Friday, March 2, 2012

Putting It Together

In the last two articles, the sources of school funding were reviewed, as well as how all that money gets spent. In this article, we'll put those two pieces together, and explain what that might mean for our future.

You've heard me say before that I believe that one of the most important documents published by our School District is the Five Year Forecast. And once again I'll say that I believe this not because money is the center of everything, but rather because money is the fuel with which we run our school district, and we need to manage it attentively. More than one auto racing team leading a big race has lost because they misjudged their fuel consumption, and ran out of gas on the final laps.

We can't let that happen to us. A lot of time, effort, and money has been invested to get our school district to the position it is in, but it can be erased in the blink of an eye if good and timely decisions aren't made - soon.

Like a racing team, it's important to know when we can step on the gas - accelerating our rate of advancement, but burning gas at a higher rate - and when we have to let up a bit and conserve fuel. Racing teams prepare a strategy for fuel management before the race starts, and adapt as conditions change.

The Five Year Forecast is our fuel management strategy, and is an important component of the overall strategy of the District, as documented in the 2020 Initiative.

The current version of the Five Year Forecast shows our annual spending growing from $160.6 million in FY2011 to $181 million in FY2016. Meanwhile, annual revenue is projected to grow from $157 million to $169 million in the same time frame. The accumulated difference between revenue and spending reaches $9 million by the end of FY2016, in spite of the new revenue from the 5.9 mill levy which narrowly passed in November. In graphic form, it looks like this:

click to enlarge
The School Board has committed that - unless the State of Ohio materially whacks our funding even more - another levy request will not be made before 2014. Given the spending budget built into the Five Year Forecast, there is little question that a levy will be proposed in 2014.

But how about after that?

If you examine the red line in the chart above - Projected Expenses - you'll note that in the period from 2003 to 2010, expenses grew at a rate of about $7 million per year. This is a time when the contract with the teachers' union included base pay increases of 3% and more per year, in addition to step increases (see Teacher Salary History to learn more).

Then the spending growth is shown to nearly flatten out through 2013. This is for two reasons: 1) the teachers' union agreed to freeze base pay at 2010 levels through 2013, to delay some step increases, and eliminate one altogether; and, b) the projected effect of an early retirement incentive program, which has been accepted by about half the teachers eligible.

But by 2015, the spending growth is projected to resume at an annual rate of about 4%, or about $7 million per year.

Why?  Compensation and Benefits - the same reason as always. The Five Year Forecast assumes that the current step schedule is resumed in 2014, along with annual base pay increases of 1%. What that means is that about half of our teachers would be getting 5% annual increases, while those on the higher end of the pay scale (at an annual salary of $79,000 or more) would receive 1% pay increases. This represents about $4 million per year in spending growth on compensation, or 3.8%.

Benefits are projected to increase at an even higher rate - 6.3% per year, driven mostly by health insurance costs, in spite of the increase of the employee share of the cost from 10% to 15% in FY2012. This is another $2.6 million/year of the spending growth.

The remainder of the annual growth - about $350,000/yr - is all the other things the districts spends money on, such as utilities, diesel fuel, and consumable supplies.

So what kind of levy schedule is required to sustain this kind of growth rate? I've put together one scenario which assumes that the spending growth rate of 4% per year goes on for twenty years while the student population remains essentially the same. I'll also assume that in spite of a static student population, our funding from the State of Ohio will grow by $1 million per year. Lastly, new levies would occur at a frequency of every three years, but would grow in size (See Budget Knobs). Here's what that looks like:

click to enlarge
You'll note that the Revenue line (blue) closely follows the Spending line (red), which is desirable as it means the amount of cash reserve (green) stays fairly constant. But since the Spending is growing at a constant percentage (4%), the year to year growth in dollars increases, and that means that each successive levy needs to get larger.

For this scenario, I made the 2014 levy be 5 mills, then increased the millage rate by 1.8 mills with each successive levy. That would mean that by the time we get to 2032, the levy on the ballot that year would need to be nearly 16 mills. Fat chance of that passing.

