Saturday, December 26, 2009

Time Is Of The Essence

I wrote a piece in October called "Rabbits & Hats" which addressed the fact that the leadership of our District had decided to use what is likely to be one-time Federal stimulus money to fund current operations, allowing Superintendent Dale McVey to make the declaration during his 2009 State of the Schools speech that there would be "no levy in 2010." While the Superintendent attributed this levy interval to 'stretching the dollars' from the last levy, the numbers in the latest Five Year Forecast show that there has been no overall decrease in spending. Indeed, there has not even been a decrease in the rate of the increase in spending from the historical trend, as can be clearly seen in this chart, drawn from the official Five Year Forecasts.

Don't get me wrong – I'm all in favor of maximizing the interval between operating levies if the lengthening of the interval is a result of significant and permanent spending reductions. But that is not the case here. Had we not received this Federal stimulus money, and were not planning to spend our cash reserves down to threadbare levels (in conflict with the Board's policy to maintain a 10% cash reserve), there would absolutely have to be a levy on the ballot on 2010 in order for all of our programming and services to be preserved, precisely because there have been no significant and permanent spending reductions made.

It is certainly true that some cost savings have been instituted – the Superintendent outlined a number of them in his speech, reporting that reductions totaling $7.5 million had been implemented in the past two years, although it is not clear whether this $7.5 million would be eliminated over one year, three years or a hundred years. However, we should note that the total operational spending by the district was $146 million in FY08, $150 million in FY09, and is projected to end FY10 at $158 million. In other words, annual operational spending has increased by $11 million in just three years. Even though our student enrollment has been essentially flat, from 15,150 in FY08 to our current 15,523, our annual operating expenses have risen by 7.7%.

There is no mystery as to what causes the increase in spending: it's the cost of compensation and benefits for the teachers, staff and administrators, which I most recently addressed in an article titled "Teacher Raises = Levy Size." Of the $11 million in expense growth over the last three years, over $8 million, or 73%, is attributable to compensation and benefits.

We may be able to make it to 2011 without putting a levy on the ballot if there are no hiccups in revenue and no surprises on the expense side. But by spending down our cash reserves, we'll have little capacity to absorb surprises without having to take drastic action.

Notice that there haven't been any official hints about how large that levy might need to be in 2011. It's not that hard to come up with a ballpark number. A key factor is the amount of revenue that is generated each year by a one mill levy. This factor is different for every school district, but is readily available from the Ohio Department of Education's website, via the "CUPP Report." In our case, 1 mill = $2.4 million/yr in revenue. Knowing that, all you have to do is look at the Five Year Forecast and see how many mills it takes to fill the gap between projected revenue and projected spending, while never letting the cash balance get below zero.

With no new levy, we'll run out of cash in FY12, so we'll need to pass a levy no later than Nov 2011 (which is in FY12), and it will require at least 4 mills to get us through FY12 – just that one year. If we go with only 4 mills in 2011, then to fund FY13 we'll need another 12 mill levy in Nov 2012, which would keep us afloat through FY14 with $5 million in cash in the bank at the end of that year. Or we could go for 10 mills in 2011, but would still need another 10 mills in 2013. Or we could go for 12 mills in 2011, and not likely need to put another levy on the ballot until 2014.

I know you must think I'm nuts saying that our tax rates would have to increase by 16 mills or more in the span of 3 years. This would add $491/yr per $100,000 of home valuation, meaning many HCSD homeowners would see their annual tax bill go up on the order of $1,000 – about 15%. But that's how the numbers come out. We can play with the size and timing of the levies (the sooner we add a levy, the smaller the millage can be), but the fundamental truth is the same – our spending is rising at a rate which will continue to require levies of increasing frequency and size.

Note that I'm not the only person saying this – in its December 14 report to the School Board, the Audit & Accountability Committee also said that having the Compound Annual Growth Rate (CAGR) of expenses be greater than the CAGR of revenue is a fundamental problem – worsened by the fact that the CAGR of expenses is double the increase in the Consumer Price Index over the same period. In their conclusion, the Audit & Accountability Committee said: "Most concerning is the fact that Hilliard's growth in spending [per student] from 1995 to 2008 is the highest of the six local districts" used for benchmarking, which were Dublin, Gahanna, Pickerington, Westerville, and Worthington.

Getting this Federal stimulus money doesn't change the underlying reality – it just lulls us into believing that the revenue vs. spending problem can be dealt with later – that we have the "luxury of time," as the Superintendent stated at the October 12, 2009 Board meeting, when the latest Five Year Forecast was presented by Treasurer Brian Wilson. I think this is a perilous frame of mind, unless the community is well-informed about the big picture. Here is an article just published by the Associated Press on this very point.

One part of the school funding story that almost everyone misses is that by the time a levy is next put on the ballot, the real fight will have been long over. When 88% of the total operational spending of the District is for compensation and benefits, the single most important recurring event in the life of our community is the renegotiation of the labor agreements with the teachers' union – the Hilliard Education Association (HEA) – and the union representing the bulk of the staff – OAPSE Local #310. Both of these agreements will be renegotiated in 2010, and will determine the labor rates in our District for a number of years following.

And so when we next see a levy on the ballot, the only thing we as a community will be deciding is how many people are employed by the district, and therefore what programs and services are offered. If the labor rates negotiated in the next contract end up being about the same as the assumptions used in the preparation of the Five Year Forecast, then we will be able to keep all the programs and services we have now – provided we are also willing to pass the 16 mills worth of levies described above. We can't have one without the other.

I personally believe there is just about a zero chance of the people of our community supporting a 15% increase in our property taxes in three years, much less a perpetual rate of increase of this magnitude, and therefore a slim chance that the School Board would even consider putting levies of this size on the ballot in the first place.

So what is to be done?

The answer is painfully clear – the only way to preserve all of our programming and services is for the employees of our district to accept a substantially reduced rate of growth in the cost of compensation and benefits. I am not now, nor have I ever, advocated pay cuts. Last year I asked the two unions to forego one year of base pay increases – a request which was met with complete silence by all members of school leadership – School Board, Administration and the union leaders.

There are only so many knobs we can turn: e.g. base pay increases, step increases, and contribution to health coverage costs – and all of these things need to be on the table and negotiated in concert so that the pace of property tax increases can stay within a range that has a chance of being supported by the people of our community.

There is one more knob we can turn of course – cutting the breadth of programs and services available to our kids. But note that this is dependent on the cost of labor as well. In almost all cases, program costs are cut by laying off the personnel associated with that program. The way this really works is that the youngest teachers in the district are laid off first so that more senior teachers in any discontinued programs can take the younger teachers' positions – a practice called "bumping." A highly effective young teacher could easily get bumped by a more senior teacher who has "retired on the job," as they say. This doesn't make sense to most of us, but that's what the labor agreement specifies, at the demand of the HEA and with the approval of the School Board. As long as the younger teachers continue to accept this provision in their union contract, that's the way it will be going forward as well.

So the point is simple – when you have an organization in which the operating expenses are primarily labor costs – 88% and growing our case – then negotiating the cost of labor is one of the key responsibilities of the governing body of the organization. Corporate executive pay has become insane not simply because those CEOs demanded the big bucks, but also because their Boards of Directors acquiesced to the demands of those CEOs. Those corporate Boards came to view their responsibility as being to keep the CEO happy, rather than to represent the interests of the shareholders. I've seen this happen first hand as a member of corporate Boards of Directors.

Our School Board has the same kind of responsibility, to first represent the interests of the people of our community, not be the friends of the administration or the union leadership. The next major action the Board has before it is to negotiate these labor agreements, and we need your input now, as well as your support when the negotiations get tough – which they almost surely will this time around.

Tell us what rate of property tax increases you would be willing to support in order to grant raises and increase benefits to our corps of teachers, staff and administrators? Will you vote to increase our taxes by 5 mills every three years? How about 12 mills every 5 years? What would be acceptable? Your answers will tell us what can be tolerated in terms of raises and benefits changes in the new contracts. What goal should we have for the average annual raise for an HCSD employee? What fraction of the health coverage costs should be contributed by the employees?

