Saturday, April 9, 2011

Budget Knobs - Which Ones Do We Turn?

Early voting has already begun for Issue 7, the question asking the voters in the Hilliard City School District to approve a Permanent Operating Levy of 6.9 mills.

There has already been a list generated by the Administration and approved by the School Board which shows what will be automatically cut from programs and services if the levy should fail.

It seems like we should also be talking about what will happen if the levy issue should pass.

First, it might be worth reviewing what drives the size and frequencies of levies. I hope this diagram helps:

click to enlarge
As you can see, there are four primary 'control knobs' in this system:
  • Size of the Next Levy:  This has come to be viewed as the first knob that gets adjusted. Current thinking among those who advise on levy campaign strategy is that 6.9 mills is the largest amount that can put on the ballot and passed by a majority of the voters. This is pretty much the reason our current levy is 6.9 mills.
  • Time Interval until the Next Levy:  In other words, do we plan for the next levy to be in 1 year, 2 years, 5 years?  The Time Interval and the Levy Size are directly related, meaning that - all other things being equal - the larger the levy, the longer it can be before the next levy has to be put on the ballot.
  • Rate of Spending Growth (or Funding Cuts):  As I have related many times in this blog, our rate of spending growth is virtually the same thing as the rate in which the costs of compensation and benefits increase, with compensation and benefits comprising nearly 90% of our budget.

    click to enlarge

    This year, we finally have to face the fact that the State of Ohio is going to take significant funding away from the perceived affluent suburban districts, and it's going to happen pretty quickly, as I described in The Other Shoe Has Dropped.  From the perspective of the bottom line (ie "Excess of Revenue over Expenditures" in school budget language), a one dollar reduction in funding is the same thing as a one dollar increase in spending - they both reduce the cash reserves by one dollar. It means you have to find that dollar somewhere else in the budget.
  • Amount of Cash Reserves:  It doesn't matter whether you are driving a Ferrari or a Yugo, when your car runs out of gas, it goes at one speed: ZERO.  Cash is like the gas for any organization. When it runs out, the organization comes to a grinding halt, and it doesn't matter whether you're talking about the doughnut shop on the corner or General Motors (although the Federal Govt seems immune to this!).

    So we need to make sure our outstanding school system with a $170 million annual budget doesn't run out of cash. When the payroll is more than $12 million per month, it can happen in a hurry.

    That's one of the reasons why our School Board enacted Policy DBDA, which states "The Board believes that maintaining a cash reserve balance of 10% of operating expenses is necessary in the interest of sound fiscal management."  This policy was adopted in August 2006, and was obeyed in FY07-FY10.

    However, if it were not for the one-time Federal Stimulus grant of $4.3 million, we would have run out of cash this fiscal year (an observation I made in 2009). We are certainly below the 10% cash reserve target. It was this one-time money and the decision to draw down the cash reservese that allowed the current levy interval to be stretched to three years, not because our spending went down (acknowledging that the teacher's union, support staff union, and non-union employees all agreed to work in calendar 2011 without base pay increases or step increases).

    It's not so much the size of the cash reserves that determines the levy size, it's whether we are drawing down or building up the cash reserves. By drawing down the cash reserves, as we have been doing this year (and would have last year without the Federal stimulus money), then the next levy can be delayed. However, to rebuild the cash reserves takes revenue above and beyond the normal operating expenses, and someday we're going to need to deal with that.

Okay, now that we understand the controls available to us, what would the situation look like after passage of a 6.9 mill levy in May 2011?

click to enlarge
The chart above, derived from the Oct 2010 Five Year Forecast, depicts where I believe we would be if the levy is passed and no changes are made to spending other than backing out the $1 million/yr budgeted for All Day Kindergarten starting FY13, which looks to be no longer a State requirement.

