Sunday, January 18, 2009

Five Year Forecasts

I finally had some time to take a close look at the new Five Year Forecast published by Treasurer Brian Wilson in December, subsequent to the passage of the 6.9 operating levy in November. Here are a few observations:

  • Total revenue is projected to grow from $142.7 million in FY08 (actual) to a projected $159.7 million in FY13, an increase of $17 million over the five years. However, it's not a steady growth, but rather $8 million in FY09, $8.7 million in FY10, and essentially flat for FY11-FY13.

    There are two causes for this. One is the elimination of commercial Personal Property Tax and the phase-out of the guarantee created to soften the blow for school districts. In FY06, the PPT+"property tax allocation" (which includes the Guarantee) was $26 million. In FY13, Mr. Wilson projects this total falling to $17 million. That's $9 million we'll need to make up locally.

    The other revenue factor is that the property tax revenue will step up from $71.7 million in FY08 to $91.2 million in FY10 (as a result of the 6.9 mill levy), then stay essentially flat in FY11-FY13. In other words, he doesn't think there will be much in the way of new residential or commercial construction in the next few years, and I think that's reasonable.

  • Total expenses are projected to increase from $146.4 million in FY08 to $188.5 million in FY13, an increase of $42.1 million, in ever-increasing steps of over $8 million/yr, of which 95% is attributable to the increases in compensation and benefits for the employees of the district.

    Take note that the FY13 revenue is projected to be $159.7 million and the expenses to be $188.5, resulting in a cash consumption rate of $28.7 million in that year alone. Clearly without a significant adjustment to expenses, or some revenue windfall, more levies will be needed.

  • We started out FY09 (this school year) with $13.3 million of cash, and are forecasted to consume cash every year of the forecast, starting with $1.5 million in FY09 and reaching $28.7 million in FY13. At that rate, we'll empty the bank account in FY11.

So clearly we need we need more revenue growth and less expense growth. If we assume there is no other revenue source available to us than local property taxes, then how much is needed, and how often will new levies be required?

Well, if we use Mr. Wilson's forecasts exactly, the math is pretty easy. According the Ohio Department of Education, one mill of property taxes generates about $2.5 million in revenue in our school district. To cover all of our projected expenses through FY13, we would need a levy of about 6.4 mills in 2010, and another of the same size in 2012.

In other words, we would need to tax the people of our district about the same increment we did this year (about $200 for each $100,000 in market value) in 2010 and 2012. If the total expenses – of which 95% of the change is due to compensation and benefits – continues growing at the same rate, we can expect to need additional levies every two years at ever increasing millage rates.

But remember, it is the official policy of this school board to maintain a cash operating reserve (call it a rainy day fund) of at least 10% of projected annual expenses. If FY13 expenses are projected to be $188.5 million, then we should have $18.9 million in cash reserves saved away by then. To reach that goal, the 2010 and 2012 levies would need to be nearly 9 mills. Once the reserve is restored, subsequent levies would be reduced back to that required to funding spending increases.

Clearly the conversation must center on two things: a) if we can expect significant additional funding from the State of Ohio; and, b) the rate of increase of personnel costs.

The Governor will soon announce his plans for education funding. We have to recognize that the State has its own funding nightmare in front of it, to the point that the Governor is seeking concessions from union employees of the state that include a 5% pay cut and the elimination of step increases. I don't see how we can expect the Governor to ride to our rescue in this environment. We may be lucky to be handed only slight decreases in our state funding.

In other words, we should expect that any increases in spending will need to be funded with local tax levies.

As always, this brings us to the subject of personnel costs. Our unions have just signed agreements that grant 7% annual increases to the majority of employees – upwards of 70%of them  according to a statement made by Mr. Wilson in one of the pre-levy public meetings. Yes, they did concede to pay a small fraction of their health insurance premiums, and I appreciate that.

But even with that concession, I don't see how the next union contracts can contain similar numbers. The step percentage needs to come down from 4.15%, the annual increase percentage lowered from 3%, and the contribution to health insurance premiums increased. The degree to which each is changed is something which is going to be difficult to negotiate, and I think the work needs to start now.

It could be that the union members might want to adjust which years get a step increase, or perhaps to make the step increases vary depending on the year. I think a good place to start would be to set a goal for annual growth in compensation and benefits costs, as Rick has been suggesting for months, and let the union members get creative as to how to allocate the funds.

