Tuesday, October 25, 2011

Five Year Forecast: Oct 2011 version

At the regular School Board meeting on October 24, 2011, the Board, on the recommendation of Superintendent Dale McVey, voted unanimously to accept the latest Five Year Forecast as presented by Treasurer Brian Wilson. For the visual folks out there, here is the forecast in chart form:
click to enlarge
The yellow area in the chart represents the gap between spending and funding. By state law, the District cannot operate without cash reserves, nor can these forecasts - which must be submitted each May and October to the State Board of Education - show anticipated revenue from levies that haven't been passed. That means that we cannot in fact operate the district past FY12 (this year) without less spending than shown in this forecast, more revenue, or both. That's the reason we have a levy on the ballot.

If our 5.9 mill levy issue passes in two weeks, it would make the chart look like this:
click to enlarge
Now the yellow area - the revenue/spending gap - is smaller, but still there. That again means we need to have less spending, more revenue, or both. Let's say that the spending is left as Mr. Wilson projected; what size future levy is needed to close the gap?

Back in April, I wrote an article in which I described the four primary knobs we can turn in the budgeting process: 1) the rate of spending growth; 2) the interval to the next levy; 3) the size of the next levy; and, 4) the size of the "rainy day fund" we want to keep. 

So let's say the 5.9 mill levy passes. The Board has committed that it will be at least 3 years before another levy is proposed. Board policy is that the rainy day fund should be kept at about 10% of annual spending, and the Audit & Accountability Committee has recommended that we restore this level of reserves as well.

The spending plan in this forecast is a little unusual. In their current contract, the teachers have been offered an early retirement incentive package that the Administration forecasts will be accepted by 75% of those eligible. Combined with the three year base pay freeze, and the postponement of step increases until 2013, this actually makes our compensation expense go down in FY13. However in FY14 spending is forecasted to rise 2.3%, and then 4.1% in both FY15 and FY16 (it was 4.8% in the years FY03-FY09). 

Given those inputs, the size of the next levy would need to be 7.1 mills, which looks like this:
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So what if we lower the rate of spending growth?  Note that projected spending has already been reduced compared to the May 2011 Five Year Forecast (the dotted red line). No, I'm not getting caught in the semantics of claiming that there has been a spending cut because one forecast projects less future spending than the last forecast did. There has not been, nor is there projected to be, any year in which the total spending is less than the year before.

Nor am I at this time advocating spending cuts, although that will certainly happen if this levy doesn't pass.

But I think we can and must continue to consider ways to decrease the rate of spending growth. For example, if we lower the annual growth rates for FY15 and FY16 from 4.1% to just 3.5%, we can lower the size of the levy needed in 2014 to 6.1 mills, which would look like this:
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So how do we go about changing the growth rate in spending?  Let's look at how the money gets spent:
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As has been long clear to readers of this blog, 88% of our spending is for compensation and benefits. Our spending for compensation and benefits increases faster than the rate of student growth, and it increases faster than the rate of employee (FTE) growth. In other words, the average cost per employee for compensation and benefits is going up.

As you can see in the chart above, that growth rate has been substantially reduced compared to the Five Year Forecast published one year ago (the dotted line). That's because of the projected effects of the early retirement incentive program, and the very real effects of the base pay freeze and accompanying step delays (one step will be eliminated altogether). 

However, this is being offset by the increasing cost of benefits, in particular health insurance. Even though the teachers and support staff have agreed to pay 15% of the health insurance premiums (it was 10% in the prior contract, and before 2008 was 0%), the total new dollars we'll spend over the next five years on health coverage will be $6 million more than we spend on increased compensation.

Some advocate demanding that the teacher take pay cuts. I don't. That might have to be put on the table if things get really bad, but we're not there yet, in my opinion. The thing that could really nail us is having the State of Ohio further reduce our state funding. We cannot continue to ask the people and businesses of our community to keep filling the deepening hole created by a bad economy. If there are significant further reductions in state funding, pay cuts might have to become part of the solution to keeping our district solvent.

