Copyright© Don E. Gordon -- Reprint permitted for nonprofit use when source is cited.

Citizen Comment for the State College Area School District High School Act 34 of 1973, the Taj Mahal Act, Public Hearing

Don E. Gordon State College, PA 16803

June 17, 2006

SUMMARY

AddendumJanuary 15, 2013

Lest we forget, of all the school districts and municipalities in Pennsylvania and probably the entire nation, only the SCASD voted to extend a SWAP with no debt issued or even an approved plan for new debt beyond the cancelled high school project. As the Superintendent commented, the district got nothing for the $9 million.

The board clearly voted to extend the SWAP to circumvent Act 1 and the need for a public referendum to approve future district spending of that magnitude. The 2007 school board changed the SWAP from a hedge to speculation. The Wall Street Journal and other financial media called the incompetence exactly what it was. The nitwittery, Director Hutchinson's apologia aside, was abetted by a lack of transparency during most of the high school project.

Hopefully we learned this -- when a public officer does not know what he is doing then do nothing and don't hire consultants who compound your ignorance.

Hopefully we also learned to elect school board directors who actually understand fiscal responsibility and how to implement it rather than namby-pamby advocates.

AddendumNovember 3, 2012

The project was cancelled in 2007 after going over budget by 28 percent but it also left the district with a potential $10 to $15 million SWAP default payment for debt never incurred -- a first for Pennsylvania. That issue is being settled in court as of November, 2012. (Pennsylvania law prohibits bonds for debt not yet incurred and arguably Royal Canadian Bank and its consultants should have known that but so should the school board and its school financing consultants. It’s a case of who pays – Dumb or Dummer?) The same school board then attempted to use the SWAP funds for other projects without a required referendum.1 Six years later this nitwittery continues to plague the school district.

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Original ArticleJune 17, 2006

During the past year (2006), I listened to many sides of the debate about the State College High School renovation project and read extensively the data provided by advocates for the $102 million renovation and also provided for other solutions by State High Vision. Missing is the most compelling argument for the most common sense and reasonable recommendation made by the paid consultant having no financial interest in the project – the $50 million solution to fulfill needs rather than wants. I believe it is in the best public interest for the school board to start the process at that recommendation and explain in plain English why it is not acceptable.

The State College Area Board of School Directors (SCABSD) cannot or will not grasp the fundamental and wide spread citizen complaint described throughout the public media about this high school construction project. First, the renovation will be one of the most expensive comparable renovations in Pennsylvania. Second, the state will reimburse proportionately less (7.65 percent) of the cost than any comparable renovation, less (percent) than ever reimbursed to the SCASD. Third, residents of the district pay 83 percent of the school budget from local taxes, among the highest allocations of any district in Pennsylvania. It’s a double whammy. Fourth, the board cannot or will not demonstrate with facts and figures how the added $102 million cost will result in the lowest forecast five year average tax increase in district history. It doesn’t make sense. Fifth, What the board does not seem to understand is that while our community may have exceptional wealth by state comparison, not all in the community share equally in that wealth. Lastly, the school board has prevented frank and open discussion and manipulated public participation at every turn.

The SCABSD refuses to conduct a referendum permitted by Act 34 to determine public preference deeming that the public is not capable of understanding the issues or attendant facts. The board concludes that a public educated in the SCASD’s world class school system lacks critical thinking and decision skills required to participate in referendum, a basic tool of democracy.

DETAILS

The State College Area Board of School Directors (SCABSD) is engaged in an extravagant renovation of the district’s high school in a manner demonstrably contrary to public preference. The $102 million cost is insensitive to those citizens of moderate, fixed, or subsistence income. The response to citizen request for reconsideration is often interpreted as arrogant and noncompliant and completely uncharacteristic of the tolerance practiced by local township government. The high school issue is an exceptional candidate for referendum allowed by Act 34, but the board refuses to conduct a referendum to determine public preference. Instead the board responded

during a school board meeting on May 8th (rephrasing from intent to interpretation) that

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even the most educated person would have difficulty understanding SCABSD decisions. The required Act 34 hearing is characterized by constantly changing dates, locations, speaking lists, and other disruptions intended to discourage participation.1