By the way, one of the things we learned via the most recent community survey is that 71% of the 500 people randomly interviewed were very wrong in their beliefs about what our teachers are paid. Those interviewed gave answers which averaged $47,770, while the district website reports that the average salary for a teacher is actually $68,058. In other words, the people of the community underestimate what teachers are paid by more than $20,000 (see Survey Question 19, page 9). We're not going to get valid guidance from the community until key numbers – such as teacher compensation – are more universally known.

If you want the Board to play hard ball and demand no raises for the employees in the next contracts – then you had better be willing to tolerate a strike by both the teachers and staff, as it would surely come to that.

Or if you want us to continue to be generous with raises, but won't support the levy necessary to underwrite such raises, then be prepared for significant programming cuts – on the order of what we saw happen in South-Western City Schools.

This stuff is all connected – you can't take a position on one thing without accepting the consequences on the others.

The time to make you wishes known to the Board is not when the next levy appears on the ballot in 2011.

It is now. Right now. Before the labor negotiations begin.

Monday, December 14, 2009

Union Contracts: Where Do We Go?

As our School Board prepares to negotiate a new contract with the teachers' union – the Hilliard Education Association – we need to think about whether it is time for some fundamental changes to take place. I came across this posting on the blog of the Fordham Institute which speaks to that question.

Your thoughts?

Wednesday, December 9, 2009

Teacher Raises = Levy Size

As Justin, Don and I pointed out during our campaign, 2010 is the year in which the School Board will engage in negotiations with the teachers' union – the Hilliard Education Association (HEA) – as well as with Local #310 of the Ohio Association of Public School Employees (OAPSE), representing the staff of the District. In my opinion, this is the single most significant act undertaken by a school board, and there is only one chance every few years to get it right.

Many of us believe that these negotiations happen in a room with teachers sitting on one side of the table and school board members on the other. Indeed, Article 2, Paragraph B.1 on the very first page of the current agreement between the HEA and the School Board specifies that each side may come to the negotiating sessions with a team of no more than five people – exactly the number of School Board members.

In reality, some of those spots on each side of the table are taken up by others, including professional negotiators. That means that not all five members of the School Board actively participate in the negotiations. I don't personally have a problem with this. Even though this will be the first time I have had any connection with collective bargaining and union employees, I understand enough about negotiating in general to appreciate that having an experienced professional negotiator representing the interests of the School Board is a good thing.

This group of ten people – five on each side – must go into the negotiations with a clear understanding as to the goals of their respective constituents. The negotiators also need to understand how far the constituents might be willing to push a point of contention.

You may recall that during the 2007 negotiation, the last point of contention was the employee contribution to the cost of health insurance premiums. This issue hung up negotiations for months, leading the teachers' union to call for a 'work to the contract' action, and even to authorize a strike. The contract was settled before that happened.

The teachers' union holds a great deal of power in these negotiations, and they know it. Listen to what the chief counsel for the National Education Association (of which HEA is an affiliate) has to say about the power of the teachers' union:

What is the source of that power? The aforementioned authority to strike is one of the keys of course. Not every state grants public school teachers this right, but Ohio does. This power to strike gives the teachers' union a nuclear weapon in a conflict with the School Board, who has no corresponding power. And of course standing in the middle of such a conflict are the innocent victims – the kids who attend our schools.

From a practical standpoint, all the School Board can do is pick at little things at the margin, like the health insurance contributions, while the teachers' union can blow up the whole District with a strike vote.

So if they have so much power, why does the teachers' union ever concede anything to the School Board – like this health insurance thing?

I think it must be because the teachers know a sustained strike is not in their best interest either. For one thing, they don't get paid anything by the School District while they are on strike (ORC 4117.15C). They may receive some strike benefits from their union, but it is unlikely to be the full amount of their normal pay, and their strike fund certainly would have a limited life before being exhausted.

I also believe that the teachers know that a strike would immediately and drastically change their relationship with the people of the community, creating wounds that would take years to heal. Kids would be harmed, from the little special needs pre-school children who would have an interruption in their programming to the high school kids who are getting their academic resumes fleshed out in preparation for college applications. School Boards and teachers unions can think in a timeframe that spans many years, but as a parent, you know your kid is on a once-in-a-lifetime K-12 journey that you definitely don't want messed with. Parents would be unlikely to forget the harm done to their kids by striking teachers. Or by a School Board who lets it get that far out of hand.

And so we end up with a kind of cold war that neither side wants to escalate to a full-blown strike.

Except that's not completely true. There is some number of people in our community who are so tired of paying the ever increasing taxes necessary to fund each successive teachers' union contract that they would support letting the teachers strike if that's what it takes to 'break the power of the union.' I heard from a few such folks during the campaign, although clearly a minority.

So what is the answer? As a community, we need to address this straightforward question: How much are we willing to tax ourselves to fund future pay raises for our school employees?

We have no one to turn to for help with this question – we'll be lucky of the State of Ohio doesn't cut our funding any further than they have already. Every additional dollar our teachers, staff and administrators get paid is going to come out of our own pockets. And not just the pockets of the two-income power couples who are doing fine in this economy – but also the pockets of the households where a job has been lost, bills are piling up, and retirement accounts are being drained.

Part of the problem in developing an answer to this question is that many people in our community don't actually know what teachers are paid. In a community survey taken in September, 30% of the people said that they feel our teachers are underpaid, but 80% of those same people also think the average salary of a Hilliard teacher is on the order of $43,000, when the real average teacher salary is more than $68,000.

Similarly, nearly three-quarters of the people who think that teacher pay is "about right" also believe that the average teacher pay is about $49,000. Only 15% of the people surveyed know (or guessed) that the average teacher salary is actually $68,000/yr.

In other words, about 85% of the public thinks teachers are underpaid or paid about right, but the public's perception of what teachers are paid is around $19,000 lower than the actual average. I wonder what kind of response there might have been had the survey included the question: "If you knew that the average salary for our teachers is $68,000/yr, would you say they are underpaid, overpaid, or paid about right?"

The story is quite different when the question is about the administrators. Only 4% of the community members believe administrators are paid too little, while 42% say they are paid too high. This is a common refrain in our community: "There are way too many administrators and they get paid too much!" It may not help that the public's perception of the average administrator salary is $12,000 less than the actual average of around $87,000.

So that's one problem we need to address – the lack of knowledge the people of our community have about these basic economic facts – the problem I've been trying to get addressed for nearly a decade.

But let's assume that everyone in the community has accurate knowledge about our teacher, staff and administrator pay scales. We still have that same critical question to answer:

How much are we willing to pay in additional property taxes to fund raises for the teachers, staff and administrators?

In his October 2009 Five Year Forecast, Treasurer Brian Wilson built an estimate of future costs based on these assumptions:

  • In 2010, the average base pay increase would be 3%, plus average step increases of 2.3%. Additional staffing at Bradley would add about $1 million to spending, but nearly the same amount of staffing costs would be eliminated elsewhere. A one-time shot of Federal stimulus money would provide $650,000 in funding this year and next.
  • In 2011, there would be no base pay increases, and the average step increase would be 2.3%.
  • In 2012 and 2013, the average base pay increase would be 2%, and the average step increase would be 2.3% and 2.4%, respectively.
So here's the punch line: If these assumptions – and the others in Mr. Wilson's forecast – hold true, I calculate that we will need operating levies on the order of 10 mills in 2011, 2013, and 2015. These will increase our property taxes by $300 per $100,000 of market value in each of those years. In other words, in the span of six years, our property taxes would increase 40%.

And that's if the teachers' union agrees to raises similar to what Mr. Wilson has assumed. If the HEA demands more, and our school board agrees to pay them what they demand, our taxes will go up at an even greater rate.

A serious and respectful dialog needs to take place between the people of the Hilliard Schools community and the employees of our school district if we are to arrive at a balance of taxes and raises that are acceptable to all. It has to happen before the ten negotiators for the school board and the teachers' union sit down to begin formal negotiations. We can't wait until a new union contract gets signed, then try to get an operating levy passed to cover costs that have already been determined.

Instead, we should have a dialog so inclusive and thorough that we will (nearly) all agree when it is time for another operating levy, and how large it should be. The tangible indication of a successful dialog between the community and the teachers, and the school board and the union, is a levy that passes with a substantial majority of the vote – perhaps 75%?

