Monday, January 21, 2008

Superintendent Mistaken About Inflation

Superintendent Dale McVey very appropriately devoted his column in the January 16, 2008 edition of Hilliard Northwest News to writing about the 9.5 mill Permanent Operating Levy which will appear on the ballot on March 4, 2008.

I agree with nearly everything Mr. McVey wrote, except for one sentence in which he said: "State law does not allow a school district's property tax revenues to increase with inflation."

Mr. McVey is talking about a law commonly referred to as HB920. This legislation was passed in 1972, and its purpose is simply to keep a homeowner's property taxes from changing just because the county auditor changes the appraised value of your home. The passage of HB920 was motivated by the rapidly rising home prices in some areas in Cleveland, and its consequence of having folk taxed out of their homes.

I think its a good law, and I suspect most Ohioans feel the same.

Inflation is a technical term with specific meaning in economics. It occurs when a government creates money faster than the economy is growing. Think how a game of Monopoly would change if - halfway through the game - the Bank simply doubled the amount of money everyone had. At first the folks with the least money would feel richer, and be willing to spend more money buying property and houses. The rent one pays when landing on another property would not seem so much. But in the end, there are still the same number of properties, houses and hotels in the game, and the only thing more money does is increase the price of all those things (when it comes time to horsetrade).

In other words, it is not inflation just because the price of a few commodities goes up. While oil prices have skyrocketed in the last year, and things made with oil have gone up as well, look at what has happened with the price of electronics - more better stuff and rapidly declining prices. When real inflation is going on, interest rates go way up. Some of us remember the prime rate around 20% in the late 1970s. We're certainly not seeing that now.

I've made this point many times before: Nearly 90% of the cost of running our school district is the salaries and benefits of the teachers, administrators and staff. It is because many of those employees are getting 7.95% annual increases under the current union contracts that our operating costs increase every year, not inflation. The cost of their health insurance has grown significantly as well.

The change in value of my home is not a reflection of either inflation or what school employees should be paid. The very best proof of that is that our county auditor has indicated that in the upcoming property value reassessment, there many be little change - yet the amount paid out in salaries and benefits to the employees of our school district continues to climb.

So if Mr. McVey really wants to tie the rate of budget growth in the school district to the rate of growth of property taxes, it means zero growth for the next several years - which is substantially the same thing as saying no growth in salaries and benefits.

I don't think he really means that.

If he really wants a revenue source that will tend to increase automatically, he should be proposing that we add an income tax levy to our funding mix. Ohio law allows for two kinds of income tax levies. One is simply a percentage of what the taxpayer reports on Line 5 of the IT1040 Ohio Tax Return, which is the same as the Federal Adjusted Gross Income (1040 line 37). It means the tax is based on almost every form of income, prior to deductions.

With the passage of HB66 by the 126th General Assy, school districts also have the option of proposing an income tax levy which is applied to earned income only, meaning wages, salaries, tips, long-term disability benefits, and net earnings from self-employment. Excluded is income from interest and dividends, pensions, social security, unemployment, alimony and child support. This form of income tax is designed to protect senior citizens, who typically have no earned income at all.*

An income tax, especially one based on earned income, is a much better analog of the cost structure of a school district precisely because - one more time - 90% of the cost of running a school district is salaries and benefits.

However there is an important way in which school income taxes are different from school property taxes: while the businesses in our community pay property taxes, they would not pay income taxes to the schools. The more that we would shift our funding to income taxes, the more complete would be the transfer of the funding burden to homeowners.

The real problem is that our school leadership has done an abysmal job of educating the public on the reality of school funding, so few people understand that this is even a choice. A great deal of time and many pages of publications have been expended talking everything other than the mechanics of funding.

They have complained about the growth in students yet have never done anything to mobilize the public to bring pressure on the municipal governments which allow houses to be built by the thousands.

They have complained that the State of Ohio has frozen our funding when the truth is that the intent of our state government is not to give us more money, but rather to take more from us to fund urban and rural districts. They support a proposed amendment to the Ohio Constitution which would amplify that policy.

