Monday, January 31, 2011

State Funding Cuts: We Still Don't Know

The Columbus Dispatch ran a story this past weekend about the school funding cuts that will be implemented in the first biennial State budget submitted by Gov. Kasich. While our Federal Government might not be so good at keeping secrets (e.g. WikiLeaks), the Kasich Administration has been completely opaque about what they intend to do about this $8-10 billion budget gap hanging over our State. However, this story gave a little hint of what I've believed for a long time - Hilliard City Schools and similar suburban districts are likely to take the brunt of the State funding cuts.

As you can see from the following chart, Hilliard Schools receives 33% of its funding, or $46 million, from the State of Ohio.

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It has been growing at a pretty good pace...

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... although not as fast as the local component of our funding - paid via our property taxes. The State funding on a per-student basis has risen as well...

...although this is partially an artifact of the phase-out of Personal Property Tax revenue as a Local source and being replaced by a temporary reimbursement by the State. The one-time money granted as part of the Federal stimulus programs also was fed to school districts via the State.

Regardless of these aberrations, the story here is Rep. John Carey, vice chairman of the House Finance Committee, saying that "there is growing support of a tiered cut."  So what does that mean?

Ohio's school funding system is, and has been for decades, based on one key principle: that the pool of State dollars budgeted for school funding should be passed out in hunks inversely proportional to the affluence of a particular school district. In other words, the people and businesses in affluent districts pay boatloads of State income (and other) taxes, but most of that money will be used to fund the poorer districts of the State.

I don't have a huge philosophical problem with that. Some might argue that there should be no State income taxes (there wasn't until the 1970s), and that communities should have to provide the entire funding necessary to operate a public system, without any help from others.

That position ignores two key points: a) the Ohio Constitution requires the state government to take what action is necessary so that every child in Ohio has the opportunity for a "thorough and efficient education;" and, b) the school district boundaries drawn 100 years ago have created opportunities for regions to fracture into communities of "haves" and "haves-not" that were not anticipated when the public school system was conceived.

Because of that, we tend to have urban districts with high commercial property values and high poverty levels, and suburban districts lacking significant commercial revenue sources, but the ability to fund their districts completely with local resources.

Why do I say "fund their districts completely?"  Because if you take Hilliard for example, we - according to a report generated by Larry Wolpert when he was our State Representative - pay out two dollars of income taxes for every dollar of school funding we receive back. If that ratio is still true today, then we pay out around $70 million in State income taxes in order to get back $35 million in State funding. It would be worse - Dublin gets back about 12 cents on the dollar.

We can't put too much weight on this analysis. After all, there are others important ways in which our State income tax dollars are spent - notably for Medicaid and to run our prison systems. But you get the point. If you combine what we pay in State income tax and local property tax, it is more than sufficient to run our schools. As a friend once said, we pay enough taxes to run our school district plus a couple of the little ones.

That's not going to end with the Kasich administration. Instead, we need to prepare ourselves for the likelihood that we'll bear a disproportionate share of the cuts, simply because we are seen to have the capacity to do so. And it's simple for the state lawmakers to implement, all they have to do is tweak the Educational Challenge Factors, which are encoded into the law as ORC 3306.051 (an easier to read list of the ECFs is available here). These factors range from about 0.7 to 1.7, and they are used as a scaling factor in the PASS calculation used to determine how much State funding a district receives. The smaller the ECF, the smaller the fraction of the calculated funding a district will be granted. Our ECF is 0.985085.

The state lawmakers will also likely have to tinker with what is often called "the Guarantee."  In the PASS calculation, it is called "Support Provided During Transition to Revised Funding Model."  What that really means is that anytime the lawmakers change the school funding system, there are winners and losers. This "Guarantee" softens the blow for the losers, which makes such changes easier to get passed in the General Assembly.

The Guarantee is more of an ax compared to the ECF's scalpel, but both will be used.

And we'll take the hit. The current Five Year Forecast is built on the assumption that our hit will be 10%. The size of the levy we just voted to put on the ballot was passed in part because of that assumption.

If we take a bigger hit - and I fear we will - our Forecast goes out the window, and we'll have to scramble to figure out how to bring spending into alignment with even less revenue. I would have preferred to have used a larger temporary levy to give us some wiggle room, but we've ended up with a Permanent Levy of 6.9 mills on the ballot.

Between now the May election, we'll find out what the Governor and General Assembly have in store for us. Let's hope the 10% assumption is in the ballpark.


