Saturday, April 11, 2009

You’ll Get Nowhere If You Don’t Start with the Truth

On April 8, 2009, the Hilliard Northwest News published an article titled "Audit committee members share complexities of finances."

In this article, Nathan Painter, a member of the new Audit and Accountability Committee is quoted as making this statement:

"When we pass a levy, that levy is not adjusted (over the years) for inflation. It is kept at a single balance, and taxes (residents) pay go down as time goes forward." He said this stuff is hard to understand, "even for an attorney."

Well, it's doubly hard to understand when your facts are incorrect. Mr. Painter is repeating the propaganda long spoken by our school administrators. I've written about this on a number of occasions**, but here it is again:

  • While commonly called "HB920" by school officials, what Mr. Painter is talking about was enacted into law via Ohio Revised Code 319.301. The purpose of this law is to prevent the amount homeowners pay in property taxes from increasing just because their property gets appraised to a higher value. This law was championed by George Voinovich at a time when folks were being taxed out of their homes during the regentrification of downtown Cleveland in the 1970s. It has been the bane of school administrators ever since who, rather than getting automatic funding increases with the rise in home values, must go to the public periodically and explain why their operating expenses are increasing so rapidly. Of course, they didn't really want to do that because the reason expenses are increasing is because of the generous pay increases built into the labor agreements with the unions representing the teachers and staff.

    It seems to me that the best rebuttal for this claim is an examination of the current situation. While most school employees continue to enjoy increases in excess of 7% per year, home values are actually decreasing with the collapse of the housing market.

    But hey Mr. McVey, if you want to argue that your salary should vary with home prices – I'm ready to concede that point.

  • The second part of Mr. Painter's observation is the often repeated, but mistaken belief that "once a levy is passed, it never collects more money."

    First, we have to understand that there are two kinds of levies. The first is a bond levy. A bond levy is essentially a community mortgage taken out to fund the construction of buildings. The bond levy authorizes the school district to sell municipal bonds to investors and use the cash raised to build (or repair) permanent structures. The taxes collected via the levy are used to make semiannual interest payments to the bondholders, and to build a "sinking fund" which will be used to pay off the bond at their maturity – usually 20 years.

    So when more people move into the community and built houses, the amount of money required to service the bond debt doesn't change, and the amount of taxes to be collected can be spread across more people, allowing the collection from each taxpayer go down. So when talking about a bond levy, Mr. Painter is correct. And it's the correct way to handle bond levies.

    The other kind of levy is an operating levy, which is used to pay for salaries, benefits, utilities, supplies, maintenance and so on. Our last operating levy added $210 per $100,000 of market value to our property taxes. As long as HB920/ORC319.301 remains in effect, we will never pay more than that $210 per $100,000 (as valued when the levy was passed*) because of that levy, regardless of how our home valuations change (up or down).

    *Note: I realize after reading the "Letter to the Editor" published in the Northwest News that I didn't explain this as clearly as I could have. Our most recently levy added $210 per $100,000 of market value to our tax bills. Let's say your house was valued at exactly $100,000 in the last reappraisal. This means $210 was added to your tax bill.

    If in the next reappraisal, your home is valued at $150,000, the amount collected by this levy will remain at $210.

    However, if a new house is built in the school district, the owners will pay an equal amount of school tax per $100,000 of value as every other homeowner in the school district – for all levies in force – causing the total amount of tax collected by the school district to increase.
As has been the case with the ACT Committee and the Finance Committee, there will be no meaningful results from this Audit & Accountability Committee unless the members take it on themselves to look past the biases of the school administrators. They must do their own research and their own analysis if their mission is to serve the community, and not just validate the erroneous thinking of our current school leadership.

And A&A Committee members, if you really want to audit something that looks fishy, check out process of selecting a site for the third high school, including the easement agreement that was signed between the School Board and Homewood Homes…

**Prior related posts:

Ignore Friction

What Goes Up

Superintendent Mistaken About Inflation


  1. "ACT" and "Finance Committee"? HAHAHAHAHA!!!!!!

    Yeah, they're really effective, I bet.

    Want to make your treasurer sweat? Ask him how many consultants the district has contracts with, and what the cost is. Ask him what the districts non-headcount One Time expenses were vs. recurring expenses last FY. How are the Actuals trending to-date against budget. As for recurring expenses, ask your business manager and CIO what are the districts license, maintenance and other support expenses--what they are for, how long they have been in place and when was the last time the agreements were renegotiated. Betcha a bunch of those have been on auto-renewal for years and nobody in the business office has any historical reference of them.

  2. I have submitted a Letter to the Editor which says substantially the same as the post, and have copied that letter to Mr. Painter. I hope he weighs in.

  3. Jim Fedako of Anti-Positivist left a couple of comments for this post that raise points worthy of response. However rather that indulge his preferred tone of voice, I'll paraphrase his comments and attempt to respond:

    1. "HB920 is simply the latest revision of Ohio law that has been on the books for some 80 years." I have no reason not to accept Fedako's assertion as true. However whether or not is true is irrelevant to point - that property values and inflation vary independently. School leaders lament that Ohio law prevents property tax collections from increasing with property values simply because property values have been going up at a historically high rate for a number of years. They just want a piece of action.

    2. "A bond levy provides a district with the ability to incur a specific amount of debt over a given amount of years. The payment structure is up to the district. So, millage rates CAN rise even with new properties added to the duplicate."

    From a practical standpoint, bond issues are monetized via the sale of municipal bonds. When we pass a bond issue, we are authorizing the school district to issue municipal bonds which are sold to the public. My portfolio contains a number of such municipal bonds, and at various times has included those issued by Hilliard Schools.

    The fixed income market doesn't like debt instruments with weird structures. Bond investors are looking for bonds in $1,000 denominations which pay a fixed interest semi-annually. The last Hilliard Schools bond I owned (CUSIP 431621CM1) matured on 12/1/03, and had a 'coupon rate' of 6.35% (boy, I'd like to have some of those today!).

