Saturday, July 30, 2011

Pleasing Everyone

You'd have to be living under the proverbial rock to not know that there is a battle royale going on in our nation's capital in regard to raising the Federal debt limit. And I'll go on record as being one of those who believes that if the US Treasury defaults on its obligations, it would put our country on a path with known and completely unexpected consequences that will negatively impact us for a long time - maybe a generation or two. Maybe forever.

Nonetheless, the resolution to this situation is not in our hands. It will or will not be settled by our elected representatives - all we can do is watch and decide whether or not we'll vote for their re-election next time they're on the ballot.

We can be confident that each and every one of the 535 members of Congress, as well as the President, are looking for ways to collect favors and make side deals that don't often get put on the table except in a high stakes situation such as this one. I'm not particularly surprised that they're waiting to the last possible second to close their deal-making, because some the of side deals will get better the closer to the deadline we get.

I'm highly confident they'll figure something out before a financial meltdown. Otherwise I'd be buying all the gold I could afford right now.

In a little more than three months, we'll be in an analogous situation in our community - trying to deal with the tough issue of a school tax levy. But the process is different in a significant way:  you - the members of the community - get the last vote.

Within two weeks, the Hilliard School Board needs to submit the resolutions necessary to put a levy on the November ballot, with the first step taking place at the special August 1 meeting, followed by the resolution to place the issue on the ballot, which is planned to be on the agenda for the regular August 8 meeting. At that point, the "knob-turning" debates will be over, and the levy size will have been selected. In terms of formal process, at that point the School Board is out of the levy game for this cycle.

Then it will be up to you - the voters of our community - to decide whether or not the right number has been nominated by the Board. Or more precisely, we'll find out whether the 50%+1 of the voters who bother to show up can live with the levy size the School Board has settled on. The rest of the community will have to live with their decision.

It's too bad it comes down to this set of YES/NO decisions, first by the School Board, and then by the community.  Whatever number the School Board nominates will be too much for some, not enough for others, and about right for the rest.

But the levy either passes or it fails.

Wouldn't it be interesting if Ohio law allowed for multiple-choice levy options. We could for example make the choices 0, 4, 8 and 12 mills, and each voter picks the levy size acceptable to her/him. Then the levy put in place would be the one with the most votes.  Or perhaps better would be to use a weighted average - if 10% voted for 0 mills, 50% for 4, 30% for 8 and 10% for 12, the levy that gets enacted would be 5.6 mills.

The best thing about that kind of approach is that the matter is settled on election day. A levy of some size will be enacted, allowing the Board and Administration build a budget where spending fits the revenue.

But that's not the way it works. On election day, the voters will have one choice, and the levy passes or it fails depending on tally. Either the full amount of new funding is provided, or none at all. If it fails, cuts are made, and the whole process starts over.

That's not to say the Board and Administration still doesn't have work to do. The cost of compensation and benefits will always drive the economics of our school district, and this the product of the salary and benefits cost times the number of employees.

Using the data published in the 2010 Comprehensive Annual Financial Report, the number of students per full-time employee equivalent* has dropped from 10.28 in FY01 to 9.79 in FY10 (however, the relationship between students and Regular Classroom Teachers has remained fairly constant at 20 to 1 during that whole decade).

The change from 10.28 to 9.79 may not sound like much, but if the 10.28 for FY01 were kept constant through FY10, the total number of FTEs* employed today would be 75 less (23 fewer teachers/tutors and 52 fewer in other roles). If the average cost of an employee is about $80,000 (per FY10 numbers), then 75 people cost $6 million/yr.

As I have said, the new union agreements go a long way toward holding down our spending growth, and the I'm thankful for that. That was a "big knob," and the most important knob to turn in this process. Now we have to start looking into finer detail.

And the community needs to tell the School Board how much more it is willing to contribute to funding its public school district, recognizing that the State of Ohio has reduced its funding to us by the equivalent of 3.3 mills.**   In other words, a 5.9 mill levy would replace the 3.3 mills the State has taken away from us, and provide 2.6 mills of new funding.

That seems pretty reasonable to me.

* Because the method for counting Full Time Equivalents (FTEs) for bus drivers changed dramatically in the past few years, bus drivers have been excluded from this analysis.

** In FY09, our state funding was primarily made up of $37m in Unrestricted Grants, $18m of reimbursement for state mandated property tax rollbacks and the phase-out of Personal Property Tax (PPT). Actual PPT collection in FY09 was $8.5 million, making the total state funding approx $64m.

For FY12, the Unrestricted Grants will be $34m, reimbursement will be $19m, and actual PPT collection will be $3.8m, making the total $56.7m, or $7.5m less than in FY09.

Since each 1 mill of property taxes will generate approximately $2.3m/yr, the loss of state funding is equivalent to 3.3 mills of local funding.

