Saturday, June 29, 2013

More Money = More Time, More Choices

While Governor Kasich has not yet had his final shot at Amended Substitute House Bill 59 (130th General Assembly), also known as the Biennial Budget, I think it's pretty safe to assume that he'll not use his Line Item Veto power to make any significant changes to the funding of Ohio's K-12 schools.

(Update July 1, 2013: Governor Kasich has published his list of Line Item Vetoes. There was no material change to K-12 public school funding)

This budget is good news for Hilliard City Schools. After years of flat or diminishing state funding, the lawmakers have seen fit to recognize that our state funding has not reflected the rising state income tax contributions made by the people and businesses of our community, nor the growth in students served by our district.

The Ohio School Boards Association this week released a spreadsheet showing how the state funding would change, district by district, in the new budget. It shows that for FY13 - the fiscal year just ending - our state funding should end up at about $34.7 million. Then in FY14, it would increase $2.2 million to $36.9 million. Another $3.9 million is to be added in FY15, bringing the state funding that year to $40.7 million (all numbers rounded to nearest 0.1 million).

So what does that mean to us?  Let's start by reviewing what our current Five Year Forecast (adopted May 2013) says:
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According to this forecast, our cash reserves would be exhausted in FY16, and it was my estimate that we would need to pass in 2014 a levy of approximately 6.4 mills (costing us about $200/yr per $100,000 of market value) to keep our cash reserves at 10% of operating expenses, as set by Policy DBDA.

By increasing the estimated state funding to the levels described above, the Forecast changes to this:

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I know those two charts look almost the same, but please note that the righthand axis has shifted substantially. With the increase in state funding, the depletion of cash reserves is delayed by a year.

Our cash reserves represent time and options. The more we have in reserve, the more time we have to have to evaluate options and make decisions. Unfortunately, many organizations squander such time by not making any decisions at all. I'm am reminded of the wisdom of Rush's lyric in "Freewill":

If you choose not to decide, you still have made a choice.

So what choices might we make?

An obvious option is to postpone putting another levy on the ballot. If we kept the growth in spending at around 4%/yr for FY15-17, as is now in the Forecast, we could pass a levy of about 5 mills in 2015 and maintain our 10% cash reserves through FY17:

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When the Board considered the updated forecast in May, using a not-so-rosy state funding forecast, I suggested that we cut our rate of spending growth from 4%/yr to about 3.7%/yr in order to reduce the size of the levy it looked like we would need in 2014.

What if we made this reduction in the spending rate growth anyway, even with all this new money from the State?  I think we still would need to put a levy on the ballot in 2015, but it could be 4 mills instead of 5 mills.

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Before we go any further in this analysis, remember that another change that came with this new Biennial Budget: the elimination of the 12.5% property tax rollback, and the equivalent reimbursement by the State. With the rollbacks in place, a 4 mill levy would cause local property owners to pay about $123/yr additional per $100,000 of property value. With the rollbacks eliminated, local property owners would pay $140/yr additional per $100,000 of property value. This doesn't change the amount of money the school district gets, it just makes the local property owners pay the whole 4 mills.

What if we went ahead and put a levy on the ballot next year, and kept the spending growth rate per the current Forecast? That would allow us to reduce the rate to 3 mills, or $105/yr additional per $100k.

What if we did a 2014 levy, and cut the spending growth rate to 3.7%?  Then we could get by with 2.4 mills, or $84/yr additional per $100k.

And there are some in our community who would advocate for going ahead and putting a 5 or 6 mill levy on the ballot in 2014, and using the additional funding from the state to increase our rate of spending growth. This certainly isn't my viewpoint, but we need to respectfully listen to those who might feel this way.

The point is that we have lots of options, just as we did two years ago when I wrote about our Budget Knobs.  I hope that this topic is a significant part of the discussion during our Board retreat in the Fall.

And this would be a great time for the voters to speak their mind. We'll represent you better as Board members if we know what direction you want us to take.