I have no doubt that convincing our community to accept a earned income tax to fund the schools would be a tough sell. Many of us - me included - want our school leaders to have to come to us on a regular basis and explain why more money is needed. It's about the only tax left where we voters still have that kind of power.

Ultimately, all of us in our community have to answer these questions:
  1. Do we accept that the size and configuration of the workforce employed by our school district is necessary to run the kind of school district we expect?
  2. Do we accept that the compensation structure for that workforce is appropriate?
  3. Are we willing to pay the taxes necessary to support that compensation structure?
Unless the answer to all three of those questions is "YES!" - there is still a lot of work to be done.

* Disclosure: I am myself a retired person whose income is almost entirely generated from investments. Therefore the Earned Income Only form of income tax would benefit me personally - indeed, it might cost me nothing.


  1. Re: "They have complained about the growth in students yet have never done anything to mobilize the public to bring pressure on the municipal governments which allow houses to be built by the thousands."

    Maybe we can ask the folks here why that is. I'd be far more inclined to help the schools out if I didn't think the financial crunch will just repeat itself as soon as the housing market rebounds and building resumes.

    Re: "The change in value of my home is not a reflection of either inflation or what school employees should be paid."

    Spot on. That indicates a lack of knowledge about basic economics which, sadly, is typical of most of our educators and journalists. Both groups have liberal arts backgrounds and often lack knowledge about economics or statistics or the hard sciences and we, as a society, continually pay the price.

  2. Re: "They have complained about the growth in students yet have never done anything to mobilize the public to bring pressure on the municipal governments which allow houses to be built by the thousands."

    My hunch is that there's a conflict of interest here: more students = the more need for teachers and administrators.

    The schools also figure, rightly, that the district will always eventually pass the levies because they can make life very difficult for parents in the form of having to pay for sports and what-not.

  3. Agreed, but one would think that the Board of Education would have no such conflict.

    I think the problem there is that our Board of Education has forgotten that it is the representative of the people of the community. They need to have a cordial and collaborative relationship with the Superintendent and Treasurer, but must never forget that the Administrators report to the Board.

    The Board has a duty to guide and evaluate the Administration through the eyes of the taxpayers of the community. I think the Board has forgotten which side of the table they sit on.

  4. I think the Board has forgotten which side of the table they sit on.

    True. I suppose that is inevitable because most people don't like conflict and I assume the Board spends the majority of their working time with the Superintendent and Treasurer and staff.

  5. Haven't read this Atlantic article yet, but thought you might be interested. I like the title. :-)

  6. TS:

    Thanks for the article link. The writer advocates running America's public schools as a national institution, and abolishing the notion of local school systems. One of his arguments is that other countries spend less per student yet have much more impressive results.

    He also tries to argue that school boards are made up of a bunch of rubes who repeatedly get taken advantage of by the teachers' unions. This is a hollow argument - the unionized federal workers have among the best deals in America.

    I agree with some aspects of this. The inequality of education in our country is appalling, in many ways as bad as it was prior to the Civil Rights Movement. But I cannot bring myself to believe that a national bureaucracy would be better than we have now.

    My dream, as I have long stated, is a publicly funded voucher system as envisioned by Milton Friedman. I believe the best way to ensure that the people delivering educational services are performing well is to give families a choice as to where their kids attend school.

    The real problem in America in general is apathy. We don't get involved, we just complain. We get taken advantage of by shrewd folks who know how to work the system (ie get folks elected who will send money their way), not because we aren't just as smart, but because we don't care.

    We coming to a time when many voters who have previously felt disenfranchised are going to rise and exert great influence in American politics. The results achieved by Sen. Obama in SC this week (winning 50% of the primary vote while Clinton and Edwards split the rest) shows what can happen when a large bloc of non-voters suddenly get interested.

  7. I'm really turned off by the idea of federal control of education so I'll probably skip reading the article.

    I agree that a publicly funded voucher system, however unlikely to pass, would be ideal.