While the School Board has not yet had a discussion about when the next operating levy will need to be presented to the voters, I expect that the decision will be made to put a levy on the ballot in May 2011. The question will be the size.
The first of these discussions is on the
agenda for the Board meeting scheduled for 7pm next Wednesday, November 10, 2010 at Darby Creek Elementary School. I believe that this is one of the most significant topics that must be dealt with by the School Board, and getting the opportunity to be part of this discussion is frankly one of the primary reasons I ran for a seat on the Board. There is a time for public participation at the beginning of each Board meeting (see the agenda for the rules). I hope many members of the community take advantage of this opportunity, especially on this topic.
There are at least two ways to approach the problem of determining the levy size:
- The “Pricing” Approach: Proponents of this approach think first about maximum size levy the community is likely to bear. In other words, how large can a levy be and still garner a simple majority of the votes on Election Day? How the money will be spent is secondary to those of this mindset.
- The “Cost” Approach: Proponents of this approach believe that the levy amount should be determined after making decisions about how we are going to change our spending in the coming years, and making assumptions about what may be altered in our revenue sources.
It should be no surprise to readers of this blog that I come from the second school of thought. This requires an iterative method of analysis, because as is the case in every budgeting exercise in which I have participated over the past 30 years, the first pass never makes sense. Perfectly reasonable assumptions about how much we would like to spend, and plausible projections about where the money would come from, inevitably lead to revenue requirements that are ridiculous to consider. So you have to adjust the spending forecast downward, reexamine the revenue projections, and tweak the parameters until something reasonable emerges.
So what are the levy parameters? First and foremost is the size of the levy that will be next be on the ballot – presumably in May 2011 in our case. But that’s not the end of it. The expected size and timing of the following levy are also part of the decision. There are all kinds of choices, but generally these things are true:
- Given a particular spending assumption, the smaller the levy now, the larger it will likely need to be next time
- The sooner we plan to put the next levy on the ballot (the shorter the interval), the smaller both this and the next levy can be.
- Conversely, the longer we want the interval to be until the next levy, the larger both this and the next levy must be.
Then there is one other element which affects levy size and timing – the condition of our cash reserve.
While spending tends to increase at a constant rate, the portion of our revenue that comes from property taxes rises in large steps each time a levy is passed, then stays relatively constant until the next levy is passed. In the first year or two after a levy passes, the revenue is greater than the spending, and our cash reserves increase. Then at some point, spending rises above the income and the cash reserves are drawn down. This phenomenon is just like what occurs in your personal checking account. You spend a little money every day, causing your account balance to gradually decrease. Then payday comes along, and in one step, your account balance jumps back up, and the cycle repeats.
So we get to decide whether we should be trying to live hand-to-mouth as a school district, allowing the cash balance to get as low as possible, or whether it is better to keep a little money in reserve so we have some ‘wiggle room’ to deal with the unexpected. On August 14, 2006, the Hilliard School Board adopted
Policy DBDA, which states that “maintaining a cash reserve balance of 10% of operating expenses is necessary in the interest of sound fiscal management.” I wholeheartedly agree with this. It is not good a good thing to have nothing in reserve.
The ‘unexpected’ stuff on our horizon is indeed scary. I’d go so far as to say terrifying. It didn’t really matter who was elected Governor this week, the State of Ohio is in deep doo-doo from a fiscal standpoint, and there are going to be spending cuts of a magnitude such that no one or no program will be unaffected.
A
story ran in the Nov 6 edition of
The Columbus Dispatch which addresses this topic. The story lead says it all: “
Ohio school districts got some hint this week of the hole the approaching budget tsunami might blow in the budgets. It could be big. State aid to school districts and charter schools could drop more than $1.1 billion over the next two years if funding is reduced by 10%.”
So what is the effect on our community if the new Governor and General Assembly decide to cut education funding by 10%? That would decrease our State funding by more than $5 million per year, the equivalent of about 2 mills of local property tax revenue. Just to stay even. Note that the $8 billion gap in the upcoming biennial budget represents 16% of current spending by the State. So if education gets hit with only a 10% cut, a disproportionate amount of the cuts will have to come from Medicaid, the prison system, and property tax relief programs (e.g. the Homestead exemptions). There are no easy choices.
But carrying this picture to the next step, it is not necessarily true that even if the Governor and General Assembly decide to make a 10% cut across all education budget lines, that the impact will be spread evenly across all school districts. Let’s face it – the folks at the Statehouse believe districts like ours have the local capacity to fund our schools however we want, so it is not hard to imagine that the impact of a State funding cut would be distributed in proportion to the perceived wealth of a school district. That is, the more wealthy the district, the deeper the cut.