    The school district doesn't sell these bonds directly. Rather they are sold at a discount to an underwriter - usually an investment bank - who in turn sells them to the public - mostly mutual funds and retirement plans. The school district collects via the bond levy the amount of money necessary to make the semiannual interest payments, and to build up a 'sinking fund' which will be used to redeem the bonds at maturity.

    The variability Fedako implies comes from the fact that the school district is not required to immediately issue the full amount of indebtedness approved by the voters. For example, we approved a $75 million levy to build Washington Elementary and Bradley High School. Since Washington was started well before Bradley, there was no sense selling the full $75 million in bonds all at once. The bonds could be fed to the market in phases, minimizing the outstanding balance on which interest would need to be paid.

    It may also be true that the full $75 million has yet to be issued, with the school board deciding to hold a little in reserve for later.

    So presuming that Fedako is right about the flexibility Ohio law gives the issuers of general revenue bonds, from a practical standpoint they are very simply structured: total face value issued, coupon rate, maturity date (and sometimes 'call date').

    3. HB 920 limits the collections for a LEVY, not the tax rate or tax collection for an individual property. So, individual property owners CAN pay more than $210, but the district CANNOT collect more than voted onto those properties already on the duplicate.

    The tax collected on properties in existance when an operating levy is passed never goes up (or down). However, new properties added to the tax roster do generate incremental revenue. This is relevant in a high-growth district, which Hilliard has been for more than a decade. The problem is that the revenue generated by incremental residential properties is not sufficient to fund the costs created by the kids who live in those new homes.

    Fedako goes on the say: In growing districts, for any given levy, the individual tax payments typically DROP for properties already on the duplicate. Again, he is agreeing with what I said. In the case of a bond levy, the total amount collected remains fixed, and so as new properties are added to the tax rolls, the burden on existing properties goes down.

    Fedako accuses me of not doing my homework. I will readily accept correction when I have something wrong, but I do perform the research, and cite my sources in most cases. In January 2008, I had the following dialog with Stan Dixon, a taxation expert in the office of the Franklin County Auditor, on these very points:

    LAMBERT: You’ve been very good about answering my questions about property taxes in the past, and I have one more that I hope you can help with. I’m trying to understand the interaction between HB920 and school levies:

    First scenario:

    A new school district is created on empty farmland. Ten identical houses with an assessed value of $100,000 are built (ie Market value of ~$285,714). The new school district puts a 10 mill permanent operating levy up for vote, which passes. Ignoring rollbacks and the homestead stuff for this scenario, each homeowner would then pay $100,000 x 10 mills or $1,000 per year in school taxes, and the total amount of money raised will be $10,000/yr. Shortly thereafter, another identical house gets built, and all the houses remain valued at $100,000.

    As a result of this 11th house being built, would the school district then collect $11,000, with each homeowner paying $1,000 per year? Or is it the total dollar amount which is kept constant at $10,000, resulting in a lowering of each owner’s tax bill to $10,000/11 = $909.09?

    DIXON: HB920 only affects the reappraisal of “carryover property”. The definition of “carryover property” is it must exist in both the previous and the current tax year. Since the new house was not there last year it is “non-carryover property” and not subject to any reduction factor so the tax rate does not change. The district now gets $11,000.

    LAMBERT: My understanding is the former – that each new house contributes incrementally to school revenue, and that in this case the school district would collect $11,000/yr after the 11th house is built.

    DIXON: This is correct. At the next reappraisal all eleven houses would be “carryover property” and subject to HB920 reduction factors that hold the revenue on operating levies to the previous year (except for non-carryover property).

    LAMBERT: Second scenario:

    Back to 10 houses with $100,000 in assessed value. Only the 10 mill permanent operating levy is in force, and the school district is collecting $10,000/hr in revenue. A reassessment happens and the assessed values of all the houses increases to $125,000. Because of HB920, each owner’s tax bill would have to remain at $1,000 per year. To provide for this, the reduction factor is set to .2

    DIXON: Yes, you are correct but the reduction factor for the levy is .2 so that the ending tax calculation generates the $10,000/yr.

    LAMBERT: Then an 11th identical house is built, also assessed at $125,000. Since no property tax has ever been assessed on this house, there is no prior tax bill to hold constant. Would the owner of the 11th house pay 10 mills on $125,000 or $1,250, or would the same reduction factor be applied and this new homeowner only have to pay $1,000 like the other ten?

    Dixon: The same rate and reduction factor generated from the “carryover property” value increase would apply to this newly built property. The idea behind this is when new property is built then additional financial burdens are placed on the school district. If the new property pays its fair share just like everyone else then the schools should have the funds to support this new growth.

    LAMBERT: Third scenario:

    Back to the first scenario with ten brand new houses 10 houses with $100,000 in assessed value. What happens if this is a bond levy instead, and an 11th house is built? My understanding is that the $10,000 aggregate amount is kept constant and each of the 11 homeowners pay $909.09 going forward.

    DIXON: Yes, you are correct again. A Bond is a mortgage. That payment is due each year. As new properties are added to an area the Bond payment does not change so the individual tax payment goes down.

    LAMBERT: Does the Auditor’s office publish a document that describes all these mechanics? I’m sure a number of people in my community would be interested in reading it – especially now that we have a 9.5 mill permanent operating levy on the ballot.

    DIXON: We have made presentations on levies and reduction factors to realtor groups, mortgage bank associations, business clubs, senior citizen groups and civic associations. We are planning to include some information on our website about the complications of HB920 and that could possible be converted to a document. We find, however, there are few people who really want to understand real property tax to this level.

    You are one of a very select few who understand this complex process.

    Thanks for eliciting this discussion Mr. Fedako.

  4. Paul:

    There is a lot of nuance to school district debt. Back when Worthington had a bond levy on the ballot, I created some pages to try and explain some of this. You can access it here:

    School district debt is incredibly safe. Before a school district would be allowed to default, the state would pay principal and interest out of your foundation payments.

    What did you mean about the municipal bond market not liking "weird" structures?

