Council tax deal leaves schools millions short

The nearly insolvent Philadelphia School District would receive less than half the additional $94 million Mayor Nutter was seeking for 2012-13 under a deal City Council reached Thursday, throwing the district's fiscal future into deeper uncertainty and scrapping property-tax overhaul for another year.

Although Council moved to delay implementation of a new property-tax system, members nonetheless passed legislation that would raise $20 million under the current system, and $20 million from businesses by raising the Use and Occupancy Tax.

Officials from the Nutter administration warned Thursday that delaying the proposed property tax and assessment reform, known as the Actual Value Initiative (AVI), could have dire financial consequences for the city and the School District.

City Finance Director Rob Dubow said the administration would continue to push for changes in the legislation in the remaining two weeks before the start of the new budget year.

"We're hoping to see changes on the amount the School District gets and we'd like to see the AVI start this year," he said.

Dubow told reporters it was premature to say whether the mayor would sign or veto the package.

School District officials appeared hopeful that the budget might change over the next week.

"We are cautiously optimistic City Council will support our efforts to maintain basic educational services for Philadelphia's schoolchildren," said district spokesman Fernando Gallard.

The compromise among Council members was hashed out after a long day of negotiations between Council President Darrell L. Clarke and Nutter.

The bills would come up for final passage next week, along with the rest of the necessary budget and spending bills.

Next week's meeting is the final one before the summer recess, but Council could add one more before the June 30 budget deadline.

The business community has opposed raising the Use and Occupancy tax, and there is no guarantee Council will approve the hike next week.

The $20 million that would be raised in property taxes also would not go directly to the schools - the money would be doled out in accountability grants after the district met certain conditions set by Council.

Even if the schools get the entire $40 million in new money, that's far short of Nutter's initial goal of raising $94 million for the schools in the changeover to AVI.

"The only good news is that some of us would like to believe it will force the state to reexamine its level of support for the schools," said Councilwoman Blondell Reynolds Brown, a strong proponent of increased school funding. "Is it enough? No, it's never enough. But it could have been a lot worse."

From the beginning, AVI was considered politically perilous. Because a citywide reassessment essential to AVI would not be completed before the budget deadline, Council was asked to assume a revenue target for real estate tax collections and pass a formula that would reach that goal.

Once the assessment was completed and the actual value of the city's taxable real estate was known, the tax rate could be plugged in to hit the revenue mark.

That has left Council in the dark, instituting a complex tax policy without fully understanding the impact on constituents.

"If we had done AVI . . . the chaos would have been disastrous for the city of Philadelphia," said Councilman Mark Squilla, the chief opponent of AVI on Council.

At one time, estimates of the aggregate value of all property in the city were well above $100 billion, which would have meant a millage, or tax rate, in the neighborhood of 1.25 percent. There was plenty of support for AVI at that millage.

But the estimate of the aggregate value dropped as low as $80 billion, raising the millage rate to 1.8 percent, and the plan started to lose votes. At that rate, homeowners would pay $1,800 on $100,000 of assessed value.

The property tax bill now on the table says the city will move to AVI next year. That's not binding - Council could amend that at any time - but members said they were committed to doing the reform next year, when they have the reassessment data.

"People were committed to it this year," Councilman Brian O'Neill said. "They were committed to it last week, until they saw they couldn't trust the numbers."

Clarke said the city's lawmakers would continue talking to the administration, but he held out little hope they would change their minds without getting specific information on how AVI would impact city residents.

"Council members just weren't comfortable with moving ahead with legislation without facts and without numbers," Clarke said.

He said most of his colleagues acknowledged the necessity of reassessing city real estate.

"We have every intention of doing that," Clarke said. "But we want simply to have an opportunity to vote on real numbers."

AVI threatens to drive the tax bills up for thousands of residents, while also reducing taxes for many lower-income homeowners who have been overpaying for years.

Two other aspects of Nutter's plan promised to compound the impact of AVI. First, he planned to make permanent two years worth of property tax increases that were billed as temporary at the time Council approved them. Council's budget would cement this plan.

Second, Nutter proposed raising the additional $94 million for schools on top of those temporary-turned-permanent tax increases.

While AVI has been universally lauded as a needed corrective for a system now rife with inaccurate assessments, critics have bashed Nutter's approach to rolling it out and balked at his attempt to collect so much more money for the schools in the process.

Last week, Council gave preliminary approval to three bills offered as alternatives - one that would move the city to AVI but collect only $40 million for the schools; one that would collect an additional $45 million for the schools by raising the Use and Occupancy Tax on businesses; and a third that would leave the current assessment system and tax rates in place for another year.

All three bills were on the table Thursday morning.

The bill that would delay AVI, sponsored by Squilla, would not have provided any new money for the schools, which are facing a deficit next year of more than $200 million. Squilla agreed to hold that bill Thursday, not bringing it for a final vote.

Rather, Clarke and Nutter haggled throughout that afternoon on how to amend the other two bills. Nutter flew home Wednesday night from the annual gathering of the U.S. Conference of Mayors in Orlando and returned Thursday night. He is scheduled to be sworn in as that organization's president on Saturday.

The administration argued that any attempt to continue using the current assessments would be "a train wreck," resulting in thousands of appeals from property owners that would likely cost the city and School District as much as $100 million.

Faced with those losses, Dubow told reporters Wednesday, the administration would have to reduce its revenue estimates, opening a hole in the budget that could be dealt with only by some combination of reduced spending or higher tax rates.

Dubow said he expected the city to lose about $50 million this year from about 2,000 assessment appeals, spurred on by a finding of the State Tax Equalization Board that the city's overall assessments valued property at only 25 percent of its real value, rather than the 32 percent target the city has been using for decades.

The only real solution to the problem, Dubow suggested, was for Council to accept the new full-value assessments expected to be completed in August.

"We're going to have these values," Dubow said. "Once we have them, we really have to use them. . . . If you have them and you don't use them, they really open you up to more appeals."

Council members said they would ask the legislature for a one-year exemption from the state's tax-equalization law to protect the city from the massive assessment appeals predicted by Dubow.