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A $50 million dollar question: Will schools get needed funds from city sales tax?

This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.

by Patrick Kerkstra for the Notebook and Holly Otterbein for NewsWorks

With less than six weeks remaining before city schools are scheduled to open, key elements of the District rescue package hastily assembled by state lawmakers in June remain unsettled, raising the specter that schools will open with skeleton staffs, or indeed, not open at all.

The most pressing concern this week is the $50 million at stake in the debate over the use of the city sales tax.

In June, Gov. Corbett and the state General Assembly approved the extension of a one percentage point increase in the city sales tax enacted in 2009, a measure that was billed at the time as a temporary step to blunt the effects of the recession.

Corbett and the state legislature now propose making that tax hike permanent and diverting the funds to the School District. Doing so would provide a permanent new revenue stream for schools and also allow the city to borrow $50 million on behalf of the District this year, to be repaid by future sales tax proceeds. The sum represents a key piece of the District’s plan to open schools in September.

But Philadelphia’s City Council feels railroaded by the state’s sales tax plan, and it is not at all clear that Council will agree to approve the sales tax extension, at least not as Harrisburg proposes.

A Notebook survey of City Council members this week found that support for the General Assembly’s sales tax plan is weak, a political reality that is readily acknowledged by District officials.

“Hell no, I’m not calm about the ability to open schools, because at the moment we don’t have access to the resources we thought we would have by now,” said District Superintendent William Hite, referring to the $50 million. “Everybody is celebrating the return of one secretary per school and art and music and sports, but there is a lot more still needed in order to open schools. This is getting down to crunch time for us.”

The $50 million in question would not be nearly enough to hire back the roughly 3,800 support staff and teachers who were laid off on July 1, but it would help. For instance, the infusion would enable the District to bring back nearly all of the 400-plus counselors and assistant principals who were pink-slipped.

But using the temporary city sales tax to increase its funding share for the state-run School District of Philadelphia wasn’t an option that City Council even considered before Harrisburg passed the enabling legislation. Council and Mayor Nutter had instead looked to generate school funds from a speculative combination of increased collections of delinquent taxes and a cigarette tax that needed state approval (which, so far, has not been granted).

Indeed, some Council members, such as Council President Darrell L. Clarke, had harbored hopes that a sales tax extension would be used for an entirely different purpose — to prop up Philadelphia’s badly depleted pension fund.

As a compromise measure, Clarke now proposes splitting the one percentage point sales tax – which raised $128 million last fiscal year – between the School District and the city employees’ pension fund.

Clarke will be pressing his case in meetings with Council members Thursday, according to several members. Clarke did not return a call seeking comment.

Mayor backs the state’s plan

Nutter, meanwhile, is lobbying Council to do as the General Assembly asks and allocate the extra sales tax proceeds for the schools.

“Schools open in six weeks,” Nutter said. “We need to make sure that it’s not a mess and that adults do what’s required to make sure that young people can get a high-quality education in an environment that is safe.”

The sales-tax extension was not originally part of Nutter’s plan to fund the schools, but he has since warmed to it.

Nutter said that he shares Clarke’s concerns about the city government’s chronically underfunded pension system. But he argued that the School District’s budget shortfall must be dealt with immediately.

He suggested that a possible compromise with Clarke could involve the proposed $2-a-pack cigarette tax to help pay for the pension system. If approved by the General Assembly – which is not at all certain, given the power of the tobacco lobby and the anti-tax hike views of many legislative members – the tax would generate as much as $90 million annually.

“That’s a lot of money that either [could be] utilized for schools’ additional funding or to help us with our pension challenges,” Nutter said. “Both [issues] are important. One is imminent and the other, over time, is going to eat us alive.”

Council not on board

So far, though, Council doesn’t seem to be embracing the notion that it should extend the sales tax and allocate all proceeds for the schools.

This being peak vacation season for Council, many members could not be reached for comment. Nine of 17 did not return phone calls or emails.

Only two of the eight members who could be reached supported extending the sales tax and using it for school funding: at-large members Wilson Goode Jr. and Bill Green. Green’s support for the notion was highly qualified, as he prefers to cut the city’s budget and use the savings for the schools.

Clarke’s proposed compromise appears to have the support of several of Council’s key education advocates, including María Quiñones-Sánchez, Cindy Bass and Blondell Reynolds Brown.

In an email, Brown said she favored splitting sales tax dollars between the schools and the pension fund, and she put responsibility for the schools crisis at the state’s feet.

“The commonwealth needs to step up to the plate and authorize the tax on tobacco products so that we can get a real foothold to fund both major public policy issues,” she wrote.

Sánchez was more blunt. The General Assembly, she said, had overstepped its bounds by instructing the city to use the sales tax to fund the schools, an option the city had never considered or wanted.

“State authorization for something like a tobacco tax is one thing. The state setting city tax policy is another thing. I think they’ve crossed a line,” Sánchez said of the General Assembly. “We’re committed to the schools but we also have other problems, and the pension situation is one of them.”

On Wednesday, Sánchez issued a press release opposing the borrowing plan and instead proposing a one-time grant of up to $50 million from the city to the schools, making use of the city’s fund balance – its projected cash left over after expenses. It is not clear how that grant would be permitted under state law, which requires municipalities to maintain funding commitments made to school districts year-in and year-out. But Sanchez is open to the prospect of additional long-term local funding for the schools, particularly if paired with fresh funding from the state.

A reluctance to tap city surplus

Nutter, though, is not willing to tap this year’s general fund balance to further fund the schools. It is projected at $86.5 million as of June 30 — “less than half of what it should be,” he said.

The administration argues that a lower fund balance means the city will have less money to deal with unexpected situations, such as natural disasters and legal settlements.

The Government Finance Officers Association recommends a surplus of “no less than 5 to 15 percent of regular general fund operating revenues.”

Donna Cooper, executive director of Public Citizens for Children and Youth, is familiar with the experts’ advice. But she believes that the city should use some of the fund balance because the School District is facing an emergency now.

“That cushion is around for when things are bad,” she said. "This is the time you’re supposed to use your fund balance. That’s why you have one.”

She estimates that $25 million of the surplus could go to the schools.

In addition to Nutter’s opposition, Council could well oppose spending down the fund balance to bail out city schools. There’s a clear sense among Council members that they have been pushed too far, that the city has done its share, and that it is time for the state to bend.

“We have to own some things. Public corruption. Wasted tax dollars. We have to own that. But I believe the city is doing everything it possibly can at this point,” said Councilman and former Speaker of the Pennsylvania House of Representatives Dennis O’Brien.

O’Brien counts himself as an undecided – as do Council members Bobby Henon and Mark Squilla. But it is clear in talking to O’Brien that he too feels the onus is on the state, not Council.

“The mayor and the superintendent have to call the governor out,” O’Brien said. “The state shouldn’t be off the hook.”

Dale Mezzacappa contributed additional reporting.

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