Having a levy pass 51% to 49% is not success – it's barely passing. Is 'barely passing' the best we can do as a community? This seems way too risky to me – a few votes the other way and the levy fails and our school board has to cut programming and staff (because the cost of labor is already negotiated into the union contracts). We saw this unfold a couple of years ago when the 9.5 mill levy failed. I most definitely do not want to be put in that position during my four year term on the school board, and I'm sure the other school board members feel the same way.

Nor do we want to slide into the mode of so many other districts – putting levies on the ballot time after time until they pass. Just look to South-Western City Schools to see how ugly that can get.

So will you participate in the dialog and help find the solution? This is no time to be an arm-chair quarterback.

Thursday, November 19, 2009

Through the Looking Glass

Although I won't be sworn in as a member of the School Board until January, the transition from 'outsider' to 'insider' has already begun. It will necessarily bring change to the subject matter and content of what I write here.

By far, the biggest change is that as an 'outsider,' I was free to gather information (often via public document requests), do analysis to try to 'fill in the holes,' then write about what I believed was going on.

As a Board member, some of those things I tried to deduce in the past will be revealed to me in the course of discussions that must remain confidential, either by rule of law or contractual agreements.

I understand the situation. I have served on the Boards of Directors of public corporations, and was an officer of CompuServe. There are a number of restrictions placed on so-called 'insiders' by the securities laws, especially during those times when insiders are dealing with information that has not yet been released to the general public. Violations of these laws carry stiff penalties. Many of you will recall the case of OSU professor Roger Blackwell, who after being convicted of 'insider trading' while serving on the Board of Directors of Worthington Foods, went from being one of the stars of the OSU faculty to a felon, now serving out his sentence in a Federal prison.

My commitment to those who voted for me is that I will do all I can to increase the flow of information from the School District to the people of the HCSD community. I hope that the other Board members will join with me in ramping up the level of intra-Board discussion at the meetings. One way this could be achieved by adding various strategic discussions to the agenda, in addition to all the routine matters that the law requires must come before the Board for approval. Perhaps one Board meeting each month could be about routine matters only, but the other meeting would have a significant topic on the agenda which would lead to a long discussion, potentially with public comment.

The idea is that if the public knows that, for example, that the first Board meeting of every month will have at least one strategic topic on the agenda, and that in February the topic will be land development policy, in March it will be transportation, in April it will be some other topic, and so on – maybe more folks will come to the Board meetings and interact with the Board and the other school leaders.

I believe that the people of our community must be informed and engaged about the strategic issues facing our School District if we are to have a sustainable future. With your support, I'll endeavor to do my part from the Board's side of the table.

But you need to do your part as well. Democracy is not a spectator sport! Here are some ideas:

  • A good way to get started is to visit the website of and read through the information that group has compiled. And lest you think these economic issues apply to Hilliard alone, check out the work of similar groups in other schools districts: EducateWorthington, LevyFacts (Westerville) and Responsible Olentangy Citizens to name a few.
  • Read the agenda of the upcoming Board meeting, which is posted here the Friday before each meeting. The minutes of prior meetings are posted here as well.
  • Justin Gardner will soon be bringing up a website where he will post video recordings of the Board meetings. Watch those to learn about how the Board goes about its business.
  • Time is allocated at every meeting for public participation. Use it to tell the Board about matters that are important to you.

This is your school district, whether you have kids in school or not. We all benefit from having a highly respected and desirable school district, and we are all invested - quite literally - in its success.

Don't be passive investors - get involved!

Thursday, November 12, 2009

Time Bomb: Beginning to Understand

I have already written a couple of articles about the ticking time bomb which is the State Teachers Retirement System (see Time Bomb and Still Ticking). More specifically, the problem is that the STRS Retirement Fund is fatally underfunded right now, given the losses they took in the stock market, and the rate in which benefits are being paid out.
After going through a period of asking for the heads of their own investment managers on a platter, some STRS retirees seem to be coming to understand the reality of their situation. This recent post on the blog of Kathy Bracy, a retired Ohio teacher, records a conversation between a retired STRS member and an STRS official.
Something has to be adjusted – either more money needs to be put in, or benefits need to be reduced. Up to now, Ms. Bracy and her readers have been calling for more money to be put in, specifically by teachers who are currently working, and by taxpayers via increased employer contributions.
The most profound statement in that dialog was the acknowledgement by the retired teacher that the everyday taxpayer has little appetite for propping up a retirement system which has been poorly managed when the taxpayer has seen his/her own prospects of having a financially secure retirement all but disappear. After all, the taxpayers have already contributed their employer share to STRS once through their school taxes. If STRS allowed themselves to get greedy and lose a bundle in the stock and real estate markets, that's on them, not the taxpayers.

Friday, November 6, 2009

Thank you!

To the voters of the Hilliard Schools community, I am humbled and honored to be entrusted with a seat on your Board of Education.

Congratulations to Lisa Whiting and Andy Teater for being returned to the Board for another term.

Thank you to Terri Botsko and Chris Courtney for your commitment to the community, expressed by your willingness to serve.

To my running mates, Justin Gardner and Don Roberts: Our mission to educate and engage the people of our community on the issues which control the economic sustainability of our schools was advanced significantly by the wisdom and integrity you brought to this election. You were tireless campaigners, and I am proud to have been on the ballot with you.

And to the team: In the few months since our team was formed, you have built a voice which has been noticed and is being heard. More people are visiting your website and joining your emailing list every day, seeking a more comprehensive and independent information source about our school economics than has ever before been available to the people of our community.

Our key campaign message was that the size and frequency of operating levies are directly coupled to whatever terms are negotiated into the collective bargaining agreements with the unions representing our teachers and staff. It is by design an adversarial process. For the School Board to be effective in representing the position of our community, the people must be engaged in the process - not when a levy is placed on the ballot, but when the union contracts are being negotiated. This will take place next year.

Please get informed and be engaged - for the sake of our kids, our schools and our community.

Friday, October 23, 2009

When Less is... just Less.

At their May 26, 2009 meeting, the School Board had item F3 on the agenda, a resolution giving the Treasurer the authority to issue and sell $10 million worth of Bond Anticipation Notes. The resolution was spelled out in its entirety, occupying more than four pages of the agenda.

I attended that Board meeting, and made comments to the Board expressing my concern about the apparently high interest rates we taxpayers were being obligated to pay. I also brought up a recurring theme – that the Board needed to talk about this stuff in public. Public discussion is required under the Sunshine Laws, and as voters we demand to hear how they process such decisions.

I learned after the meeting that the language in the resolution was just boilerplate that did not reflect what the actual borrowing rates would likely be, which Treasurer Brian Wilson expected to be less than 1%. I can understand granting the Treasurer a little negotiating latitude when he actually sits down to the do the bond underwriting deal, but this boilerplate language gave him a great deal more latitude than that.

The Board, the Superintendent and the Treasurer were clearly annoyed at my questioning of the language of the resolution. I suspect that some members of the Board did not understand it themselves. Of course the resolution passed 5-0 with little discussion.

For the Monday, October 26, 2009 School Board meeting, there are once again resolutions on the agenda to approve the sale of debt instruments – in this case, long term bonds. It seems as though the Board's new strategy is to ward off tough questions by just not publishing the details in the agenda any more.

I can appreciate that the number of pages it would take to include the full text of five separate resolutions is significant. However, there are two easy things the Board could do, either of which would be acceptable:

  • Provide the actual resolution language as an addendum. After all, it's not like they're actually printing paper copies and distributing them to everyone in the community. The cost to put a second PDF on the website with the agenda is about zero. Community members could decide for themselves if it is worth the paper to print it out (I certainly wouldn't).
  • Describe the key parameters of each bond issue: a) issue size (which they did state); b) maximum underwriting costs; c) maximum coupon rate; d) anticipated repayment schedule; and, e) what, if any, change to property taxes should be expected by the residents of our school district. After all, since this is a refinancing, there is a chance that property tax collections could actually go down if the long-term bonds are sold at a lower interest rate than the short-term notes they replace.

Not everyone understands the mechanics of bonds, but there are plenty of people in our community who do. I have no doubt that should copies of the full resolutions and eventual underwriting contracts be requested by a member of the public, they would be provided.

