Revenue is down, utility rates are up and a huge spike in pension costs is looming as school officials begin to formulate their 2010-11 budgets.

Business managers hoping to rely on property tax increases to help them make ends meet next year had better think twice.

The state has imposed the strictest limits yet on tax hikes since Act 1 took effect four years ago.

And while that's good news for property owners battered by rising tax bills, it may force schools to make painful cuts in programs and staffing next year.

"It's going to be very challenging," Sherri Stull, Cocalico School District business manager, said. "This year is going to be the worst since I've been in this business."

Stull, who's been balancing school budgets for six years, isn't the only one concerned.

"All in all, we're looking at some cuts," said Joe Kurjiaka, Manheim Township School District's director of operations and planning. "Nothing is sacred, I would say, in this budget unless we have a mandate to continue the expenditure."

Statewide, school districts will be limited to raising taxes by no more than a base rate of 2.9 percent in 2010-11, compared with a 4.1 percent base this year.

In Lancaster County, school officials will have a little more leeway — the average Act 1 index is 3.4 percent. But that's a steep drop from the 4.8 percent average permitted this year.

Locally, the indexes range from a low of 2.9 percent for Lampeter-Strasburg, Conestoga Valley, Pequea Valley, Elanco and Manheim Township school districts to 4.2 percent for Columbia Borough School District.

More than half the county's 17 districts raised property taxes this year by more than their indexes for next year.

Unless a district gets permission from the state or approval from voters in a referendum, it must keep tax hikes within its Act 1 index.

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The tighter taxing constraints for 2010-11 are a result of the stumbling economy.

The state bases its indexes on the statewide average weekly wage and the employment cost index, a measure of the cost of an hour of labor.

Because inflation is low and wages are relatively flat, the index is lower than in past years. And it's expected to stay low next year, too.

Meanwhile, districts are facing a spike in the cost of electricity of 15 percent to 40 percent beginning Jan. 1, and a near doubling in contributions to the Pennsylvania School Employees Retirement System, which provides pensions for teachers and other professionals.

The PSERS contribution for school districts is expected to jump from 4.78 percent of employee salaries this year to 8.4 percent in 2010-11.

For School District of Lancaster, that would mean a $3.5 million increase for 2010-11 alone, said Matt Przywara, the district's chief financial officer.

SDL's tax index will drop from 5.8 percent this year to 4.1 percent in 2010-11. That represents a $900,000 decline in the amount of tax revenue the district can generate, Przywara said.

How will it pay for the PSERS increase?

It can't rely on increased state funding — Pennsylvania's budget deficit keeps growing — and federal stimulus dollars won't be increasing next year.

Revenue from property taxes and investments is either flat or declining. That leaves cuts in programs and staffing.

Przywara declined to speculate on what spending cuts the district may have to consider for 2010-11 but said "they could be very significant."

Other school officials also would not discuss possible cuts for next year.

Several business managers want the state Legislature to intervene and help out with the PSERS hike, which is projected to increase again in 2011-12 to 10.7 percent before jumping to more than 29 percent the following year.

The steep rise is the result of poor investment returns, increased pension costs and artificially low contribution rates in previous years.

"It's definitely a problem (the Legislature) can't ignore," Przywara said. "Something needs to change because they can't pass the burden back to the local taxpayers."

Some districts have tried to prepare for the hikes by setting aside funds to cover the rising PSERS rates. Elizabethtown School District, for instance, placed $350,000 into a PSERS reserve fund last year, business manager George Longridge said.

But "that's just a drop in the bucket," he said, compared with the nearly $1 million in PSERS increases the district expects to incur next year.

To help balance its 2010-11 budget, Elizabethtown may seek exceptions —permission to exceed its Act 1 index because of costs beyond its control — from the state for the first time since 2006-07.

Last year, only two county districts sought exceptions. This year, many more are likely to apply.

They must decide by Jan. 28 whether to seek exceptions or keep a tax hike within their indexes.

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In addition to PSERS and utility costs, districts are getting battered by low interest rates.

Cocalico two years ago earned $655,692 in interest on long- and short-term investments, Stull said.

This year, it expects to make only $200,000 on investments generally earning less than a 1 percent return.

"We have a few CDs earning 1 percent, and we're excited about that, and that's pretty sad," she said.

With housing sales down and unemployment up, revenue from earned income and title transfer taxes also has declined.

To offset the revenue reductions, districts in the past year have implemented spending and hiring freezes, energy conservation programs and other cost-cutting measures.

Cocalico, for instance, adopted a four-day summer work week that saved the district $22,000, Stull said.

Conestoga Valley reduced its electricity costs by 27 percent from September 2008 to September 2009, superintendent Gerald Huesken said, by turning off lights and computers when not in use and installing more efficient light fixtures.

Ephrata cut its electricity usage by at least 10 percent over the same period after it installed motion-sensor lighting controls and more energy-efficient windows, spokeswoman Stephanie Gingrich said.

The cost cutting will continue as business managers prepare their new budgets in the coming months.

"We're just going through the budget now, budget by budget, building by building, just looking at where we'll trim," Stull said.

But officials said the savings won't be enough to offset increased expenditures they'll have little control over.

Budgeting will become even more difficult next year, Przywara said, when federal stimulus funds expire, leaving districts and the state — which used stimulus money to plug holes in the state education budget — with even bigger funding gaps.

"It's going to call for some tough decisions," Przywara said. "The next two years are going to be tough."

bwallace@lnpnews.com