Comment here, send us emails, write letters, give us a phone call, or speak at a Board meeting. Just don't be silent and assume the outcome will be what you want.

22 comments:

  1. I think it's pathetic we're in this position such that we have to beg the state government for a handout, but we're there and it is what it is.

    Philosophically, the state and federal government shouldn't be spending money on education and furthering the "education bubble" that we're seeing now. It's just like with health care, which has been going up at an astronomical rate DESPITE (because of!) the fact that 50% of all health care spending is provided by the government. It's counterintuitive, but subsidizing education or health care makes the problem bigger. Just as Social Security should be a safety net, the state government should be providing funds only to the poorer schools in Appalachia.

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    1. 43% of the school districts in Ohio get less back in state school funding than their residents pay out in state income taxes. 22% get less than half back.

      30% of the districts get back more than 2x what they contribute in income taxes. 18% get more than 3x back.

      East Cleveland City Schools gets back nine times what it contributes.

      I don't think it was always like that. The districts with these large subsidies are typically districts which once had a large industrial base, but is now gone. When industry was booming, lots of folks moved in, many low skilled laborers. When the industry died, those with transferable, high demand skills boogied, leaving only the least mobile behind.

      These places may never revitalize, and if they do, it will require far more skilled workers. The thing is, industry will tend to seek locations where such workers already are, and where the labor environment is most friendly (ie non-union).

      So what is to be done with a place like East Cleveland, or New Boston (Scioto County)?

      I think we need to find ways to make it more attractive to leave such areas in search of better fortune, and give less incentive (ie subsidy) to stay.

      After all, America was built by people who risked a great deal to leave their homes in hope of a better life here. My ancestors made that choice 200 years ago, and others are making that choice today.

      So how can we show both compassion to those living in poverty, but yet do so with enough tough love to nudge them to go to where the jobs are? There must be jobs out there - we have multitudes of people risking their lives every day to break into the country to fill those jobs.

      When we redistribute wealth, we also distort the economic incentives. Safety nets are good, until they become too comfortable.

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  2. Forgot to mention my take on the mills. I would be tempted by the 3 mills in 2015 or the 2.4 in '14. Anything over that is cost prohibitive.

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    1. Thanks for your feedback.

      Note that 3 mills in 2015 wasn't one of the options I discussed. If we wanted to keep the spending plan described in the Five Year Forecast (4% annual spending growth) it could be funded with a 5 mill levy in 2015, or a 3 mill levy in 2014.

      If we limited the annual spending growth to 3.7%, it could be funded with a 2015 levy of 4 mills, or a 2014 levy of 2.4 mills.

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  3. Paul, there's another thing that should be factored in. 2014 is the tri-annual property tax adjustment. While it is not the same scope as the one every 6 years, it does still occur effective January 1, 2014.

    It's clear that in Hilliard, prices have started to move upward from the doldrums of 2011. If we assumed a 2% increase in property values (vs 4.something % decrease last time), how might that affect the potential millage needed?

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    1. I think the math is straightforward:

      Adj_Millage = Current_Millage / (1 + incr%)

      So you can take any millage I calculated above, divide it by 1.02, and you'll get the millage required if property values increase 2%.

      So for example, instead of 5 mills, we would need 4.9 mills

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  4. The Governor has released his list of Line Item Vetoes. There is no material change to K-12 public school funding.

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  5. Paul,

    Today appears to be a big day for Hilliard Schools. It is the first day on the job for Dr. Marschhausen and school fundings will be a little better than in past years from the State of Ohio.

    Now the community has the chance to see how a new leader and the board deal with new money. Will we save and curb spending making it last, allowing the tax payer catch up a little. Will be spend like a lottery winner or a combo of both. Even if we only cut spending growth by .5% would be a positive sign. The big item looms, the new labor contract.

    No matter which path we take remember one key point. More state money and casion dollars help the district pay for operations. It is added money not planned on in the 5 year plan. So if we go the path of not asking for a levy vote until 2015 it had nothing to do with how the district managed money. I hope we do not see Because of how well we manage the district we don't need to ask you for more levy money in 2014 like we said we would need to!