But we shouldn't have to keep individually asking for disclosure of stuff of this magnitude. It's trivial for the Board to provide this information. Their behavior suggests that they don't want to be questioned by the public. That was certainly the case in regard to the easement deal they signed with Homewood Homes as Bradley High School was being constructed.

Justin Gardner, Don Roberts, and I have committed that if we are elected to the School Board on Nov 3, we will see to it that this kind of documentation will be included in the agenda and minutes, and that meetings will be streamed and recorded for viewing by the public.

Please vote for GARDNER, ROBERTS, LAMBERT for Hilliard School Board.

Thursday, October 8, 2009

Rabbits & Hats

At tonight's annual State of the Schools address, Superintendent Dale McVey made the announcement that there would be no levy on the ballot in 2010, and that the District would take the steps necessary to allow our current level of local property taxes to carry the Hilliard City Schools to 2011.

He said that this was necessary because the information he has access to suggests that the public is not inclined to support a levy in 2010 because of the current level of economic distress in America. More on this at the end of this article.

He didn't say whether the next levy would be on the ballot in the Spring of 2011 or the Fall of 2011, but he definitely said there would be no levy in 2010.

By the way, it was interesting that he made this declaration, because to my knowledge the School Board has not made any formal statement to that effect. Is the Superintendent overstepping his authority with this statement, or has this been discussed out of public view, in violation of the Sunshine Laws?

There is a new Five Year Forecast being developed as this is written, due to be presented to the School Board at their Monday, Oct 12 meeting. I am extremely interested to see what has been changed from the last Five Year Forecast (May 2009) that gives the Superintendent confidence that no levy would be needed in 2010. According to that forecast, this fiscal year will end on June 30, 2010 with a cash balance of $11.9 million, and the following year will end on June 30, 2011 with a cash balance of $3.8 million.

Note that the May forecast was developed prior to the finalization of the Biennial Budget for the State of Ohio. Since then we have found that because of the dire condition of the State's budget, the State's funding to Hilliard City Schools will drop 1% ($370,000) in FY10 and 2% ($730,000) in FY11. In other words, all other things being equal, you can reduce the projected June 30, 2011 cash balance by another $1.1 million, down to about $2.7 million.

We should be reminded that in August 14, 2006, our School Board adopted policy DBDA which begins by stating: "The Board believes that maintaining a cash reserve balance of 10% of operating expenses is necessary in the interest of sound fiscal management." Our current operating expenses are on the order of $160 million per year, meaning our cash reserve – according to the Board's own policy – should be approximately $16 million.

Why did the Board make this policy in the first place, and why is 10% the magic number?

It's not of course. You have to think about cash like the gas in your car. Your car might be the one of the highest performing vehicles on the planet, like a nice million dollar Bugatti Veyron, but when it runs out of gas, your top speed is zero.

So saying you want to keep a 10% cash reserve is like saying you're going to stop for gas whenever the gauge reads about an eighth of a tank. I took a cross country motorcycle trip in 2007, and forgot to gas up during our stop in Roswell NM. That's not usually a big deal around central Ohio – there's always a gas station within a few miles. But we were in the desert on sparsely traveled roads where gas stations might be 100 miles apart. We just made it to a little hole in the wall, ironically in the middle of a huge oil field.

If the School District intentionally draws its cash reserve down to a few percent, it's like heading off into the unknown with the gas gauge near Empty. All it takes is one surprise, and you're in trouble.

So I'm real interested to see what kind of rabbit our school leadership pulls out of the hat to pass by all the gas stations in 2010.

And it bears commenting that we are just over three weeks away from a School Board election. Is any part of this a political maneuver to bolster the chances of re-election for the incumbent members? Nothing makes a voter happier than a candidate saying "no new taxes" – even when there is little chance of it coming true.

Our school leadership recently commissioned Saperstein Associates to conduct a public opinion survey of our community, which included questions about the willingness to support a levy in 2010. I know this because I was 'randomly selected' to participate in this survey, just like I am 'randomly selected' seemingly every time a survey has been done in the last few years. And once again, I am trying to get a copy of the survey report – if possible before the "Meet the Candidates" event next Tuesday.

Carrie Bartunek, the community relations coordinator, says the survey report has not yet been delivered by Saperstein to the Superintendent. But isn't it curious that the Superintendent would state that he made his "no levy in 2010" decision on the basis of public opinion?

Sunday, September 20, 2009

Us vs The Teacher’s Union

As was the case prior to the last election, the Hilliard Education Association (HEA) – the union representing teachers and other certified staff in our school district – invited the candidates for School Board to participate in their process for selecting who the HEA would back in the upcoming election. All three of the candidates – Justin Gardner, Don Roberts, and I – participated in the interviews (here are my comments). Yesterday we all three received letters from the HEA telling us that we would not be getting their support.

Instead, the HEA will be supporting incumbents Andy Teater and Lisa Whiting, plus Chris Courtney, the candidate supported by the Hilliard Democratic Party.

Let's remember that this time next year our School Board will be engaged in negotiating a new labor agreement with the HEA as well as the classified staff union, OAPSE Local #310. The outcome of that negotiation will be heavily influenced by who sits on the School Board, and the unions are not going to let that be left up to chance. They picked these three people because this is who they want to be negotiating with – not Justin, Don and me.

Here's one thing I want to be clear about: WE ARE NOT ANTI-UNION. Unions play an important and valuable role in our society by giving workers the strength of numbers when negotiating – even demanding – better compensation and working conditions. I grew up in a blue collar family in West Virginia, perhaps one of the most unionized states in our country, with some of the most dangerous occupations. I have no doubt that the prosperity enjoyed by my generation was facilitated by the struggles of our union forefathers.

However, that doesn't mean the unions should get whatever they want. The historic role of the union is to level the table when negotiating with the ownership of a company. Instead of being indentured servants of the powerful coal mine operators, the union leaders could sit down at the bargaining table knowing that until the owner and the union came to a compromise, no one was going to make any money. It is a kind of economic "mutually assured destruction," and the stakes run high, as do emotions. The "mine wars" in Mingo County WV were just that – not a euphemism, but a real war in which people died.

The risk to the owner is that the customers will find other suppliers if the work stoppage lasts too long. The risk to the union members is that the owner will find another way to make money, and just shut down the business. For both parties, a work stoppage is generally a bad thing.

The situation is fundamentally different when the employer is a public entity. For one thing, there is no "owner" per se. The organization is by definition an entity operated for the common good of the people, who are represented by a School Board elected from the members of the community. There is no profit objective, and the money being put on the table is that of the people, not the Board's. And it's a lot of money – to the tune of $140 million per year and growing rapidly.

On the other side of the bargaining table are the unionized workers – or more precisely, their union officers. They will be joined by professional negotiators from the state organization, the Ohio Education Association.

The process is, by design, an adversarial one. The School Board, representing the people, take a position of wanting to spend less on employees, while the union leaders, representing their membership, will want to get more. A give-and-take process follows until the parties find a mutually acceptable answer.

Here's where labor negotiations in private industry are radically different than those between School Boards and teachers: the teachers get to hold the kids of our community hostage. If the town steel mill shuts down during a strike, everyone's kids still get to go to school. If the teachers go on strike, the kids get hurt – particularly those in high school, many of whom are getting prepared to compete for a spot in college.

And so we have this situation where parents of school age children are almost frenzied to make sure the schools stay in session and the teachers are happy, to the point that just about any levy on the ballot, regardless of size, will get their support. Anyone who offers any criticism of the status quo is immediately branded an enemy of the state – because such is person is perceived to be a threat to their children. I understand this completely. I have voted in favor of every single levy that has been on the ballot for precisely this reason.

But we have been led to a dangerous place, and both our School Board and the union leaders are complicit. This dangerous place is one where critical decisions are being made on emotion rather than reason. It is this way not because the people of our community are irrational, but rather because the only thing they have to go on is hearsay and emotion.

That is the fault of our school leadership. For nearly a decade, I have recommended to our School Board that they get ahead of this looming crisis, starting with the creation of a program of community education about school economics, of which labor relations plays a large part. There have been at best feeble attempts (e.g. the ACT Committee and the Treasurer's Committee), with no real impact.

Once the smart and talented people of our community have a better handle on how school economics work, then we can have an informed and rational conversation with the teachers about compensation. Just as diplomacy is better than war, a rational and empathetic conversation between the people of our community and the teachers is better than a strike.

