Sunday, October 20, 2013

The Math of Development

The very first article I posted to this blog, in December 2006, was about the impact of ongoing residential development on our school district. The crash of the housing market in 2007 - and its impact on our economy - has made this fall from the top issue in our community, but the threat has been smoldering all the while.

With the first glimpses of recovery, the developers and home builders are again eyeing our community as a good place to make a profit. And they have little concern about whether their profit opportunities are simultaneously beneficial to our community. Nor should we expect them to be concerned. They're in business to make money, and they do that by buying up farmland, building new homes, and selling them to folks who want to live in our community.

It's the officials we elect to public office who have the responsibility to represent our interests versus those of the developers. In particular it is the duty of the Mayors and City Council members who govern our cities. In our case, that means Hilliard, Columbus and Dublin. They must weigh the one-time profit desires of a developer against the long-term health of the community.

The challenge is that our community is made up of several overlapping governments, or "political subdivisions" to use the language of the Ohio Revised Code. I used this diagram back in March for the story titled "Patchwork Community" to help explain the relationships:
click to enlarge
While this chart tries to show how the jurisdictions of these various entities overlap, it doesn't say anything about the flow of money, and as some wise person said a long time ago, if you want to really understand things, follow the money. Maybe this diagram will help:
click to enlarge
I've left out a few relationships to simplify the diagram (e.g. the City of Dublin), but the main themes are captured:
  • The school district is mostly funded by local property taxes, paid by both the home owners and the business owners within the boundaries of the school district. In other words, the school district is funded by the people who own property in the school district. If you live in the school district, you pay property taxes to the school district.
  • The cities are funded by income taxes paid by the employees of businesses and other entities (like the school district), within the boundaries of the school district. If you work in a city, you pay income taxes to the city.
  • Each city provides certain services - such as police protection, water/sewer, street maintenance, trash collection - to the entities within their municipal boundaries, including home owners, businesses, and the school districts.
  • The school district provides educational services to all children whose legal residences are within the school district boundary.
When a new home is built within in a city - Hilliard for example:
  • Hilliard City Schools will collect property taxes from the owner of that home, and will provide education services to any school age children living there. The amount of property taxes collected may or may not be sufficient to fund the cost of educating the kids who live in the new house, depending on how many kids live there, and the value of the house. By my calculations, a home must be valued in excess of $250,000* in order to fund the local cost of educating the 0.8 school age kids who will come with a new home, on average.
  • The City of Hilliard will provide to the home owner police protection, water/sewer service, street maintenance, trash collection, etc, but will collect revenue from the home owner for only some of those services (water/sewer, trash). The home owner will pay little to offset the cost of police protection, street maintenance, and for park operations.
When a new business is built within a city:
  • Hilliard City Schools will collect property taxes from the owner of that business, but will be providing the business no services. Therefore, the property tax revenue collected from businesses reduces the amount of property taxes needed from home owners.
  • The City of Hilliard will collect income taxes from the employees of the business, and will provide police protection, water/sewer service, street maintenance, and so on. Additionally, this revenue will fund the cost of providing these city services to home owners as well.
So the story is the same for both the school district and the city:

The more businesses that there are in relation to homes, the less the home owners will need to pay in taxes to run both the school district and the city. 

Conversely, the more residences which are built in the city, the higher the cost of providing services, both via the schools and the municipal government.

But how do we go about recruiting new businesses to the area?

Some businesses, such as retailers, don't have to be recruited. They naturally want to have storefronts where there are consumers. As more homes are built, more supermarkets, gas stations and pizza shops will follow. We're glad to have these new businesses in our community, but only a few of them will generate significant tax revenue for the schools or the municipality.

Big manufacturing operations are great for the economy, but not always welcomed if they bring with them significant environmental concerns. The extreme example would be a nuclear power plant. I'm a big fan of nuclear power, and believe that as long as our country has an insatiable appetite for electrical power (e.g. for our new electric cars), we're going to need nuclear power to provide a significant portion of the base load.

Nuclear power plants also produce an incredible amount of tax revenue for their host communities. A former superintendent of Perry Local Schools up on Lake Erie once told us about the enormous amount of money that flowed into their school district in an otherwise low-income community because of the taxes paid by the Perry Nuclear Power Station. They built a beautiful new $100+ million central school campus without the need of a local levy, just using the revenue from the nuclear plant. I think nuclear power plants are cool, and can be made very safe. Nonetheless, I don't think I'd want to see one built on Darby Creek.

Some manufacturing operations can be great neighbors, and we're blessed to have one in Boeringer Ingelheim Roxanne Labs.

So what is the ideal kind of commercial development?