Saturday, July 9, 2011

Levy Step 3.0 - Selecting the Parameters

The last item on the agenda of last week's School Board meeting was a discussion of an operating levy in November. The discussion was inconclusive.

As I described earlier in "Four Knobs,"  a levy isn't just about the millage. I believe that the School Board must inform the community of its intentions in four dimensions:
  • The size of the levy.
  • How long the Board commits to waiting until the next levy is put on the ballot.
  • What rate of spending growth the levy is intended to fund.
  • How many dollars will be kept in reserve (ie in a 'rainy day' fund)
Unless the School Board discloses its intentions in regard to all four of these parameters, I believe that the public doesn't really know what it is 'buying' with a decision to increase property taxes.

At the Retreat two weeks ago, we had consensus that we want it to be three years or more until the community is again asked to raise its taxes. That's one parameter down, three to go.

For my own decision process, I selected the rate of spending growth as the next 'stake in the ground.'  In the current Five Year Forecast, the annual growth rate for the period FY13-FY15 is 4.8% after backing out the 'make work' numbers that were inserted in order to allow the certification of the new union agreements.

I think a 4.8% annual growth rate is too high for our current economic situation. In dollars, it is about $7.8m/yr, which is larger than any year-to-year increase in the last five years. In other words, while the new union contracts help a great deal by freezing costs over the next three years, this 4.8% annual growth rate puts us afterward right back on the same spending trajectory we were on before the new contracts.

I'd like to see our annual rate of expense growth reduced to about 3.5%. Note that I didn't say we should reduce spending by 3.5%. I said that we should restrict the rate of spending growth to about 3.5%. In dollars, that would add about $5.5 million dollar per year to our FY13 budget of $159 million.

... that's two of the four:  levy interval (3 years) and expense growth rate (3.5%).

Next, I believe we should have a goal of restoring our cash balance to at least 5% by the end of FY15. That won't be without cost. I estimate that it will require about 1.3 mills of our next levy just to get us back to a 5% cash balance by the end of FY15 (we'll run out of money in FY12 without a levy or more than $3 million in spending cuts). But we need to keep some cash reserve on hand to create 'wiggle-room' to deal with unexpected expenses. The current Board policy, set in 2006, is that this operating reserve will be kept at 10% of our annual operating expenses, which in FY11 would be about $16 million given our annual spending of $160 million. In recent years, this has been as low as 4.4% in FY05 and as high as 12.2% in FY07.

That's three of the four parameters, and once you have three, the fourth is determined. In this analysis, the fourth parameter is the levy size. My calculations show that the answer is 5.9 mills in Nov 2011 and around 5.9 mills again in 2014, the three year interval.

What if we don't want the next levy before 2015 - an interval of 4 years?   Keeping the spending rate and cash reserve target the same, that means we need would need a levy of at least 6.4 mills.  And there are many other scenarios we could talk about. Here are some I've been looking at in this process (warning: 3.5meg file).

Last September, the School Board was asked by the leadership of the Columbus Metropolitan Library System to pass a resolution in support of their new levy, which appeared on the November ballot as Issue 4. I voted against this resolution, which passed 3-1 (Dave Lundregan was absent due to a business conflict). My reason was that the Library system was asking for a levy large enough to fund their operations for a 10 year interval, and I didn't feel comfortable turning over that much money to them, and trusting their current and future management to use it as promised.

I have some of the same concerns in regard to our own school district. While few of us like the idea of having a levy issue on the ballot every 3 years, the reality is that - given any particular rate of spending growth - the longer you make the levy interval, the larger the levies have to be. And it also means that in the first years of a levy designed to last 4-5 years (or 10 as was the case with the Library levy), there will be large cash reserves in the early years, and it could be pretty tempting for future School Boards to dip into those funds, forcing an early return to the ballot.

So it seems to me that a three year interval strikes a reasonable balance. It's significantly less annoying and painful than every other year, but it's frequent enough to keep the levy size somewhat palatable. I also think it doesn't hurt that it forces the District leadership to stand before the people of the community and be held accountable for the way their money has been spent, if people care to ask the tough questions that is.

So here's the numbers I'd like to see for this levy:
  • Interval to the next levy: at least 3 years
  • Rate of Spending Growth: 3.5% per year (with a stable student population)
  • Cash Reserve Target: 5% by the end of FY15
  • Therefore:  Levy Size:  5.6 5.9 mills
Graphically, it looks like this:

click to enlarge
What happens next will depend on how important President Maggied feels it will be to have a unanimous vote on the levy resolutions. Ohio law requires that 4 of the 5 Board members must vote in favor of the resolutions necessary to submit a levy issue to the Board of Elections. So it is possible for a levy resolution to go forward without my vote.

However, I remain open to considering other combinations of the four parameters provided a meaningful reduction of the planned rate of spending growth is part of it.

As always, I appreciate your input.