So what has to change?

Well, it would be nice if the State of Ohio returned more of our tax dollars back to us. According to CUPP Report produced by the Ohio Department of Education, we get back only 41% of what we pay annually in income taxes. To be sure, we have a responsibility to fund our share of other State programs like Medicaid and the corrections system, but are we funding more than our share of the cost of other school districts? There are some folks, such as the Ohio Association for Equity and Adequacy of School Funding who argue that the poorer districts in this state still aren't getting enough. I think my assumption that our State funding will grow by $1 million/year is realistic - maybe even a little optimistic.

It would be even better if the municipalities which overlap our school districts, especially Hilliard, Dublin and Columbus, would bring in lots of new commercial development, generating an growing revenue stream for the schools (and the cities) without adding to the student population. But for now, the cities seem intent to encourage the construction of family-friendly apartment complexes, which add to the student population but generate much less school tax revenue than single family homes. Granting TIFs to apartment developers, as was the case with the Schottenstein apartments at Roberts and Alton-Darby Rds, just makes matters worse.

As I've said many times, our costs are driven primarily by how many people we employ, and how much we pay them. Our economic solution has include making strategic changes in these elements.

Asking our teachers, staff and administrators to forego pay increases for another 20 years is mathematical solution to the situation, but it's not reasonable. We certainly need to work with the unions to seek a more sustainable compensation model. I think that could mean introducing mechanisms that cause total personnel costs to better track the general economic conditions of the community. By that I mean that when times are good, the team should enjoy that along with the rest of us, and when times are tough - like now - they should take the hit along with the rest of us then as well.

On that point, one could debate the role the Senate Bill 5 situation had in causing the 2011-2013 union contracts to have base pay freezes, step delays and higher health insurance contributions, but the fact of the matter is that the teachers, staff and administrators have at least temporarily slowed the growth in personnel costs, and I for one appreciate that.

We also need to think about the breadth and depth of our programming and services. One of the first steps might be to carve off extracurricular programming, and make them full pay-to-participate activities. This would be a step fraught with emotion - especially for the parents of teenagers, the primary consumers of these programs. But there is a growing fraction of the voters who are saying that they're tired of their property taxes going up every 3 years, and they want to see this kind of stuff cut before they'll vote on any more levies.

Maybe it's time to think about adding an income tax component to our funding structure. Ohio law allows school districts to use two forms of income tax. The first kind is on all income, and is paid by everyone who lives in the school district. It is not imposed on businesses however, so the funding burden is more concentrated versus property taxes. The cities could bring in lots of new commercial activity, and it would cause no revenue lift to the schools.

The second form of income tax permitted is called an 'earned income tax,' and that essentially means that only income from W-2s is taxed. This form of income tax was supposedly created to ease the burden on retired folks (like me!), but it also has a political angle:  retired folks typically represent a large voting bloc in a community, and while they are less likely to favor increases in property taxes, they are very easy to sell on the idea of a tax they won't have to pay.

Income taxes have a dark side: while revenues tend to grow while the economy is healthy, there can be a rather sudden decline in revenue when things go sour, as has been the case for the past 5 years. This is the reason that the Federal, State and municipal budgets are in such disarray - not so much an increase in spending as a sudden loss of revenue.

Property taxes are a very stable source of funding for schools, but that can draw us into complacency.

The only thing that is clear is that we've reached an inflection point in the economic health of our school district. We can't do things for the next 20 years in the same way as they have been for the past 20. The sooner we face up to that, and start building a new model, the less painful the transition will be.

There's a saying that goes "A good decision made late is the same thing as a bad decision."  I think that's very applicable right now.


  1. So, just for the sake of argument, of course.... what is the process for implementing an income tax? It goes on the HCSD election ballot and then applies to whomever works in the district? or lives in the district?

    Thank you!!!! For continuting to think about our kids' future and telling us what path we are currently on.

  2. It's the same as for a property tax levy. The school board passes the appropriate resolutions, and the tax issue is put on the ballot for consideration by the voters.