The above-noted
Dispatch article reports that “
some local school leaders are preparing for cuts of 10 to 15 percent.” Our District Treasurer, Brian Wilson, baked a cut of 10% into the just-approved
Five Year Forecast. We may be being optimistic.
One way to prepare for such cuts is to put a little extra money in the piggy bank to give us some time to react when we find out what the real depth of the cuts will be. For that reason, I advocate having a part of our next levy dedicated to maintaining a 10% cash reserve.
Here comes the hard part.
Readers of this blog also know that we spend nearly all of our budget on the compensation and benefits of our great team of teachers, staff, and administrators. The current
Five Year Forecast shows the FY2011 portion to be 88%, growing to 89% by FY2015. There are no doubt a number of nice-to-have budget items that we can reduce or eliminate, still a little efficiency to be gained, and there’s a lot of that which has taken place over the past several years.
But it’s now time that we have to talk about compensation and benefits.
I am not at this time advocating pay cuts. But we may have to cross that bridge if the State of Ohio really sticks it to us as the State leaders try to figure out how to dig Ohio of this mess. In fact, I believe that any radical reduction in State funding has to come paired with the authority to bring the employee unions back to the table to renegotiate their collective bargaining agreements as needed to keep our district solvent.
Over the past several weeks, I have developed a number of
spending/levy scenarios that I could use to try to understand some of the many options the Board might consider (copies were sent to the other Board members, Superindent and Treasurer, as well as to the members of the Audit & Accountability Committee).
None of them are pretty. Scenario #1 shows that to fully fund the spending indicated in the Five Year Forecast with a levy in 2011 and then again in 2014 (3 year interval), the levy would need to be on the order of 11 mills. I’m quite sure that’s a non-starter, so something has to be adjusted.
Scenario #2 shows that if we drop the levy interval back to 2 years (2011, 2013, 2015), the size of the levy would still need to be on the order of 9 mills. I don’t think that would fly either.
In fact, Scenario #3 shows that if we passed a levy every year, it would take nearly 6 mills each time to cover the spending as has been forecasted.
Clearly we have to start looking at reducing the rate of spending growth, and that means the rate of compensation and benefits growth. Scenario #4 shows comp+benefits growth limited to 2% per year, adjusted by the forecasted growth in students. A 2% annual growth rate in comp+benefits is about what it takes to cover the current step increase schedule as long as base pay continues to be frozen. With a three year levy interval, the size would need to be 8 mills in 2011 and 2014.
That’s still a pretty big gulp. It’s maybe something the community would have bought into had we spent the last few years better educating our community about school economics – something I’ve been harping about for a very long time. But I don’t think there’s much of a chance of passing an 8 mill levy given the general lack of understanding about these matters.
So Scenario #5 also looks at limiting comp+benefits growth to 2% per year, but assumes that a levy is passed every two years. In that case, each levy would have to be on the order of 6.5 mills. Scenario #6 looks at an annual levy schedule, and shows that it would have to be 4 mills each year.
Scenario #8 asks this question: If we wanted levies to be no more than 5 mills, and no more frequent than every three years, what is the rate of comp+benefits cost increases that can be supported? The answer is 0.6% - essentially frozen at today’s cost. No base pay increases and no step increases. We would also have to talk about how to apportion increases in health care costs.
I reject the assertion that the only choice available to us is to fully fund the Five Year Forecast as presented, or to suffer programming cuts. However, this is exactly the choice that has been presented to the community in the past.
There is another range of solutions that involve examining ways to preserve staffing levels and programs (which are nearly synonymous) yet lower costs. One of those is to look at the possibilities for lowering our per-headcount cost.
You might wonder how I can reconcile that with my statement above that says that I am not at this time advocating pay cuts. To understand my thinking, perhaps this chart will help:
click to enlarge
This is a histogram showing how many HEA members were in various base pay bands as of January 2010. You’ll notice that 55% of the HEA members are paid $70,000/yr or more, and 32% are paid $80,000 or more. Is it possible that we could, jointly with the HEA, create a buy-out program which could make sense for everyone, allowing highly paid teachers to be replaced with teachers at the beginning of their careers (and there are lots of them looking for jobs right now)? The State Teachers Retirement System doesn’t make this easy, but there are changes on the horizon for STRS that may open a short-lived window that could motivate teachers near retirement to be willing to accelerate their retirement given the right deal, which would also have to be one that makes sense for the school district. We have to run the numbers and find out.
The conversation this time around has to be more involved than “pass the levy or we’ll cut extracurriculars and busing.” The discussion at the next Board meeting will be a start.
I hope you will come and participate.
