A Montgomery County judge has ordered the Lower Merion School District to revoke its latest tax hike, saying the district misled taxpayers by projecting large budget deficits to justify raising taxes 4.4 percent when it actually had socked away millions of surplus dollars.

In what may be an unprecedented win for Pennsylvania taxpayers, Common Pleas Judge Joseph A. Smyth said in his decision Monday that the district could increase taxes for 2016-17, but no more than 2.4 percent.

The judge said he would "leave for another day" the question of rebates, refunds, and credits for those who already paid their current school tax bills. He said he would consider establishing a trust to collect "improperly" accumulated past taxes - an estimated $1,400 per household - if it is determined that all Lower Merion taxpayers are plaintiffs.

The ruling came in a class-action lawsuit filed in February by Arthur Wolk, a lawyer who lives in Gladwyne, and two others, who said that the district had misappropriated funds and that its large end-of-year surplus was "ill-begotten." They had sought a long list of remedies, including a five-year moratorium on tax increases.

"I've never heard of this happening before . . . a judge substituting his/her judgment of financial needs of the district in place of locally elected school board members," Jim Buckheit, executive director of the Pennsylvania Association of School Administrators, wrote in an email.

He said he anticipates more lawsuits against districts that also have healthy fund balances but raise taxes above their Act 1 indexes, the maximum amount allowed under state law.

The Lower Merion school board said in a statement Tuesday that the district planned to appeal the decision, and strongly defended its accounting and budgeting practices.

The ruling could eliminate $4 million targeted for special education and retirement benefits in the coming year, according to the board, which added, "If the court's decision stands, the financial health of LMSD and districts across the state is in jeopardy."

In a separate letter to parents, the board said the decision "could significantly impact the quality of school programs," and warned it might have to impose personal income taxes to make up for shortfalls.

The district has had some big bills. It spent $200 million on two new high schools that opened in 2009 and 2010, and its per-pupil cost is more than $22,000, the highest in the state.

Between 2010 and 2015, the 8,300-student Lower Merion district - which, with a $259 million spending plan, is one of the wealthiest public school systems in the Philadelphia area - predicted large annual budget deficits, yet had millions stashed away in its reserves, Smyth said in his ruling.

For instance, in 2009-10, the district projected a $4.7 million budget hole but ended the year with a $9.5 million overage. In 2011-12, it anticipated a $5.1 million gap but wound up with $15.5 million to the plus side.

"The evidence was overwhelming. It was indubitable," said Wolk, who had long complained about high taxes. "We knew they were doing it. We just had to stop them."

Since 2006, the district has raised taxes by 53.3 percent and has $50 million to $60 million in the bank, Lower Merion business manager Victor Orlando testified in the case.

The judge said the anticipated $9.3 million deficit for 2016-17 likely would require even less than a 2.4 percent tax hike to balance the budget.

According to the judge's findings, the district got away with raising taxes above the Act 1 index of 2.4 percent by telling state officials the money was needed to cover soaring special-education and employee pension costs, two of the biggest expenses for most public school districts.

However, audits of Lower Merion's budgets show it had year-end surpluses ranging from hundreds of thousands to millions of dollars for special education. The district also had $15.3 million tucked away in a retirement fund that was never used for pensions; instead, those benefits were paid from the general fund, according to the findings.

Because the Pennsylvania School Code does not permit a district of Lower Merion's size to store more than 8 percent of its money in reserve funds, the district transferred its surpluses to other accounts, the court found. Reserves are intended for one-time or unanticipated purchases, not ongoing expenses, according to school officials.

Yet Orlando testified that in four of the six years that he prepared budgets, he used unassigned reserves to balance the books.

Smyth ordered the Lower Merion school board to revoke the 2016-17 tax rate at its next scheduled meeting Sept. 19.

Schools across the state are stashing more money in their reserves for a rainy day. In 2014-15, they had nearly $4.3 billion sitting in fund balances - about a 5 percent increase over the previous school year, according to state Department of Education data.

School administrators said that while the funds grew through 2015, last year's nine-month state budget impasse forced many districts to raid their reserves.

"Given what we went through, . . . all you do is encourage more cautious, fearful budgeting" by school finance officers, said Jay Himes, executive director of the Pennsylvania Association of School Business Officials.

Steve Robinson, a spokesman for the Pennsylvania School Boards Association, said school districts should have 5 to 10 percent of their operating expenditures in reserve. He noted that low fund balances can affect credit ratings.


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