More Millage Math

NOTICE: If you read this article prior to January 8, 2011, the calculations I had performed showing the effective percentages increases of various levy amounts were incorrect. An updated chart has been posted, and the numbers in this article have been corrected, as shown by strikethroughs. I apologize for my error.

First, allow me to begin by saying "Thank you" to all the members of the community who participated in the Breakfast with the Board last Saturday. There were great questions and lively discussion, lasting well past when the session was formally concluded. Most of the conversations were about the cost of running our school district, what Ohio's budget crisis is going to mean to school funding, and how large the next levy will be.

I hope two things were achieved during this meeting:  1) that folks learned some things about school economics that they didn't know before; and, 2) that the members of the Board heard how much the people of our community love their schools, yet are still concerned about the ever-increasing financial burden of funding its operations.

We are rapidly nearing the time when the School Board will need to vote on the two resolutions required by law to put a levy on May ballot. There is a regular School Board on Dec 13 (@ Horizon), then the next two will be Jan 10 and Jan 24. The first of those resolutions will likely be on the agenda on Jan 10, and the final resolution on Jan 24, in order to meet the deadline for filing with the Board of Elections.

I've recommended to my fellow School Board members that we schedule a working session soon for the sole purpose of having an in-depth examination and discussion of various funding and spending scenarios, leading to the selection of the millage rate that will be on the ballot. I have also recommended that the Audit & Accountability Committee be invited to participate in this discussion, allowing the School Board to benefit from their talent and wisdom, especially since they have spent the last two years working hard to understand the economic underpinnings of public schools.

My last article included a chart that I constructed to help me understand the implications of various levy sizes. I've enhanced that chart a bit, and make it available to you - with the disclaimer that it is accurate to the best of my knowledge, but is NOT an official publication of Hilliard City Schools. Before making your decision about how to vote on the levy - whatever size it may be - read the official ballot language, and ask Treasurer Brian Wilson to clarify any questions you might have.

That being said, you may find the chart here. Directions for use:

1. Pick a levy amount between 4 and 10 mills from the first column
2. The second column shows the amount the annual property tax will increase for each $100,000 of market value (as determined by the Franklin County Auditor). For a 6 mill levy, this number is $184/yr. So if your home is appraised at $250,000, a 6 mill levy would cause your property taxes to increase $460 ($184 x 2.5).
   
   By the way, this calculation would be the same for every school district in the State. In other words, a 6 mill levy would increase the annual property tax by $184/yr per $100,000 regardless of whether the levy is in Hilliard, Dublin, Toledo or Chillicothe.
3. The third column shows the total amount of new revenue the District would receive should the levy pass. Looking again at the row for 6 mills, this shows that a 6 mill levy would raise approximately $14.6 million per year of new money for the District.
   
   This number does vary from district to district, depending on the aggregate property value. Again, the math isn't mysterious.  The total value of all real estate in our District is about $2.4 billion, and 1 mill is a tax equivalent to 1/1000th of the value of a piece of property. So a 1 mill levy raises approximately $2.4 million per year in our District.
4. The next columns attempt to create a sense as to what various millage amounts equate to in terms of annual rates of increase. In actuality, when a levy passes our tax bill increases in one step, and remains at that level until additional levies are voted in, or existing levies expire.
   
   So if the School Board said to the community, "we recommend that you approve a 6 mill permanent levy, and estimate that, given our assumptions as to funding and spending, we will not need to ask you for another levy for 3 years"  -  you would scan across to the columns for 3 years, and note that this is equivalent to a 2.6% 3.6% annual increase in just the school portion of your property tax, and to a 1.6% 2.6% annual increase in your overall property taxes (The school tax is approximately 64% of your total property tax bill. The actual fraction depends on which city or township you live in).
   
   Of course, if our assumptions are off, and the Board has to come back to your for more money in 2 years instead, it would be like raising the effective annual rate of increase to 3.9% 5.5% on the school portion of your tax bill, or 2.5% 3.6% overall.

So how much does the District need, and how many mills will you be asked to pay?

There is simply no mathematically correct answer to that question - it's a matter of opinion. You are welcome to look at the current Five Year Forecast, as well as a bunch of scenarios I've constructed for examining various configurations of levies vs a couple of spending rates.

Very soon, the period of theory, opinion, analysis and discussion will end, and the School Board will reach a decision as to the levy amount.

If you have not expressed your views on this matter, please do so right away. We would love to have you come to the next Board meeting and speak to us directly, but if you cannot, send a letter, or an email and make your voice heard.