The June 5th district budget hearing including discussion of funding for the high school was a sham. Upon completion of the comprehensive budget presentation by the district’s business manager, the projection screen was raised into the ceiling, the projector put away, and the manager dismissed from answering questions. Budget questions from the public, invariably complex, were limited to three minutes. The entire public hearing for a $100 million budget was concluded in a record setting one hour – only 30 minutes for questions. When a citizen asked a legitimate and critical question about the presentation – how can the board project the lowest five year average tax increase in its history while adding $102 million debt – no screen, no projector, no slide, no answer.2 Rather than have the district’s expert answer the question, board members one after the other parroted we are confident, but presented no data.

The school district explanation on April 9, 2006 that the $102 million dollar high school renovation would cost 4 mills or for the average homeowner ($67,845 assessed value) $274 per year for 20 years was accurate and straightforward. Significantly lowering that

number in the May 24th SCASD’s local newspaper advertisement and during subsequent school board meetings to only $4.25 in 2007-08 and increasing to $141 per year after 2012 was, if not deceptive, certainly unnecessarily confusing. The board assigned 1.5 mills to one budget category and 2.5 mills to another in an attempt to wash 1.5 mills from cost. The total is still 4 mills. At $102 million, after funds are completely dispersed, the school will cost 4 mills and the total annual cost remains $274 for the average homeowner until the debt is paid. The State Department of Education (PDE) may reimburse the district about $8 million, reducing the cost 8 percent, according to the board from $274 to $242, but that will not be known until after the construction plan is approved by the PDE and well after the Act 34 Hearing.3 (At $8 million the tax is actually reduced to $252 not $242.)4 It is irresponsible to tell taxpayers that the PDE will reimburse $8,000,000 when previous and recent reimbursement estimates for other SCASD schools (Easterly, Gray's Woods, and Park Forest) have been 150 percent wrong.5

The board cavalierly explains it is only $141 or $274. “That’s not much.” Look at it this way: $274 is 1.5 weeks net pay for many $8.00 an hour wage scale retail workers struggling to find a 30 hour work week. Many struggling single parents, hard working families with multiple jobs, and retirees on fixed income live in those “average” houses. For the family earning an average annual wage of about $43,000 and living in a home assessed at $144,000, 4 mills is a $576 tax increase or one week’s net pay.6

And that’s just the property tax to renovate the high school. Both families also pay a 1 percent school earned income tax. Does anyone on the board understand the term, “many are struggling?” The school board raised taxes 5.6 percent in 2005, well beyond need, in order to circumvent reasonable budget constraints anticipated from referendum provisions included in pending state tax reform laws like Act 72. That was made clear during recent budget hearings.7 Then the board had the audacity to tell the public that the tax increase

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is “only” 3.8 percent this year (2006). Look at this way, the two year tax increase was 9.4 percent.

Despite 4 new mills to be added to regular budget expenditures, and in addition to inflationary and other increases, the board forecast the lowest five year average tax increase (3.5 percent) since the 1995 county property reassessment. The inconsistency is that the SCASD has never in the last ten years ever had a five year average property tax increase of 3.5 percent or lower and that was without adding $102 million in debt or any amount of debt service as proportionately as large to the total budget. The ratio of debt to budget will almost double beginning in 2006-07 leaving no dollars for elementary school renovation or replacement – unless the SCABSD raises taxes.

Applying the district’s own budget forecast assumptions with salaries increasing 4 percent per year at 54 percent of budget, fringe benefits increasing at 14 percent per year at 17 percent of budget, allowing that all other costs will increase at a Consumer Price Index (CPI) rate of only 3 percent, with debt service8 at about $11,800,000 (no added debt for next five years), and a reserve balance of about $5 million, the SCASD budget will increase at a minimum of 6 percent per year. That is consistent with the previous five year budget increase average of 6.2 percent, but during the past five years the district did not add $102 million in debt service.

