Pennsylvania school districts looking to alternative revenue sources to make up for state funding cuts will be constrained by amendments to the Taxpayer Relief Act of 2006 (commonly known as Act 1) that strengthen provisions requiring a school board to obtain public approval by referendum before increasing the school tax rate by more than the rate of inflation.

The Commonwealth’s fiscal year 2011-2012 appropriations bill, signed by Gov. Tom Corbett on June 30, 2011, reflects significant cuts in state and federal funding for basic (K-12) education. In keeping with his “no new taxes” policy, Gov. Corbett negotiated with the legislature, reportedly as a condition to his signing the budget bill, the passage of a companion bill, Act of June 30, 2011 (No. 25), the “Act 1 Amendments.”

Act 1 was passed in June 2006 to remedy what was perceived as an over-reliance on local property taxes to fund school districts. The intent was to change the composition of funding sources for schools, i.e., to substitute state funding (to be derived mainly from gaming revenues) for local funding.

Act 1 also limited the ability of school boards to raise property tax rates beyond the rate of inflation, but contained 10 exceptions that set forth costs for and conditions under which a school board could implement such rate increases. Since enactment of Act 1 in 2006, across the Commonwealth’s 500 school districts, taxpayers have approved one of 14 referendums held.

Under the Act 1 Amendments, there are now only three exceptions to the referendum provisions, the exercise of which must be approved by the Pennsylvania Department of Education: (1) costs associated with payment of existing or refinancing debt, (2) certain costs incurred in providing special education programs and services to students with disabilities, and (3) certain pension costs.