Millage Math

At our last School Board meeting, Treasurer Brian Wilson presented a couple of simple charts showing what the district's future cash balance is projected to be given three different levy scenarios: 6.9 mills, 8.9 mills and 9.9 mills. He developed these scenarios by starting with the most recently approved Five Year Forecast and dropping in the revenue stream that would be generated by these various levy amounts.

Of course, this is from the perspective of the school district. What would these various levy amounts and funding periods mean to you, a homeowner or business owner in our district?

Here is a chart that I hope helps answer that question:

You read it this way:

• Each row is for a different millage amount, from 4 mills to 10 mills. I'll not insult your intelligence by tacking a ".9" onto the numbers as though you don't know 6.9 mills is pretty much the same thing as 7 mills.
  
  
• If you pick the row for say 6 mills, the "$Incr" column shows that this would increase your property taxes by $184 per $100,000 of market value, or 7.9%.
  
  So if the Auditor has said your home is valued at $250,000, you would multiply the $184 by 2.5 and arrive at $460 for the amount your taxes would increase if a 6 mill levy were passed.
  
  
• The columns show what the effective annual percentage increase is based on how long the Board tells you it will be until yet another levy is placed on the ballot. If the plan is to wait for three years before asking the community for more money, then a 6 mill levy is equivalent to increasing your taxes at an annual rate of 2.6%.
  
  But if the district spends the money faster than forecasted, or the revenue - notably the state funding - is less than expected, then it might later be decided that another levy is needed in just two years. If that's the case, the effective annual rate of increase rises to 3.9%

You can also 'work backwards' using this chart.  For example, if you decide that you're not willing to have your property taxes increase at an effective annual rate greater than say 3%, look for numbers close to 3% on the chart, and see what combinations of levy millage and years yield about 3%.

It looks like something between 4 and 5 mills on a two year cycle would be about a 3% annual growth rate.

Or 7 mills on a three year cycle.  Or 10 mills on a four year cycle.

I hope this helps you gauge the impact of various levy sizes on your property taxes.  The decision as to the levy amount that will be on the ballot is going to happen in December or January.  If you wait around until April, the only choice you'll have is whether or not to vote for the levy.

If you want to influence the Board as to the levy amount, you'll have to speak up now. The Breakfast with the Board this Saturday, November 20, from 9am-10:30am at the Central Office Annex is a great place to make your voice heard. Come any time during the hour-and-half gathering, speak your mind and leave, or stay the whole time if you like.

Just don't be silent and expect things to come out the way you want.

The Political Language of School Finance

In the Columbus Dispatch story published following our November 10 School Board meeting, the closing line was this:

"The district also shaved $6.5 million in expenses through staff reductions, department budget cuts and efficiency improvements since 2008."

I believe this quote merits further explanation to make sure the folks of our community understand what it means.

It does not mean that spending decreased over this period. In fact, it went up every year. The actual numbers for Total Spending over the past three years are this, as reported in the latest Five Year Forecast:

FY08: $146.4 million
FY09: $149.6 million (+2.2%)
FY10: $157.2 million (+5.1%)
Three year Total: $453.2 million

So what does the use of the word "shaved" as in this Dispatch story mean?  

It is an indication of how much actual spending was below an earlier forecast. Specifically, the Five Year Forecast published in December 2008, after the passage of our last operating levy, depicted the following:

FY08: $146.4 million (actual)
FY09: $152.2 million
FY10: $161.0 million
Three year Total: $459.6 million

Therefore $6.4 million less was spent during 2008-2010 than had been forecasted in Decmber 2008. This is where the "shaved $6.5 million in expenses" comes from (please excuse the rounding differences).
 
So one way to talk about "savings" or "cuts" - the way reflected in the quote reported by The Dispatch - is to compare what was actually spent vs what we had thought we were going to spend, given the assumptions made at that time. From that perspective, spending was indeed around $6.5 million less for this period than what we had planned.

However, in absolute terms, our spending increased at a rate of 3.6% per year even after all of those programming cuts and staff reductions had been made.

Looking forward, the latest Five Year Forecast shows annual spending increasing from $157m in FY2010 to $191m in FY15, a compound annual growth rate of 4.0%. During that period, Compensation & Benefits costs are projected to increase 4.45% per year.

I leave it to you to decide whether there has in fact been a "savings" when spending grows, but at a rate less than forecast. The objective of this article is to point out that the word "savings" is ambiguous, so don't assume that what you read or hear reported is the same thing you are thinking. Ask follow-up questions until you fully understand what is being said.