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  6. Paul,

    currently i have property in Hilliard. I am always amazed at how the schools state it would only raise property taxes 140.00 per hundred thousand. they are very good at spin.

    What they should state or disclose is that presently on a 201000.00 property your taxes presently are ie my property taxes for the year is 6985.00 of which 4531.00 goes to hilliard schools per year. if the proposed tax increase is approved you would pay an additional 504.00 per year or 5035.00 for school and which raise total taxes to 7489.00 per year.

    at some point we are talking real money. wake up hilliard.

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    1. It's not spin to say "this levy will raise property taxes by $X per $100,000 in market value." It's simply a way to give information that allows each property owner to easily calculate what it means to them, and you'll notice it's how I express the impact of a levy as well.

      If your property is assessed at $201,000, then the levy will cost you 2.01X per year. If it's $90,000, then your additional tax would be 0.9X per year.

      And if you own that $2.5 million home on the river that was written about in the paper the other day, your addition tax would be 25X.

      The amount of property tax we're paying is indeed substantial, regardless of how your home is valued. That's the reason we need to start talking sooner rather than later if we want to change the rate of spending growth.

      Thanks for your comment.

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  7. Paul,

    One of the charms of Hilliard is we have homes and apartments for all, low end to high. I know you and I have homes worth more than $100K. However there are many in that range.

    Many times there is a relationship between family income and the resources allocated to housing. When looking at census data for Hillliard there is some striking facts. The income of an average teacher in Hilliard is higher than the average family income in Hilliard.

    While teachers deserve a working wage, when a teacher makes more than an average family? If you would do a review of retirement income you would find the gap becomes larger.

    When the contract talks arrive later this year, I would take great care not to make the gap wider. Many might say being a teacher in Hilliard is like winning the lottery of life. 35 years at an average of 65,000 is $1,750,000,. Then retire for 25 years at $55,250 for lets say total $1,381,250 for a grand total $3,131,250. That is using an average income $65,000 and how many of them are there?

    So when you talk about the $100,000 home, lets talk about the $3M teacher.

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    1. I've been looking for official census data for our school district - can you tell me where you found yours? It's easy to find data for zip code, county or SMSA/CMSA, but not so easy for school district. If one looks at 43026 only, then you're missing the data points for 43221 (some of the most expensive real estate in the district) but is mostly in the UA school district and 43228, much of which is in Columbus and South Western schools.

      A primary data source I use is the Ohio Dept of Ed's CUPP spreadsheet. It reports our district average income as being $65,864 and the median income being $47,617. For the same year - FY11 - it reports our average teacher salary as being $69,870.

      But one has to be careful to not look at this average teacher salary number in isolation. For example, the average teacher salary for Olentangy schools is $63,783. As recently as 2009, the average for Olentangy was $55,995. Ours was $64,703 in that year.

      Between 2009 and 2011, our average increased 8%, and Olentangy's increased 14%. The spread between the two districts was 16% in 2009, but dropped to 10% by 2011.

      What caused all that? Nothing more than the fact that Olentangy's growth spurt started about ten years after ours, so our teachers tend to have 10 more years of service than theirs. That means that while our teachers tend to be higher on the salary grid than theirs, more of our teachers are no longer on the annual step schedule, while most of theirs are. So the difference is rapidly closing.

      That relationship is going to reverse as the many teachers we hired between 1999 and 2003 start to retire, to be replaced with new teachers at much lower salaries. Meanwhile, the large cohort of Olentangy teachers hired in the last few years will be hitting their peak salary years, and the people of their district will start the feel the pressure of rising comp/benefits costs without corresponding growth in commercial revenue or state funding.

      As I have said many times, both parties need to go into this cycle of contract negotiations with respect, empathy, and good information.

      The reality is that there's aren't just two constituencies. There are teachers who are near retirement, and teachers who are just getting started. The are taxpayers who are retired and challenged to pay their property taxes, and there are those in their peak earning years with kids in high school. All those voices need to be heard.