  5. Since the value of my house has fallen over 20%, I'm elated to learn that my school taxes will fall over 20%! :-)

  6. You accuse a community member of being dishonest, and I have the shrill tone. Nice.

    To your points:

    1.Regarding your analysis of HB920: You gave a history of property taxation that is simply not complete. I ask you to call Mike Sobul (Ohio Department of Taxation) for the real story. Or, at the very least, I ask you to buy the Ohio school law book from OSBA in order to understand what you do not understand (If you have intent of providing info or running for a board seat, you should already possess the book).

    2.You cannot see the forest for the trees. It’s great that you know your specific bonds, but those bonds do not show you how the issue was structured. The amount collected on a year-over-year basis does not necessarily remain fixed. And this is independent of the issue date(s) for the specific bonds. Again, I ask you to have your treasurer explain how Hilliard’s issues are structured. Then, contact the treasures over at Dublin and Olentangy for the same explanation. Wouldn’t it be better to ask and know than to make pronouncements that are untrue?

    3.Spend some time learning about the workings of the Division of Tax Equalization at the Department of Taxation. While it is true that the amount collected from all carry-over properties does not change, the rate and collections can – and, in your district, do – change for individual properties (and not just in reappraisal years).

    4.Regarding a bond being a mortgage: A bond issue is not a mortgage – the bondholders do not have an interest in the school’s property. Beyond that: Ever hear of ceteris paribus? Your county official answered the question asked, assuming that everything else remained unchanged. The county has a calculation to set the millage rate for a bond issue, which assumes equal principal payments throughout the life of the issue (even here, the interest amount changes as the principal is paid down). That is not necessarily the way issues are structured (things change). Ever hear of the No-New-Mills or the No-New-Tax bond issues used by Dublin and Olentangy, as well as many other districts?

    5.“You are one of the very select few who understand this complex process.” I can’t believe you included that comment. Sounds like you are on the Yellow Brick Road to omniscience. Do some real research and earn you degree from Oz.

    Look, we all make mistakes. But you are doing the very same thing you accuse your neighbor of doing.

  7. OH EIRE, way too funny, and absolutely NO WAY JOSE !

    Did you know that your home value dropping is your fault and might hurt the students !?

  8. Marc:

    Thanks for the link to your pages on bond levies. They do a nice job of explaining things.

    By 'weird structures,' I mean that the fixed income market wants municipal bond issues to have very standard features, which are pretty much limited to these:

    1. Being denominated in $1,000 increments;
    2. Paying a fixed interest rate every six months;
    3. Maturing on a particular date in future, normally 10 years or more. The one tweak that is tolerated is a 'call feature' in which the issuer can, at it own discretion, redeem the bond early, after a specific date.

    Why is this simplicity demanded? Because the big institutional bond purchasers want to be able to easily compare one bond to another. They want to be able to calculate 'yield to maturity' (and 'yield to call' if applicable') and decide whether - in the light of the risk rating of each bond - it's a good deal compared to alternative investments.

    For those investors who want more complicated investments, there are (were) plenty of folks willing to invent such things - which includes the exotic kinds of derivatives that has gotten lots of folks in trouble. I've owned some of those too - and was lucky to get out unscathed a few years ago.

    The notion of restructuring you describe is also a simple concept that many folks already understand. I've described a bond issue is like a community mortgage. Well, a restructing is simply taking out a new mortgage, presumably at a lower rate, and using it to pay off higher rate debt, including the current mortgage.

    Corporations which include bond debt in their capital structure are rarely prepared to just pay off a bond series when it matures. Most will issue a new set of bonds and use the proceeds of that sale to redeem a set of bonds just maturing. They do this over and over, always hoping that their 'credit rating' remains good enough to get the lowest possible interest rate for their new bonds.

    Many times, the thing that takes a company down is its inability to sell new bonds, making it default on outstanding bonds which mature. This is exactly what happened to Worldcom, which quickly ran out of cash after all the accounting fraud was revealed and was therefore unable to find buyers for the new bonds it needed to sell to redeem bonds coming to maturity.

    Anyway, the point is that a school district has a lot of flexibility in terms of whether or not to issue all the debt the voters approve (or hold some back for future needs), and to use some or all of the cash raised by the bond sale to restructure other outstanding debt (provided that the outstanding debt is callable).

    My point to Mr. Painter is simply that these catch phrases the school leadership toss about are not necessarily true just because they say them over and over.

    He doesn't have to believe me either, or you for that matter (although I do).

    All I'm saying is that he and the rest of the A&A committee need to fact check this stuff themselves.

  9. Paul, sorry but the A &A hope WILL NOT happen

  10. I must admit, I'm a little confused, so I will re-ask the same question in terms I understand.

    In 2008 we passed an operating levy for "some" millage of apprasied home values in the district (translated into a total value amount. Let's say $10,000,000 a year... doesn't matter.

    There are 10,000 houses in HCSD (I understand businesses and other participate in this, but I'm keeping it simple).

    Thus, each house pays $1,000 more a year in taxes.

    If another $10,000 houses are built, with no additional levies, my portion of that levy would be reduced to $500 a year? Or does the school district collect an additional $10,000,000 because of the new builds?

    I always "assumed" that each new house carried a tax "value" equal in value to other comparablly valued homes. I was told by school officials (1 of only 2 that report directly to the BOE) that this was not true and that the total value of a operating levy was "fixed" and that each new home lowered by overall contribution to the total levy vale.

    Was I misinformed?

  11. Jim:

    Thanks for dialing it back a little. You make some research suggestions that I will endeavor to pursue.

    I didn't say a bond issue IS a mortgage, but rather that it like a mortgage in the way it functions: The district is a borrower on behalf of the people, and the people must repay the debt with interest - via their property taxes.

    You said that the interest amount changes as the principal is paid down. As one who has invested in school district bonds for a long time, I can say that this has never been my experience. In that way, a bond issue is most like an 'interest only balloon mortgage' in that no principal is paid back to the borrower until the very end.