My Comments at the Board Meeting Regarding the Next Levy

The Columbus Dispatch chose to distill my comments at last night's School Board meeting down to a tiny sound bite that left the reader with no idea what I'm thinking.  Below is the full text of my comments.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I have spent the last two days at the annual Ohio School Boards Association annual conference attending every session I could that dealt with school economics. The primary question on everyone’s mind – from all across the State – was how much the Governor and General Assembly are going to cut the funding to schools. There was no question about if there would be significant cuts, and no one thought it would be less than 10% - the number Brian has used in the Five Year Forecast we just accepted. More than a few thought it would be more.

Assuming that we all agree that we desire to maintain the excellent quality and breadth of programming and services offered by our school system, it seems that we have two primary things to discuss.

First is whether we want to stick with this assumption of a 10% state funding cut, or perhaps increase it, and what kinds of contingencies we want to put in place in case we are wrong. A big part of this is deciding how aggressive to be in raising our cash reserve back to 10%, as is Board policy. That’s not free – it will take mills to achieve this.

Secondly, this has to be a conversation about the cost of compensation and benefits for our excellent team of teachers, staff, and administrators. Comp & benefits consumed 87% of our operating budget last year, and is projected to reach 89% of our budget by FY2015. We can and must continue to seek ways to save money in the other 12% of our budget, but there will be no way to work our way through these economic times without dealing strategically with comp & benefits.

It is a time when both sacrifice and investment are necessary. When we next put an operating levy on the ballot, we will be asking the already stressed homeowners and businesses of our district to increase their investment in our schools. It will be burden on them, and they will not be inclined to support a levy unless convinced that it is absolutely necessary – after we have taken steps to minimize spending.

And recognizing the base and step freezes the whole body of employees have agreed to for 2011, I believe we also need to ask the employees of our district to continue to share in the investment necessary to preserve all the great things they have achieved over the years. We can use all kinds of euphemisms in this discussion, but the question comes down to how many people will be employed, and what will be the collective cost of their compensation and benefits.

I reject the notion that the only tool available to us is the broad axe of layoffs and the attendant cutting of programs. I attended a discussion this week about Early Retirement Incentive Programs. I don’t know that such a program would make any sense for our district or for our employees, but it seems like we need to run the numbers and find out.

And there are no doubt many other options to explore if we can do so in the spirit of coming together to solve a shared problem in what is soon going to become a statewide climate of fiscal warfare. 

It can be done.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Thanks to all those who attended this session, and especially those who came forward during the time for public participation. I hope that many more attend the Breakfast with the Board on Saturday morning, November 20, at the Central Office Annex. Come any time between 9am and 10:30am and let both your school leaders and other community members know what you think about a levy on the ballot this coming May.

Time to Start Dealing with the Hard Stuff

While the School Board has not yet had a discussion about when the next operating levy will need to be presented to the voters, I expect that the decision will be made to put a levy on the ballot in May 2011. The question will be the size.

The first of these discussions is on the agenda for the Board meeting scheduled for 7pm next Wednesday, November 10, 2010 at Darby Creek Elementary School. I believe that this is one of the most significant topics that must be dealt with by the School Board, and getting the opportunity to be part of this discussion is frankly one of the primary reasons I ran for a seat on the Board. There is a time for public participation at the beginning of each Board meeting (see the agenda for the rules). I hope many members of the community take advantage of this opportunity, especially on this topic.

There are at least two ways to approach the problem of determining the levy size:

1.    The “Pricing” Approach:  Proponents of this approach think first about maximum size levy the community is likely to bear. In other words, how large can a levy be and still garner a simple majority of the votes on Election Day? How the money will be spent is secondary to those of this mindset.
   
   
2.    The “Cost” Approach: Proponents of this approach believe that the levy amount should be determined after making decisions about how we are going to change our spending in the coming years, and making assumptions about what may be altered in our revenue sources.

It should be no surprise to readers of this blog that I come from the second school of thought.  This requires an iterative method of analysis, because as is the case in every budgeting exercise in which I have participated over the past 30 years, the first pass never makes sense. Perfectly reasonable assumptions about how much we would like to spend, and plausible projections about where the money would come from, inevitably lead to revenue requirements that are ridiculous to consider. So you have to adjust the spending forecast downward, reexamine the revenue projections, and tweak the parameters until something reasonable emerges.

So what are the levy parameters?  First and foremost is the size of the levy that will be next be on the ballot – presumably in May 2011 in our case.  But that’s not the end of it.  The expected size and timing of the following levy are also part of the decision.  There are all kinds of choices, but generally these things are true:

•            Given a particular spending assumption, the smaller the levy now, the larger it will likely need to be next time
•            The sooner we plan to put the next levy on the ballot (the shorter the interval), the smaller both this and the next levy can be.
•          Conversely, the longer we want the interval to be until the next levy, the larger both this and the next levy must be.