SCASD taxpayers will most likely feel the impact of property tax increases in excess of 7 percent beginning in 2008. SCASD tax increases may exceed 10 percent by 2012. The 2006-07 budget leaves practically no dollars for risk anticipation or mitigation other then increasing taxes or reducing expenses like teaching. Too easily forgotten is that the district’s Citizens Advisory Committee for Facilities hired the architectural firm of Burt Hill Kosar Rittlemenn Associates to examine, analyze, and recommend the most cost effective, thoroughly documented, and functionally adequate solution to the high school renovation. That firm alone had no financial interest in the outcome. Their reasonable solution cost $50 million and should be reexamined.

BACKGROUND

During the SCASD 2006-07 budget process, several cost and tax projections for the $102 million high school renovation project were provided during school board meetings and requests for information.9 The SCABSD explained in a May 24, 2006 local newspaper advertisement that the board authorized a maximum high school project cost of $102 million and a maximum building [new] construction cost of $63.3 million.10 (The remaining $38.7 million is allocated to site cost: $10 million; renovation $17; million: management and contingency; 7 million; financing $5 million)11 The district should be reimbursed at a rate of about 7.65 percent by the Pennsylvania Department of Education for the entire debt service on $102 million ($7,800,000). The district may also decide to use funds from the capital reserve fund accumulated from general obligation bonds and from real estate tax millage reserved for capital projects. That amount could range from $5 to $15 million.12 Remaining funds will be borrowed. Regardless of how the cost is allocated it will result in a 4 mill tax burden.

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The Pennsylvania Department of Education (PDE) uses a formula to determine the amount of reimbursement provided for school construction.13 The formula considers community wealth based on the total value of assessed real estate, personal income, school design, enrollment, capacity, and so forth. The PDE won’t provide the amount of reimbursement until after the Act 34 Public Hearing is completed and the construction plan (ConPlan) is submitted. The PDE system is backwards to public interest. The public should know the amount of reimbursement and hence the taxpayer contribution before the Act 34 Public Hearing.

However, the SCASD had recent experience renovating and building several other schools -- Easterly, Gray's Woods, and Park Forest. The SCASD District Wide Master Plan (DWMP) updated November, 2005, clearly shows that the L. Robert Kimball & Associates Architects and Engineers consistently advised the district to expect a 20 percent state reimbursement when each of the schools, cited, were reimbursed only 8.6, 11.5, and 8.5 percent respectively.14 Kimball reportedly has long time and firsthand experience building schools for the SCASD. The SCABSD anticipated 20 percent reimbursement for the high school until about April, 2006 when an awakening must have occurred. We actually pay Kimball for this kind of “expert” but failing advice. The SCASD newspaper advertisement also included a table and explanation showing that the annual tax impact for an (average) home assessed at $67,845 would be:

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 thereafter$12.89 $25.10 $4.75 $73.95 $13.57 $10.18 $140.44

Incongruously, the May 24th projection was reduced from an April 9th annual tax projection of $274 each year for the average home beginning in 2006-07 and until 2028 but based on a total debt service cost for the high school of about 4 mills.15,16, 17

During an office meeting with Don Gordon on June 2, 2006, the District Business Manager, Dennis Younkin advised that he estimated that the Pennsylvania Department of Education (PDE) would reimburse the district about 7.65 percent of the total debt service ($7,803,000). That is among the lowest reimbursement rates in Pennsylvania (average is 22.5 percent) and a consequence not only of capacity rating but also of both design and community wealth.18 Not only does the state provide a measly reimbursement, but the state requires that the district pay prevailing (union) wage scale thus doubling the labor cost for construction.

The local newspaper advised on June 10th, “… taking into account the expectation for some state reimbursement for the project, district planners have reduced the figure this spring to about $242. School officials took pains to clarify … that number does not mean that the average tax bill will go up $242. Rather, it means that $242 of the average homeowner's annual tax bill will be set aside to pay down debt on the school.”19 That is very cleverly worded by the district. Here is another, more straightforward, way of explaining the cost impact. The high school project will cost $102 million. It is anticipated by the district that the Pennsylvania Department of Education will reimburse

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$8 million leaving a balance of $94 million or a cost of $252 for the average homeowner. The district began taxing an additional $95 for the high school in 2004 and will increase taxes incrementally to another $157 in 2011 and 17 years thereafter. The total cost for the high school will average $252 per year for 20 years. The district will not know how much the PDE will actually reimburse until the state approves the construction plan well after the Act 34 hearing and $ 8 million is not assured.