    If I buy a 10 year, 5% bond when first issued at its face value of $1,000, then every six months I will get an interest payment of $25. On the maturity date, I will get a payment of $1,025, which redeems the bond and makes the final interest payment.

    Meanwhile, the school district has been collecting property taxes sufficient to make both my semiannual $25 interest payment and to build up a 'sinking fund' from which will be paid the $1,000 face value when the bond matures.

    The Ohio Revised Code (3313.03) limits the kinds of instruments the 'commissioners of the sinking fund' can use to invest the tax money collected via the bond levy to US Treasuries, State of Ohio bonds, or municipal bonds.

    Consequently, there's a chance that the sinking fund may grow enough so that less tax money than planned will be needed to redeem the bonds at maturity. That's a good thing, and may mean that the school district could reduce its tax collections as time goes on, presumably after consulting with actuaries in order to determine how much less to collect.

    I wonder if any school districts have actually done that?

    Good discussion, but we're straying from my central point - that the members of the A&A committee need to not just accept the opinions of the school leadership (or me, or you for that matter) as fact - they need to dig this stuff up on their own, calling in their own expert advisers if needed.


  12. KJ:

    Thanks for thinking like an engineer and 'Ignoring Friction'If another 10,000 houses are built, the operating levy would cause each of those new houses to be taxed the same $1,000 as everyone else, and the district would collect an addition $10 million in revenue. And it would be collected forever assuming it is a Permanent Operating Levy, which HCSD typically uses.

    However, if this were instead a bond levy used to build new schools, the district needs to collect just $10 million plus interest over the life of the levy, so if 10,000 new houses were built (and we'll assume all those kids could be housed in the buildings funded by this levy) your share would go down to $500 and change, and would end altogether when the bonds mature - usually 10 or 20 years.


  13. Paul, Thanks!

    So, I was either misinformed or lied to by one of the top 2 ranking officers of the school district.

    I won't predict which of the two occurred, but neither one gives me confidence in this administration.

  14. Correction to a comment above:

    In that way, a bond issue is most like an 'interest only balloon mortgage' in that no principal is paid back to the borrower until the very end.That should have said:

    to the investor

  15. Paul,

    Once again ... You understand one side of this issue (maybe), but not both. And you keep missing the forest for the trees.

    "[T]hey need to dig this stuff up on their own, calling in their own expert advisers if needed." This is what I've been saying that YOU need to do. Talk to folks, read the documents and laws, and learn.

    A district declares to the county auditor the amount of tax revenue it will need in the coming year. That can include money for principal, interest, sinking fund, and a reserve in case there is a shortage in revenue due to delinquencies, etc. (Note: This is the fund that the rating agencies require a healthy balance. Districts will spin the idea of a "balance" to mean a balance in its operating fund -- not true).

    A district is not required to have a sinking fund.

    Issues can be a combination of bonds and notes.

    A district can ask for any amount of taxation it needs -- though it is subject to federal arbitrage rules, so it cannot use these funds to earn a "profit," so to speak.

    When the county auditor establishes a rate for a bond issue, he assumes equal principal payments, as well as interest payments. He does not assume a sinking fund.

    He runs this calculation over the life of the issue (the life is the blended lives of the capital goods in the issue -- buildings at 30 years, computers at 5 years, etc. -- typically 27 years) and then finds the average millage rate. This is the published rate on the ballot.

    I assume that you have Excel. Run the equation and see how it works.

    So the millage for the first year should exceed the millage on the ballot. This is fine since voters vote on debt, not millage.

    However, most districts try to keep their ballot millage rate down (they do not want to exceed the published millage -- whether that is the ballot millage or the millage the district reports during the campaign)so they push off some principal payments until the later years when they hope new growth will make up the difference (Olentangy had a 27-year bond issue for $60 million where it only paid $100,000 in principal each year for the first 10 years). And the district collected $0 toward a sinking fund. Talk about a balloon.

    "You said that the interest amount changes as the principal is paid down." You are conflating rate with amount. Oh, and rates do change -- in other words, different bonds and notes in the same issue can carry different interest rates. Again, ask your treasurer for the document that is created for each bond issue (it's a public record). It will detail the assumed schedule of principal and interest payments. Read and learn.

    Let me leave you with this little tidbit ... Districts that are growing do not like their bond millage rates to decrease over time (as would naturally occur -- depending on the structure of the bond issue, of course). So they ask for more revenue in order to keep their millage the same, year over year -- they simply tell the auditor to keep the millage the same as the previous year.

    Why do they do this? Simple. By keeping the millage higher than needed, they can reduce the ballot millage for their next issue. The residents overpay for years so that the district can claim it is keeping their taxes low by asking for lower millage than should be required. It's a great game for the district, but a loser for the taxpayer.

    Once again, my point in all of this: You know a bit, Painter knows a bit, but you are implying that he is being deceitful or a district stooge. Wouldn't you be better served by calling him to discuss where he is wrong -- after you take the time to understand the issue first. Or, is a blasting letter to the editor your approach?


    1. KJ is conflating operating levies and bond levies. You are simply wrong when you state, "[W]hen the bonds mature - usually 10 or 20 years." (my emphasis) Once again, read before you write.
    2. A mortgage is not the debt, it is the interest in the property someone else holds (bank, etc.) until the debt is paid. The bondholder has no interest in the property. A bond is similar to commercial paper -- an unsecured loan (of course, Mark is correct that the state secures the loan, so to speak).

  16. Jim:

    Once again you package what seems to be valuable information in a sneering and condescending wrapper. I'm happy to learn from you or anyone else, but have low tolerance for this tone of dialog. You use that style on your blog - it is my perogative to set the tone here.

    On this matter of a sinking fund, ORC 3315.02 says this:

    The board of education of every district shall provide by a tax levy for the payment of the annual interest on its bonded indebtedness, for the payment of its serial bonds as they mature, and for a sinking fund for the extinguishment of its other bonded indebtedness.If there were no sinking fund associated with a bond issue, I'd certainly want to know what the district is doing with the money it collects via property taxes above and beyond that necessary to make the interest payments on the bonds. I wouldn't want to trust a school district to come up with all that cash on the back end of the bond term. If they call it a 'bond retirement fund' or something else, that's fine.