And I hope that the younger members of the unions, particularly the HEA, make their voices heard. When there's only so much money to go around, and a minority gets to negotiate for all, that minority will be tempted to tweak the deal to benefit themselves at the expense of those who feel weak and vulnerable. Remember young teachers, for the more senior teachers the difference between the best case and worst case scenarios is largely about compensation, while for you, it is about whether or not you have a job. If you don't want the senior members of the union gambling with your job, you need to ensure that the union represents all of you.

I don't think we have anything resembling a clear picture of the future fiscal health of our school district. It's clear that sacrifices will need to be made, and we'll have to make some hard decisions about what things are "must-haves" and what are "nice-to-haves." We may have a stretch here when we can't afford much of the latter. So the same admonition must go out to the people of our community: this is no time to be apathetic about the governance of our school district or local municipalities.

And I don't totally disagree with the position taken by Jim Fedako over at Anti-Positivist, who asserts that this system we have of allowing a simple majority of voters to cram tax increases down everyone's throat is a bad thing – he would say immoral. As with so much in our government, we've taken a good idea and allowed it to be morphed by special interests into a grotesque version of the original vision (which was simply that all American kids should have access to some level of education, regardless of their financial capacity). I'm not sure our country can afford what public education has become. This may be the opportunity to recalibrate our national priorities.

We've got the gas pedal to the floor, but are looking in the rear-view mirror.

That reminds me of the joke about two brothers, Bubba and Jim Bob, who are being interviewed to drive a semi cross-country as a team. The interviewer says "Bubba, you're driving a truck with a heavy load, and Jim Bob is sleeping in the back. You crest a big hill and see that a train is on the tracks across the road at the bottom of the hill. You hit the brakes and discover that they've failed. What do you do?" Bubba says, "I'm wakin' up Jim Bob." "Why for goodness sake?" says the interviewer. Leroy answers: "'Cause Jim Bob ain't never seen a crash like's about to happen!"

(apologies to those who've been wanting this dialog raised to a higher plane)


  1. Paul, a good in depth look. I would
    add a pension contribution increase of 1 to 2%, a bond issue for infrastructure maintenence, and increases in the contract, more employees etc. I think this will drive the two levies to the ten mill level.

  2. Rick, I really don't see that pension contribution increase going anywhere, at least not any time soon. I'm pretty sure that everyone can relate to decreases in pension fund balances as it has affected everyone, and even the OEA has said that if it does happen, members should be prepared to sacrifice on the compensation side. Of course we will have to see if they stick with that, and if the local unions get on board too. Still doesn't solve the problem of the current school funding model, and we will have to see what Strickland proposes. Here in Hilliard we need, at a minimum, to stop all residential development
    and we need to convince the City, not the School Board, of that.

  3. Hillerdite, you are absolutely correct on the development issue
    The pension increase contribution
    is just in my opinion that the district should be planning for.

    My whole point is we are in the same mode as 6 years ago. Nothing has changed. We are in a business reactive mode versus reactive.
    All the issues and challenges seem to be thought of as just cynicism or not possible by many. The reality is when these real, not imagined costs, come to be paid,
    the community will need to step forward and cover those
    "challenges" I dont have an issue covering the increases, but there
    seems to be a one sided contribution that no one wants to
    own up to. Somehow if we alter
    our business module and compensation the general feeling is we are going to see this huge
    drop in educational performance.

    How a slowing of the rate of spending, which is tied up in over 90% in personnnel cost would have a drastic effect on educational quality and learning, is puzzling
    I guess if we only give out raises at 3to 4% the results would be lower than if we stay on the same pattern.

    I think the paradigm is we will continue to pay out the compensation module as in the last
    3 contracts. The 3% adjustment would have been acted upon by now to be included in the 5 year forecast. so that is what we have to work with. That is why I am going to stay focused on trying to figure out how to pay this continued bill in the future. The community is the only entity expected to contribute. If this was not the case, we would have heard to the contrary by now, dont you think?

  4. Good forecast Paul.

    I had a laugh this weekend with an article in the Dispatch about teachers compalining about bonuses to the fund managers at the teacher's retirement fund.