Mr. Younkin also advised and illustrated using an Excel spreadsheet table that approximately $900,000 was placed in a capital reserve fund in 2004-05 (.5 mill) along with a fund balance of $2.7 million in 1905-06, $2.8 million is projected in 1906-07, and $2.9 million in 1907-08.20

The table used by Mr. Younkin also shows how the complete $102 million cost may be funded using $10 million in bonds issued in 2004, $10 million in 2006, $58 million in 2007, and the remainder not yet issued but approved May 8th ($24 million or less depending on the amount of state funding and the amount of the reserve fund that is used)21, a total of $102 million. The interest rate for all bond issues ranges from 3 to 5.10 percent. The SCASD also arranged a “swap” for $58 million of variable interest rate bonds sold now for fixed rate (3.88 percent guaranteed) bonds after the school is completed thereby lowering the interest rate in the long term for the $58 million bond issue. 22, 23

So how does the district stand with respect to debt? State law imposes a current 2006 SCASD debt limit of $183 million, $144.6 is borrowed, leaving $38.5 million borrowing capability. But, the total debt (principal and interest) projected through 2030 is $217 million of which $156.8 million is for the high school. The debt ceiling will increase each year as debt is retired and total revenues increase. But there will also be new debt -- there always is. Is that legal? Yes. Is it prudent? Not unless the SCASD has a rigorous Strategic Debt Service Plan. It doesn’t. Right now, the district is spending 5 to 6 mills (depending on the year and until 2020) for interest. That’s about $10 to $12 million every year spent on debt rather than teaching. The high school project will cause the debt to double.

Assuming that the SCASD is required to borrow the total $102 million for the high school, the annual debt service payment calculated by the SCASD is $7,500,000 or 4 mills (2006).24 That means that $7,500,000 will be added to the budget every year to pay for the high school after the complete fund draw.25

How will the SCASD pay the $102 million (maximum project) cost for the high school renovation? 26 What is the tax impact in mills so that mills can be multiplied times assessed value of an individual’s home and divided by 1,000 to obtain the property tax in dollars?

Each year the school district determines the tax mill rate needed to collect sufficient revenue from the school property tax to meet budget expenditures. To do this the total value of taxable real estate property is calculated and the value of a mill is determined.

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In 2005-06, the total assessed value of real property in the SCASD was about $1.9

billion.27 Since a mill is 1/1000th of a dollar, one mill equaled $1.9 million revenue for that tax year. As new real property (new construction) is added or removed from the tax rolls in the school district, the value of a mill increases or decreases respectively. As an example, at $2.4 billion total assessed value a mill increases to $2.4 million of revenue. As the value of a mill increases and the “mortgage” payment remains constant, the tax required to produce a mill should decrease proportionately because it is spread over a larger assessment base. If only it were so. Rather, the increased value of a mill is invariably consumed by increased spending but arguably may reduce the amount of higher tax increases. The concept of zero based budget (ZBB) is unknown to Pennsylvania education so it is not likely that the increased value of a mill will reduce taxes.28

Once the entire $102 million is paid to the contractor and architect, taxpayers will pay 4 mills tax every year until the debt is paid.29 The tax dollar value of 4 mills differs based upon the assessed value of each property. Taxpayers will multiply the assessed value on their school property tax bill by 4 and divide by 1,000 to see the cost of the high school in dollars. If the 2008 total school district tax bill is 36 mills, then 4 of those 36 mills are used to pay for the high school and the remainder for all school operating costs and other debt service.