There are no easy answers. We'll all have to participate in finding solutions. I hope this article helps inform the conversation.

(Part 2)

At M's request, here are a couple of additional charts.

The first is a chart that shows what happens if the levy fails and the approved cuts are implemented. All other assumptions in the Five Year Forecast are kept in place:
click to enlarge
This shows that cutting $10.2 million from each year of future budgets extends the time until we are out of cash by just one more year. Without question, there would be discussion about putting a levy on the ballot again  in 2012. If we modify the goal to say that we want to get the cash balance to 7% by the end of FY14, then a 2012 levy of at least 3.6 mills is required, but the interval to the next levy would need to be only two years:
click to enlarge
To make the interval following a 2012 levy at least three years, the 2012 levy would need to be on the order of 5.5 mills.

There are an infinite number of permutations we could explore. but the point remains the same: there are four knobs to twist, pick three and you get the fourth.

There is no right answer. Some people in our community want the Board to spend less, whether that be cuts to academic and extracurricular programming (which reduces staffing needs), or by pay cuts, or both. Others are concerned that we might not be spending enough - that we are depriving the kids of opportunities by not spending more. There is no majority position, only a spectrum of individual opinions.

That's the way democracy works. Candidates run for office, and issues are put on the ballot. The winners get to choose how things go until the next election. If folks with extreme positions are elected, we tend to get legislation that brings extreme changes. 

SB5 is the current right-wing example. But we've already forgotten that not so many years ago, the left-wing prevailed, and we got all kinds of legislation that tipped the laws in favor of their views. 

This whip-sawing can't be good for Hilliard, for Ohio, or for America. We have to again learn how to communicate (listening is at least as important as talking), negotiate, and live with compromise.


  1. @Paul

    Can we get another chart? One that shows the projections if the levy fails and the cuts are deployed?

    The first chart has neither the levy or the cuts; the second shows the impact of the levy passing.

    But I think we need to see the impact of the cuts on the spending, and what I suspect will be a significant change in the deficit...

  2. Hey Paul - have you seen this video created by a group of parents?...it is pretty amazing what a small group of parents and students can create

  3. Nice video - thanks for the link.

  4. Thanks Paul.

    What this shows, I believe is two things:

    1) As you have stated multiple times, the spending growth rate has been too high in the past, remains too high in the present and will continue to be too high in the future

    2) Despite all the self-applauding and back-slapping, the $9.6m in concessions from the district employees, as nice as they were, were far away from what was actually needed.

    And let me emphasize something to the "pro-teacher" people out there: whether it is through pay cuts now, or job losses later, when we run out of money it WILL be the teachers that pay the price.

    You only have to look at this cut list to see this. Despite only accounting for 60% of the staff in the district, they are accounting for close to 80% of the staff cuts.

    Meanwhile, the administration (~18% of the staff) is only ponying up 5% of the cuts.

    So if anyone out there still thinks that the teaching staff isn't going to get hammered every time cuts come along, I hope these charts from Paul and the empirical evidence from the cut list help convince you otherwise.

  5. Paul, so on the compromise front as you stated
    with hope ? So the levy will pass, the community ante's up, Keck and Maggied get elected and so please tell me about the compromise. Do you really think that will happen. So in two to 3 years if not sooner plus perhaps a bond levy we again will have to
    provide even more money. Is that a COMPROMISE
    REALLY. Where do the citizens get any input.
    Showing up at a board meeting to speak. Is the majority of the board even listening.

    Fact: We have asked to look at spending and the new five year forecast is consistent, no compromise, we keep spending over our revenue and expect the community only to ante up.

    The board had the state rep GRossman at the last meeting and did anyone try to beyond all the happy happy presentation stuff, get her to commit to fight for more money. She is not going to do it, she allready has stated her case publicly.

    So will their be a compromise with the yes vote next week, to have the board to commit to keeping our kids out of the tough conversations
    Is it about the kids when they get confronted and get to bear the brunt of work to the contract.

