Saturday, January 1, 2011

Emergency Levy - An Idea Worth Consideration

At the last meeting of the School Board, community member Mike Harrold used the Public Participation time to pitch the idea of using an Emergency Levy as the means to fund our school district over the next year or two.

It's an intriguing idea.

The Ohio Revised Code allows school boards to implement, with voter approval, a variety of revenue mechanisms. For quite a few years, the leaders of our school district have chosen to use Continuing Levies, sometimes called Permanent Levies. They are exactly what the name implies- a levy that never expires. A levy of 6 mills would cause a homeowner to pay $184 per year per $100,000 of current home value FOREVER.

In contrast, an Emergency Levy is proposed for a fixed period of time of no more than five years. Then it goes away, unless the School Board and the voters decide to renew it.

We are in a period of great uncertainty right now. Here are some pretty significant things that we just don't know:
  • It is widely believed that there is an $8 billion gap between the revenues the State of Ohio will receive in the next biennium and the projected spending. This week, I heard that some are now saying it is more like $10 billion. Since public education is one of the three primary spending components in the State budget, one has to assume that a significant portion of this $8-10 billion gap will be closed through substantial reductions in funding to public school districts like ours. (Think it will be easy to balance the State budget?  Give this tool developed by The Columbus Dispatch a try...)

    Our Treasurer, Brian Wilson, built the most recent Five Year Forecast with the assumption that our Foundation Aid would be 10% less in FY12 than in FY11 (the fiscal year we're in right now). It could easily be much worse. Our neighbors in Olentangy Local Schools have just built a new fiscal plan assuming a 30% decrease in State funding.

  • Next year, we will be again negotiating with the unions representing the teachers and staff of our District. Meanwhile Governor-elect Kasich has said that he will be championing collective bargaining reform when he takes office, but hasn't given anyone a clue what he's thinking. How can we negotiate a multi-year agreement with the unions with this kind of uncertainty?

  • The Franklin County Auditor will be performing a Revaluation of all real estate in the county during 2011. These revaluations occur every six years, as directed by the Ohio Revised Code. We can be pretty confident that the County Auditor will reduce property values across the county, but we can't be sure how much. Mr. Wilson has baked an 8% decrease into the Forecast, but that may be conservative. The Delaware County Auditor decreased property values 10%.

    Many folks will be surprised that a reduction in our property valuations won't result in a commensurate reduction in our property taxes. The same mechanism that keeps our property taxes from increasing when real estate valuations are increased also keeps them from decreasing. So an 8% reduction in valuation will affect only the 12% of our property tax bill which is the so-called "inside millage," netting an overall reduction of about 1%.

    But going forward, the amount raised by 1 mill of new tax will be 8% less. Currently, 1 mill will raise about $2.4 million per year. If property values are decreased 8%, 1 mill will raise $2.2 million/yr. So it will take more mills to raise a specific amount of money.
Given all these unknowns, and the fact that we have spent down our piggy bank to the point where we have no reserves (the current Five Year Forecast shows the FY12 year end cash balance to be zero), I think we may - in the short run - need well more than the 6.9 mills that has been the strawman.

But as I said in my previous article, I'm not willing to vote for a permanent levy of any size until we talk through the long-range fiscal strategy.

An Emergency Levy with a duration of 2 years is a viable solution, in my opinion. That way, if we've been overly conservative with our assumptions, and end up needing less than projected, we have a chance to fix it when the emergency levy expires.

So here's the punchline: If we can limit the growth rate of expenses to about 3% per year (it has been 5.2% since 2003), I estimate that an emergency levy would need to raise on the order of $18m/yr, which would fund operations and restore our cash balance back to $10 million by the end of FY13 (we are now large enough that the cost to meet one month's payroll exceeds $12 million). This would be the equivalent to 8 mills.

But it would automatically expire in two years.

During those two years, we'll gain greater knowledge of what the State funding picture looks like, and we'll have the time to have a serious conversation about our long term fiscal strategy, which is the same thing as saying our long-term compensation & benefits strategy.

My analysis suggests that if we continue spending on the trajectory described in our Five Year Forecast, which implies an compound annual growth rate (CAGR) of 4.7%, we'll need to pass 11.5 mill levies every 3 years, or 8.5 mills every two years. That can't makes sense to anyone.

So what if we held our spending growth to a CAGR of 3%?  That would lower the levy need to 7.8 mills every 3 years, or 5.6 mills every two years.  This is still a chunk of money - either choice would be equivalent to increasing our property taxes approximately 3.5% each year (5%/yr for the just the school tax portion).