However I have made some significant changes to the Revenue projections used in the Oct 2010 Five Year Forecast:
  • The Franklin County Auditor will reduce property valuations by 8%, meaning that a 6.9 mill levy will raise $15.4 million/yr rather than the $16.7 million/yr that has been reported in the newspapers (by law, the Five Year Forecast cannot show revenue from levies which have not yet passed).
  • The impact of the change in Personal Property Tax Reimbursement will be a total of $17.6 million between FY12 and FY15, distributed as follows: $3 million in FY12, $6 million in FY13, $3.5 million in FY14 and $5 million in FY15. Note that this is above and beyond the reduction in PPT reimbursement already built into the Forecast.
The yellow blob in the chart shows the gap between funding and spending, and it's still pretty big. That means we still have some knob-twisting to do. So let's look at some scenarios (all assume passage of the May 2011 levy):

  1. Next levy no earlier than 2015 (four years):  In order to end FY15 with a zero cash balance, we would need to cut the growth in spending to no more than $2.2 million/yr. To put that in perspective, the Oct 2010 Five Year Forecast shows spending growing $4.7 million from FY11 to FY12, $9.3m in FY13, $7.3 million in FY14, and $8 million in FY15.

    No Earlier than 2015 - click to enlarge

  2. Next levy no earlier than 2014 (three years): This doesn't help much, as calendar years and school fiscal years are offset by 6 months, meaning that a new levy contributes only half its annual value in the first year, which is the following Fiscal Year. In other words, the May 2011 levy, if passed, will not contribute any revenue until January 2012, which is in last half of FY12.

  3. Next levy no earlier than 2013 (2 years), and let's keep spending as planned in the Five Year Forecast:  This is simply not possible. If we want to commit to waiting until 2013 before the next levy is put on the ballot, there must be spending cuts a reduction in the rate which spending is forecasted to increase.

    Why? Because if we don't cut spending, we'll run out of cash in FY13.

  4. So if we want to wait until 2013 to next put a levy on the ballot, and we don't want that levy to be any larger than 7 mills, how much do we have to cut spending?  This is the key point I'm trying to bring to light - that we'll have to reduce the rate of spending growth to about $4.5 million per year - about half the rate dialed into the Five Year Forecast - in order to survive for two years until an additional 7 mill levy would have to be put on the ballot. It would look something like this:
click to enlarge
There are many more ways we could twist these knobs to generate other scenarios. All of them will tell the same story - regardless of whether or not the May 2011 passes, we have a lot more hard work to do. We simply cannot sustain the rate of spending growth at which we have indulged ourselves over the past decade or so.

Friday, April 8, 2011


Pencil in Saturday May 7, 2011 - 9:00am to 10:30am for a Coffee with the Board at the Central Office Annex.  The official announcement should come soon.

Coffee with the Board – Canceled for April 20

The Hilliard City Schools Board of Education is cancelling the April 20 Coffee with the Board event due to the Hilliard City Council Meet the Candidates Night. The board would like for residents to be able to attend both important events. The coffee will be rescheduled and the details will be shared with the community once they are determined.

Note: although this was originally posted on April 18, I'm moving it down in the order so that the 'Budget Knobs' story is at the top of the blog until after the election - as many folks only read what's at the top of the blog (according to the traffic statistics).

Sunday, April 3, 2011

SB5 Signed Into Law - Referendum Vote Likely

In the several years I have been involved in matters of local government, and in particular of our School District, no issue has before arisen which polarizes people more than the legislation known as "Senate Bill 5."  It is so divisive that I wonder if it will be possible for me to express my thoughts without inviting the kind of emotionally-charged, mean-spirited vitriol one sees is so many public forums - notably the online forums such as Topix, which allows anonymous and unmoderated comments. 

Just yesterday I made a comment on a friend's Facebook note about SB5, and almost immediately received a reply from someone who said they wanted to know where I work so that they could organize a boycott in order to hurt my income. I told him I was retired and a full-time volunteer at my church and our local school district, and asked which he wanted to boycott first...

So while I invite debate and discussion in this blog, I do moderate the comments, and do not tolerate those which contain personal attacks or language I wouldn't want a student to read. If you want that kind of blog to comment in, start your own.