But just as we cannot say that our country will never go to war regardless of the threat, we can't say the School Board will never press issues of great importance to the point of a teacher strike.

So it's up to you – the people of Hilliard – to decide whether you want your representatives on the school board to be those chosen by the teachers' union, or by independent thinkers who understand the proper role of our School Board.

Saturday, September 12, 2009

Pay Comparisons

There is an increasing amount of dialog these days about teacher compensation. There are many perspectives on how to evaluate whether teachers are underpaid, overpaid, or being paid about right.

I tend to be a proponent of the free market in determining compensation. The simple description of this viewpoint is that employee pay is the result of a negotiation between an employer and a prospective employee in which the employer would prefer to pay less, and the prospective employee wishes to be paid more. In the course of the negotiation, the employer and prospective employee make personal economic decisions. Does the employer believe the skills of the prospective employee are such that it's worth paying this candidate more, because the employer's profit could be even greater? Will the candidate accept less because the potential for future compensation is much higher?

This is grossly oversimplified of course. The decision is much more complicated, as both parties try to evaluate all kinds of objective and subjective elements during the negotiation. But in the end, the two parties have to decide whether the deal on the table is 'good enough,' or whether it is time to take a walk. In the end, this system works because employers have to compete with each other to hire qualified candidates, and candidates have to compete with each other to find acceptable jobs.

And in the larger sense, this supply and demand operation influences career choices. When I was a young engineering student at Ohio State in the early 1970s, one of the most popular fields was Aerospace Engineering. Kids of my age group grew up watching the development of the space program from Alan Shepard's first short flight to Neil Armstrong's first step on the Moon (I still have an 8mm film of John Glenn's orbital flight). The really smart, engineering-oriented kids were often drawn into dreams of working for NASA or Jet Propulsion Laboratory. It wasn't so much the pay that attracted them as it was the thought of being a part of the first generation of space pioneers.

Then in 1972, the Apollo program ended, and Congress pulled the plug on the Supersonic Transport. The demand for aerospace engineers plummeted, and many graduates in my class had no luck finding jobs in their field. The number of new aerospace engineering majors dropped, and the interest turned to other fields – notably computer science and electrical engineering. There is a similar story to tell about nuclear engineering in the aftermath of Three Mile Island.

But eventually an equilibrium was reached, and the number of majors in the various engineering fields tended to line up with the demand for skills. This state of equilibrium will tend to last until some significant sea change happens in our economy. One of those was in the 1980s, when many of the brightest young students in our country flocked to business majors. Former Ohio State professor Roger Blackwell summed it up this way: In the 1960s, the brightest kids tended to go into engineering; in the 1970s, they went into the social sciences such as psychology and sociology (the hippy days, some would say); and in the 1980s, they went into business majors, especially marketing, finance and real estate. I don't know what he said about the 1990s, but from my ongoing contact with the engineering program at OSU, I think they're headed to engineering again.

Back to the subject of this post…

There is another perspective which says that compensation – at least for some careers - should be based on some notion of societal value. In other words, it doesn't so much matter what the free-market forces are that might influence compensation; the pay rate should be set by what someone, or some agency, determines the pay should be. It matters less what the supply vs demand relationship looks like, followers of this perspective say people doing certain jobs should be paid more or less than people doing other jobs based on other criteria.

Interestingly, this perspective seems to be most prevalent in the public sector. In this case, the employer is a government. Governments aren't meant to generate a profit for their owners, they are service organizations. They do still have to compete for workers however, so they must offer a set of tangible and intangible benefits that make it worth taking a government job versus one in the private sector.

Compared to private sector workers, government workers often have less potential financial upside, at least while they are working. They grind their way up through some civil service pay chart with predetermined pay raises, and little if any chance of individual pay negotiation. Compare that to private sector workers who get paid whatever they can negotiate with their employers, which for the past decade or so often included things like stock options. My last employer was Worldcom – through its acquisition of CompuServe Network Services – and it was their policy to grant stock options to every one of its 30,000 employees. There were many stories of low level employees who paid off their houses and sent their kids to college solely on their profits from stock options. Things like that just don't happen for public sector workers.

But then again, many of those Worldcom employees had their retirement savings tied up in Worldcom stock, so when the company went belly up, they lost not only their jobs, but their retirement savings as well.

One of the benefits of working in the public sector is that public sector jobs almost always have a defined-benefit retirement program attached to them. Work long enough – usually around twenty years – and you are guaranteed a pension for the rest of your life. That seems like a fair trade-off, lesser earnings potential while working in exchange for great retirement benefits. As someone approaching the golden years – without a pension – it looks like a darn good deal to me.

Yes, there are still some private sector pension programs out there. But they are rapidly disappearing, and some have already failed. My older brother spent his life laboring in a hot, dirty, dangerous steel mill, as did a number of other men of our family in generations past. He retired to a livable but not generous pension - right up until the day his company went bankrupt and took the pension plan down with it. Now his retirement benefits are paid by the federal Pension Benefits Guarantee Corporation (PBGC) at a small fraction of his former pension. He also lost his medical coverage at an age too young to be eligible for Medicare. His story is not unique; so many private pension programs have failed that PBGC is running out of funding.

Contrast that to the situation with the State Teachers Retirement System (STRS), which I wrote about previously in Time Bomb and Still Ticking. STRS is controlled by a Board made up of STRS members, who are all teachers or other certified or licensed education professionals. This Board oversees the management of tens of billions of dollars of money which was paid into the system by working teachers (10% of salary) and the school districts (an additional 14% of their salaries), as well as the fund's earnings over the years. They chose to take risks in the stock and real estate markets, and got burned pretty badly. In spite of these risks being entirely the choice of the STRS Board, they now seek to have the State government force school districts (meaning we the payors of property taxes) to increase their contributions in order to restore benefits. Yet another bail-out.

About this time next year, our School Board will be engaged in negotiating new union contracts with the employees of our school district. It is very likely that there will also be a levy campaign underway, asking the people to increase property taxes on the order of 7 mills ($214 per $100,000 of market value). It will a powerful opportunity to 'connect-the-dots' between the rising cost of compensation and benefits and the rate in which our property taxes are increasing (the purpose of this blog). Indeed, more than 90% of any new money raised with an additional levy is applied to the increased cost of compensation and benefits.

A component of this conversation is the question: What is fair compensation for our teachers?

We can't answer that question effectively with free market tools. In a free market, when you have many more qualified applicants for jobs than you have openings, it's a signal to employers that their compensation packages are more than good enough. That tends to drive pay scales down, or at least suggest that pay doesn't have to be raised to hire new employees.

But that's not what we see in the teacher contracts. Regardless of the number of candidates who seek employment in our school system, or the condition of our economy, the pay level has continued to increase on the order of 7% per year for over a decade (when both base pay increases and step increases are taken into account).

If free market methods won't work for determining what is appropriate pay, that seems to leave us with this notion of societal value as the way of setting pay.

How often do see one of bumper stickers which read: "If you can read this, thank a teacher"? Okay, I agree with the notion that the foundation of American society is constructed with some key building blocks, and public education is one of them. In spite of being a free-market economist, I accept that this building block of public education is so important that I'm willing to pay some amount of taxes to support it. While the US Constitution is silent on this matter, the framers of the Ohio Constitution saw fit to call out public education as a necessary good, creating a state funding requirement such that all Ohio children would receive a "thorough and efficient" education (and no, property taxes are NOT unconstitutional).

But there are other roles in the public sector which are pretty important as well. Consider the members of our armed forces.

I ask you to consider the case of a young US Marine, one who also happens to be my nephew. He is now assigned to the Wounded Warrior battalion at Camp Lejeune, being treated for injuries sustained in battle in Iraq which have ended his career as a Marine. He will be discharged sometime next year having never earned much money, no pension, and with permanent disability (which brings a little compensation), but at least he'll have lifetime medical care via the Veterans Administration. Teaching is indeed a tough profession, but I don't think anyone would put it in this category.

Another argument heard for current teacher pay levels is the fact that they must all earn a Masters degree by their 10th year in order to retain their teaching license. That is true, even though there is some disagreement about whether this additional education actually manifests as improved classroom performance. I'm willing to accept that it does, but it is exceeding hard to measure. After all, if the primary argument against performance pay for teachers is that it is difficult to measure individual teacher performance, how can we tell if the achievement of a Masters degree makes any difference either?