    While I have no reason to doubt your Olentangy example as being true, if it is I will never buy an Olentangy school bond. Nor can I image a rating agency like Moody's saying they're okay with a school district letting $60 million of bonds sit out there for ten years without any significant amount of money - $15-20 million in this case - being set aside in a bond retirement fund. Didn't Mssrs McPherson et al just go through the bond rating process, and Olentangy got a good rating?

    Yes, I understand how interest rates are set on bonds. It is set based on the opinion of the underwriter, who takes the district's credit rating (e.g. Moody's) and prevailing marketing interest rates into account when setting the rate. The underwriter will also endeavor to pre-sell the bonds before they are ever issued, mostly to big institutional investors like mutual funds and pension funds. If he has no takers at the interest rate he proposes, then the school district and the underwriter may have to reconsider what interest rate they put on the bonds, and jack things a little higher until the market is interested.

    But let's be clear - during the life of an issued bond, it pays exactly the same fixed coupon rate, and that will be the yield-to-maturity for the initial purchaser. If the bond gets sold during its life, the new buyer will pay a price which reflects prevailing market interest rates and the creditworthyness of the issuer, and that new price will determine the yield-to-maturity for the new buyer. But the dollar amount the school district has to pay in interest on that bond never changes.

    My comment about the variability of interest rates has to do with the way in which the sinking fund (or bond retirement fund) is invested. There is an arbitrage opportunity for the school board, in that if interest rates go up over the life of the bond, it might be able to lessen the amount of money that needs to be collected from taxpayers to retire the bond debt. However, it would surprise me if any excess earnings on the bond retirement fund is used to reduce tax collections. I'd expect such excess earning to be piled into a 'capital reserve' or something for a future use consistent with the allowed use of bond levy funds.

    Anyway, a good deal of this dialog we're having is about signal-to-noise ratios.

    My mission is to filter out the peripheral nuances so that the central signal can be understood. Just as we first study the physics of motion by ignoring the effects of friction, I'm hoping to help the people of our community understand school economics at the basic level.

    So yes, a mortgage is not the debt agreement, but it's the term people are accustomed to using when talking about the deal they do to finance their own homes. Yes, it's actually the "Note" in that pile of papers you endlessly sign during closing which is the debt agreement.


  17. Paul:

    If school district debt was structured as some corporations structure debt, you would be correct, however, school district debt is often structured in a ladder. Let's say you have a 40 million dollar offering. You might structure 4 million dollars to mature in year one, another 4 million in year 3, another 4 million in year 5 all the out to year 20 or 21. In any given year, you would have to levy taxes sufficient to cover the 4 million dollars that might be coming due that year plus whatever interest is owed on the package. I've not seen a case where the entire 100% of the issue would be due at one time (it's possible, but I've not seen this).

    As for the rating agencies, this is an entirely different topic, but school district bond debt is "insured" partially by the state via the foundation program such that if a school district is unable to pay principal or interest, the state will pay it and deduct the money from your foundation allotment. Because of this, I view school district bonds in Ohio as among the safest investment there are.

    One another quirk of Ohio law is that the interest that bond funds generate can be transferred to any other school district account, including the general fund. Let's say that the voters pass a 40 million dollar bond issue but the district doesn't need all of that money right away (they have five years to issue the bonds). They can issue the bonds, put the money in the bank and transfer the interest to the general fund. The taxpayer is paying an interest charge for money that is being used to generate additional money for the district. From what I can tell, it is common practice although most of the time, the interest stays in the bond fund and is used to invest in additional facilities.

  18. Paul,

    What can I say? I have both the Ohio school law handbook (which provides commentary, Attorney General opinions, as well as court decisions -- not just citations from the ORC) and the Official Statement from a $117 million Olentangy bond issue. You possess neither (you obviously never asked your treasurer for a Hilliard Official Statement, nor have you spent the $100 or so to purchase the Ohio School Law Manual), yet you challenge me. And profess knowledge to your readers. Amazing.

    Once again, I ask two things from you:

    1. Buy, read and learn.
    2. Withdraw your letter until you understand what you don't understand.

    I recognize that my challenges to you appear shrill from your point of view -- it's called pride.

    Note: The Ohio School Law Manual is the first reference for school attorneys, etc. I'm not simply reciting my opinions. But I do question anyone who has not read the book yet speaks with authority and is seeking a board seat.

  19. Jim:

    Is it just that you must have the last word? Is that the pride we're talking about?

    If you look at my response to you, I don't refute anything you've said. And I've said that you made some good research suggestions that I'll follow up on.

    But all these details are making complicated a concept that is fundamentally simple. When a bond series is issued, the school district accepts money and makes a promise to pay it back with interest by a certain date. If more people move into the school district, the amount that needs to be collected per property to pay off the bonds goes down. That's the simple concept.

    Everything else is financial engineering that hopefully serves to shave some cost or generate some extra income. And politics being what it is, there's probably some room in the legislation, regulation and case law for stuff to take place that would piss off most of us.

    So in this case, I'll say it one last time:

    1. There is no direct connection between inflation, home valuations, and school operating expenses. School officials lament HB920 and whatever might have preceeded it because they want tax collection to increase automatically (as though home valuations are guaranteed to rise indefinitely) rather than make the effort to engage with the community in a real dialog about school operating costs (which requires that they first educate people on the basics).

    2. The cost of operating our school districts is driven by compensation and benefits, which increase over time for two primary reasons: a) growth in the number of employees; and, b) the steady rise in compensation brought about by a combination of base pay raises and step increases. Neither of these is driven by inflation. The former is driven by the housing market and municipal development policies, and the latter is a manifestation of the power of the unions vs our school boards.

    I'm willing to concede that your level of school finance exceeds mine. I'm also willing to concede that you know tons more about riding bikes that do I.

