June 1 Meeting Notice

June 1, 2009, 6:45-8:15pm
Jim Rice Meeting Room
Joint Safety Services Building
5181 Northwest Parkway

Our next meeting to continue to formulate our PAC and School Board Campaign strategy is next Monday. There were two meetings in May that resulted in much progress:

- Two more potential candidates were identified
- The structure and naming of the Political Action Committee were decided as well as how it would relate to individual campaigns
- We started budget analysis for the campaigns
- We identified a new site to host our PAC ideas and raise funds
- Continued discussion on strategy

At this meeting, we will discuss:

- Detailed timeline for milestones
- Communication strategy
- Update on campaign financing
- Continue to discuss the marketing of our message
- Identify goals in regards to vote totals and reach required

If you are interested in helping out, please join us on Monday!

Our New $10 Million Mortgage

According to the agenda for next Tuesday's Board of Education meeting (8/26 7pm, at the Admin building), the School Board will consider a resolution to take on $10 million in long-term debt "for the purpose of improving, constructing, reconstructing, renovating, remodeling, enlarging, furnishing and equipping buildings and facilities and improving sites for school purposes."

We gave the Board the authority to do this when we voted to approve the $75 million bond levy issue in May 2, 2006.

In actuality, the indebtedness has already occurred. Ohio law gives a school district the option to issue "Bond Anticipation Notes" in advance of the sale of the actual bonds. The School Board authorized the sale of such notes on May 12, 2008, with a maturity date of July 1, 2009. Since the Board and Administration is apparently not prepared to sell the long-term bonds yet, they are going to issue a new set of short-term Bond Anticipation Notes. These notes will be paid off via the issuance of long-term bonds, which they plan to issue by Sept 1, 2009. Note the gap – this $10 million, which has likely already been spent – was financed via short term notes which mature July 1, 2009. However, the $10 million long-term bond issue designed to replace these short term notes aren't expected to be issued until Sept 1, 2009. What happens in that three month gap?

Most folks haven't been walked through the mechanics of the sale of these kinds of debt offerings. It's not hard to understand – most folks just never have reason to think it through.

The first consideration is that the school district doesn't have on staff any folks with the skills and licenses to directly sell notes/bonds to the general public. Instead, the school district will make an arrangement with one buyer – the underwriter (called the "Primary Purchaser" in this resolution) – to buy the whole issue in one transaction. At the end of that transaction, the school district has a big check from the underwriter, and the underwriter has possession of a whole bunch of notes/bonds, which they turn around and sell to the public (in actuality, they will have pre-sold most of the issue prior to the transaction with the school district).

How does the underwriter get paid for their services? The bulk of it comes from the fact that they get to buy the notes/bonds at a discount off face value. In the case of these Bond Anticipation Notes, the underwriter gets to buy $10 million worth of notes for $9,700,000. They'll turn around and sell them for $10 million, netting a gross profit of $300,000 – often within days since they pre-sell most of the offering. This is all described in Section 6 (a) of the resolution before the Board.

Section 3 says that we may pay up to 5%/yr interest on the money borrowed, which is the full $10 million. We'll likely not be told what interest rate the notes are actually sell at – it just can't exceed 5% without a new resolution. I'd be surprised if it's much less however. The underwriter wants the interest rate to be as high as possible after all – it makes the notes easier to sell. These days 5% is very much a premium interest rate, and these notes should sell like hotcakes. My guess is that they have all been spoken for already – common folk like us never get a shot at these kinds of deals.

But the 5% interest is the small potatoes. It's the 3% discount the underwriter gets in the price of the notes which is expensive. The math works out like this: The school district gets $9.7 million from the underwriter when the deal is closed, and in 90 days we will have to pay out to the note holders the full $10 million in face value plus $125,000 in interest ($10 million x ((5%/12) x 3 months).

So for the privilege of borrowing $9.7 million for 90 days, we will pay $425,000 – the $300,000 discount we gave the underwriter plus the $125,000 interest at 5% APR. That works out to a little more than 13% APR.

And guess what. When these notes mature in 90 days, and the actual bonds are issued, the same kind of thing will happen again. The underwriter will buy the $10 million in bonds for $9.7 million or so. The district (meaning we the taxpayers) will then be on the hook to repay the full $10 million of face value to the bond holders, plus interest, over the life of the bonds.