      Negotiations are never fun. I had a boss once who said a good negotiation is never over until no one is smiling.

      I think that's true, but it doesn't have to end up with a scorched Earth outcome either.

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    2. Paul -

      In the CUPP report, do you know if the salaries listed are simply the average or the average per FTE? There's a big difference there. The iLRC just reports an average salary - total payroll divided by the number of employees, not the number of FTEs. This makes the average salary in a district with a lot of part time workers look particularly low compared to one with few part time workers.

      One local district here in SW Ohio has been blasted by the anti-school groups for "handing out gigantic raises" because their average salary jumped significantly several years back. In reality, they moved from many part-time workers and job shares to fewer full time workers. They ended up saving money with fewer benefits and less administration, but it did make the average salary in the iLRC appear to jump, even when actual pay scales didn't.

      Call it a curse for being fiscally responsible - save some money and then have people use it as evidence that you're wasting money.

      In any case, I'll admit I'm a bit jealous Hilliard is getting that big of an increase from the state. Our district gets next to nothing - The state has decided that we're "wealthy" because we have a lot of taxable property per student - in fact, 86% more than Hilliard. At the same time, median income in Hilliard is nearly 50% higher. We get almost the exact same amount of state funding as a neighboring district with Hilliard-level income and our level of property value per pupil.

      Evidently the state government doesn't understand the general concepts of disposable income or ability to pay....

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    3. I don't know. I trust that the method of calculation is consistent across all districts, but it wouldn't surprise me if the distortions you describe exist.

      The state funding formula isn't very sensitive to income, as you know, it's driven by property values. While property value per student is often a reliable indicator of prosperity, it's not always so.

      You may be speaking of New Richmond Schools, which has a valuation/median income ratio of about 7, compared to 3 for Hilliard Schools. New Richmond has the benefit of being home to the Zimmer Power Plant. Zimmer would generate a great deal of Utility Personal Property Tax income for the district, but the landowners of the community don't necessarily have the resources to cover much in the way of new levies.

      Or Princton Schools, which has the benefit of some sizable industrial operations, such as the Ford Tranmission plant, but not high incomes.

      This ratio can be misleading, because school districts like Indian Hills have a large valuation/income multiple, but the incomes are substantial.

      For a numbers geek, the CUPP report tells all kinds of stories. One of the key ones is that there are all kinds of school districts in the state, and I don't think our leaders have yet found an equitable way to fund them all.

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  8. Read the school web site ASAP. Yes a new sheriff, but with a new tone!

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    1. Indeed. For those who haven't seen it, Dr. Marschhausen has made the first of what I hope will be a steady stream of posts to the new district website blog. This was his practice at Loveland City Schools, and I'm glad he is continuing it here.

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  9. Personally, I think a sustained 4% growth rate in spending is unsustainable and unfair to residents, the majority of which I assume don't see incomes increase anywhere near that fast. I'd like to see a reduction in the growth of spending regardless of when and how much the next levy needs to be. Given the historic appetite of this board for making the tough decisions (present company excluded), I'd say that is unlikely.

    A smaller levy is going to be easier to sell, so perhaps sooner is better than later. However, a sooner small levy simply means that the next one will be required sooner too. Recent history tells us that this district tends to reject the levies the first time out as well.

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  10. Paul,

    Here is another website that you might find to be a valuable resource from time to time: http://proximityone.com/sd_oh.htm .

    It provides Ohio School District Demographics and is sortable by criteria.

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  11. Having checked out the Loveland web site I had the chance to read Marschhausen web blog.!!! Wow!!! Open honest with personal views. No excuses no spin just fact, opinion. This will be something new to Hilliard and the board.

    If we could have this creep into board meetings. Maybe learn the same about our board member ( Paul, thus thinks we know where you stand) This is a great start going into contract and future levy actions.

    It is the tone set by the leader, his willingness to expose himself to let us learn.

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