    Doesn't mean I can't ride a bike, and it doesn't mean that what I do understand about core school finance principles is invalid.


  20. Paul,

    So, here's the game ... will you let me have the final word?

    Refute me? Sure you did. That's why you called out the ORC relative to sinking funds.

    "When a bond series is issued..." If by this, you mean serial bonds, those are the ones that do not require a sinking fund (they use the bond retirement fund).

    I note that since it is the callout in the Ohio school law handbook. A little irony here, don't you think?

    Again, my challenge to you is to buy, read and learn.

    As it stands, you are no better off than Painter. And, since Painter is likely not aware of the source documents, and so cannot choose to not read them, I would say that you are worse off than Painter.

    And, it's not that I know more than you, it's that I go to the source documents before sharing my opinion.

    By the way, just because I may be able to ride a bike faster than you, does not mean that I know more about bike riding (think football and Jim Tressel).

  21. Here's what I know, sorry Glen Beck

    1. We have been exposed to the so called "experts" for some time now.
    Has not gotten us anywhere
    2. The entire issue is very complicated thanks to our worthless legislature, and even worse Ohio State Dept of Education
    3. An honest effort by a very small minority is trying to sift through the "facts" Sorry MR Fedako,perhaps your unyielding attitude on why you are right versus Paul JUST TRYING TO GET ALL OF THIS OUT INTO THE OPEN. SORRY
    4. Paul at least is making an effort> How about encouraging those who are trying to communicate
    and figure it out, instead of
    denigrating them.
    5. I get totally sick and tired of those who point fingers at those trying to ask questions.
    It is bad enough our school boards, and its employee entitites dont give a rats manure about the community and the support most communities give their schools

    Mr Fedako, take a chill pill, your anger and obstinence at Mr Lambert
    is a useless exercise. He has at least put out his best foot forward.

    This is why people dont get involved. They get potshots from the left and the right, if they speak up at school their kids suffer and worse yet districts and their employees tell the homeowner
    "you dont get it"

    It seems we all should be close to being onthe same page here, no one is perfect. Dont shoot the messenger!

  22. Marc:

    Thanks for the information about laddering bond issues. I can see the value in structuring maturities in the way you describe, and expect that a number of the school district bonds I own are part of just such a structured offering, because of their relatively short maturities (as an investor, the issue date isn't really relevant - it's the maturity date and interest rate, from which one calculates Yield-to-Maturity).

    A maturation ladder as you describe would indeed cause the interest payments to go down as time goes by, and there would be no need for a sinking fund or bond retirement fund per se as the in that case there would be a pay down as you go.

    However, none of this is in the realm of my original point: which is best exposed by KJ's question. The question people have is how the construction of new homes influence school levies.

    The answer is that: a) in the case of an operating levy, the total collection goes up; and, b) in the case of a bond levy nothing changes in aggregate (ie from the perspective of the school district), but that the impact will be spread over more properties, lessening the amount all homeowners would have otherwise paid (even if a laddered structure is used).

    I also understand your point of the school bond debt be backed by the State of Ohio via redirection of the foundation payments. Nonetheless, I have some Ohio school bonds that Moody's rates as A1, and others as AA2, so they aren't viewed to be of equal risk.


  23. The answer is that: a) in the case of an operating levy, the total collection goes up; and, b) in the case of a bond levy nothing changes in aggregate (ie from the perspective of the school district), but that the impact will be spread over more properties, lessening the amount all homeowners would have otherwise paid (even if a laddered structure is used).

    In the case of a bond issue, the auditor will calculate the millage based on the total value of property in the district. If property values increase, one mill generates a higher number so fewer mills are required. Property values can increase either by individual houses being worth more or more houses being built. The reduction factors in HB920 don't apply to bond levys. Note that the reverse is also true - if property values decline, more mills are required to generate the amount required.

    I also understand your point of the school bond debt be backed by the State of Ohio via redirection of the foundation payments. Nonetheless, I have some Ohio school bonds that Moody's rates as A1, and others as AA2, so they aren't viewed to be of equal risk.

    I've noticed this as well and continue to be confused on this point. One possibility could be bond insurance. Until 2008, bond insurance could always boost ratings up to AAA but now, most districts will have to rely on their own underlying rating. Having read the actual ratings documents, the points they make (enrollment, operating levy status etc..) seem to have nothing to do with the district's ability to repay the debt. Apparently, people far more versed in school district debt than I are also confused, so whatever the factors that are being used by Moodys/S&P/Fitch are, they aren't obvious.

  24. Marc:

    Again, good information as to the details on bond levies, but my central point remains true: when more houses are built, operating levy collections go up in aggregate and bond levy collections stay the same.

    From the perspective of existing individual homeowners, the construction of new homes has no effect on operating levies, but it causes the per home contribution to bond levies to decrease (albeit while creating demand for more buildings, which could lead to yet another bond levy).

    The real question people want answered is: "Why do my property taxes keep going up?"

    The primary causes (here in Hilliard) are: a) the 7%+ annual raises built into the union contracts; b) the growth in the number of students; c) the lack of commensurate commercial development in our community; and, d) the flawed state funding system.

    This is the "signal."

    All the fine details that have led to the long list of comments on this post are the "noise." Anytime there is any attempt to have a strategic discussion about funding the schools in our community, all this noise gets brought up and most people tune out.

    KJ gets it. That's the reason for my "thanks for thinking like an engineer" (which he is) point of appreciation. Engineers are taught to understand complex systems by looking at the simplified fundamentals first, then adding on complexity. You learn to understand the physics of motion by ignoring friction.

    It doesn't help the learners to have Albert Einstein in the room saying "Don't forget to account for the spacial distortion caused by the relative motion through the space-time continuum."


  25. Paul,

    I was told that the value of a operating levy did not increase with additional homes. Both bonds and levies were discussed and I asked the specific question about operating levies. I even clarified by saying that I had always "assumed" new homes brought additional operating funds. I was told that assumption was incorrect. I then used a similar analogy to the one I used above, and was again told the same.... that new homes don't bring additional operating funds and the tax base base is just increased for which to spread the total operating value.