My question is: Why are we spending the $425,000 in financing costs for the 90 day notes?

Is it because the Treasurer did a market analysis and decided that we would be able to issue the long-term bonds at a lower interest rate if we wait 90 days? After all, we want to have to pay as little interest as possible. But does anyone really think investment-grade interest rates are still headed down? After all, the interest rate on Treasury Bills is pretty much zero these days. And even if the Treasurer does think interest rates will drop further, will it be enough to offset the $425,000 in financing costs on the short term notes?

Here's what I guess: There's a lot of details that have to be taken care of when an entity is going to issue long-term bonds. You have to find an underwriter. Then you have to negotiate the discount with the underwriter. Then you have to set the interest rate on the bonds, which brings about a discussion with the bond rating agencies, whose job is it to tell investors how risky they think the bonds will be (the more risky, the higher the interest rate we'll have to pay). Then you have to register the offering with appropriate state and federal regulatory agencies.

All that takes time. My guess is that the Treasurer or someone else in the Treasurer's office figured out that they had $10 million in short term notes coming due on July 1, and not enough time to get all the legwork done to sell the long-term bonds. If that's the case, it's as pure an example of waste as I could think of. It certainly would buy a lot of diesel fuel.

Not to worry though – the bond levy we passed and state law gives the Board the power to sell another set of short term notes and stick us taxpayers with the financing cost.

This is the kind of thing the Audit & Accountability Committee should be digging into. They're supposed to make a report at Tuesday's meeting. I intend to be there to hear it. Hope you are as well.

Property Taxes are NOT the Problem

Rick Gibbs of Worthington wrote a letter which was published by The Columbus Dispatch on May 9, 2009. He repeated a tired old refrain:

"The real problem is that in Ohio there is too much reliance on property taxes to run our schools and, district to district, 1 mill of taxation may bring in dramatically different amounts of money."

However he fails to describe what he proposes should replace property taxes as a funding source. That's because the real problem he and the many others who say this have is something else altogether.

Mr. Gibbs makes the point that 1 mill of taxation produces differing amounts of revenue from one district to another. But let's say that instead of property taxes, Ohio law required that public schools be funded solely with income taxes. Wouldn't it also be true that 1% of income tax would collect differing amounts of revenue, district to district? Expensive homes are generally owned by people who have a lot of income. Homes with low values are typically owned or occupied by folks on the lower end of the income scale. So how would basing the school tax on incomes produce a result any different than property taxes?

Well, there is one key difference. Our senior citizens often find themselves in a situation where they have a high value piece of property – often fully paid for – yet not nearly the income they enjoyed before retiring. Nor do these folks have school age children, yet many have been paying property taxes for decades after the kids left home. So it is particularly onerous that these folks end up paying ever increasing local property taxes. But there's a simple solution to this situation – enhance the property tax exemptions available to senior citizens.

So what are the real objections to property taxes as a funding source?

First, it's the fact that property taxes are one of the few taxes that are voted on directly by citizens. The professional education community hates the fact that they have to periodically 'sell' the people of their community on the value of paying more money to operate the schools. Since 90% of the operating costs are the compensation and benefits of the teachers, administrators and staff, it's like they have to justify their own pay to the public. Imagine that.

Local voter control puts the educators on the wrong side of the power equation. By far, they prefer to have their compensation and benefits determined by politicians who can be influenced with substantial campaign contributions. The National Education Association, the national-level organization of state and local teachers' unions, has been the 7^th largest political contributor over the past ten years (data from OpenSecrets.org)

Secondly, it's not so much the form of the tax that's the problem – it's the way the revenue gets redistributed. What they really want is for schools to be funded by a state-level income tax that allows the money to be redistributed according to rules set up by the Governor and the General Assembly, the very politicians who receive all those campaign contributions from the teachers' union. That puts the educators in the power seat, not the voters.

But Governor Strickland's new "Evidence Based Model" isn't making them happy either. It turns out that the districts that have been performing badly have also been losing students, so the EBM system, which is heavily driven by student population, is sending money right back to growing districts, which also happen to be some of the most affluent, such as Hilliard. The various parties are now negotiating how to tweak the system such that in the end, money will go where they want it - not according to what the 'evidence' says.