But let's map this discussion to the military as well.

With very rare exception, all officers in our military services are required to have a Bachelor's degree. If you go to college, enter Officer's Candidate School, and successfully graduate with a commission as a 2nd Lieutenant (Ensign in the Navy), your starting pay will be $32,000/yr. You will also get a one-time allowance for uniforms, plus $200/month for food and $1,000/month for housing (if government housing is not available, like a tent in Afghanistan) - a total of $46,400.

This compares to a starting teacher salary in Hilliard of $37,245. At a minimum, some allowance would have to be made for the fact that members of our armed services are allowed 30 days of leave each year, compared to the summer vacation enjoyed by teachers. We also have to consider that a military officer can't just quit after a year if he/she decides to try something else. Nor can we forget that many - not all - members of our military will repeatedly put their lives on the line, as has my nephew.

Career military officers are expected to get a Masters degree as well, and it often takes place in the first ten years of their career, just like the teachers. Many go on to earn a second Masters degree (often in military arts), and occasionally doctoral degrees. For many career officers, their 'terminal rank' is Lieutenant Colonel (Commander in the Navy), at between 30 and 35 years of service. At this level, the base pay would be $91,000 plus a housing allowing of $22,500, or $113,500. However, an officer of this grade would have substantial responsibility, for example the command of a Navy destroyer, which has a crew of nearly 300 and nuclear weapons capability.

The top salary for a Hilliard teacher is $87,731 (for Masters + 15 and 23 years of service).

At retirement, such an military officer would be entitled to 87.5% of the average of their highest three years pay, which would work out to about $80,000/yr. Again, this is comparable to a public school teacher who under the current STRS rules would retire at 88.5% of the average of their highest three years.

However, it should be noted that the maximum retirement benefit may be dropped under proposed new STRS rules. Why? Because, as the STRS itself says: "The 35-year enhanced benefit is no longer needed to encourage teachers to work longer and is eliminated." That sounds like a free-market concept to me!

So if societal value is to be used as a basis for setting teacher pay, how do feel about the alignment between teacher pay and military pay?

What if we use effort as the basis for setting pay levels? How does the effort expended by a teacher compare to a military officer?

How about professional freedom? Teachers are granted academic freedom in their contracts, and given tenure to guarantee it. What kind of freedom does a member of our military enjoy? There's a great line in the movie "Crimson Tide" when the commanding officer says to his executive officer: "We are here to defend democracy, not to practice it!"

So what is the appropriate level of compensation and benefits for public school teachers? We are going to have to wrestle with all these issues next year, right here in Hilliard. The discussion is already well underway in other school districts such as Worthington, Olentangy and Westerville.

Don Roberts, Justin Gardner and I feel we have the education, experience and demeanor to lead this discussion as members of our School Board. If you want to learn more about us, visit the website of, a recently-formed Political Action Committee who has endorsed and is supporting our candidacy.

Most of all, we ask for your vote on November 3rd.

Sunday, September 6, 2009

Free Speech

Sent to the Hilliard School e-news mailing list on Sept 4, 2009:

The Hilliard City School District learned of President Barack Obama's student address scheduled to air at noon on Tuesday, September 8, just two days ago from several concerned parents. Since then, we have been overwhelmed with phone calls and e-mails both in favor of and against airing the broadcast in our school buildings on Tuesday.

As a district, we take a non-partisan view towards this address. The President of the United States is our nation's leader and a world power* who will be addressing the youth of our country. The intent to speak to students is not unprecedented, as other Presidents have done the same. For educators, this address presents a teachable moment for our students. As a system, it is our responsibility to provide educational opportunities for our students.

As Superintendent of this district, I always make an effort to listen and be responsive to community concerns. This issue has resulted in a divided community outcry that cannot be ignored. In an attempt to bring some calm to our community and be responsive to the concerns on both sides of the issue, I have decided to permit our schools to air the broadcast on Tuesday. Students whose parents prefer they not participate will be provided an alternative activity during the 15-20 minute address.

I understand this decision will be met with mixed emotions; however, I believe it offers an educational opportunity that should be made available to students.

Dale A. McVey


I find it sad and more than a little troubling that the state of affairs in our country has reached a point where it is questionable whether school children should be required to watch an address by the President of the United States, especially a speech directly meant for the kids.

I understand that there are those who disagree with President Obama on things both big and small. I'm one of them. That doesn't mean I wouldn't want my kids to hear what the President has to say. Regardless of whether the name on the White House stationary is Barak Obama or John McCain, the person we elect to be the President of the United States is the constitutional head of the Executive Branch of our federal government for at least the next four years. What he or she has to say is important.

To those parents who are opposed to this, I have one thing to ask: where are you the other 179 days of the school year when your kids are getting their heads filled with stuff from schoolbooks, curriculum, and teachers' words? Do you discuss any of the points of view on other topics presented by our school district to your kids? Do you know what their textbooks say on matters important to you? Have you tried to ascertain whether your kids' teachers are injecting a degree of personal bias that you feel is inappropriate?

After all, none of us really know what the President is going to say (update: the text of the President's address is now available here). Nor will most parents take the time or make the effort to talk to their kids ahead of time about what they think of Mr. Obama's policies and politics. Likewise, few parents will listen to the President's speech, or make time afterward to talk with their kids about it.

Democracy is not a spectator sport. The First Amendment to the US Constitution preserves (not "gives") our right to freedom of speech, and that means sometimes things will be said that we don't agree with. The solution to that is not to suppress freedom of speech, but rather to engage in the debate. And not just by yelling at each other, as we see at some many of these so-called "town meetings" lately, but rather an actual informed and respectful discussion of opposing viewpoints.

This reminds me a lot of the dialog about school economics. People largely ignore the issues until it's time to vote on a levy then, rather than spending the time to gather and analyze pertinent information, make their decision to vote for or against the levy based simply on hearsay, sound bites, and emotion.

Democracy will not survive much more of this.

* I don't think it is appropriate to say "The President of the United States is ... a world power." A more appropriate description is that the United States of America is a world power, and the President of the United States is elected to serve as its Chief Executive and Commander-in-Chief.

Thursday, September 3, 2009

Still Ticking

Last December, I wrote a piece titled Time Bomb which discussed the deep trouble the State Teachers Retirement System (STRS) had gotten itself into. Today, the Columbus Dispatch published an article on the same subject. I'm glad to see this topic get more attention, because it has a direct impact on the school taxes we'll have to pay going forward.

The story is this: the STRS was created by Ohio Law to operate a retirement system for the benefit of Ohio's public school teachers. Each teacher may currently choose from one of three plan options: 1) a Defined Benefit Plan; 2) a Defined Contribution Plan; and, 3) a blended plan. Most choose the Defined Benefit Plan because, as the name implies, commitments are made to pay out certain amounts each month for life to a retired teacher based on retirement age, years of service, and the average of the three highest salary years.

The Defined Benefits Plan is funded by contributions from the teacher, currently set at 10% of their salary, and contributions from the employer – meaning us – of another 14% of the teacher's salary. However STRS members do not participate in Social Security, neither paying the Social Security tax nor receiving Social Security benefits (although some will have worked in other jobs in which Social Security tax was paid, and benefits earned).

Just like any other retirement system, the premiums paid into the retirement fund and the investment earnings on the fund are supposed to be sufficient to pay out future obligations. However, there must be decisions made about how to invest the money in the retirement fund.

One of the fundamental assumptions of investing is that risk and reward are related: the safer the investment, the lower the return. The complimentary case is also true – in order to earn larger returns, greater risk will have to be taken. It is the duty of the State Teachers Retirement Board to determine how much risk they should take with the teachers' money.

Once the risk/return parameters are established, the actuaries can calculate whether the funding, earning estimates, and benefits are in alignment. If the actuaries determine that there is more than enough money coming into the fund than is needed to pay future obligations, any or all of these factors can be adjusted by the Board. The funding requirements can be lessened, the risk profile reduced, or the benefits increased.

Conversely, if the actuaries determine that there is not enough money coming into the system, the Board can ask for an increase in contributions, choose to take greater risk, and/or reduce benefits.

