State Funding Guarantee

This is amplification of a story the Columbus Dispatch published with Jim Siegal's byline in the Sunday, February 14, 2010 edition of the paper. The original article is here, and should be read prior to my comments below (if the other link doesn't work, here is a backup copy of the article).

The only comment I have is that the story (as published) doesn't explain why the guarantee amounts have increased so much for districts like Hilliard. Seeing Hilliard's numbers go from $3.6 million to $15.6 million makes it look like we're getting a boatload of new money, and that's not helpful to district leaders trying to help voters understand that State funding is going down, not up.
The truth is that the total amount of money we're getting from the State in FY10 is actually less than we received in FY09.
Every once in a great while, the State significantly changes the algorithm it uses to allocate State funds to the 600+ school districts across Ohio (they make little tweaks all the time in the biennial budget process). While some school districts might have a large windfall with such a change, other districts, particularly the so-called wealthy suburbs, often take a substantial hit. To fix that, a "transitional aid guarantee" is employed to make sure the funding to such a district doesn't go down in the changeover from the 'old' algorithm to the 'new' algorithm.
The prior funding system - which you can call the "SF-3" system - had such a guarantee, and in the last year the SF-3 algorithm was applied Hilliard did indeed receive the $3.6 million in transitional aid guarantee that was reported in the story. However, this was added to $33 million of Basic State Aid and other funding components to bring Hilliard's total Foundation Aid to $37.7 million. Other adjustments took it down to $34.5 million.
With the new system, the PASS form shows that the basic state aid and other funding components come to $21 million, well less than the SF-3 algorithm, which is why $15.4 million in transitional aid guaranteed was added - to bring the total back to the same ballpark as the SF-3 system. After 'other adjustments,' the actual state aid is now $34.1 million, or $400K less than under the old system.
By the way, the 'wealthy suburbs' are doing the yeoman's share of funding State Foundation Aid other school districts. The Dept of Ed publishes a spreadsheet called the CUPP Report which includes a statistic called "District total SF3 AID as a % of Income Tax Liability." What that means is that if a district gets back exactly as much State Foundation Aid as its residents pay in state income tax, then this statistic would be 100%. When the percentage is less than 100%, the school district is a net payor – its residents pay more income tax than the school district gets back in school funding from the state. For the districts named in the Dispatch story, here are the values for this statistic:
Worthington: 17.0%
Reynoldsburg: 98.5%
Gahanna-Jefferson: 16.2%
Hilliard: 40.5%
Dublin: 9.5%
Olentangy: 3.4%
This means that in FY09, the people of the Hilliard school district paid $85 million in state income taxes, but we got back only $34.1 million in State Foundation Aid for our schools.
Whitehall and Hamilton Local schools were both over 200% by the way. They received more than twice as much money from the State as their residents paid in state income tax.
[note that this isn't a discussion about 'fairness' – only an explanation about how things work]
The Dispatch has been doing an important public service bringing these various aspects of public school economics to light. Unfortunately, most of the public remains apathetic to these matters. Public school leaders have a lot of work to do to break through this apathy, and I for one appreciate the help.

Affordability Index

I'm a habitual number cruncher. Give me a spreadsheet full of numbers, and I will calculate ratios and statistics for hours, just to see if anything interesting pops out.

So you can imagine the glee I felt a couple of years ago when I found out that the Ohio Department of Education annually publishes a spreadsheet of statistics on each of Ohio's 600+ school districts. It's been called the CUPP report, and you can find several years worth of them on the ODE website.

The Audit and Accountability Committee used data from CUPP spreadsheet when they created their December 2009 report, which I very much recommend that you read. The Committee did a very nice job of benchmarking our fiscal performance to the school districts they felt were the most like ours: Dublin, Gahanna, Pickerington, Westerville and Worthington. Their conclusion read as follows:

In conclusion, on a cost per ADM (student*) basis, Hilliard is about 6% higher than the state Peer Group but in the middle of the 6 local district comparison. Administrative costs are the lowest of the 6 local districts but Instructional costs are the 2^nd highest. Most concerning is the fact that Hilliard's growth in spending from 1995 to 2008 is the highest among the 6 local districts. The reason(s) for spending per ADM outrunning inflation by approximately double the Consumer Price Index (both Hilliard and the other 5 districts) is debatable and not within the scope of this report.

So is there a "right" number for any of these factors? How does one determine if the people of a school district are paying the "right price" to educate their kids? If there's one thing we can be sure about, it's that no two school districts are actually alike.

If we look at the funding side, we know all of Ohio's public schools are funded by three sources: 1) local commercial property taxes; 2) local residential income and property taxes; and, 3) State Foundation Aid. The basic notion of the state's funding system is that there is some floor level of funding, per student, which every school district should have to operate with. The first dollars – equivalent to 23 mills of local taxes – should come from the local sources, and the rest from the State. Then if the people of a local school district want to spend more than this floor amount, they are free to tax themselves all they want in order to fund this additional spending.

