Monday, April 15, 2013

Miles to Empty

That last tax document finally arrived on April 13, allowing me to get our 2012 Income Tax returns filed on time. It's kind of amazing the degree of stress and havoc a couple of pieces of paper can create in this annual ritual. Of course, it's not the investment that generates this condition - it's the complexity of the US tax code.

In the process, one eventually hits Schedule A, Line 6: Real Estate Taxes. For me, like you, that number just keeps growing. I looked back at my 1999 tax return just for fun - 13 years ago. Since then, our property taxes have grown 73%, equivalent to a compound annual growth rate of 4.25%.

While around 65% of our current property tax bills are for Hilliard City Schools (your percentage may vary depending on the municipality you live in), I don't have data for what the breakdown was 13 years ago. So I can't say whether our school tax has grown more or less than the overall 4.25% CAGR, but I suspect it has been in that ballpark.

When the last operating levy was passed in November 2011, the five of us on the School Board committed that it would be at least three years before another levy appeared on the ballot, provided we didn't get a big surprise from the State of Ohio. That still looks to be doable.

How can we tell?  As I've said many times, one of the most important documents produced by leadership of our school district is the Five Year Forecast. I say this not because money is the most important thing, but rather because money is the fuel we need to run the district, and we must always be cognizant of the rate it is coming in versus the rate it is being consumed.

Many of our cars have a display called something like "Miles to Empty."  It's the job of one of the myriad of processors in modern cars to divide the amount of gas remaining in the tank by the recent average fuel consumption rate (miles/gallon), and tell us about how far we can go before we're out. I have that display up all the time in my pickup truck to help me figure out if I need to buy gas now, or can maybe wait a couple of days and hope the price goes down. I can often stretch my decision time a little by taking action to reduce my rate of consumption.

This is what the Five Year Forecast does - tell us when we need more money in the bank at our current rate of consumption. Visually, this is what the Forecast looked like last October:
click to enlarge
It says we'll run out of money in Fiscal Year 2016 (July 2015-June 2016). But we can't wait until then to make some tough decisions.

For one thing, there is a time lag between when a levy is passed and the revenue starts showing up. When the levy passed in November 2011, it first appeared on our tax bill in January 2012, which is already halfway through FY12. This means that in FY12, only half the additional annual revenue was collected. The first year the full impact was seen was FY13.

So if we don't want to run out of money in FY16, and we don't change our rate of consumption, that means the next levy has be passed in calendar 2014 - three years since the last levy was passed.

As I wrote back in April 2011, we have Four Knobs we can adjust at this point:
  • The Rate of Spending Growth - currently forecasted at a rate of about 4% per year, around $7 million more each year.
  • The Amount of Cash Reserves - which by policy is to be kept around 10%
  • Interval to the following Levy - that is, how long will we try to stay off the ballot
  • Size of the 2014 Levy
These factors are all related. Let assume that we try to keep the cash reserves around 10%, don't want another levy on the ballot before 2017, and we keep the spending growth rate as currently forecasted. The math is straightforward: by my calculations (which is not confirmed by the Treasurer) the 2014 levy would need to be on the order of 7.7 mills, assuming that the funding by the State of Ohio remains as forecasted as well.

Tall order. What if the 2014 edition of the School Board decides 5.9 mills - same as the 2011 levy - is all the community will accept?

Again, assuming they will want to maintain a 3 year levy interval, keep cash reserves around 10%, and stick with the assumptions about State funding, then the rate of spending growth would have to drop from 4% per year to 3% per year.

In dollars, that means we would have to take $1.7 million of spending out of the FY15 forecast, $3.7 million out of FY16, and $5.6 million out of FY17. It would look like this:
click to enlarge
This is well past what can be done by making extracurricular activities self-funded, and by cutting high school busing. This would challenge all of us - parents, other community members, teachers, staff and administrators - to make some tough decisions. And we have to start working on this soon. The FY14 budget is already in place. That's the next school year after all, and it starts in ten weeks.

If we don't figure out how to reduce the FY15 budget by around $1.7 million, the cuts will have to be even greater in FY16 and FY17.

Frankly, this situation requires us all to find a compromise that spreads the impact across all constituent groups in a manner we can all live with, even if no one is completely happy. Our elected officials in Washington DC have been an embarrassment to our country in this regard, and our people in the Statehouse haven't been much better. But it's because we expect them to make someone else suffer while we are kept whole. Or that my political philosophy is correct, and yours is wrong.

I hope we will have more success reaching compromise in our community. What better lesson can we teach our children if our school district and our nation is to survive?

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