How Philly schools are funded — property taxes play a huge role — and why state budget negotiations are key

Philadelphia’s school district will spend more than $4 billion this year to educate city kids.

School District of Philadelphia headquarters at 440 N. Broad St.

School District of Philadelphia headquarters at 440 N. Broad St.

Mark Henninger / Imagic Digital
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State budget negotiations, local property tax relief, and a recent Pa. Supreme Court decision are threatening to throw a wrench in the Philly School District’s $4.3 billion budget for the upcoming academic year.

Residents overwhelmingly think the city should spend more on education. It was the most popular response when Billy Penn asked readers for their spending priorities in April.

But the city actually provides less than half the revenue that funds local education. The School District of Philadelphia receives state and federal funds alongside local revenue, which is mostly drawn from local taxes. Here’s where FY23 money comes from, according to the recently adopted budget:

  • $1.79 billion from the city
  • $2.2 billion from the state
  • $16 million (not billion) in federal revenue

At less than 1% of the total, federal contributions look paltry, but that figure doesn’t factor in money from the American Rescue Plan Act (ARPA), which the district is counting on to keep it in the black.

Other uncertainties exist because when City Council approved Philadelphia’s operating budget for fiscal year 2023, it included property tax relief — which cuts into the revenue usually sent to schools. And a June court decision may force the city to refund commercial property taxes from several years ago, cutting deeper into that well.

Serving nearly 200,000 students, Philadelphia’s school district isn’t just the largest in Pennsylvania, it’s one of the biggest in the nation.

Here’s a look at how the SDP gets financed, and the questions it faces in the coming year and beyond.

Local funding

Over $1.5 billion of city revenue dedicated to the school district comes through local taxes. Seven different levies make up this piece of the pie, but property taxes are the main contributor by far, at $1 billion in SDP’s adopted FY23 budget.

Other sources include the cigarette tax, business use and occupancy tax, and sales tax. A portion of the profit of ridesharing companies like Uber and Lyft are mandated to benefit the school district through a 2016 law.

The biggest source of local funding not from taxes is a City of Philadelphia grant drawn from the General Fund — not via tax dollars but from general obligation bonds — on a yearly basis, this year to the tune of $269 million.

Some advocates think there should be more funding for schools through Payments in Lieu of Taxes, or PILOTs — voluntary contributions of nonprofits that hold large amounts of untaxed property in the city. Right now, those payments make up just about $4,000 in the school district’s budget, which activists at places like Penn and Drexel have been trying to change.

How will this year’s city tax changes impact schools?

Tax relief is one of the headline features of the new city budget, which City Council approved this month and sent to Mayor Jim Kenney for his signature.

The wage tax cut won’t mean much for most residents, unlike an initiative passed to soften recent property assessments that threaten to price residents out of their homes. The new city budget increases the Homestead Exemption from $45k to $80k, which means many property owners will be paying a bunch less in real estate taxes — which means less for schools.

This year alone the change will result in $25 million less than laid out in the SDP’s adopted budget, per Chalkbeat Philadelphia. Some on City Council advocated against the measure for this reason.

“Failing to protect the School District of Philadelphia from the budget shortfalls that this will cause in 2-3 years when federal relief funding runs out is a mistake that could have been avoided,” said Councilmember Kendra Brooks in a statement, noting that the vast majority of ARPA funds are projected to be used by the end of FY24.

What about state-level changes?

More than $1.5 billion of all state contribution to the Philadelphia School District comes via Pennsylvania’s Basic Education Subsidy, which is distributed via the commonwealth’s fair funding formula.

One of the holdups in the budget negotiations going on now in Harrisburg is over whether to distribute all of the state’s education-marked money in the same fashion. The formula allocates more money to school districts with lower median household incomes, which means Philly gets a larger share.

Gov. Wolf is arguing that it should happen, and also proposed a $1.8 billion increase in education funding. Republican legislators are considering approving up to half of the recommended spending increase, per NBC10.

Since the district’s FY23 documents are written under the assumption that Wolf’s plans are all approved, there could be a sizable shift in outlook based on deliberations in Harrisburg.

The financial uncertainty doesn’t end there, because …

Court-ordered repayment of 2018 tax increases

In 2018, the Philadelphia Office of Property Assessment only assessed commercial properties and not residential properties. City officials say it was an attempt to avoid violating the Commonwealth’s Uniformity Clause, as they believed that they already had an understanding of the market value of residential properties.

Long story short, a group of commercial property owners sued the city over this assessment process and won.

In a decision handed down in early June, the state Supreme Court stated that the disparity of information on commercial and non-commercial properties was not wide enough to “render the assessment of residential properties for 2018 unnecessary.” Philly’s failed appeal means that 2018 real estate tax assessments were unconstitutional and the city must refund any tax increase over the prior year assessments.

As we know by now a refund in property taxes is liable to affect the school district. The verdict could cost the SDP $35 million, according to Chalkbeat, funds which must come out of the district’s FY23 budget.

Between property tax relief and refunds, there’s a $60 million hole in this year’s adopted budget.

What about the federal grants?

The district hasn’t minced their words about the importance of ARPA funds, detailing that the $1.1 billion in ARPA funding the district is receiving directly will create “a short-term operating surplus in FY22, FY23, and FY24” which can give the district the capacity to address long standing problems.

In FY23, ARPA funds are being put towards similar initiatives as FY22, such as:

  • More before-school, after-school, and extracurricular programs
  • More teachers for English Language Learners
  • Retention and recruitment bonuses for staff
  • Improving facilities and building safety across the District
  • Trauma response initiatives and more counselor support
  • Curriculum development
  • Information technology equipment

What’s the timing of the SDP budget process?

The school district’s budget process aligns with Philly’s, but not perfectly.

The district begins preparing for the next fiscal year at the turn of the calendar year, after enrollment is determined and the first quarterly report on implementing the budget is in — usually due in October or November.

By February, a second quarterly report is released and projected enrollment for the next year is shared with schools. Come March, the school board approves a lump sum budget and school budgets for the following year are submitted to aid in writing up the district’s books.

Those documents are released in April, the same month that the Board of Education holds its budget hearing. That’s followed by their hearing for Council in May, the main period of alignment with the city overall. That said, the district also approves their budget in May, often more than a month before Council approves the city’s financial plan.

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