HARRISBURG, Pa. (WHTM) — On Wednesday, Auditor General Timothy L. DeFoor released an audit of 12 school districts across the commonwealth, uncovering a legal practice where districts are raising their local property taxes while holding millions of dollars in their General Funds.

“These districts represent a cross-section of Pennsylvania – from wealthier to poorer tax bases and urban, suburban, and rural communities,” DeFoor said. “These districts have found a way to use the law to their advantage so they could always raise property taxes. It’s basically a ‘shell game’ that allowed these 12 school districts to collectively raise taxes 37 times during the four years we reviewed, which increased their respective General Fund accounts to $390 million.

The following districts were selected based on criteria that included a district with approved referendum exceptions and substantial Government Fund balance for the fiscal years ending in 2018 through 2021:

• Abington School District, Montgomery County
• Bethlehem Area School District, Northampton, and Lehigh Counties
• Cannon-McMillian School District, Washington County
• Hempfield School District, Lancaster County
• Lower Merion School District, Montgomery County
• Neshaminy School District, Bucks County
• Northampton Area School District, Northampton County
• North Penn Manor School District, Montgomery County
• Penn Manor School District, Lancaster County
• School District of Lancaster, Lancaster County
• West Chester Area School District, Chester and Delaware Counties

The audit evaluated the following aspects of each district:

• Whether the district appropriately used the Pennsylvania Department of Education (PDE) referendum exception method to raise local taxes
• Whether each district ensured its General Fund balances were properly designated as committed, assigned, and used in a timely manner for intended purposes

“Some startling trends began to appear to our auditors, like moving money around to make sure a district would always meet the threshold to raise taxes,” DeFoor said. “They also applied for a referendum exception as a regular budgeting tool, rather than an extreme measure as the law intends. Each of the 12 districts had sufficient unused funds that should have negated some of the 37 tax increases.”

The Pennsylvania School Code and the Taxpayer Relief Act (ACT 1) dictate how school districts can raise taxes, as well as set limits for those increases.

If the district has to raise its taxes above the limit, they are required to ask voters for permission to do so through a referendum or by applying to PDE for a referendum exception. A referendum exception would allow school districts to raise the taxes above the limit without voter input.

The applications for a PDE referendum exception are based on what a district has budgeted to cover expenses, versus actual cash on hand.

“School districts told us they must develop their budgets this way because they never know how much funding they will receive from the state,” DeFoor said. “But at the end of the day, it’s the taxpayers, especially those on a fixed income, that is shouldering the burden. If this is standard operating procedure for these urban, suburban and rural districts, it’s not a stretch to say that it’s common practice across the state.”

The following suggestions were made to the General Assembly by an audit team to help school districts fund education and protect taxpayers:

• Add a provision Act 1 that requires districts to use committed and assigned General Fund balances and the prior year’s fiscal surplus funds before they request a referendum exception to raise the taxes
• Revise the Pennsylvania School Code’s terminology used in the determination of the mandated threshold for raising taxes from unreserved, undesignated to unrestricted to include committed and assigned funds in the calculation, to prevent school districts from retaining millions of dollars in General Fund commitments and assignments while increasing taxes
• Determine if there should be parameters around budgeting practices and transferring operating surpluses while increasing taxes

The audit team made the following recommendations for PDE:

• Review and revise the process of approving referendum exceptions if the district has committed and assigned General Fund balances. Audit results show that school districts have adequate funding for related expenditures, are transferring excess surpluses, and are not using designated funds timely or to balance the preliminary budget before requesting to increase taxes above the limit for the same type of expenditure
• Consider revising the PDE Property Tax Referendum Exception Guidelines accordingly

The School District of Lancaster Acting Superintendent Matthew Przywara responded to the report saying “the audit report refers to common practices of school board budgeting, which the auditor general agrees are fully legal. The School District of Lancaster has a long history of prudent, forward-looking, transparent financial management. Our district has been recognized annually for more than a decade by the Government Finance Officers Association of the United States and Canada and by the Association of School Business Officials for excellence in financial reporting.”

Penn Manor School District said the audit report “completely ignored the fact that we were dealing with a large, multi-year construction/renovation project” and that the district is “currently ranked 404 out of 500 school districts in spending per student.”

“Penn Manor takes pride in how it funds and operates its schools, and we believe this report does not accurately reflect our prudent use of taxpayer funds.”

Pennsylvania House Republican Leader Bryan Cutler (R-Lancaster) says the report highlights problems with current law and that the tax increases amid surpluses are “wrong.”

“It is my hope that, once we organize our chamber, we can look at the issue of record school district surpluses once and for all and ensure Pennsylvania’s families are treated fairly in the return on investment they receive for the education of our children,” said Cutler.