For some time, the State Teachers Retirement Board has opted to manage their retirement fund inhouse, under the supervision of a Chief Investment Officer who is required to be a "licensed state retirement system investment officer." This decision was likely made to both increase perceived control over the money (versus hiring an investment firm to manage the fund), and reduce the amount of money paid out in commissions and fees.

However, to recruit and retain competent investment professionals, it would be customary for the retirement fund to pay their inhouse investment staff bonuses based on performance. Designing incentive compensation plans are one of the trickiest things one does as a manager. They always work as designed, which isn't always what the management expected.

The STRS investment managers were put on a plan where their performance was gauged relative to a well-known index, such as the S&P 500 Stock Index. The idea is that the STRS investment managers should not be rewarded for generating a 10% return on the portfolio if the market (represented by the S&P 500) went up 10% as well. The common expression is "all boats rise with the tide."

For a number of years, the STRS investment managers did indeed outperform the market, and they were paid well. There was a time in years past when the earnings of the STRS portfolio was such that the Board elected to pay out a "13th paycheck" to retirees – essentially an 8% bonus. Maybe they should have kept that extra money in the portfolio – it might have softened the blow of what came later.

But the STRS Board didn't think carefully enough about what would happen if the market crashed. It turns out that the incentive plan for the investment managers didn't take into account whether money was gained or lost, only if the earnings of the plan exceeded the market index. So if the S&P 500 went down 30%, but the portfolio value decreased by only 20%, the plan said the investment managers "beat the market" and their bonus were paid.

The retired teachers have taken great exception to this. Regardless of the fact that the investment managers were paid exactly according to the rules of their bonus plan, which was approved by the STRS Board, these teachers wanted the investment managers to give their bonuses back. In other words – in tough times, they expect their own employees to give back bonuses even though they were earned. One of the strongest voices of this faction of teachers is Kathie Bracy, who writes her own blog – you are encouraged to read a little bit of it to understand how these folks think.

And times are particularly tough for STRS, as shown in this chart from Ms. Bracy's blog.

At its lowest point, the value of the STRS retirement fund had plummeted from a high of $80 billion in Oct 2007 to $46 billion in March of this year, a loss of 42%. A respectable chuck of that has been restored with the inexplicable recovery of the stock market – rising back to $56 billion by June 2009. While this is a gain of 22% in three months, this $56 billion is still 30% less than the 2007 peak. To get back to that $80 billion peak, the fund will need to grow by another 42%. That will take either a long time at reasonable risk, or a short time at great risk. It will be interesting to see which bet the STRS Board allows its investment managers to make.

The Dispatch article today reports that the STRS Board doesn't believe that their investment manager can generate enough income to fully fund its future obligations. So they need to go back to the other two of their three knobs: increasing contributions and reducing benefits.

Ms. Bracy does a nice job of describing the changes proposed by the STRS Board, in a great deal more detail than the Dispatch article, so I'll not go into all of them here. Both retirees and working teachers will take a hit – significant in some aspects. Two of the big ones are that a teacher's retirement benefit will be based on the highest five (rather than three) salary years, which will almost always result in a lower number; and a reduction of the payout percentage.

In the current plan, a teacher gets 2.2% of the average of their highest three years times the number of years of service, up to 30 years. So a teacher who retires at 30 years gets 66% of the average of the three highest years. If a teacher stays to year 31, the benefit is 66% plus 2.5% for the extra year, or 68.5%. Stay to year 32 – the teacher gets 68.5% plus 2.6%. This escalation of .1% for each additional year continues theoretically until a teacher reaches 100% of their final average salary, which would happen at 42 years of service.

The real payoff is if the teacher stays to 35 years. In that case, the payout is set to 2.5% of the average of the three highest years times 31 years, plus 2.6% for the 32nd year, etc. This means that a teacher retiring after 35 years of service receives a pension of 88.5% of the final average salary for life.

A Hilliard teacher who retires after this school year at the top of the pay grid (Masters + 15 and 23 years) would receive an annual pension of $77,600 - for the rest of their life.

The new plan eliminates the special case for 35 plus years or service, saying "The 35-year enhanced benefit is no longer needed to encourage teachers to work longer and is eliminated."

No kidding. Even under the new rules, a Hilliard teacher retiring at the top of the grid with 35 years would still receive an annual lifetime benefit of $67,500.

The STRS Board also decided to increase contributions. The teachers will have a phased-in increase that reaches 2.5% by 2015, making the total teacher contribution equal to 12.5%. The employers – we taxpayers – will be required to increase our contribution from the current 14% to 16.5%, with a phase-in starting 2016 through 2020.

It could have been worse. I calculate that this increase in employer contribution will increase our 2020 employer contribution from $8.5 million to $10 million, and that the total extra paid from 2016 to 2020 will be $4.4 million. By 2010, we will be paying an extra $1.5 million/yr to cover this increase in employer contribution, representing 0.6 mills of tax burden. This assumes a 3% annual growth in salaries and a constant number of teachers.

Of course, this depends on how well the STRS investment managers handle the money. If they lose another big chunk of money on the investments, they'll come right back to us for more money. According their 2009-2010 Investment Plan, they still hope to make 7.7% return on their portfolio. To achieve this, they are keeping more than 60% of the portfolio in equities, and expect to make an 8.5% or more return on those. That doesn't sound like much for those who recall the go-go years of the 1990s, but remember that 60% of the fund is over $30 billion – and that's how much they're exposing to stock market risk which, as we've all seen, is more volatile and unpredictable now than it has ever been. This is against a backdrop of an economy that is unlike anything experienced before in America.

And I hope the teachers remember how they treated their investment managers – expecting them to give back bonuses they earned under a plan agreed upon by the STRS Board. My recollection is that most if not all did, as doing otherwise would likely have meant losing their jobs. Those teachers didn't care what the contract they negotiated in good faith said – they felt that if money was lost, the investment managers had to share in the pain – maybe even be punished.

Let's apply that same logic when the HEA contract is negotiated next year. Regardless of what the norm has been in the last several contracts, times are tough for many of us, and it's appropriate for the teachers to share that pain as well. It might even require some give-back.

Think about who it is that you want negotiating that contract. The same Board who negotiated the last one? Or a Board with a majority of new members who are finance, legal and management professionals?

Vote for the team of:




Monday, August 24, 2009


The subject of teacher salaries is getting a lot of attention in the news these days. Reporters are writing stories that talk about not only the base pay increases that are negotiated into the union contracts for teachers, but also the 'step increases' that often make up half or more of the total year-to-year compensation increase teachers realize. This is a crucial piece of information - for a long time, it was only the base pay increased that was discussed.

For example, the prior contract with the Hilliard Education Association, the union representing our teachers and other certified staff, called for 3.65% annual increases in the base pay over the three years of the contact. In the current contract, that increase was dropped to 3%*.

However, in both contracts, 65% of the teachers will also receive 4.15% step increases. Therefore in the prior contract, most teachers received an annual raise of 7.95%, and under the new contract receive 7.27%.

This is neither good nor bad. This pay structure is the result of years of contract negotiations, performed in the context of a pretty good economic climate in America.

But things have changed. America has pretty much maxed its credit cards in all respects, and now the hard reality is that, as a good friend said to me yesterday, everyone and every organization needs to figure out how to live within its means.

At issue now is sustainability: how do we adjust all the many knobs available so that over the long term, spending lines up with resources? Listen to this podcast from The Dispatch on the subject, and note how many times the term "sustainability" comes up.

As my friend said, we've done all the easy adjustments, rearranging bus routes, redeploying staff, buying supplies in bulk, etc. It leaves us with the big issue - the core one - the one in which we spend 88% (and growing) of our operations budget: Compensation and benefits.

This issue is kryptonite. Just look at the online comments attached to this recent story in The Dispatch. At last count, there were 569 comments - most of which take on the tone of the recent town meetings about universal healthcare.

The sad state of affairs in America is that we are more than willing to engage in high-decibel arguments about matters in which we have little understanding. Free speech is not the same thing as intelligent speech. There are opinions based on truth, understanding and compassion, and opinions based on ignorance and selfishness. One takes a lot of study and thought, the other is spewn into the air like toxic waste. My mind is drawn to one of my all-time favorite Monty Python skits: Argument Clinic.