  1. My feeling is that John Kasichs mantra of no tax increases translates into no income tax increase only. That means that local taxes, and state fees, will have to rise, as we simply cannot overcome the shortfall and still fund current programs at the same level.(Ohio did that during the Taft administration if I recall correctly - costs for anything the state required fees/licenses for were raised, and things that had been exempt from state sales tax were made taxable) Schools are no exception - seems half the area districts have a levy proposal coming up, and the rest will follow suit once the state budget is released. But I still believe that this only reinforces that we must be concerned about WHERE the money goes in these programs, not just how much money goes there. It is simply unconscionable to cut program AND add compensation - the state already cut most employees through the 10 day unpaid furloughs, effectively cutting their pay. It doesn't make sense to give teachers 10 day furloughs - students need teachers in the classroom every day; they can't "catch up" the next day like with a lot of positions. And hiring subs for those days is self-defeating, at least to a large extent. The Boards own Audit & Accountability Committee tells them, and us, that the compensation issue MUST be addressed. If they refuse to do so, they will get called out on it. And I'll be honest - again. My vote will be No on this levy, and I will revisit that after the new contracts are announced. If I see a contract that keeps steps at 4% + on top of base increases, I'll vote No again. And it is my strong belief that I will get to revisit it in November(or maybe August if they try to backdoor the vote with another "special election like Pickerington is planning) - I simply don't see this levy passing in May.

    In case you are wondering what I think increases should be, 1-2% base max, maybe even less depending on program/services cuts, and no steps, plain and simple. I don't have hard figures to support this - but like Paul, I am not philosophically opposed to paying more than some of the less "affluent" districts, and I realize that the state cuts could be devastating. I am sure there are many in the district who think that is too much (some will think it too little, or just won't pay attention per usual), and some here who might even be surprised to hear it coming from me, given some of my past posts. I also realize that many can't afford to help fund ANY increase but we can't fix the past mistakes overnight. At the same time, I voted Yes on the last levy so that I could "fight from within" and not be accused of being just anti-levy and when I look at the increases in the 5 Year Forecast, line by line, it simply pisses me off that they just don't get it 3 years later.

    My intent is to wake up as many folks as I can - and I love a good debate anyway. Although I will continue my stance that speaking at board meetings is an utter waste of time, at least as far as the board members are concerned (with, of course, one exception)I'll still try to attend more of those, as there might be some opportunity to connect with the audience members depending on who they might be. Meanwhile Board and whatever levy committee is formed, convince me I'm wrong. I'm waiting.

  2. "It is simply unconscionable to cut programs AND add compensation"

    This is the default course of action, as we all know. The strategy is to make the public feel guilty - perhaps fearful - that if they don't pass a levy, the will cause huge number of teachers and other employees to be laid off, which of course affects the breadth and depth of programs and services which can be offered.

    The other alternative is for the union leadership to recognize that it is not business as usual right now, and that their first priority should be to negotiate a contract that keeps as many of their members employed as possible, rather than throwing their youngest and most vulnerable members under the bus so their senior members can receive raises that are out of whack with the current state of our economy.

    This isn't going to happen unless the community speaks up. The more different people who express this view at the Board meetings, the better the message will be heard. Letters to the Editor of the weekly newspapers carry weight as well.

    And talking to one's neighbors and friends about this stuff is very powerful. As we know, there is a ton of misinformation out there. If we can replace that with truth, we can change the way things get done.

    Thanks for your thoughts, and for spreading the word!

  3. Paul, I think the overall cut will be more in the neighborhood of 12-15% of state funding. How the funding cut is done is very important. Cut on percentage basis and those districts heavily reliant on state funding get hammered. Cuts on a dollar amount disproportionately impact districts mostly funded by local property taxes.

  4. Colleen: Thanks for the info. Another big question seems to be "x% of what?"

    In other words, looking at the Five Year Forecast format, is it x% of just line 1.035 - "Unrestricted Grants-in-Aid," or will it also be x% of line 1.050 - "Property Tax Allocation"?

    That's a $1.5 million distinction for our district.

  5. Hillirdite writes that 1-2% raises would be acceptable.

    I wonder if Hillirdite has looked in detail at the factors that made up the 4.25 CAGR in the 5 year forecast?

    1. Step increases of 2.3%
    2. COLA of .5%, 1%, and 1.5% over three years.

    While I think these are too high, I wouldn't call them excessive.

    What I don't understand, and Paul, please write a blog on this -- it's the one way that the public WILL understand the fiscal chasm we're facing -- is why people aren't being told what the next levy will be.

    In order to fund the 5 year forecast at te 4.25% CAGR included in the forecast, the next levy MUST be in 2013... and will be 12.9 mills.