I think the first step is for everyone to climb down from their high-horses and agree that what we're talking about is how we go about negotiating the compensation and other terms of employment for people who work for our government. In return for the services provided to all of us by these government employees, the people of a community agree to pay taxes of various forms which are used to grant compensation and benefits to the public employees.

The trick is finding balance - in particular balancing an economic equation that looks something like this:

Cost of Services = Value of Services as Perceived by Taxpayers

The idea is that if the taxpayers perceive a service to have value, such as plowing the streets when it snows, they will be willing to pay some amount of taxes to have that service performed. But that's not the end of the conversation. The government has to find a way to have the snow plowed for a cost the taxpayers are willing to fund. The government can hire independent contractors, or decide to buy snowplows and hire people to drive them. If the government decides to hire workers, the workers have to be willing to agree to do the job for what the government offers to pay them.

If the workers want to be paid more than the taxpayers are willing to fund, the process of negotiation will continue - and the workers will perhaps offer to work for less and the taxpayers will perhaps agree to pay more - or the decision can be made to not offer the service after all.

What happens after some time goes by and the workers decide they want a pay increase?  A new negotiation takes place. The workers want to drive up the Cost of Services in the equation above, and the taxpayers have to decide if the Value of the Services as Perceived are such that they are willing to pay more to keep it going. There is no one correct answer for this situation. Either the workers and the taxpayers will agree to a mutually acceptable cost, or the service will be terminated.

But over time, this negotiation process has been handed off to third-parties, and the direct relationship between the government worker and the taxpayer has faded into the background, to the point that it has become an abstraction - or even invisible.

So let's be clear on these two truths:
  1. Every dollar of compensation and benefits that flows to a government worker comes out of a taxpayers's pocket.
  2. Government services are not free, especially those which are delivered by humans - and  most of them are. If citizens want a rich and expansive set of government services to be provided to them, they have to be willing to pay the taxes necessary to hire and sustain the workers who perform them. If the taxpayers aren't willing to pay what the workers demand, then the taxpayers have to be willing to live without the service.
We Americans have become all mixed up about rights, responsibilities, privileges and obligations. We struggle as to which (and whose!) moral and religious beliefs should be encoded into governmental law, and enforced by our justice system.

The idea of our democratic system is that these struggles can be resolved by means of debate and compromise. But for this to work, we need to share an underlying desire to remain a community that accepts and abides by the compromise.

I grew up in a little community in a river valley in West Virginia. When you live in that part of the world, bridges are pretty important. To get to the grocery store across the river, which I could see from my front porch, one had to drive a mile upstream to the bridge, and then a mile back downstream to the store. Everyone who wanted to cross the river had to use that bridge, else drive five miles upstream or nine miles downstream to the next closest bridges.

Our bridge was one car wide. That meant that you had to wait until the bridge cleared of traffic coming in the opposite direction before you could cross. Lots of people used that bridge, especially in the morning and evening when people were traveling to and from their jobs in the city. It could be quite easy for a long line of cars going in one direction to completely tie up the bridge for a good while, denying the folks going in the opposite direction a chance to cross.

But I never saw that happen. Two or three cars might go in one direction together, but the next car in line would stop, and give the folks going in the other direction a chance. There's a good reason why it worked that way - the folks coming the other direction were probably friends or family, and the consideration they showed each other when crossing the bridge was the kind one shows to a friend. So when someone charged the bridge with their horn blazing, it might be a neighbor in trouble, but was more likely some jerk outsider who had no ties to our community.

I wish the negotiations with government employees would work more like the way the folks of my hometown figured out how to share the one-lane bridge. In fact, let's quit talking about government workers in general and talk specifically about the teachers in Hilliard City Schools.

Many of these folks aren't just teachers, they're also friends and neighbors, members of our places of worship, and parents of swarming little soccer players and marching band members, just like the rest of us. As parents, we entrust them with our kids for 180 days per year. We trust them to be our partners in preparing our kids to be happy, productive and independent adults.