    Like I said, I was misinformed, whether intentionally or not doesn't matter, each scenario is equally disturbing to me.

  26. Paul, Mark and the group

    Attended the Hilliard City Council
    Republican candidates night,last evening.


    I think I heard " I agree with everyone else" about 12.8 million times.

    I submitted 4 questions as it relates to their selection process, residential development,
    developer relationship etc.
    Naturally not one question got posed

    The City continues to take credit for "slowing down the residential
    growth" but failed to mention
    Homewood, Alton Darby Planning
    New density near Bradley,
    proposal for the old Dana site.
    No mention that the economy and housing market might have had an effect.

    Bottom line , and I am sure they wont tell us, the real numbers of potential residential remains a concern and a mystery.

    They did a great job of stating
    sic that the property tax increases that they have heard about from their door to door campaigning ? are all about the schools. not acknowledging the residential growth.

    Anyway, Heather Keck is not
    endorsed by the Rep party, and if anyone here has been paying attention to the endorsement process it was kind of the same old taking care of those who will support them blindly and have the usual connections.

    If you are voting in the Rep primary in might be a good idea
    to look at her credentials .

    The endorsed group is clearly very pro admin, and will be in lockstep with no questions asked.

    Kind of sounds like a topic we discuss on this board.

  27. I'm not a Hilliard resident. But I read the Hilliard City Council candidates' profiles in the Dispatch today (Sunday, Insight section) and have some thoughts.

    It's an interesting slate, and so transparently apparent of who is worthy of endorsement.

    Jim Ashenhurst: No-nonsense background as an Army colonel (retired). His platform centers around "controlling growth". Where was he ten years ago when Hilliard was exploding? Kinda late to put Humpty Dumpty back together again. Sorry, Jim, sounds like you have other motives. Next!

    Doug Jackson: A professional, tax paid administrator. He's the object definition of a taxpayer disaster in public office. Oh, but he was involved in creating Hilliards new aquatic park...(Gee, Beave!)

    Heather Keck: Love her. She's bright and seems unflappable. I'd hate to be on the other side of an issue with her (which is where I suspect most Council members will be with her). Pull the lever for Heather. Hey--there's a campaign slogan...

    Stephanie Kunze: Like her. My understanding is that the Hilliard Area Republican Club is the "outsider" GOP club that Tim Ward, conservative, defeated Council candidates other residents disaffected with Council began (correct me if I am wrong). Like her from her (I believe) outsider GOP status, but her membership in PTO screams conformity and an unwillingness to do the difficult things that may be unpopular. Enorse with reservations.

    Kelly McGivern: Terrible candidate on paper--who could elect the CEO of a statewide trade association to public office and expect her to do anything that might rock the boat and sully her image? Further, she could not have been chosen to replace residential growth-tool Mike Cope unless she was solidly pro status quo, which is poison to Hillard.
    Throw her out.

    Brett Sciotto: Great candidate on paper. Web site shows him cheek-to-cheek with Schonhardt. That makes him unelectable in my book. He's also guilty of possibly the worst thing any candidate with phony intentions will ever, ever say: "...take the community to the next level". That is the politics equivalent as hearing "trust me" from a salesman.
    But worst of all he's also part of the Machine: as former president of Council he's at the core of the rotten apple.
    Toss him out of office. But try not to mess up his hair.

    Have fun electing your next council. I don't envy you. Then again, we in Delaware did the right thing and tossed out two highly corrupt officials last November. You can do it, too!


  28. TJ:

    Thanks for your thoughts. I'm not a resident of the City of Hilliard either, so like you won't get to vote on these candidates.

    Growth isn't over in Hilliard - the City is in the process of accepting annexation requests for nearly 1,000 acres of land, with more annexation requests in the wing (you have to break it up into parcels of 500 acres or less to get automatic approval by the county commissioners).

    The city leaders want to say that the development density will be 1 DU/ac with 50% open space, which is the density specified in the Brown Twp comprehensive plan and the Big Darby Accord. However, the actually development density will, I believe, depend entirely on what kind of houses the developers see a market for when the new home market returns.

    If it's $125,000 houses packed five to an acre that were all the rage a couple of years ago, then we might end up with thousands of homes on this acreage.

    Our school district is only 50% developed. There's still plenty of room for growth.

    It will interesting to see what the turnout will be. I've been a pollworker in every election since Nov 2004, and never has the ballot been so sparse. Here in Brown Twp, the ballot will have only one issue, ISSUE #1 for Metro Parks. I could be an incredibly boring day.


  29. My apologies:

    The Northwest News was good enough to publish this week my letter to the editor on this topic. Only then did I realize that the way I explained the workings of HB920 didn't help make thing clearer. Please read the note I inserted in the main body of this post...


  30. Wow - what a bunch of idiots. Why are you criticizing a group of people who are volunteering their time to be on the A&A committee. From what I have read of HB 920 - Painter was exactly correct - the most the school district will collect was what was originally may vary from house to house but the district sill gets the same amount of money each year. If you strike oil and your property is now worth millions - yes, you pay more but it's all relative to your property value and assessed value.

    On a side note...Paul is just a pain in the ass because he wasn't popular enough to get elected to the school board and now wants to tell everyone how miserable the schools that he supposedly loves are for our children.

    Thank you to Mr. Painter and all of the A&A committee for attempting to better our community! I appreciate your work and efforts to make our schools a better place for my son and the children of Hilliard.

  31. Okay .. here's the truth about HB920 one more time.

    Let's say that at time of the passage of the levy, the net impact on your house was to add $100/yr in property taxes, then no matter what happens to the appraised value of your home, up or down that $100 is all that would be collected.

    However, if a new home is built of the exact value of yours, the owners of that home would also pay $100/yr, and it would be new money to the school district.

    In the context of a growing district, HB920 doesn't prevent aggregate tax collections from growning, only the amount on existing properties from changing. Our school leadership however prefers to paint the picture that if a levy collects $X million/yr in aggregate when it passes, that's all it ever collects. It's just not true.