Even if we plan for zero spending growth for the next decade, we need a levy of 4 mills (1%) just to cover our current level of spending ($162m/yr), which is greater than our current income ($157m/yr). That would imply at minimum a total freeze on compensation and benefits for the next decade, as well as no new staff. As non-personnel costs might rise, staff (or pay rates) would have to be reduced to compensate.

Others will say that we should just cut $5m/yr from our spending, then we'll be okay with the revenue we stream we already have. That can be done, but not without some tough decisions.

This levy decision has lots of moving parts, and I don't understand how we as a Board can proceed to a resolution asking for a specific amount until we talk it through. Here's what I said to the other Board members, in a message on December 22:
I believe there is merit in discussing the idea Mike Harrold brought forward at the last meeting -- using an emergency levy as an interim step while we learn more what the State is going to do to us. It could be that our community would be willing to stomach a larger levy millage if they know it will expire in say 2 years. Of course, we would need to be very good at educating them about what happens when the levy expires - the next permanent levy would likely have to be large enough to replace the emergency levy and fund the CAGR [Compound Annual Growth Rate] of expenses.
If this makes sense to you, please make your feelings known to the other members of the School Board as soon as possible. As always, I encourage and appreciate your comments here, that alone won't sway the other Board members to consider this excellent idea. A letter, an email, or your voice at the next Board meeting works significantly better.

Thanks again to Mike Harrold.  I hope this demonstrates that comments made in person at the Board meeting can indeed start the ball rolling.

FYI - check out this cool tool one of the members of the Finance Committee for Olentangy Local Schools put together to help them understand and discuss various scenarios. He has offered to adapt the tool for our use as well.


  1. Paul - you stated in part... our current level of spending ($162m/yr), is greater than our current income ($157m/yr).

    It seem that somebody is living outside their means! That lack of self control and fiscal discipline is just plain irresponsible.

    And if our non-elected school administrators are being irresponsible with our money, it begs to question what else are they being irresponsible about?

  2. JTM: Thanks for the comment.

    I see it this way: we've been running the district for a number of years with the gas pedal shoved pretty much to the floor. We've let up a little every once in a while, but get back on the gas every time a levy has passed.

    So now we have to decide whether we're going to let up on the gas and coast a little (from a spending standpoint), or slam on the brakes and put everyone through the windshield.

    I'm advocating what I've always said - we need to make a painful reduction in the rate of spending growth, and be willing to pay a little more taxes while we're slowing down.

    To carry on with the analogy, the challenge is bit like when I got caught in a white out on the I-90 near Buffalo one winter. All of a sudden I couldn't see the road (like our current high degree of uncertainty), but I knew that if I slammed on the brakes, there would be some 18-wheeler behind who would run me over.

    So I slowed down a bit, turned on the flashers, and spent about as much time looking in the rear view mirrors as I did looking for clues as to where the road was leading ahead.

    We have to remember that a lot of time, money and energy has been put into building this school district, and it doesn't make a lot of sense to me to put it all at risk by just slamming on the brakes. Let's slow down and regroup.


  3. We moved to Hilliard for the schools and are fortunate enough to send them instead to a parochial school. After one year at the elementary level, we had enough for many reasons. Why is it that the private schools can run with a per cost student ratio SO very much lower than the public schools? Unions, check. Out of line spending, check. Inability on all levels to control costs, check. And I love that the very things they (threaten to) cut in tough times are what affects the children the most(after school activities and sports). It is disgusting! If you want some good ideas on how to control spending, look to non-public schools and wake up.

  4. 90% of the money spent in our school district goes to compensation and benefits. I can find no financial information on parochial schools, but it wouldn't surprise me if compensation and benefits consume 80-90% of the funding there as well. Schools are a professional services organization, like a law firm or a barber shop, so the bulk of the money is always going to get spent on compensation and benefits.

    So almost certainly, the primary reason parochial schools run at a lower cost per student is that they pay their teachers and staff much less than is paid to unionized public school workers. At least that's the case for our daughter, who teaches in the parochial schools in another city.

    However, there are other differences. I take this from the Policies Manual of the Columbus Diocese: "Catholic schools are schools of choice. Any parent who wishes to have a Catholic education for his/her child agrees that the parent and child will abide by the policies and regulations of the school. If the policies and/or regulations are not adhered to, or if the school determines that attendance by a student will not be continued, the child may be asked by the principal and/or pastor at the elementary level and the principal and/or superintendent at the high school level to leave the school."

    The public schools have no such options. They must educate any and all kids who live in the district. For example, we have highly trained special ed teachers who might see only a handful of kids each day. For kids who don't have English fluency, we must provide ELL teachers.