The school district explanation on April 9th that the $102 million dollar high school renovation would cost 4 mills or for the average homeowner ($67,845 assessed value) $274 per year for 20 years was accurate and straightforward. Changing that number to

$141 per year in the May 24th newspaper advertisement by allocating the 4 mills to different categories – Project Millage (2.5 mills) and District Wide Master Plan Millage (1.5 mills) was, if not deceptive, certainly unnecessarily confusing. The total cost is 4 mills and it doesn’t matter to what budget category the school district assigns those mills – at $102 million the school will cost 4 mills and the total annual cost remains $274 for the average homeowner until the debt is paid.30, 31 Remember that the so-called average home in the SCASD includes many properties subdivided for college students which distorts the average home calculation. The average home for a family is closer to an assessed value of $140,000 with the high school project 4 mill tax increase at $560 per year for 20 years or $11,200 total.

The district explains that since 1.5 mills for the DWMP is included in the 2005-06 total tax of 31.273 mills that 1.5 mills should be subtracted from the 4 mills cost of the high school added in future years thereby making it appear as though the high school costs only 2.5 mills. The best argument that can be made is that taxpayers began to prepay a portion of the 4 mills as early as 2005.32

During a May 8th SCASD board meeting, the school board president, Susan Werner explained that 1.5 mills [of the 4 mill tax increase for the high school] really wasn’t a tax increase because the district started setting aside 1.5 mills for the District Wide Master Plan for three years prior [beginning in 2004] to offset the cost of the high school.33 It doesn’t matter when the collection started or that it was only a part of the 4 mill total cost, it is a tax increase every year it is collected. The school board raised taxes 5.6

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percent in 2005 in an attempt to circumvent funding constraints anticipated from referendum provisions included in pending state tax reform laws like Act 72. That is not fiduciary responsibility respective to public taxation.

Despite 4 new mills to be added to regular budget expenditures and in addition to inflationary and other increases, the SCABSD now forecasts the lowest five year average tax increase since the 1995 county property reassessment. This table shows the June 5, 2006, SCASD five year property tax increase forecast:34

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Average

3.8% 3.6% 5% 2.3% 2.9% 3.4% 3.5%

The inconsistency is that the SCASD has never in the last ten years ever had a five year average property tax increase of 3.5 percent or lower and that was without adding $102 million in debt service or any amount of debt service as proportionately as large to

the total budget. On April 9th the SCASD forecast a more reasonable but very conservative average five year property tax increase of 4.2 percent.35 The SCASD history of tax increases from 2001 to 2005 is 4.88 percent.36 The five year average from 1998 to 2002 is 4.5 percent, the ten year average is 4.1 percent.37

There is no substantive data or analysis or prior experience convincing that the SCASD can add 4 mills of debt service to the district’s budget and tax increase history and hold property tax increases to the average 3.5 percent forecast.38 Nor can the district sustain the historical average five year budget increase of 6.2 percent. However, this will not become obvious to taxpayers until 2008 when the full $7,500,000 impact of the $102 million debt service hits the budget. At that time taxpayers can expect property tax increases of 8 to 9 percent. If major renovations are also required for the elementary schools during this period then tax increases of 10 to 12 percent may be anticipated or a combination of significantly cutting expenditures and raising taxes will result. This is the SCASD data used for its annual tax increase forecast:

SCASD Assumptions:39

Real estate growth: +3% Earned Income growth: +3% State subsidy growth: +1.5% Retirement costs: zero increase or decreasing. State transportation subsidy growth: +3.5% Salary and benefits cost increase (54 percent of budget) (teachers’ contract thru 2010-11): + 4% Medical insurance cost increase (all fringe are 17 percent of budget) thru 2012: +14% Utilities cost annual increase ($226,000 base): + 10%

During a June 2nd meeting including Don Gordon and SCASD Business Manager, Dennis Younkin, and Director of Accounting, Randy Brown, Younkin and Brown concurred that the district’s revenue forecast exceeded historical district experience, but only by about 1/10 of a percent. That’s about $1 million or .5 mill. That also means that the district forecast depends upon at least five continuous years of strong local

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economic growth and no downturn in the local real estate market or employment, an inflation rate of about 3 percent, no significant enrollment increase, and the retirement rate history as forecast.40 It depends on no other cost-significant repairs or renovations required throughout the district, that Gray’s Woods Elementary School overcrowding is resolved without additional cost, and that the Centre County vs. Village at Penn State lawsuit and the considerable impact on similar properties is resolved in favor of the county and school district.