So how did we come to let this important relationship be defined by outsiders --- Outsiders more interested in blowing their horns as they barge their way across the bridge, as though the most important thing in the world is to be first across the bridge every time, even if that means making a person going the other way back up in fear of getting hurt?  The kind of Outsiders who don't give two licks whether their behavior has a lasting negative impact on the fabric of our community??

We all know that we have a School Board made up of five folks elected from our community to represent all of us in the governance of our school district. The teachers are represented by a local union called the Hilliard Education Association, and its officers are all teachers in our school district, elected by the teachers from their own ranks. One would like to think that the equation I proposed above...

Cost of Services = Value of Services as Perceived by Taxpayers

... is worked out by those School Board members and the officers of the Hilliard Education Association, both interested in striking a deal that makes our schools a great place of learning for the kids and a great place to work if you're a teacher, all within the bounds of mutually acceptable economics.

But it's not.

Each side brings in professional negotiators - OUTSIDERS - to do the hard work.  As outsiders, those negotiators are less interested in working out a deal that preserves the emotional fabric and economic sustainability of our community than they are proving that they are effective intimidators on behalf of their clients.

SB5 is this disease taken to the state government level. These matters which we should be able to work out in our community have been escalated to the next level of government, with each side hoping they have the votes to cram an unsustainable solution down the throats of the other.

Sometimes one side does gain that kind of power, and uses it like a dictator who doesn't have to worry about the next election. But there is a next election, and the more one-sided the legislation enacted during one party's time in the sun, the more likely it is that at the next election, the other party will regain power, and will in turn use it to seek not only revenge, but to preemptively weaken the other side for the next battle. SB5 isn't the first example of this - this strategy has been utilized by both sides for a long time.

We all get that that the State of Ohio has a budget problem.  The economy of our state has permanently changed, with tens of thousands of industrial jobs disappearing as the factories have shut down. When there is no business income, there is no personal income, and when there is no business or personal income, no taxes are paid to the state. That's the problem, and it won't be fixed overnight.

So the State of Ohio has less money to give the schools. Understood.  That means that each school district must figure out how to make do with less state funding. Maybe the people of the community are willing to make up a little of the gap with increased property taxes. Maybe the teachers are willing to make up the some of the gap with compensation concessions. It seems like calm heads motivated to find a solution could figure this out.

The premise of SB5 is that we can't.  SB5 says that the people of a community - parents, homeowners, teachers and business owners - need to bring bigger weapons into the room and solicit their own gangs of hired gunslingers to take on the fight for them.  And we'll all sit in the stands like fans at an OSU-Michigan game hurling insults at each other.

Except it won't be for fun. It will be vile and hurtful, with the intention being to inflict harm on the other team, like the guy I mentioned above who wanted to boycott my place of employment.

What do you say we forget that SB5 exists, and commit to working this out on our own?  We still have a chance to do so before it becomes law.

Clarification and Apology

I published a piece Friday about a story published in the student newspaper of Bradley High School - The Reporter.

I am guilty of violating one of my own principles: keeping the governance debates between the adults of our school district, and leaving the students out of it. In this emotional dialog about SB5, a piece of legislation which I have been publicly critical of, I put a student - a student writer for The Reporter - in the line of fire.

To Ms. Haworth, the reporter:  I apologize to you for doing this.  My comments were never meant to criticize you or question your integrity. I'll endeavor to not repeat this mistake.

Paul Lambert

Friday, April 1, 2011

Journalism or Propaganda?

I invite you to read the story about Senate Bill 5 published on the front page of the student newspaper of Bradley High School, the Reporter.

I have no concern or objection in regard to the statements made by the teachers, and completely respect their right to these opinions.

But there are other viewpoints, and journalistic integrity - one of the things I assume we would be teaching to students publishing a newspaper - would seem to require that these be reported as well.

I've shared this view with the Superintendent and Board.

Please read my additional note of apology to the student who wrote this story.