing a $39.4 million budget deficit. The deficit grew by $4 million from last year, and the district is facing a 21% decline in kindergarten enrollment from last year. To fill the budget gap, the school district proposed a 2.6% property tax increase, but in December, the PPS board voted down the hike by a vote of 3-5 with one abstention. Board members who opposed the hike cited the wariness of raising taxes during an economic downturn, as well as saying that targeted cuts could be made to save money.

But as commotion was stirred again recently thanks to the announcements of potential closures, several concerned Pittsburgh residents and parents started speculating on social media about what could be done to bring in revenue for the school district as a way to help stave off school closures. Many suggested taxing large nonprofits like UPMC and others said securing a payment in lieu of taxes from those nonprofits would bring in money.

There is always the chance to balance the budget by reducing spending through internal cuts, and there are potentially other methods, including the tried-and-true method of raising property taxes and the more combative strategy of ending a tax diversion to the city of Pittsburgh. Below, Pittsburgh City Paper explains each method, how viable it is, and some of their political realities.

Raising property taxes

The simplest way to raise revenue for the school district, and the way that has been used most over the years, is to increase the millage rate on PPS property taxes. PPS district has the same boundaries as the city of Pittsburgh, but also includes Mount Oliver borough. The city of Pittsburgh and PPS are separate taxing bodies, with different rules of governance, and separate elected officials. PPS is governed by nine elected school board members, and run by a superintendent, who is hired, not elected.  Superintendent Anthony Hamlet was hired to a five-year contract starting in July 2016.

Pittsburgh's School District millage rate of 9.95 is one of the lowest in Allegheny County, and far lower than many other school districts in the county, many of which have millage rates above 20. The oft-used justification of this lower millage rate is to balance out the city of Pittsburgh’s and PPS’s higher combined Earned Income Tax. Pittsburgh residents pay 3% in income taxes, while many other Allegheny County residents pay between 1-1.5%.

The millage rate was raised from 9.84 mills to 9.95 mills in 2020, meaning property owners in the city pay $995 for every $100,000 of assessed value of their property. Before 2020, the millage rate hadn’t been raised for several years. In 2013, it jumped from 9.65 to 9.84 mills, but that was after more than 10 years without a millage increase.

PPS board member Pam Harbin voted to increase the millage rate in December 2020 to 10.21 mills, even though the effort was voted down by the full school board. She says there is a limit to how much the board can increase millage rates each year, so the fewer years they raise millage rates, the slower the rates can be raised to address any budget deficits.

“There is a limit on what we can do,” says Harbin. “There is a limit on how much we can raise real estate taxes. We can’t raise it beyond a certain limit. It is definitely hard.”

Board members who voted against an increased millage rate for 2021 said that doing so would be unfair to people financially struggling due to the pandemic. Raising millage rates hits property owners directly, and sometimes landlords transfer those increases in the form of raised rents to tenants.

Ending tax diversion to the city of Pittsburgh

After Pittsburgh City Council introduced a bill to declare a state of emergency within PPS, citing racial inequality and other factors, PPS put out a statement calling for the city “to cease the collection of $20 million per year of Earned Income tax revenue levied by the School District but taken by the City when it was financially distressed.”

In 2005, a couple of years after the city of Pittsburgh entered into Act 47 financial distress designation, a section of the earned income tax that originally was sent to PPS, was instead siphoned off to the city. Instead of 2% of the earned income tax going to the school district, 1.75% went to PPS, and instead of 1% going to the city, 1.25% went to Pittsburgh city coffers. (Interestingly, the city website still mentions the 2-1 percent breakdown, even though a TribLive article from 2019 says the ration has been 1.75-1.25 percent since 2005.)

The city of Pittsburgh left Act 47 designation in 2018, and this month’s PPS statement isn’t the first time PPS has brought up the earned income tax allocation. In 2019, school board members and administrators said they wanted the earned income tax allocation returned to PPS.

In 2019, Pittsburgh Mayor Bill Peduto objected to PPS' characterization and said that money belongs to the city. In that same year, the mayor called for PPS to enter into financial oversight by the state.

Chris Rosselot is a parent with two children in Pittsburgh Public Schools. He also ran for Pittsburgh City Council in 2019 and formerly worked for U.S. Sen. Bob Casey (D-Scranton). He is a bit concerned over the potential battle over the tax diversion and hopes the school district and city can explore some other solutions to avoid an ongoing fight.

“It almost sounds like they are not going to do anything until they give up the $20 million,” says Rosselot. “There are more issues that need to be discussed.”

Taxing UPMC and other large nonprofits

While technically possible, successfully challenging the charitable status of the city’s large nonprofits — UPMC, Allegheny Health Network, University of Pittsburgh, and Carnegie Mellon University — is an incredibly daunting and highly improbable task.

Currently in Pennsylvania, Act 55 of 1997 allows charitable entities like nonprofits to forego paying property taxes to municipalities. So even though health care giants like UPMC own a lot of very valuable land within the PPS district, and UPMC executives rake in million dollar salaries, UPMC is still technically a nonprofit and doesn’t contribute to the PPS property tax base.

