Saturday, December 26, 2009

Time Is Of The Essence

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

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

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

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

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

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

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

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

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

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

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

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

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

So what is to be done?

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

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

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

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

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

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

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

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

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

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

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

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

Monday, December 14, 2009

Union Contracts: Where Do We Go?

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

Your thoughts?

Wednesday, December 9, 2009

Teacher Raises = Levy Size

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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