I think Dublin has gotten this right for a lot of years: it's professional office space. Take a look at the Franz Rd corridor - large office buildings all around. Dublin is a place a where affluent people want to both live and work. I won't claim that the economic structure of Dublin is the perfect model - they still have the challenges of residential development outpacing their commercial development, but at least they have high-value residential real estate and a healthy amount of the right kind of commercial development to help.

I know that Mayor Schonhardt and the City Council would like Hilliard to become much like Dublin in this regard, and I applaud this vision. The redevelopment of the former Dana Manufacturing site is a good move in that direction, with a mixture of retail, residential, and professional office space.

But meanwhile, we have the huge Heritage Preserve development underway on Alton-Darby Rd. This sits on 400 acres of land newly annexed into the City of Hilliard. On it, the Planned Development company will build 687 dwellings consisting of 387 single-family homes and 300 apartments.

There was no compelling public need for the City of Hilliard to annex this land. Had they chosen to not annex this land, no one would have been harmed except the developer, Dan O'Brien. I'm not insensitive to the economic motivations of Mr. O'Brien. He was gracious to sit with us on the committee to rewrite the Brown Township Comprehensive Plan, even though he was uncomfortable doing so - knowing the objective of the Plan was to restrict his options. I'm also a commercial real estate investor, and know how hard the market has been for the better part of a decade. It's quite painful to have a big hunk of money tied up in a piece of real estate that's generating no revenue.

But it's not the City of Hilliard's job to protect the interests of Mr. O'Brien or any other real estate developer. They're supposed to protect our interests - those of the residents and businesses already in the community. And right now, I believe that means holding off on the annexation of any additional land for residential development. Let's get more of the commercial tracts along I-270 developed with professional office space first.

And if we need to use TIFs to make that happen, I can support that. Let's not leave money on the table if we don't have to, but I'd rather waive some or all of the property taxes for a few years and set up a future revenue stream than have no revenue stream at all.

But let's not use TIFs to facilitate residential development, as the City of Hilliard chose to use for the apartment complex on the corner of Alton-Darby and Roberts Rds.

* If the State of Ohio continues to provide incremental funding with incremental growth, the local share of the cost of funding the education of 0.8 kids is equal to the property taxes generated by a $250,000 home. As the amount of state funding decreases, as it did in recent years, the amount of money we must generate locally increases, which also raises the value of the home required to fund the cost of 0.8 kids.


  1. Paul,

    Thanks again for your research and presentations. They never fail to be fact based always create pause for thought.

    I understand the need to lobby the Cities that make up the HCSD. It is just that, lobby to give us the base we need to allow our schools to be properly funded. I wish we could have had a little more talk about getting out of win-win which would have solved the problem for Hilliard residents.

    The real issue for the rest 2013 is the contract with both unions. I wish we would have more talk about that. Has the board ever polled or had meetings with the residents on what we want to pay our teachers?

    Off to the dark secret place to meet and talk then smoke from the union office black or white telling new contract or not. Yet this is the driver for 80% plus of operational costs. When you ask a board member one gets the we are unable to talk about that until after it is done then levy on ballot next.

    Well I will be unable to vore for any levy until the board gets feedback from the community. I mean hard hitting fact based numbers, not smoke and mirrors.

    Thanks again.
    *comments on board members not willing to talking is based on a few but not all members

    1. One of the key roles of the School Board is to represent the voters in these negotiations, and that's exactly what we'll be doing.

      Interesting that during the Meet the Candidates night last week, not a single question was asked about how the four of us candidates felt about teacher compensation.

    2. Paul, that's probably because if you dare challenge teacher pay you are immediate labelled as anti-children....

      Let's not beat around the bush: the teachers' unions are well oiled machines with a lot of political clout and financial incentive to play hardball. It's a pity our children have to suffer as a result.

  2. Paul,

    Once again, important information and great analysis here. A couple of comments/suggestions:

    A condensed version of this blog post should be submitted to the Hilliard NW News/This Week paper (guest column) to help educate community stakeholders about the “financial impact to the district” by these "new development" decisions made by our City officials/representatives.

    In light of the district having the authority to determine which bus routes are “financially viable” (District Business Manager), could the district legally take a hard line approach to new development by saying “district transportation services for any new residential development will not be provided until equivalent tax revenue from new commercial development is in place to offset the impact of the 0.8 students per housing unit of that new residential development”?

    Steve B.

    1. Thanks for the feedback Steve. We're talking about recrafting the Audit & Accountability Cmte to have a broader mission, which would include a public education component. I'd hope this topic would be part of it.

      Interesting concept about restricting bus service, but I don't think our interest is in punishing the people who buy the houses in new developments. What we want to do is take away the motivations of the politicians who keep annexing more land, which circles back to the voter education effort.