    A school income tax applies to all residents of the district, regardless of where they work. This is the inverse of a city income tax, which is paid by folks who work in the city, regardless of where they live.

    And just to be clear, I'm not a fan of income taxes or any taxes for that matter. But if we're going to have public schools, and we plan to give raises at some point to the teachers, staff and administrators, they'll have to be funded with taxes of some kind, and I'd argue that local income taxes are the most efficient mechanism for communities like ours, because 100% of the taxes collected stay here.

    I'll not give up on Impact Fees as a mechanism for funding the need for new buildings should we get another surge in population. Right now, Ohio law doesn't allow school districts to assess an impact fee, but municipalities can, and the City of Hilliard does.

  3. Correction: In the comment above I said "I'd argue that local income taxes are the most efficient mechanism."

    I mean to say "I'd argue that local taxes are the most efficient mechanism"

    It doesn't matter whether they are property or income taxes - the revenue from both stay in the community.

  4. Paul, this is one idea of yours that I hope does not get a second....

  5. T... It's an interesting situation.

    Most governments in this country, including the federal, state, and city governments, are funded predominately by income taxes on individuals and corporations. So when income goes up, revenue goes up too. No new votes have to be taken - it's just automatic.

    So during the boom times of the past couple of decades, tax revenue just kept climbing, and governments were able to crank up spending pretty aggressively. They used some of that growing pot of money to buy and build stuff, but a lot of it was used to hire more people, give raises, and sweeten benefits - notably retirement programs.

    Contrast that to school districts, which are funded by property taxes in most parts of the country. And here in Ohio, there's another wrinkle: because of HB920, passed back in the 1970s, a property tax levy collects a fixed dollar amount on a given piece of property regardless of what happens to the market value of that property over time.

    Most public education professionals think HB920 is a bad thing. I don't. I've said for years that I appreciate the fact that funding to school districts doesn't automatically increase with property values, and that I think it's a good thing that if a school district wants to get more money to spend, it needs to make its case to the voters.

    The primary purpose of any new levy is to fund the growth in personnel costs - there are many articles on this blog which make that point. At times when the student population is growing, we need more money to fund the cost of new teachers and staff. In most years, we need to fund the cost of base pay increases as well as step increases for the existing staff.

    It's pretty clear to me that we'll be lucky if our state funding grows much at all on a per-student basis. I've said many times that I think we'll be lucky if it remains the same, but the indications are that it will continue to erode.

    So unless it is the will of the voters of this community to demand that teachers and staff freeze their compensation and benefits costs for the foreseeable future (and if that's the case, they had better elect school board members who will carry out that mandate), we'll need more revenue at some point.

    I'm simply putting on the table some alternatives to the standard old perpetual property tax like we used for decades.

  6. "The remainder of the annual growth - about $350,000/yr - is all the other things the districts spends money on, such as utilities, diesel fuel, and consumable supplies."

    Gosh, I thought sports, music and art were going up $7m/yr and responsible for all the levies!

    Sorry, type brake failed. ce

  7. Westerville was the first to try an income tax component to their financial problems with a defeat of epic proportions.I would think Hilliard would experience much the same result if put on the ballot.

  8. As I've said before, unless the intention is to never again give a salary increase to the teachers, staff and administrators, at some point we'll almost certainly need to put an issue on the ballot to raise taxes.

    While the so-called HB920 mechanism prevents taxes from increasing (and decreasing) automatically with property values (which I think is a good thing), it simultaneously carries with it the responsibility that each community have periodic conversations about whether the spending budget should increase, and if so, where the money is going to come from.

    I'm not trying to sell the idea of an income tax - I'm just putting it on the table as an option to consider. Compared with taxes based on property values, income taxes have both positives and negatives.

  9. If, along with increasing compensation, we also look at how many employees we actually need, we just might mitigate some of that need to raise taxes. Seeing as how employee growth has far exceeded student growth, seems this might be something to look at. Doing more with less is the new business model, at least in the private sector.

  10. Indeed, and I talk about the size of the team in the the following story.