    Yes, I do appreciate Mr. Painter and the others stepping forward in this service. However, if the A&A Committee becomes just one more house organ of the leadership it was created to inspect on behalf of the people of the community, then what has been gained?

    By the way, serving on the school board is not supposed to be a popularity contest, like electing the high school class officers or something.

    We should elect people to the school board who know how to govern a quarter-billion-dollar enterprise, and are willing to apply that talent in the service of our community.

    There are certainly at least five people in the community who know how to do so. Are you one of them? If so, I hope to see your name on the ballot this fall.


  32. By the way - your math is way off. $183.75 is the total per $100,000 that most residents will pay. You forgot about the reductions for homeowners that live in their property so your total that you are telling people is 12.5% too high.

    Before you start educating others on HB920, maybe you should double check how the taxes are calculated on your own property.

  33. Actually there is a third type of levy that you failed to mention - Permanent Improvement Levy

  34. Anon:

    You are correct that there are also Permanent Improvement Levies. Structurally they work like operating levies, but the proceeds can be used only to build, repair and maintain assets having a relatively long useful life. Hilliard taxpayer had approved several of these over the years. They may not be used to fund current operations.

    There are also at least five kinds of operating levies. However, our school board has used only Permanent Operating Levies in recent times.


  35. Actually, the number I quoted - $210/yr per $100,000 of appraised market value - is the correct number for the majority of people.

    I think you are referring to the Homestead Exemption, which applies only to folks 65 years or older, or those who are permanently and totally disabled (or the surviving spouse of a person who qualified). For those who are eligible and apply for it, the Homestead Exemption is a reduction equal to the taxes that would have otherwise been paid on up to $25,000 of the market value of the property, provided that it is the principal place of residence for the individual making the claim.

    If you want to verify this, you are welcome to check out my property tax card on the County Auditor's website. I'd be happy to look at yours as well if you didn't prefer to take potshots while hiding behind a veil of anonymity.



    Yes, there is a homestead "exemption" for seniors but there is also an homestead "reduction" for "owner occupied homes" that equals 2.5%. The above site links readers to the application if you are not recieving this owner occupied homestead reduction. I am very familiar with the auditor's website and both you and I have this 2.5% homestead reduction on our summary page (see the bottom right corner of the summary).

    The additional 10% that I was referring to is a tax credit that is offered by the sate and was passed in 1971 so it is nothing new. It is credited to your state income tax and therefore reduces the amount you pay.

    Most of our community members live in their home and work in the state so they get a 12.5% reduction of their voted school millage which makes our total less than the $210/$100,000 you suggested. If a resident lives in their home and works in Ohio they pay only $183.75/$100,000

    Again, if you go to the auditor's website for your property and click the link on the left that says tax information you can clearly see the line for the 10% rollback (labled 10% RB) and the homestead reduction (labled 2.5% RB).

    By the way - I'm only anon. because I don't want to register. My name is Marie and I live in Hoffman Farms and have one child that attends HSC. I didn't mean for my comments to come across as rude but please make sure you are spreading the correct amount. You are paying 12.5% less than what you are telling your readers. I want to make sure our community knows the appropriate amount they are paying for our children to get a fabulous education in HCS rather than other surrounding districts that are facing huge cuts right now.

  37. Marie:

    I have my 2008 and 2009 property tax bills in front of me. Here's the facts:

    2008 school tax: $4,566.71
    2009 school tax: $5,312.73
    Difference: $746.02

    Assessed value: $123,980
    which is 35% of the market value, making it $354,228.57.

    $746.02 is to $354,228.57 as
    $210.60 is to $100,000.

    However, you are correct that there is both a 10% and 2.5% rollback applied to the gross tax bill, and so it is also appropriate to prorate it to the school tax in this analysis. In doing so, the net increase in tax is $184.28. One or the other of us has a rounding error, but close enough to call them the same.

    So, I appreciate your taking the time to read the blog and to point out my error. I hope you will continue to engage in our dialog here, and correct me when I get something wrong. The objective here is to share and debate information in order to make everyone smarter, especially me.

    My original comment about the A&A committee is still valid. The school leadership will bring its bias to the discussion, and if the members of the A&A committee don't seek the whole truth independently, we'll end up with yet one more rubber stamp report and no progress towards finding real solutions to the increasingly dire situation in which we find ourselves.

    If you go back to the beginning of the blog, you'll find that my primary concern was the high pace of residential development without balancing amounts of commercial development. If residential development outpaces commercial development, the whole incremental cost of running our schools ends up being borne by the homeowners and existing businesses.

    Mayor Schonhardt knows this, but frankly doesn't care because his agenda is something other than the best interests of the school district and the taxpayers of the community. His best friends are the developers and the homebuilders, not us.

    None of our school leadership will deal with this though. They just throw up their hands and say they have no control over development. They miss the point that the people who vote for Hilliard Mayor and City Council members are also taxpayers in the school district, and so it is completely appropriate - even necessary - for the school leadership to: a) educate the community on this fact; and, b) call out the Mayor on his actions (e.g. the recent annexation of 1,000 acres for residential development).

    The spending side attracted my attention only when the teachers pulled their shenanigans during the last contract negotiation. They have a very good deal - and it will have to be adjusted in the next contract, if not before.

    We don't have to talk about diesel fuel or paper waste - it's insignificant compared to the personnel costs, which are 90% of our operating budget - as would be expected in any professional services organization. But the fact that it is 90% means it's the place we have to concentrate our attention, and make sure things aren't getting out of whack relative to the rest of the economy.

    By the way, you don't have to register to attach a name to your comments. Just click the button next to "Name/URL" and you can fill in any name you want. It's a lot less confusing to have names, even a psuedonym, than several folks using Anonymous.

    Thanks again Marie.


  38. Marie: By the way, the $210/$100,000 factor is exactly what was used by the school district and the levy committee during the last levy campaign --- and they were equally wrong. Much to understand, huh?