  3. Paul,

    Let me clarify my suggestion a bit. To your point “we want to do is take away the motivations of the politicians who keep annexing more land” as it indirectly increases costs to the district via families (with 0.8 kids to educate) in “new” housing on that annexed land. I am suggesting that an alternative way may be to bypass the Hilliard City politicians and “take away the motivations of residential developers” to build any new large scale developments.

    I’m asking if the district could say: “from now on” (post Heritage Reserve as it is apparently a done deal), “district transportation services for any new (large) residential development will not be provided until equivalent tax revenue from new commercial development is in place to offset the impact of the 0.8 students per housing unit of that new residential development”. Or the developer could pay some sort of “impact fee” to the district over a period of time.

    Folks looking to buy in these new developments would be made aware of the potential district transportation limitations. It’s affect would be to discourage new development (population growth), and now existing homes would be more of a “commodity” with potentially increased property values and increased revenue to the district.

    I’m guessing that the primary motivation for new residential development from the city is that income tax revenue per new household is less than the cost of services provided - a net financial gain for the city, but a net loss for the district.

    Ironically it is the quality of our school district that attracts those new residential developments to Hilliard, but with the district having no financial say in the matter.

    As the economy continues to struggle with median household incomes shrinking, I don’t see city leadership looking to turn down any new income tax revenue. But, maybe something like I have described here could help strengthen our school district’s voice with the city in the future…

    Steve B.

    1. Steve: You have a misconception that lots of folks have: you pay income taxes to the city in which you work, not where you live. Check your pay stub or W-2: your local income tax is paid to the City of Columbus, not Hilliard.

      There is therefore no revenue motive for a city to bring in new residents, unless those residents happen to work for employers who are in the city as well. Which is why I wonder why Hilliard keeps annexing land for residential development.

      This is the reason we want professional office space in our city, so that there is a place in our district for well-compensated people to work, not just live.

      Again, this is something Dublin does very well. I suspect that lots of the folks who work in those Dublin office building also live in Dublin. Win for both the city and the school district.

  4. Paul,
    I missed the meet the candidates night, never saw the communication. To be honest if I asked what is a fair dollar amount would you or any of the others given a number reply. Now that you are an endorced candidate. ( sorry could not let that fact pass)

    I know placing an exact number is not easy. Given the health care and retirement package our teachers do well in my opinion. It just seem odd that the supply abd demand curve does not show up in the contract pay scale.

    High supply, limited demand and step and grade @ 4% with no accountability. You talked about concern of time to evaluate teachers, yet leadership has no match results to pay chore. In th enon school plantation we have pay range and must give limited pay increases all ie pay for performance.


    Just say the comments from Dr. M about levy. I wish we would stop using how much we cut number, since it is driven by how much was budgeted. I would like to see numbers expressed more in what % of increase.


  5. I'm forever stumped on how it is that government at this most local level doesn't better represent us. You'd think at a state or federal level there's a lot more chance for representing commercial interests, but at so local (and thus accountable) a level it's amazing. I guess it's due to voter ignorance or apathy.

    Teacher compensation is such a sensitive and controversial subject that I'm not too surprised it wasn't brought up. Since most of our property taxes go to schools and most of school cost is teacher salary, levies become a sort of defacto referendum on teacher pay.

  6. Paul,

    My response is delayed as I have been on travel…

    As “withheld local income tax by folks who work in Hilliard located business” is greatest revenue source to the city, I do understand the need to be more like Dublin and attract more business to our community. But there is substantial amount in personal income tax revenue that is generated by “other folks” in our community – my point was that city leaders may be looking to grow income tax revenue in any way possible. Consider the following:

    When I fill out my local tax return through RITA every year, I provide my W2s for the 2% taxes withheld by Columbus, the city in which I work. From what I understand, those folks who live in Hilliard and do not have local taxes withheld from their income, then Hilliard gets their 2% if not documented to be earned in other municipalities .

    One interesting thing in the 2012 city CAFR, income tax for reported “withholdings” was $14.7M (from 23,230 employees), income tax from “non-withholdings” was $2.0M, and income tax from business was $2.2M. So if I understand this right, about 13% of the personal income taxes come from individuals who live in Hilliard but do not have local taxes withheld during the year. Based on these number, I estimate about 3,100 Hilliard folks are self employed whose business address is there home address – that’s over 10% of our 28,524 city population (2012 CAFR) that also includes almost 10,000 kids. On my street alone I have 4 neighbors who are professionals that work of their homes.

    So I do agree that bringing new business is the best bang for the buck, but the substantial contribution from the “non-withholders” may provide an incentive to city leaders to encourage folks to move to Hilliard including by approving new residential developments.

    In addition, the city receives funding from Franklin County and from the state in the form of “Local Government Fund distributions” totaling about at half a million dollars – I wonder how much of this is based on city population?