Then there is one other element which affects levy size and timing – the condition of our cash reserve.

While spending tends to increase at a constant rate, the portion of our revenue that comes from property taxes rises in large steps each time a levy is passed, then stays relatively constant until the next levy is passed.  In the first year or two after a levy passes, the revenue is greater than the spending, and our cash reserves increase. Then at some point, spending rises above the income and the cash reserves are drawn down.  This phenomenon is just like what occurs in your personal checking account. You spend a little money every day, causing your account balance to gradually decrease. Then payday comes along, and in one step, your account balance jumps back up, and the cycle repeats.

So we get to decide whether we should be trying to live hand-to-mouth as a school district, allowing the cash balance to get as low as possible, or whether it is better to keep a little money in reserve so we have some ‘wiggle room’ to deal with the unexpected.  On August 14, 2006, the Hilliard School Board adopted Policy DBDA, which states that “maintaining a cash reserve balance of 10% of operating expenses is necessary in the interest of sound fiscal management.”  I wholeheartedly agree with this. It is not good a good thing to have nothing in reserve.

The ‘unexpected’ stuff on our horizon is indeed scary. I’d go so far as to say terrifying. It didn’t really matter who was elected Governor this week, the State of Ohio is in deep doo-doo from a fiscal standpoint, and there are going to be spending cuts of a magnitude such that no one or no program will be unaffected.

A story ran in the Nov 6 edition of The Columbus Dispatch which addresses this topic. The story lead says it all: “Ohio school districts got some hint this week of the hole the approaching budget tsunami might blow in the budgets. It could be big. State aid to school districts and charter schools could drop more than $1.1 billion over the next two years if funding is reduced by 10%.”

So what is the effect on our community if the new Governor and General Assembly decide to cut education funding by 10%?  That would decrease our State funding by more than $5 million per year, the equivalent of about 2 mills of local property tax revenue. Just to stay even. Note that the $8 billion gap in the upcoming biennial budget represents 16% of current spending by the State. So if education gets hit with only a 10% cut, a disproportionate amount of the cuts will have to come from Medicaid, the prison system, and property tax relief programs (e.g. the Homestead exemptions). There are no easy choices.

But carrying this picture to the next step, it is not necessarily true that even if the Governor and General Assembly decide to make a 10% cut across all education budget lines, that the impact will be spread evenly across all school districts. Let’s face it – the folks at the Statehouse believe districts like ours have the local capacity to fund our schools however we want, so it is not hard to imagine that the impact of a State funding cut would be distributed in proportion to the perceived wealth of a school district. That is, the more wealthy the district, the deeper the cut.

The above-noted Dispatch article reports that “some local school leaders are preparing for cuts of 10 to 15 percent.”  Our District Treasurer, Brian Wilson, baked a cut of 10% into the just-approved Five Year Forecast. We may be being optimistic.

One way to prepare for such cuts is to put a little extra money in the piggy bank to give us some time to react when we find out what the real depth of the cuts will be. For that reason, I advocate having a part of our next levy dedicated to maintaining a 10% cash reserve.

Here comes the hard part.

Readers of this blog also know that we spend nearly all of our budget on the compensation and benefits of our great team of teachers, staff, and administrators. The current Five Year Forecast shows the FY2011 portion to be 88%, growing to 89% by FY2015. There are no doubt a number of nice-to-have budget items that we can reduce or eliminate, still a little efficiency to be gained, and there’s a lot of that which has taken place over the past several years.

But it’s now time that we have to talk about compensation and benefits.

I am not at this time advocating pay cuts. But we may have to cross that bridge if the State of Ohio really sticks it to us as the State leaders try to figure out how to dig Ohio of this mess. In fact, I believe that any radical reduction in State funding has to come paired with the authority to bring the employee unions back to the table to renegotiate their collective bargaining agreements as needed to keep our district solvent.

Over the past several weeks, I have developed a number of spending/levy scenarios that I could use to try to understand some of the many options the Board might consider (copies were sent to the other Board members, Superindent and Treasurer, as well as to the members of the Audit & Accountability Committee).

None of them are pretty. Scenario #1 shows that to fully fund the spending indicated in the Five Year Forecast with a levy in 2011 and then again in 2014 (3 year interval), the levy would need to be on the order of 11 mills.  I’m quite sure that’s a non-starter, so something has to be adjusted.

Scenario #2 shows that if we drop the levy interval back to 2 years (2011, 2013, 2015), the size of the levy would still need to be on the order of 9 mills.  I don’t think that would fly either.