By the way, the current state funding system is designed to make allowances for the local resources available to districts with high property values. The higher the property value in a district, the less Foundation Aid funding they receive on a per-student basis. But remember, districts with high property values generally have high personal incomes as well, and it is largely the state income taxes on this personal income which funds the Foundation Aid. So wealthy districts get to keep more of their property taxes, but less of their income taxes. The Governor's EBM system won't change that.

Proponents of a new school funding system want us to think the outcome in terms of taxes collected and spending allocations will be drastically different than what we have today. It simply can't be. Money will flow from high income areas to low income areas, regardless of the form of taxation used.

The battle is over who makes the decisions, and the educators don't want it to be us taxpayers.

Note: I believe the central problem is that there are public school districts. I invite you to read Food Stamps to stimulate thinking about other possible ways to educate our kids.

Simple

In both the articles I have posted and the many comments you have made, this blog has explored many aspects of the fiscal operations of our school district. This conversation has exposed many details and nuances which undoubtedly add to our shared knowledge of this subject. I certainly appreciate the dialog.

But every once in a while, I think it's important to back out of the details and review the big picture. This is what emerges as the core fiscal drivers:

• Our operating funds come from three primary sources: a) residential real estate taxes; b) commercial real estate taxes; and, c) funding from the State of Ohio. As the district has grown in population, the commercial and state funding has not increased at the same rate. In fact, commercial and state funding has not grown much at all. The result is that virtually all the increase in costs must be funded by the residential homeowners via operating levies.
  
  If Mayor Schonhardt and the City of Hilliard allow the construction of thousands of houses on its newly annexed acreage west of Alton-Darby Rd – and doesn't balance it will equal funding from new commercial sources – this problem will get much worse.
  
• Our costs increase for three reasons: a) the number of students has grown; b) the number of employees has grown; and, c) the compensation per employee has grown. The percentage growth of employees (56%) was 50% greater than the percentage growth in students (34%) in the 10 year period between 1998 and 2007 (see table).
  
  But even if there wasn't any growth in students and employees, the teachers and staff of the district have been getting annual raises in excess of 7% for the past two contracts. This alone pushes our spending up approximately $7 million/yr, and requires an additional operating levy of about 7 mills every three years to support.
  
  We spend 90% of our operating costs on salaries and benefits, as should be expected for a professional services organization. But that also means most of the other stuff that gets talked about relative to cost-cutting is by definition relatively insignificant. If we don't want another sizable levy added to our tax burden in 2010, we've got to start talking about adjusting the employee pay scales – beginning with the teachers' contract.
  

Schools are a very personal thing for us, because the schools have a huge influence on our kids – now and for their future. Most of us moved to this community to give our kids a chance to partake of what we believe to be a great school system with great teachers, staff and administrators. By and large, that's exactly what happens. While we have kids in school, and our lives become intertwined in all the activities they get involved in, we tend to be supportive to the point that criticism of the schools is felt to be an attack on the welfare of our kids. I understand that. I didn't give two hoots about school governance while our kids were in school, caringly only about their wellbeing.

But we've reached a point in time where those blinders have to come off, and we must look at the sustainability of the trajectory we've been on – whether or not we have kids in school. We need to ask and answer some tough questions:

• Are we willing to pay the taxes necessary to have all these folks on the payroll under the current contract terms?
  
  If the answer is "no," then how do we determine which optional (as defined by law) programs and services to cut?
  
  If the answer is "yes," then at what rate are we willing to see our taxes increase - $hundreds per year?
  
  In either case, what is a fair pay structure for the folks who are necessary to deliver the programs and services we expect?
  
  
• Is ongoing growth in student population a good thing?
  
  If "yes," then are we willing to underwrite most of the costs associated with growth (more employees, more buildings)?
  
  If "no," are we willing to tell the Mayor and City Council to stop annexing land and issuing building permits?
  

We have to quit talking about the little stuff, and focusing on the experiences – good or bad – that our own kids have. The school system is the largest, most expensive and most impacting institution in our community. Our attention needs to be focused on the big stuff right now.