    Does my analysis here make sense? Thanks for the dialog on all of this!

    Steve B.

    1. Good research and analysis. Thanks.

      Hilliard's planner, John Talentino, once told our Brown Twp land use planning group that for every new rooftop constructed in the City of Hilliard, the cost of services provided would require at least four new jobs paying $40,000/yr to be created in the City.

      So you could get there if every third house had a $120,000 self-employed work-at-home professional. Possible, but not likely.

      I don't know the formula for the Local Goverment Fund distributions from the state budget, but I would expect that population is a significant factor. It may look a little like the school funding formula, where the state funding decreases as some measure of local wealth increases.

  7. Speaking of development, it looks like Heritage Preserve is getting ready to ramp up soon over on Alton Darby and Davis. Between the new single-family and additional apartment residences, it would be about 700 new dwellings. This could mean around 420-450 new school age students in Hilliard schools. Not only are there concerns about funding, but there is no way 200+ kids will fit in one single elementary in that area of the school district. Not to mention, the crowding that is likely to occur at Memorial, if all students were assigned there. Hopefully, the district leadership will be proactive in balancing the enrollment as the development unfolds.

    1. As you know, redistricting is a process fraught with emotion in our district. Heritage Preserve is close to three of our newest design elementary schools: Alton Darby, Darby Creek and Hoffman Trails. Unfortunately, the elementary building with the most capacity is Washington. And in the current scheme, Washington feeds to Weaver and Davidson, which are our most crowded middle and high schools.

      Accommodating growth is never easy for an established community.

  8. Understood and agreed about accommodating growth. That said, the previous redistricting by the BOE fell a bit short with a long-term view. Not only were the southern elementary schools allowed to get near capacity, but the redistricting didn't really seem to consider the future growth trends in the three MS/HS zones. With the exception of a small area of growth near the Y and across from NW Bible, Heritage/Darby is nearly built-out and will probably level out in enrollment. The combined enrollment of Memorial/Bradley already is larger than Heritage/Darby.

    A possible logical choice would be to split the secondary school enrollment with Heritage/Darby and have the elementary schoolers that attend Hoffman Farms feed to Heritage/Darby. The Alton Darby and Darby Creek students would feed to Memorial/Bradley.

    "Spot-redistricting" can be done, but now the neighborhoods that are assigned at Memorial/Bradley have established an identity with the school and I can't imagine that the parents would be too happy (and understandably so), to be redistricted to Heritage/Darby.

    Of course, the third alternative is to have all of the growth go to Memorial/Bradley. Probably the easiest at first, but might not be the best option a few years down the road, when the development is complete.

    1. As I understand it, Washington Elementary was built in the northern end of the school district to accommodate the growth expected as parcels near Hayden Run Rd and Cosgray developed (e.g. the large one SW of that intersection). Instead, we had lots of families with lots of kids moving into apartments in the southern portion of the district.

      Lots of moving parts in our school district. There are the older neighborhoods where the primary occupants are senior citizens. Gradually those homes are turning over to young couples who don't yet have kids, or have toddlers yet to enter school. Where new homes are developed, e.g. Heritage Preserve, the kids are typically school age. Then there are all the folks like me, whose came here 20+ years ago to build a new home and raise our kids, but are now empty nesters.

      In districts in which there is no more developable land, such as UA or Worthington, the dynamics are different. UA has largely passed through a full cycle, including a time when enrollment declined and they sold at least one building (where Wellington School now is sited). Now the elderly who first came to UA are passing on, their homes are being bought by younger families, and enrollment is picking up again.

      Worthington has slightly declining enrollment. They'll probably have to go through the empty-nester and elderly stage before it goes up again.

      We've got all of it: elders, families with school age kids, young couples without kids, empty nesters, and a ton of land waiting to be developed.

      It wouldn't surprise me if we still have more schools to build. Maybe a 6th grade and middle on the Bradley site. Probably an elementary somewhere south.

      And I'm sure we'll have a conversation about a 4th high school sometime in our future, including another look at building a new school versus expanding the existing three.

      It's for this reason that we need to continue to have discussions about the pace of residential vs commercial development. If we allow HCSD to become a giant bedroom community like UA and Bexley, then we'll have to endure tax levels like UA and Bexley, or accept a lesser kind of school district.

  9. Paul, I concur with what you're saying in the post above. We have some tough decisions as a community and school district facing us in the future. And as you indicated, much of this hinges on the pace of residential development and how it balances with commercial development.

    In the meantime, I am of the opinion that the BOE has a decision facing it, even if it means 'standing pat' and letting the current attendance boundaries remain in place. If it were a 'mini-sub' of 8-16 homes like Darby Knolls or Abbey Chase out in Brown Township, that would be one thing, but this is a large-scale development.