There is technically a path for PPS to sue each or one of these large entities, but no local tax-governing body has successfully done so before. Challenges happen via lawsuits, which taxing bodies like PPS or the city of Pittsburgh could take on. Smaller nonprofit entities’ charitable statuses have been successfully challenged in the region and other parts of the state, but those challenges have been to a local YMCA or another small entity. UPMC is one of the largest employers in the state and has considerable legal resources at its disposal.

In 2018, Pennsylvania Attorney General Josh Shapiro challenged the charitable status of UPMC in an effort to get the health care provider to accept non-UPMC patients. UPMC eventually settled the lawsuit, which meant that its charitable status remained. Even the power and influence of Shapiro’s office didn’t technically get a ruling that UPMC is violating Act 55.

Another way to get nonprofits to pay up is for the state legislature to amend, rewrite, or end Act 55. But that is largely out of the control of PPS and would require many Republican lawmakers, many of whom are staunch allies of UPMC, to go after large nonprofits.

Harbin says challenging UPMC and other large nonprofits is a conversation she is willing to have, but she adds it would be a very difficult task for PPS and would likely be exorbitantly expensive to fund the legal challenges.

And even settling with UPMC wouldn’t result in a steady stream of tax revenue to PPS. A settlement or agreement would likely result in a PILOT, aka payment in lieu of taxes.

Payment in Lieu of Taxes from large nonprofits

PILOTS are rare in the Pittsburgh region, but not unheard of. PPS used to have a PILOT program with UPMC when the health care giant provided funds for the Pittsburgh Promise scholarship program, but the funding for that has apparently dried up.

In 2012, UPMC did enter into a PILOT program with South Fayette Township, but that was when the hospital giant wanted to purchase land that was owned by the township. After that agreement, politicians including Allegheny County Executive Rich Fitzgerald and former Pittsburgh Mayor Luke Ravenstahl expressed optimism at the possibility of a PILOT for property UPMC already owned in the city, but nothing materialized.

Harbin is also wary of PILOTS because the nonprofits essentially hold the power on what they want to agree on. She says she would rather see the nonprofits pay taxes.

“I wouldn’t do that,” says Harbin, referring to PILOTS, “it has to be sustainable.”

Payroll tax for the school district

Certain school districts have the ability to create and institute a payroll tax when they enter Act 47 financial distress designation. A payroll tax levies funds from employers who have employees who work within the school district’s boundaries. And even after a school district exits Act 47 designation, the payroll tax stays on the books.

The city of Pittsburgh instituted a payroll tax when it was in Act 47, which also applies to municipalities. This ability was granted to several taxing jurisdictions and school districts when Act 222 of 2004 was passed. That law was explicitly written with Pittsburgh in mind, in order to help the city escape from its dire finances.

But the problem for PPS is the Pittsburgh school district is classified as a First Class A school district, the only one of its kind in Pennsylvania. First Class A school districts are not included in Act 222 of 2004. Every class of school district below First Class A can create a payroll tax, if they enter into state financial oversight.

Harbin says she asked the PPS solicitor about a payroll task, and the solicitor told her the district can’t create one because of the First Class A classification. According to Act 14 of 1949, First Class A school districts are only permitted to collect earned income tax and property taxes; they are not permitted to collect any amusement taxes.

Legislative action in Harrisburg would seem necessary to permit PPS to collect a payroll tax, but the question remains if Republicans would support such a move.

Internal cuts, reorganization, and tax abatement

Probably the least sexy option is to focus less on raising revenue and focus more on cutting costs and other abatements that PPS has and doles out.

Harbin was particularly critical of the tuition payments PPS must make to charter schools, noting the payments are up now to $106 million, but she recognizes that changing that would require legislative action from the state government.

Rosselot is supportive of taxing UPMC and altering the charter school payment provisions but believes there can be some belt tightening to help close the budget gap.

“It’s bad policy that UPMC doesn’t pay taxes, and the charter school stuff needs to be reformed. That stuff is important,” says Rosselot. “But I look at some of this as more of a management problem.”

He notes that the PPS staff and total budget has grown significantly over the years, even as the student population has shrunk. He says those are the realities that should be addressed when balancing a PPS budget. In December 2020, board members Sala Udin and Bill Gallagher suggested cost-saving measures and going through the budget with a “scalpel,” according to WESA. Gallagher said he would want to see moratoriums on travel and out-of-school professional development before supporting a millage rate increase.

But Rosselot also decries the finger pointing going on between the school board and city council. He lauds the PPS effort to boost Community Schools — schools that are walkable for students and also provide community resources for residents — but he thinks that all local officials can work together to create a comprehensive plan that benefits the school district, which in turn would be a boon to the city.

Harbin also believes some teamwork will help save PPS money. She says the usual practice of handing out tax breaks for new development has recently come under criticism among some public officials. The county, the city of Pittsburgh, and the school board all must agree to provide tax breaks to new developments, and for decades, it has been common to provide them to attract development to a city that didn't see a lot since the 1980s. But things are now changing. Some Pittsburgh neighborhoods, like the Strip District, have become hot commodities, and so tax breaks to developers are being questioned as necessary.

“Starting last year, we have been more vocal asking why we are giving away potential tax revenue,” says Harbin. “Three taxing bodies have to agree, and the school board used to be a rubber stamp.”