My whole reason for creating is to help lift the level of knowledge of school funding among the people of our community so that we can have one of those reasoned and empathetic debates about how teachers should be compensated. I have found that neither the public nor the teachers - nor often the School Board - really understand how school funding works.

But some have been listening, and share this goal. A few months ago, was formed with one its primary mission being to educate the public on school economics so that a meaningful dialog can take place. Similar groups are emerging in other central Ohio communities as well.

If you agree with us - please tell your friends about

* the teachers also agreed to increase the portion of health insurance premiums they pay from 0% to 10%, in three annual steps - 6% in 2008, 8% in 2009 and 10% in 2010.

Thursday, July 30, 2009

New School Funding Law

The debate about how to fund Ohio's public schools has been raging for years, most famously via the DeRolph vs State of Ohio lawsuit. All most folks understand about this lawsuit is that it concluded that "funding schools with property taxes is unconstitutional." The leaders of the group opposing the operating levy being voted on in South Western City Schools next week make this a key part of their platform. However, neither these folks nor anyone else I've heard make this assertion can answer the question: "okay, so what kind of tax do you want to pay to support our schools?"

Governor Strickland has touted his "Evidence Based Model" (EBM) as the solution to the problem raised in the DeRolph case. A good chunk of this approach was incorporated into the 2010-2011 Biennial Budget, signed into law by the Governor on July 17, 2009 (with a substantial number of line item vetoes).

So how is the EBM different than the old funding model?

In terms of outcome for Hilliard City Schools, the answer is – not much. More on that later.

From a philosophical standpoint, the difference is this: The authors of the old funding model knew they didn't understand how all the moving parts in the various local school districts fit together to make a district either "thorough and efficient" (the Constitutional language), or not; while the authors of EBM believe they do.

In the old funding system, all of the 600+ public school districts in Ohio that meet certain performance indicators are put on a list, sorted by their per-student spending. The top and bottom 5% are thrown out, and the rest averaged to come up with a number. The theory is that even without knowing exactly how those well-performing districts spend their money – and it varies from district to district – if all districts are given this amount of money, they too should be able to have a well-performing district. Just for illustration, let's assume that this number is $6,000/pupil. If you have 10,000 pupils in your district, you should be able run it for $60 million/yr.

So how do property taxes fit in? Two ways. First, the primary adjustment to the state funding formula is called the Charge-Off. It is the amount of money that would be raised with 23 mills of local property taxes, and it is subtracted from the basic funding calculation. So let's say that in our example district of 10,000 pupils, the property has value such that 23 mills would generate $40 million in local property taxes. In that case, the State would subtract $40 million from $60 million to determine that the State's share of funding for our district would be $20 million.

This whole system makes perfect sense in my opinion. So why was DeRolph filed in the first place, and why did the Supreme Court say to chuck out property taxes as a funding mechanism?

It was because the Governor and the General Assembly never actually used this method to determine the base funding amount (ie the $6,000/pupil in this example). This money would have to come from the State's biennial budget, and school funding competed with a lot of funding demands, including big ticket items like Medicaid and law enforcement. So in the development of the budget, the Governor and General Assembly would need to make tough decisions how much to allocate to schools and these other funding needs, and how much new revenue could be raised with additional taxes. In the opinion of the education community, the public school funding was always shortchanged. That's why over 500 school districts ended up joining the DeRolph case.

The first attempt to replace the old funding system was a constitutional amendment, championed by a group called Getting It Right For Ohio's Future. Our Superintendent was very much in favor of this amendment, and convinced our School Board to support it as well. While GIRFOF might have solved the constitutional problems raised by DeRolph, in the process of doing so, it would have vested the Ohio Department of Education with the power to dictate how much of the state budget would be allocated to education, regardless of what impact it would have on every other funding need. In the opinion of the GIRFOF supporters, if we wanted all those other programs to be funded too, all we had to do was raise taxes.

Neither Governor Strickland nor the General Assembly supported GIRFOF, primarily because it would give the Department of Education first dibs on the state treasury without needing to seek approval from either the Governor or the General Assembly. GIRFOF took control away from local voters, the Governor, and the General Assembly, and gave it all to the Ohio Board of Education. Slick move on the part of the educators.

So the Governor came up with his own plan – the so-called Evidence Based Model. The claim of the EBM supporters is that they do understand what components are required to construct and fund a thorough and efficient school system. So they tell you how many teachers, principals, nurses, maintenance people, etc that you need based on the number of students in your school district. Here is an example calculation – obtained from the Ohio Office of Management and Budget.

Then – guess what – they reduce the amount of funding a district gets from the State based on the amount of money that would be generated by 20 mills of local property tax levies. Each school district is expected to continue to levy sufficient property taxes to fund a 'fair portion' of the cost of running their schools. So how is that different than the current plan?

Like I said above – not much. The Governor's EBM plan, now enacted into law, would provide $35.6 million in State Foundation Aid to Hilliard City Schools in 2010. As can be seen in our July SF-3 report, our State Foundation Aid under the old system would have been $34.6 million. To me, it seems like an argument about how you make the color Green. You say you add Blue to Yellow, I say you add Yellow to Blue. Does it matter since the outcome is the same?

I am particularly suspicious of a number in the new EBM calculations called the Ohio Instructional Quality Index (OIQI). This is a number with a 6 digit decimal fraction that is used to tweak the amount of money a district is supposed to get from the state to pay teacher salaries. It is supposed to be a factor calculated using various demographic characteristics of the people of a school district, including the number with college educations, the wealth per pupil, and certain poverty measures. The calculation is not codified into law – only this number with the six digit decimal fraction, district by district. It smells of being a 'knob' the legislators can twist to change the distribution of tax money without being detected on anyone's radar.

For Hilliard City Schools, this number is 1.154997. For Dublin, it's 1.035579. In this calculation, the larger the number, the more you get from the state to pay teacher salaries. Upper Arlington's factor is 0.914789, meaning that if their student profile were exactly the same as ours – same number of kids in the various grades and categories – they would get 12% less from the State to pay teacher salaries. Both South-Western City Schools and Columbus City Schools have similar factors: 1.460040 and 1.509988, respectively. This means those two districts would get about 30% more per student to spend on teachers. Of course, a district can spend whatever they want on teacher salaries as long as they fund the excess with local taxes.

The law describes 11 different teacher categories, and uses the enrollment data to determine how many of each kind of teacher are needed. In our case (example), we supposedly need 1044.5583 total teachers. You multiply that number by $51,407 (the State's number for average cost of salary and benefits for teachers), and you get $53,697,608.5281. Now multiply that by our OIQI of 1.1550, and you get $62,020,738 – and that's how much we should have to spend for 1,044 teachers.

But guess what – the property tax Charge Off still exists. In the EBM plan, it is based on 20 mills rather than 23 mills, but the concept is identical. The effect is that districts with high property values pay a greater share of the cost of operating their schools than do districts with low property values.

At the end of the day, the process of budgeting at the State level has only so many variables: a) how much revenue is projected to come in; and, b) how is that revenue to be distributed among various agencies, departments and programs. The reality in our great State is that the revenue side of that equation has tanked, along with the rest of the Rust Belt economy.

To a large degree, the education community acts like they don't care about the state of the economy – they want the schools to be funded as well or better than ever before, and since nearly 90% of school funding goes to pay compensation and benefits, the education community is essentially saying that they want to be paid in the same way as always, regardless of what has happened to the rest of us, and regardless of what impact that has on other State programs.

The process of negotiating union contracts and state budgets have something in common – they are an adversarial activity. That means that a debate takes place, and the outcome is determined by how well one side argues its case vs the other. Sometimes the argument takes the form of a threat, as is the case in South-Western City Schools where the educators have told the community to fork over more money in property taxes or they'll take away extracurricular activities.

The adversarial process works well as long as both sides have equal power, knowledge, savvy and motivation. The problem we have in America is that we have become almost completely apathetic to all things political.

All these crazy technical details exist in the school funding law because those on the side of the educators have knowledge, savvy and motivation, which gives them power. On the other side of the table is a public that mostly doesn't give a damn, and is certainly lacking the motivation to really dig into this stuff and take a stand.

A group of us have formed for the purpose of changing that imbalance of power. We want our fellow community members to be informed, savvy and motivated.

Will you join us?