In short the revenue and expenditure model must be completely precise and free of uncontrollable and unanticipated cost impacts. Those assumptions are unlikely because every time citizens question SCASD tax increases they are told the increases are caused by unpredictable and uncontrollable state and federal mandates. Only one example is the year 2000 loss of $40 billion in the state employee and teacher pension accounts due to imprudent investing.41 That financial crisis will hit taxpayers very hard beginning in 2013. Historically, unanticipated costs add about .5 to 1 mill to the SCASD budget. There is no risk mitigation in the district’s forecast except for tax increase. Worse, the high school project allows only 5 percent for cost overrun on a major renovation. That is irresponsible.

Applying the district’s own assumptions with salaries increasing 4 percent per year at 54 percent of budget, fringe benefits increasing at 14 percent per year at 17 percent of budget, allowing that all other costs will increase at a Consumer Price Index (CPI) rate of only 3 percent, with debt service at about $11,800,000 (no added debt for five years), and a reserve balance of about $5 million, the SCASD budget will increase at a minimum of 6 percent per year. That is consistent with the previous five year budget increase average of 6.2 percent, except that during the past five years the district did not add $102 million in debt service.

There are other concerns. First the ratio of debt to budget (expressed as a percent) will almost double beginning in 2006-07 leaving no dollars for elementary school renovation or replacement (please see table below).42 Second, the amount of the school budget paid from local revenue has increased by 1 percent to 83 percent of total revenue collected (among the highest in Pennsylvania).43 That is a continuing trend. According to a Commonwealth Foundation report, taxpayers will also fund a 672% increase in pension contributions in Fiscal Year 2012-13 for the Public School Employees Retirement System (PSERS). The impact will begin earlier.

Ratio of Debt Service to BudgetIn $ millions

Year 2004 2005 2006 2007 2008 2009 2010Budget $85.5 $93.6 $99.3 $105.2 $109.2 $114.0 119.4

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Debt Service

$4.9 $6.0 $9.4 $11.9 $11.6 $11.9 $11.9

Budget Increase%

NA 5.6% 5.4% 5.9% 3.8% 4.4% 4.8%

Ratio Debt to Budget

5.7% 6.4% 9.5% 11.3% 10.6% 10.4% 10.0%

CONCLUSION

At a cost of $102 million the high school project will cost taxpayers 4 mills. The average taxpayer ($67,845 assessed value home) will pay $274 for 20 years or longer ($252 if the PFE reimburses $8 million). The taxpayer with a higher assessed home, say $140,000 assessed value, will pay $560 more in property taxes each year for twenty years only to fund the high school. SCASD taxpayers will most likely feel the impact of property tax increases in excess of 7 percent beginning in 2007. SCASD tax increases may exceed 10 percent by 2012. Too easily forgotten is that the district’s Citizens Advisory Committee for Facilities hired the architectural firm of Burt Hill Kosar Rittelmenn Associates to examine, analyze, and recommend the most cost effective, thoroughly documented, and functionally adequate solution to the high school renovation. That solution cost $50 million and should be reexamined.