    I guess they only organize a protest against "excessive compensation" when they are not at the receiving end of it. What a disgrace...this is not and never was "about the kids".

  5. Well, after taking another look at that forecast, it does seem to factor in current spending levels, which is no great surprise given that the entire presentation seems to be on somewhere around a a high school level. It would be nice if there were some "editorial" comments from Mr. Wilson explaining how the figures were reached, especially on the expense side. But that would be contrary to the usual lack of communication/explanations that our Board is known for.

  6. Maybe I spoke too soon - gave the forecast a bit more than a glance last night and there actually is some basis given for the figures. Noticed that they are anticipating smaller compensation increases, 2% instead of 3% although the "steps" appear to be about the same, maybe a few less people eligible. Hope the union is paying attention to that. Given the economy right now, and the messed up state funding model, can't blame them for forecasting flat revenues. Did see additional staff mentioned, assume this might be because of Bradley? I think we, and they, are facing some tough choices in 2010 and further years. Maybe on the bright side, there was an interesting article on the Central Warehouse operations in last weeks paper - I have met Ralph and he is a pretty smart guy, with the best of intentions. We need more like him.

  7. I hope that the use of 2% raises in the forecast is an indication that the Administration, Board and HEA have already starting talking down that path. It would be nice to know if that is the case.

  8. It appears to me as though the teachers and Administration would prefer to cut teacher positions rather than salaries or benefits.

    And if that's what they want then so be it - they should gear up for class sizes 50% bigger over time.

    I voted for the levy this last time, but there's no way I can see voting for one in '10 and '12.

  9. Classes can't get 50% bigger. State law limits the number of child per classroom (in elementary anway) to 30 (or so, I don't have the exact number).

    What will happen is the non-classroom positions will be eliminated, and those currently out of the normal classroom will bump less senior teachers and re-enter classrooms. Bottomline will be only a mild increase in class sizes as they are already at max in most cases. It will be the "supplemental" positions (such as intervention, ELL, tutors, etc) that will be cut

  10. This, from today's (Sunday) NY Times, might be of interest to you and your readers. It suggests what most of us have often thought: that teachers, not class size, matters. The HEA historically wants to take us in exactly the wrong direction - protection of poor teachers and spending precious funds in order to decrease class size. Here's the column:

    In the letter, Mr. Gates goes out of his way to acknowledge setbacks. For example, the Gates Foundation made a major push for smaller high schools in the United States, often helping to pay for the creation of small schools within larger buildings.

    “Many of the small schools that we invested in did not improve students’ achievement in any significant way,” he acknowledges. Small schools succeeded when the principal was able to change teachers, curriculum and culture, but smaller size by itself proved disappointing. “In most cases,” he says, “we fell short.”

    Mr. Gates comes across as a strong education reformer, focusing on supporting charter schools and improving teacher quality. He suggested that when he has nailed down the evidence more firmly, he will wade into the education debates.

    “It is amazing how big a difference a great teacher makes versus an ineffective one,” Mr. Gates writes in his letter. “Research shows that there is only half as much variation in student achievement between schools as there is among classrooms in the same school. If you want your child to get the best education possible, it is actually more important to get him assigned to a great teacher than to a great school.”

  11. Erie: Thanks for the note and the link.

    When I was growing up, nearly all my classes had 30+ kids. I had some excellent teachers and a few real duds (and admittedly at times it was me that was the dud).

    It was much better to be in a class of 30 with an effective and inspirational teacher than it was to be in a class of 20 with a dud.

    Somehow we've got to figure out how to get those duds out of the classroom so we can afford to reward the effective and inspirational teachers more.

    Note that 'reward' doesn't always have to mean salary or benefits. It can be better equipment, relevant field trips, guest speakers. Often it's finding a way to cut the administrative crap.

    But I fear the ever increasing cost of carrying the deadwood will crush the ability to reward and support those teachers who really make a difference with the kids they teach.


  12. Interesting development in Columbus today with firefighters forgoing
    negotiated raises and postponing increases due to budget issues.

  13. I imagine the cops are none too happy with the firefighters for capitulating. There are many situations in which the firefighters depend on the cops to secure a scene and provide general security. I hope we don't see a lack of cooperation between the two public safety services.

    Or maybe there's more to all this than we civilians understand...