Northampton Area School District Superintendent Joseph S. Kovalchik is defending district financial policies from criticism by a state agency.

NASD and 11 other school districts in Pennsylvania, including Bethlehem Area School District, have been criticized by Pennsylvania Auditor General Timothy L. DeFoor, who said an audit “uncovers a legal standard practice where districts are raising local property taxes while holding millions of dollars in their general funds.

“These districts have found a way to use the law to their advantage, so they could always raise property taxes,” DeFoor said.

“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,” DeFoor said in a Jan. 25 news release.

Kovalchik, in a Jan. 30 phone interview with Northampton Press, said, “The attorney general’s office is entitled to their opinion, but I am offended by their comments because we have not violated any laws or policies, and we are following the procedures and rules that the state has in place.”

NASD is considering using money from its “rainy day fund,” the district fund balance, to balance the proposed 2023-24 budget, which has a $1.8 million deficit.

In his first-look 2023-24 budget presentation at the Jan. 9 school board meeting, Kovalchik said use of the fund balance is an option the school directors could choose to balance the budget.

The NASD 2023-24 preliminary general fund budget expenditure is $127,918,870 and revenue is $126,077,545 - a $1,841,325 deficit.

In his presentation, Kovalchik said the estimated ending unassigned fund balance is $8 million, or 6.3% of budgeted expenditures.

If $1,841,325 is taken from the unassigned fund balance, there would be $6,158,657 in the unassigned fund balance, which would be under the minimum 5% fund balance of $6.4 million.

According to fund balance policy 620, which the school board adopted Sept. 13, 2010, NASD will maintain an unassigned general fund balance of not less than 5% and not more than 8% of budgeted expenditures.

In the Jan. 25 news release, DeFoor said it was evaluated whether each district appropriately used the Pennsylvania Department of Education referendum exception method to raise local taxes and whether each district ensured its general fund balances were properly designated as committed, assigned and used in a timely manner for intended purposes.

The districts chosen for audits were based on criterion that included a district with approved referendum exceptions and substantial government fund balances for fiscal years ending 2018 through 2021.

DeFoor said, “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.

“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,” DeFoor added.

The Pennsylvania School Code and the Taxpayer Relief Act (Act 1) dictates how school districts can raise taxes and sets limits for those increases. If a district must raise taxes above the limits set in law, they are required to ask voters for permission through a referendum or apply to PDE for a referendum exception. A referendum exception allows school districts to raise taxes above the inflationary index without voter input. PDE’s referendum exception applications are based on what a district has budgeted to cover expenses, versus actual cash on hand.

In the phone interview, Kovalchik said, “[DeFoor] mentions throughout the report about transparency. Since I became superintendent 13 years ago, and all the board members I have worked with in that time, we have been nothing but transparent when it comes to the budget.

“We’ve always applied for exceptions, but we have not used them since at least 2017. We have not gone above the Act 1 index. The reason we seek the exceptions is because of the state budget timeline. We never know what we’re receiving from the state until June or July.”

School districts in Pennsylvania are required by law to approve budgets by June 30 each year.

“The boards I have worked with seek the exceptions, just in case,” Kovalchik said in the phone interview. “The average annual tax increase over the last four years has been 0.87%. I think it’s prudent that any school district or individual has some form of ‘rainy day account.’ The question becomes how much should be retained in that account. The 5% minimum is something we’ve talked about for the last couple of years. It would generate more money to reduce the deficit, and that would reduce the amount in the ‘rainy day fund.’”

Kovalchik said there’s an important factor in maintaining a school district fund balance.

“If your fund balance is below a certain amount of money, you’re not going to receive favorable borrowing interest rates, whether that be for a new project or a renovation project,” Kovalchik said. “We do get audited every year. We’ve had zero or minimal finds the last several years.”

Kovalchik continued, “For the past 30 years, the primary way to fund schools is through property tax. I‘ve always been in favor of looking for ways to fund schools other than the property tax.

“Maybe the real issue is that Harrisburg should look at how they’re funding schools and the formula used to fund schools. It’s hard for me to believe that our leaders in Harrisburg can’t come up with a new formula to fund schools to reduce the burden on the community, especially on the senior citizens. But the school district still seems to get the blame, even though you need funds to run a school district the size of Northampton,” Kovalchik added.

NASD and BASD are the only Lehigh Valley districts selected for audits. Other districts cited in the auditor general’s news release include Abington School District, Montgomery County; Cannon-McMillian School District, Washington County; Hempfield School District, Lancaster County; Lower Merion School District, Montgomery County; Neshaminy School District, Bucks County; North Allegheny School District, Allegheny County; North Penn School District, Montgomery County; Penn Manor School District, Lancaster County; School District of Lancaster, Lancaster County; and West Chester Area School District, Chester and Delaware counties.

A copy of the auditor general’s report can be found at paauditor.gov.

Kovalchik said the state auditor’s general report will be addressed at the next school board meeting, set for 6:30 p.m. Feb. 13 at Northampton Area High School, 1619 Laubach Ave.