    Can we ever have a focus on the waste and overspending, ridiculous benefits associated with the supplemental contracts. This was all negotiated. A 4 to 1 vote keeps things the same

    So the levy passes, specifically where is the hope for COMPROMISE, and seniors, those in the private sector who have taken layoffs, pay cuts and pay medical costs that continue to soar, and have not received 4,000 per year raises year after year, continue to have to pay.

    I believe in compromise, they say they need money but in the end is it all just the same thing like the last levies, oh guess what we need more of your money and the board still isnt going to listen unless you are in lockstep with everything that the district puts out.

  6. Potentially a link of interest:

    "Of course, there is an intense debate unfolding over whether public-sector employees are paid more than their private-sector counterparts — a debate that will never see a definitive resolution, because the methodology is so subjective. Nonetheless, one sophisticated estimate, that of Andrew Biggs and Jason Richwine of the American Enterprise Institute, suggests that public employees in Ohio are overpaid by as much as 43 percent. Simpler measures point in the same direction: Nationwide, for example, public-school teachers are paid considerably more than private-school teachers, despite having essentially the same job."

    Whole story:


  7. Of course the statement "public employees in Ohio are overpaid by as much as 43 percent" is itself subjective and qualitative.

    I don't believe prices or salaries can be determined in any way other than the market forces of supply and demand. In other words, we should compensate public employees what it takes to get the number and quality of folks necessary to deliver the services we expect from our government.

    So for me, the debate is whether or not the mechanism for determining the compensation (salary and benefits) of public employees is being allowed to react to market forces.

    I've been having this debate for many months with a good friend who is also a school board member (in another district). I claim the mechanism is okay, but that it requires the participation of an informed public. Unfortunately, we don't have that - and that's exactly the reason I started this blog five years ago.

    In other words, I believe that if you think the teachers are getting too good a deal, then your recourse is to get folks elected to the school board who share you view.

    My friend thinks the public will never put the effort into getting informed and getting engaged. Hence, he believes, we need something like SB5 to encode what might be a minority viewpoint into law.

    Or it might be the majority viewpoint. We might find that out next week - if we get decent turnout at the polls. Or we might merely find out that the union members and their supporters are more motivated to vote that the rest of the public.

    Whichever way it goes with SB5, there's still a lot of hard work to do. If SB5 is sustained, then we still have to figure out how to fairly evaluate (or fire) teachers on the basis of performance. Nowhere near enough research and thought has been put into this, in my opinion.

    And if SB5 is repealed, we still need to figure out how to balance our school budget in an environment of reduced state funding and increasing resistance to new taxes. Pay cuts might be part of the solution. Reduced programming and services will also need to be discussed.

    We can't just print money like the Feds.

  8. Paul

    I would be happy to pay higher taxes if there was performance based pay and a reasonable number of sick days and sick day accumulation limit. My 3rd grader suffered a lost year last year when her 2nd teacher essentially took a majority of the days off "sick". She missed cursive writing and multiplication because they were so behind! What can be done to work towards a performance based system (Like the one I have at work!)

  9. I don't have a problem with a fair and objective performance-based comp system for teachers. Nor do most teachers I know. The challenge is defining such a system when there is agreement on what should be measured, and how it should be measured.

    Like you, I worked my whole life in a merit-based compensation system. But I never questioned the criteria, because it was usually simple and unequivocal (e.g. "Did we hit our revenue target?"). There is no such simple measurement in education.

    As I said in another comment, I don't yet understand what the takeaway is from an election in which SB5 was trounced, and yet so many school levies were defeated. It seems like the anti-SB5 crowd would have been pro-levy, since virtually all of any new levy money would be used to fund the compensation and benefits of the very public sector union members upon which SB5 was seen to be an assault.

    We'll have to look at the SB5 breakdown for just the precincts in our school district, when the Board of Elections posts that data. Maybe the SB5 vote was closer in our district.