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ENDNOTES

1 Act 34 of 1973, the Taj Mahal Act 2 How can we have confidence that we will have the lowest tax increase and the high school project? Mr. Younkin attempted to explain but dismissed as school board members responded they were confident but didn’t explain the data. 3 Centre Daily Times, June 10, 2006, District's taxpayers to pay less for project 4 $274 – 8 percent = $252. 5 See the SCASD District Wide Master Plan Update at http://www.scasd.org/249710026193544/lib/249710026193544/DWMPupdate1105.pdfL. Robert Kimball & Associates Architects and Engineers consistently advised the district to expect a 20 percent state reimbursement when each of the schools, cited, were reimbursed only 8.6, 11.5, and 8.5 percent respectively. estimating 20 percent reimbursement when only 8. 6 The home assessed in 1995 at $144,000, in this example, would cost about $102, 000 when purchased in 1975. 7 SCASD Special meeting, Incurrence Resolution, to incur $24million bonds on HS project. April 7th, 2006. 8 The amount of cash necessary to meet the periodic payments of principal and interest on an amortizing mortgage or debt or bond issue. 9 On April 9th, Dennis Younkin reportedly (CDT) advised a 4.9 percent, 4.9 percent, 3.4 percent, 3.4 percent and 4.4 percent tax increase over the next five years, respectively, an average of 4.2 percent. During a May budget meeting, Dennis Youkin projected reduced tax increases beginning in 2006-07 as 3.8, 3.5, 4.7, 2.2, 2.6 percent respectively or an average 3.36 percent. The SCASD has never had a 3.36 five year average or lower tax increase (excluding the three years of and following reassessment). The SCASD history of tax increases from 2001 to 2005 at 5%, 4.1%, 6.2%, 3.5%, and 5.6% is an average is 4.88 percent. The five years prior was 4.25 percent average. The average 10 year increase is 4.1 percent. 10 SCASD advertisement, Centre Daily Times, page A9, May 24, 2006. 11 Email responses (two) from Dennis Younkin, June 5, 2006, subject: A few Questions. 12 The District Wide Master Plan’s Financing-Update Schedule -- Construction Fund shows a balance of $14.7 million at the end of 2005. As of 6/30/05, according to the audited financial statement, there was $12.4 million in "cash & cash equivalents" in the Capital Projects Fund. Also the audited financial statement reports "Approximately 77% or $14,665,840 of the District's net assets represents proceeds from general obligation bonds and from real estate tax millage reserved for capital projects. These proceeds will be used to fund the DWMP, including the completion of Park Forest Elementary School project and the High School renovation project." 13 See: http://www.pde.state.pa.us/constr_facil/lib/constr_facil/intro2005.pdf and http://www.pde.state.pa.us/constr_facil/cwp/view.asp?a=11&Q=61127 14 See the SCASD District Wide Master Plan Update at http://www.scasd.org/249710026193544/lib/249710026193544/DWMPupdate1105.pdf 15

Centre Daily Times, Sun, Apr. 09, 2006, “Residents worried controversial plan will mean a big jump in their taxes.” “The district has estimated that the price [for the high school] will cost the average homeowner about $274 annually for the next 20 or so years, although that number could decrease as the tax base grows. District business administrator Dennis Younkin said that $274 figure would be the added tax for the average property.” The average property has an assessed value of about $67,845, according to the Centre County assessment office. A tax increase of $274 = an increase of 4.039 mills.

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16 Either set of numbers could decrease depending on the changing value of a tax mill if future spending

did not consume that increase. But, the SCASD has never decreased spending. 17

According to Dennis Younkin, during a meeting with Don Gordon on June 2nd, the total tax increase from 2005-06 to 2010-11 is $140.44 and $140.44 is also the approximate amount of annual increase for every year after 2010-11 until the debt service is retired. See SCASD Table: Debt Service Est HS Net.xls, June 2, 2006. 18 Telephone discussion with PDE, June 5, 2006 and How is Reimbursement Calculated: http://www.pde.state.pa.us/constr_facil/lib/constr_facil/intro2005.pdfReimbursement Examples:http://www.pde.state.pa.us/constr_facil/cwp/view.asp?a=11&Q=61127 19 Centre Daily Times, June 10, 2006, District's taxpayers to pay less for project 20

See SCASD Table: Debt Service Est HS Net.xls, June 2, 2006. 21 May 8, 2006, May 8, 2006, SCASD Board of School Directors Meeting.. See SCASD Table: Debt Service Est HS Net.xls, June 2, 2006. 22 23 FY07 Debt service Budget-1.xls spreadsheet. 24 $7,650,000/$1,943,485 = 3.96 mills rounded to 4 mills See: SCASD Debt Service Schedule Debt Service Est HS-1.xls 25