In fact, Scenario #3 shows that if we passed a levy every year, it would take nearly 6 mills each time to cover the spending as has been forecasted.

Clearly we have to start looking at reducing the rate of spending growth, and that means the rate of compensation and benefits growth. Scenario #4 shows comp+benefits growth limited to 2% per year, adjusted by the forecasted growth in students. A 2% annual growth rate in comp+benefits is about what it takes to cover the current step increase schedule as long as base pay continues to be frozen. With a three year levy interval, the size would need to be 8 mills in 2011 and 2014.

That’s still a pretty big gulp. It’s maybe something the community would have bought into had we spent the last few years better educating our community about school economics – something I’ve been harping about for a very long time. But I don’t think there’s much of a chance of passing an 8 mill levy given the general lack of understanding about these matters.

So Scenario #5 also looks at limiting comp+benefits growth to 2% per year, but assumes that a levy is passed every two years. In that case, each levy would have to be on the order of 6.5 mills. Scenario #6 looks at an annual levy schedule, and shows that it would have to be 4 mills each year.

Scenario #8 asks this question: If we wanted levies to be no more than 5 mills, and no more frequent than every three years, what is the rate of comp+benefits cost increases that can be supported?  The answer is 0.6% - essentially frozen at today’s cost. No base pay increases and no step increases. We would also have to talk about how to apportion increases in health care costs.

I reject the assertion that the only choice available to us is to fully fund the Five Year Forecast as presented, or to suffer programming cuts. However, this is exactly the choice that has been presented to the community in the past.

There is another range of solutions that involve examining ways to preserve staffing levels and programs (which are nearly synonymous) yet lower costs. One of those is to look at the possibilities for lowering our per-headcount cost.

You might wonder how I can reconcile that with my statement above that says that I am not at this time advocating pay cuts. To understand my thinking, perhaps this chart will help:

click to enlarge

This is a histogram showing how many HEA members were in various base pay bands as of January 2010. You’ll notice that 55% of the HEA members are paid $70,000/yr or more, and 32% are paid $80,000 or more. Is it possible that we could, jointly with the HEA, create a buy-out program which could make sense for everyone, allowing highly paid teachers to be replaced with teachers at the beginning of their careers (and there are lots of them looking for jobs right now)?   The State Teachers Retirement System doesn’t make this easy, but there are changes on the horizon for STRS that may open a short-lived window that could motivate teachers near retirement to be willing to accelerate their retirement given the right deal, which would also have to be one that makes sense for the school district. We have to run the numbers and find out.

The conversation this time around has to be more involved than “pass the levy or we’ll cut extracurriculars and busing.”  The discussion at the next Board meeting will be a start.

I hope you will come and participate.

Tomorrow's Levy Votes

With it being likely that the Hilliard School Board will place an operating levy on the ballot in May, it will be interesting to see what happens with the several school levies which will be on the ballot tomorrow:

New Permanent Levies: (last forever)

• Bexley: 6.5 mills   PASSED with 60% of vote
• Gahanna Jefferson: 6.8  FAILED  getting 49% of the vote
• Grandview Heights: 3.9 mills plus a 2.0 mill Permanent Improvements levy PASSED with 65% of vote

Renewal Levy: Madison Plains, 8 mills, expiring after three years (keeps collecting at current effective rate) PASSED with 56% of vote

Replacement Levy: Pickerington, 8 mills, permanent (a prior levy expires, but is replaced with a new one which lasts forever)  FAILED  getting 49% of the vote

Bond Levy: Groveport Madison, $114 million (to be collected at approximately 6.7 mills for 38 years) FAILED  getting 45% of the vote

Bexley's levy passed by a considerable margin for a school levy, but Bexley is an affluent community and generally gives the schools what they ask for.  Same thing for Grandview Heights.

Madison Plains passed their renewal, which keeps their tax burden the same (ie - their taxes would have gone down had the levy failed). Notice that they put a time-limited levy on the ballot again, meaning that the taxpayers will in three years again have a voice whether to keep sending this amount of money to their schools. I think that increases accountability and forces better communications. Good for them.

Interesting that neither Gahanna nor Pickerington passed their levies. Those communities are much like Hilliard - rapidly growing, relatively affluent bedroom communities without much growth in their commercial tax base to help fund the schools. That means the homeowners are bearing all the burden of growing personnel costs.

The question now will be how the leadership of those districts will deal with the defeat of the levy.  Will they just grit their teeth and try again to push it through?  Will they punish the community with program cuts and service cuts?  Will they approach their unions to see if they can get concessions that will allow a smaller levy to be put on the ballot?