    The CAGR MUST be reduced to 3% in order for the 2013 levy to be just 6.9 mills.

    But that puts us on a 2 year levy cycle. If the May levy fails, which I believe it will simply because of the current economic situation, that makes it harder for the district to put a 2013 levy on the ballot because of the time-between-levies factor. More importantly, it dramatically raises the chances that a 2013 levy fails, pushing it into 2014.

    At that point, in order to simply finish the year with $5m in the bank (compared to $18m at the end of FY10, and a projected $12m in June), we would need a 12.6 mill levy in 2014 with a CAGR of 2.5%, or a 6.9 mill levy CAGR in 2014 with a CAGR of 2.1%.

    And none of that takes into consideration additional funding cuts from the State!

    On the other hand, a 1 year expense freeze NOW, and a CAGR of 2.2%, allows us to go to a 6.9 mill levy every 4 years, something I think the community would accept.

    Of course, that's called a fiscal plan, something the district simply doesn't have. Ironic really, since it has a 10 year academic plan, but no way to fund it...

    Wake up Hilliard!!!

  6. I'm not sure I see all that much difference in 1-2% and Anonomys' 1 year freeze (already in place) for another year and then 2.3% after that. My point on the 1-2% raise is simply that I don't believe there is a snowballs chance in you-know-where that the HEA is going to agree to a 3 year contract with NO increases in compensation, especially now in lieu of the fact that they are facing increased contributions to STRS. I am simply trying to be realistic - as long time readers here know, I am an employer myself, and if I had told my employees 3 years ago that they would not be getting raises for 3 years, I think I would have been facing a revolt of some type.
    In actuality, most of my employees DID end up going 3 years with no raises(the two owners took pay CUTS), although we covered yearly increases in health benefits, and of course the employer pays state and federal unemployment taxes as well as workers comp, which were all subject to increases during that time. Now I'll admit, my business does not employ the same revenue/expense models that the schools do, and any 5 Year Forecast for us would have to modified continuously as we can gain or lose a client on any particular day - we gained several in the last 2 years which put us back on track financially, thankfully making up for lower revenues from the existing client base due to the economy still being in the tank. We have been "sharing the wealth" as we should be - at the same time letting folks know we have debt to pay off and folks are not going to be "made whole" as quickly as they would like. We have been blessed that our employees have understood all of that, and turnover has been practically nil.
    I would be more than happy to see 0% increases in the HCSD, but I fear the pain that will come with that - there is absolutely nothing that can prevent teachers "working to the contract" for that entire 3 years, should they choose. They could also strike, and while I don't think the chances of that occurring are very high, I have nothing to base that on - I can't recall a 3 year contract in ANY district which froze all increases for the life of the contract.
    The compensation problem did not occur overnight - it is the result of most of us not paying attention over the past 10-20 years. The problem cannot be totally solved overnight - it will take some time, and some more pain. I am not naive enough to believe we can run the schools without the occasional levy and I am willing to pay higher taxes if I truly believe they are addressing the problem. Right now, i don't for an instant, believe that.
    As far as the levy failing in May, I agree that it will probably will fail. But they will simply be back on the ballot again in August, after announcing cuts in services. History shows that will probably pass - then, you are correct, we will face another levy in 2013, which given your reasoning, will probably have to be August again to keep the spacing at two years.
    Few have pushed harder than me for the Board to be transparent about where the money goes - I have written letters to the local papers, as well as directly to each Board member, requesting that. And as I have said on this blog, unless and until they do that, my vote will be no, and my recommendations to my friends and neighbors in Hilliard will echo that.
    A subject that has not been discussed around here in a while is the City's role in this mess.
    It is time for the City to work their tails off to get some more business property tax revenue to the schools, without the impact of adding students. The City helped get us into this mess with the uncontrolled residential growth over the years and they should be held culpable for that. But that is an entirely different subject so I'll let it be for now.

  7. I'm very much interested in what kind of strategy the levy campaign committee will use. I've communicated to them my hope that it will be based on educating the community on the simple truths that have been put forward on this blog over the past four years.

    And of course, I'm interested as to whether my fellow Board members will agree to constraining expense growth to a level well under the 4.25% CAGR built into the current Five Year Forecast.

    We simply must use this levy campaign as an opportunity to inform and engage our community. If we do, our community has a bright future. If we do not, this community is going to be torn asunder by greed, selfishness and ignorance.

  8. Hillirdite said...

    I'm not sure I see all that much difference in 1-2% and Anonomys' 1 year freeze (already in place) for another year and then 2.3% after that.