    There is a dynamic with the parochial schools that we don't have in the public schools: parents have to pull out their checkbooks and pay for tuition. I bet that if the community portion of the funding for our public schools had to be paid by tuition checks rather through property taxes, we might see more interest shown by community members in the governance and operation of their schools.

    But also note that the policy manuals for Columbus Catholic schools says that the tuition charged (for elementary students in this case) is only 65% of the full cost for the first child (of a family the pastor certifies is a participating member of a parish), 55% for the second child, and 45% for additional children. Non-Catholic kids, or Catholic kids from families who don't participate in the parish life, pay 100% of the cost. The difference between full tuition and what participating Catholic kids pay is presumably made up via donations and fund-raisers. So if you gauging the full cost of parochial schools on what you pay in tuition, it may be a little misleading.

    There are no simple answers to this situation. To restore our public school district to a path of fiscal sustainability, everyone is going to need to make a sacrifice.

    We're not very good at that these days. Everyone wants everything cut except the programs and services partaken of by their own. I think everyone is going to have to feel a little pain this time around.

  5. Paul - agreed and you are adept at the issues - it is why we voted for you. The savings are in large part because there is not a union to contend with in paying wages and compensation. The diocese does assist members - but the cost per pupil is still lower.
    As a taxpayer who is crying "uncle", HOW do we bargain with the unions to live in the real world? This household hasn't seen a pay raise in over 5 years (actually a decrease) and is spending more on healthcare than before - and we consider ourselves to have good healthcare.
    Regardless of where our children go to school, Hilliard needs to have good schools. But the costs seem exorbitant.

  6. "Schools are a professional services organization, like a law firm or a barber shop."

    So where are the ethics that go with such an organization? The pay follows but not the ethics on standards. I would not work with an organization that has multiple standards for customers, yet the schools do. How would people feel if the law were the same way?

  7. I'm thinking that I might be in favor of nothing but temporary levies as opposed to the permanent ones that don't seem to have served the taxpayers very well. Seem it might keep the Board on a somewhat shorter leash when it comes to accountability. But, what would that do to the typical 3 year contracts with the bargaining units? Of course (and I realize I have beaten this horse to death already) the status of a levy did not affect the last contract much, if any, did it?
    It will be interesting if there is any discussion of this approach next Monday...

  8. The challenge with temporary levies is that if spending continues to grow, each successive temporary levy has to get bigger. That's what happened in New Albany, and they were recently faced with a situation where half of their local funding was tied up in one levy on the order of 25 mills. If that levy had been defeated, it would have decimated their school district. So last time around, they passed a permanent levy that funded what they viewed to be their permanent spending level.

    Of course, it is possible to build a portfolio of temporarly levies that are "laddered" in the manner used by many corporations (and the US government by the way). In other words, we could pass a 5 year levy for say 4 mills this year, then another one for 4 mills next year, and so on for five years. On the fifth year, the first temporary levy would run out, and we could choose to renew it at the same rate, or replace it with a larger or smaller levy as appropriate for the times. And we would have such a choice every year.

    I personally like that idea a lot, but it would take hard work to educate the community how this strategy works. But as you say, it would make the district leadership much more accountable.

  9. At this point I dont think anything but 4 mills or a little less is appropriate. 4 mills will bring about 9mil which is a significant increase. Perhaps a flat raise of 750.00 average out would do the trick for the next 3 years until economically things get ironed out. If we have a permanent levy
    that is simply going to go to nothing else but
    salary increases. Nothing has been done since the last contract on medical contributions. Premiums are up double digits again for at least
    the 8th year in a row.

    I think some programming , supplementals need to be looked at with the microscope now. IS it something we absolutely want to keep or a
    like to.

    Funny, and the point WILL BE MADE. The District opened its mouth (NOT) one time during the work to the contract. At that point I think parents and students were treated WORSE than WIDGETS

    And once again, as there are those who dont see this as serious. JUST ONE COMMENT FROM THE DISTRICT or HEA< EMPLOYEESS WHOMEVER of "YOU DONT GET IT and the levy gets opposition faster
    than Lindsey Lohan is in and out of rehab!

  10. Agenda for Mondays meeting contains 6.9 mill levy request. Apparently not much discussion to take place. Paul, your thoughts on anyone making comments to a emergency levy or a lesser amount.
    6.9 too much in my opinion.

  11. Yep, I saw that number for the first time this morning as well. I'm preparing a blog article right now which will explain my position - probably will post tomorrow (I've learned to sleep on these things to see if I feel the same way in the morning).

    I think that by all means people should come to the meeting and tell the Board what they think about 6.9 mills. That number is not cast in stone until the vote on the resolution is taken, so there's always a chance that what is said during the Public Participation time could tilt the discussion.