Judge says Lower Merion school officials misled taxpayers

A Montgomery County judge has ordered one of the state’s highest-achieving school districts to slash its local property taxes, saying it fudged annual budgets in order to dupe taxpayers and justify tax hikes.

Montgomery County Court of Common Pleas Judge Joseph Smyth said in a Monday decision that the Lower Merion School District — which borders Philadelphia to the west and spends more per pupil than almost any other district in the state — ”deliberately engaged in a course of conduct” that allowed it to raise taxes for years without going to a voter referendum.

To do that, Smyth said, Lower Merion officials led residents and state officials to believe the district was in danger of running major deficits when, in reality, the wealthy suburban enclave had millions in reserve.

The judge issued an injunction that forces Lower Merion to withdraw a board-approved tax hike of 4.44 percent for the 2016-17 school year. The board must rescind the tax at its next meeting.

Lower Merion officials said Tuesday they will appeal the ruling.

A state law known colloquially as Act 1 precludes school districts from approving tax increases larger than 2.4 percent without a voter referendum. The state, however, can exempt school districts facing budget shortfalls triggered by rising special education or pension costs. According to Smyth’s decision, Lower Merion routinely projected deficits, successfully applied for a state exemption, and subsequently ended the year with large surpluses.

Between 2009 and 2015, the district’s annual budget estimates anticipated a combined $40 million shortfall. In those same six years, the district actually wound up with surpluses totaling over $42 million.

In 2011-12, for example, the district budget projected a $5.1 million deficit and ended the year with a $15.5 million surplus.

“An injunction against this repeated practice of the Lower Merion School District is the only appropriate remedy to bring the illegal practice to a halt,” Smyth wrote in his 17-page opinion.

Lower Merion has raised taxes 53.3 percent since 2006, the opinion noted. In the past decade, no district in the commonwealth has requested as much tax money through Act 1 exemptions, according to a recent analysis by the Associated Press. The AP found that 384 out of 500 Pennsylvania school districts have received an Act 1 extension from the state in the past decade, though none had been as aggressive as Lower Merion.

Resident challenges tax hike

Lower Merion’s wealth and proximity to cash-strapped Philadelphia make the township a frequent point of comparison for those seeking to illustrate funding inequality in Pennsylvania. Its schools are also among the state’s highest performers. U.S. News and World Report ranks Lower Merion High School as Pennsylvania’s fifth best. Harriton High School, also in the Lower Merion School District, checked in at 28th.

The challenge to Lower Merion’s tax increase was brought by longtime resident Arthur Wolk, who is no stranger to litigation. The founder of a prominent aviation law firm based in Philadelphia, Wolk also made waves a little over five years ago when he sued a blogger for libel. The case was notable, in part, because it had broader implications for the application of libel law.

Wolk argued the Lower Merion case pro bono and said he became interested in the issue after watching his tax bill climb. Only after investigating the matter personally did he become aware of what he called “false representations” to the Pennsylvania Department of Education by Lower Merion officials.

“This was a continuous plan — for reasons that I can’t fathom — to accrue huge amounts of money,” said Wolk.

Lower Merion has $50 million to $60 million in the bank, according to testimony from the district’s business manager cited in Smyth’s opinion.

State law is designed to catch school districts that over-represent need when applying for tax-hike exemptions. School districts that receive exemptions for tax increases cannot end the fiscal year with fund balances greater than 8 percent of their overall budgets.

Lower Merion skirted that part of the law, Smyth’s opinion said, by shifting year-end surpluses into other accounts, such as those reserved for capital funds.

The state Department of Education said it was reviewing the case, but could offer no further comment.

Judge: Average taxpayer out $140 a year

Smyth did not rule on whether the district owed back taxes related to past tax hikes, saying he would leave the matter “for another day.” Smyth did estimate that improper tax increases had cost the average Lower Merion taxpayer $1,400 over the past decade.

In a Tuesday letter to parents, Lower Merion Superintendent Robert Copeland and board President Robin Vann Lynch vigorously disputed the judge’s conclusion and said the ruling could hurt the district’s long-term financial outlook. The letter said Judge Smyth misinterpreted the district’s budgeting practices as deceitful.

“The premise that school districts’ unspent funds are the result of intentional overestimation is flawed; these funds instead reflect efforts taken by the district to manage its finances in a responsible manner,” the letter stated. “The district does not spend funds simply because they have been budgeted and after each budget is passed, continues to work hard to capitalize on opportunities to reduce expenditures and realize cost savings.”

The letter also cited Lower Merion’s strong credit rating as evidence of sound policy. District officials argued that if they weren’t given fiscal flexibility it would open Lower Merion to risk that would eventually degrade the quality of local schools and home values.

If Smyth’s decision holds upon appeal it could have ramifications across the state.

As costs rise and Harrisburg lawmakers bicker over education funding, Pennsylvania districts have leaned harder on local tax bases.  A June report released by the Pennsylvania Association of School Business Officers and the Pennsylvania Association of School Administrators found that 30 percent of the commonwealth’s 500 districts planned to raise taxes this year above the 2.4 percent threshold established by Act 1.