    That's 2.2% growth in the district, not 2.2% salary increases. The current 4.25 district growth only includes 2.3% salaries and .5 to 1.5 % COLA across three years.

    My point was that in order to get to a 2.2% growth rate from 4.25% means that the salaries will need to be less than the current placeholders.

    Paul's comment as to whether other board members will agree to constraining expenses to a lower level is, IMHO, a bit moot at this point; if they don't, they're guilty of fiscal negligence (they can't pass 12.9 mill levies and they know it). I can't see board members ignoring this issue too much longer, especially in an election year...

  9. Anonymous - My bad on missing the CAGR reference. I now understand your point regarding getting to 2.2% growth but that leaves me wondering what salary levels you think will help accomplish that. When I look at Expenditures in the 5 Year Forecast, I don't see anything increasing by more than 1% - except of course the subject at hand which is compensation. And regarding that, I must be missing the specific mentions of both steps and COLA - perhaps you can point me to those? Then, instead of just saying "less than the placeholders" perhaps you could share your thoughts on a more exact figure?
    As far as knowing the size of the NEXT levy, that can only be "scenario" based with the main factor being the next contracts. That is what we really need to be watching, especially since the last time around, even a levy failure did not stop the 6% average salary increases with only a small percentage of pickup of the health insurance premiums.

  10. Hillirdite:

    My point was to demonstrate how bad the district's fiscal situation is. In order to cut the CAGR to 3% (2013 levy @6.9 mills) we're going to need to cut deeply into planned increases for teachers because there's not much else they can go after unless they scrap any plans for new teachers, in which case we can get part way there that way.

    (The biggest placeholder, btw, was an estimated 8% increase in insurance costs; all of these numbers were discussed at the special meeting of the board. The fact those numbers are not public is a bit disturbing.)

    The reason we're in such a hole is because of the reduction in state aid for the personal property tax elimination a few years back. Again, I reiterate, this it out of the district's control. The board isn't going to be able to magically get itself out of this hole as one board members has implied to me will happen because that's what always happens...

    But we really need to cut the CAGR to 2.2% to survive in the long term, and I just don't know how that happens without a total freeze on compensation.

    Frankly, it's about time Brian Wilson and Dale McVey did their jobs and come to the board with proposed solutions. We're paying these guys almost $300k a year between them (plus benefits), and we're not getting our money's worth.

  11. Anon - I won't disagree with your figures, but again, I am trying to be realistic. I simply do not believe that the HEA is going to agree to a 3 year contract without any increases in compensation, nor will they agree to a shorter term contract with the same scenario. And on the slim chance that they might, we will not be getting the best efforts from our teachers. Not right, of course, but again, reality. The solutions are painful - and as I have posted before, my vote on the May levy is more than likely a NO as I need to see the new contracts prior to giving them more money. As I have also made clear, someone has not been doing their job in coming up with solutions - we can't even get anyone to admit where the money goes, which is also a factor in my NO vote. I will wait to see what they actually cut before I vote Yes since they won't tell me ahead of time. And I will encourage others to do the same. Too bad that that is going to really hit the kids hard though if handled right, will only be for the short term. Then again, the kids/parents are going to have to do without some things too - it can't solved in only one specific area even though we know that the majority of savings has to come from the areas of the majority of spending.

  12. I wonder if folks have seen the following from the newly-introduced Ohio Senate bill to strip collective bargaining from public sector employees:

    # No longer makes longevity a deciding factor when management is deciding to make layoffs.

    This one line can immediately make Hilliard and every other suburban school district solvent overnight...

  13. Anon - I would not get your hopes up about being solvent overnight simply due to that. While not a "deciding factor" you can bet that unions are not going to take that lying down.

  14. Hillirdite, you may have missed what the line really does.

    Yes, in theory, you could remove older, more expensive teachers and replace with younger, cheaper ones.

    But federal discrimination laws would probably make widespread use of this nigh-on impossible, and besides, you can't do that overnight.

    I'm looking at something more important: this levels the playing field INSIDE the union. No longer are new teachers powerless to stop older employees from refusing contract terms because they know when the cuts come, they are safe. Now, no one is safe.

    What happens next is left as an exercise to the reader, but it should be obvious...

  15. Anon:

    Not quite, the law as proposed (line 8675) still reads that you have to give preference to teachers with tenure (on continuing contracts). I don't actually know what the proportions are, but I suspect the vast majority of our teachers are on continuing contracts, which means that this change affects only the ability to pick which of the newer teachers get laid off.