(For 2006-07 the debt service is $1.1 million.) 26 SCASD advertisement, Centre Daily Times, page A9, May 24, 2006. 27 $1,869,834 rounded to $1.9 million. See Centre County Property Assessment Report, 2006. 28 A method of budgeting in which all expenditures must be justified each new period, as opposed to only explaining the amounts requested in excess of the previous period's funding. For example, if an organization used ZBB, each department would have to justify its funding every year. That is, funding would have a base at zero. A department would have to show why its funding efficiently helps the organization toward its goals. ZBB is especially encouraged for government budgets because expenditures can easily run out of control if it is automatically assumed what was spent last year must be spent this year. http://www.swb-inc.com/Zero-Base_Budgeting.htm; June 2, 2006 29 If the budget was held constant, the increased value of a mill year-to-year could reduce the tax paid to produce each mill. But that has never happened in the SCASD in the last 25 years. 30 SCASD advertisement, Centre Daily Times, page A9, May 24, 2006 and Centre Daily Times, Sun, Apr. 09, 2006, “Residents worried controversial plan will mean a big jump in their taxes.” 31

The SCASD mill allocation table shows that the $102 million high school cost represents 4 mills. But the district has created a unique method of distributing the mills in the table. The accumulative mill debt service impact during that period -- .35 mill in 2004, zero in 2005, .35 in 2006, 2.11 in 2007 and .75 in 2008 is a total of 3.57 mills. The table also shows the District Wide Master Plan (DWMP) mill impact during that same period – 1 mill in 2004, 1.5 in 2005, 1.5 in 2006, and .07 in 2007, zero thereafter, a total of 4.07 mills. 32 See SCASD Table: Debt Service Est HS Net.xls, June 2, 2006 33 The SCASD set aside 1 mill in 2004, 1.5 in 2005, 1.5 in 2006, and .07 in 2007, zero thereafter, a total of 4.07 mills. In 2006 the Citizens Advisory Committee for Finance advised the board to discontinue the practice. 34 SCASD FY 07 Budget Hearing, June 5, 2006, Page 13. 35 Centre Daily Times, Sun, Apr. 09, 2006, “Residents worried controversial plan will mean a big jump in their taxes.” The SCASD advised a 4.9 percent, 4.9 percent, 3.4 percent, 3.4 percent and 4.4 percent tax increase over the next five years, respectively, an average of 4.2 percent. 36 The SCASD history of tax increases from 2001 to 2005 at 5%, 4.1%, 6.2%, 3.5%, and 5.6% is an average of 4.88 percent.

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Copyright© Don E. Gordon -- Reprint permitted for nonprofit use when source is cited.

37 Five year property tax increase from 1998 to 2002 respectively: 5.25, 3.13, 4.89, 4.99, 4.10, an average of 4.1 percent. Ten year average property tax increase from 1996 to 2005 respectively: 2.38, 1.12, 5.25, 3.13, 4.89, 4.99, 4.10, 6.17, 3.49, 5.56, an average of 4.1 percent. 38 SCASD FY 07 Budget Hearing, June 5, 2006, Page 13. 39 Dennis Younkin, May 11, 2006 39 40 SCASD FY 07 Budget Review PowerPoint document, May 1, 2006, p. 29. 41 Beneath the Surface: Pennsylvania's Looming Pension & Healthcare Benefits Crisis, February, 2006; Commonwealth Foundation; Senior fellow and actuary Rick Dreyfuss 41 42 See table below this paragraph. 43 $82,263,430 of $99,328,030 from local taxes

FINIAddendum Notes

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1 A SWAP is Tthe exchange of two securities, interest rates, or currencies for the mutual benefit of the exchangers. For example, in an interest rate swap, the exchangers gain access to interest rates available only to the other exchanger by swapping them. In this case, the two legs of the swap are a fixed interest rate, say 3.5%, and a floating interest rate, say LIBOR + 0.5%. In such a swap, the only things traded are the two interest rates, which are calculated over a notional value. Each party pays the other at set intervals over the life of the swap. For example, one party may agree to pay the other a 3.5% interest rate calculated over a notional value of $1 million, while the second party may agree to pay LIBOR + 0.5% over the same notional value. It is important to note that the notional amount is arbitrary and is not actually traded. http://financial-dictionary.thefreedictionary.com/Swap