Statewide, the district operating at the lowest per-pupil cost is Allen East Local Schools (near Lima), which spends $6,920 per student. Allen East earns a respectable "Effective" rating on its state report card, with a Performance Index of 97.3. For purposes of this analysis, let's say that this $7,000/student per year spending seems to be enough to educate kids to the "thorough and efficient" standard specified in the Ohio Constitution.

So why is it that statewide, the average per student spending is $9,300 if Allen East seems to be able to get the job done for 25% less? Why do we spend $10,968/student here in Hilliard?

One must examine many elements to answer that question. School districts have varying demographic profiles which contribute to the degree of difficulty involved in educating kids to a common standard of performance. Cleveland Heights City Schools has the sixth-highest per student spending in the State, at $16,195, yet achieves only a "Continuous Improvement" with a Performance Index of 86 on its Report Card. I suspect the fact that 57% of their kids come from economically disadvantaged homes may put extraordinary challenges into their education process. Consequently, their student-teacher ratio is 14.75 : 1 while Hilliard's is 18.75 : 1. More teachers means more money.

There are also other factors that enter into the cost per student, such as the local cost of living, which tends to be higher in metro areas than in the rural sections of the state. Consequently teachers, administrators and staff in metro areas expect to be paid more.

But isn't it also true that the cost per student in some districts is in part driven by a mostly emotional desire for "quality," which is a composite of many subjective elements? For example, we want our schools to look nice, and to be nicely equipped. We want the kids to have textbooks which are current and not beat up, and we would like the grounds to be well-maintained.

Beyond academics, we want our schools to have excellent athletic and performing arts facilities, with coaches and directors of a caliber that our teams and organizations are trained and led to compete well at the state, national, and even international level.

None of that stuff is free, but hey, if we can afford it, why not?

The challenge of course is that not all of us can afford it. As our school district's operating costs continue to rise, driven as should be expected by personnel costs, more and more of our community members will be challenged to pay the taxes necessary to underwrite the spending.

So I have been looking at the statistics in the CUPP Report to see if there is some ratio that would indicate relative affordability for a school district. It might also be called a "pain index."

My first thought was to relate the per-pupil cost for a district to the amount of money raised by one mill of property tax. The amount raised by one mill varies because the property values in each school district are different. For example, in the Columbus City School District, one mill raises $10.3 million. In the Bettsville Local School District (near Fremont), one mill raises $21,000. In Hilliard, one mill raises $2.4 million. But the number of pupils served varies similarly: 63,500 for Columbus, 15,000 for Hilliard, and 195 for Bettsville.

So if you divide amount raised per mill by the per-pupil cost for these districts, you get "pupils educated for one mill." In Columbus City Schools, you can educate 739 kids for one mill (highest number in the State), while in Bettsville the number is 2 (two). For Hilliard, it's 221 students per mill.

Interesting numbers, but they aren't very good indicators of affordability. Columbus has a high ratio not because they are particularly efficient, but because the city has a huge commercial tax base which contributes substantially to the funding for their schools. The reason Bettsville educates only 2 kids with 1 mill of revenue isn't because they spend so much per kid, but because their property values are so low. But they're low because it's all agricultural land, and agricultural land is valued artificially low by State law (this is part of what creates the problem of funding schools with property taxes, but that's another story).

You have to be careful drawing conclusions from ratios of ratios, but I think there is something to be learned by relating the cost-per-student in a school district to the average incomes of the residents. I've done this by dividing the cost per pupil by the average income. The idea is that the smaller this percentage, the less pain that is placed on the residents to fund the schools.

The lowest of these ratios is for Indian Hills Schools (near Cincinnati), where the average income is $363,000 (wow!), and the cost to educate a student is $14,000, meaning the cost to educate one kid requires only 3.9% of the average salary.

On the other end of the spectrum is East Cleveland schools, where the average income is $28,000 and the cost/pupil is $13,800, meaning it takes 49% of the average salary to educate a kid. This is the reason East Cleveland schools gets 62% of its funding from the State, and its State funding is 662% of the amount its residents pay out in state income taxes.

As is the case with most of these kinds of factors one can calculate, Hilliard sits right in the middle of Franklin County School Districts. At our average income of $64,006, it takes 17% to educate 1 kid, 8^th of the 16 districts in the county. New Albany, with an average income of $186,000, can educate a kid for 5.9% of average income, while for Columbus residents it requires 37% of average income.

Our immediate challenge, as noted by the Audit & Accountability Committee, is that our cost-to-educate is going up faster than the CPI and incomes, meaning this 'pain factor' is only going to get worse for us if the trend continues. Some in our community can absorb this accelerating cost without much impact. Others however, may well be driven from our community a rising property tax burden.

How much our costs go up will be one of the most critical discussions in our community over the next few months. I encourage you to read, learn, and analyze the information that will be made available so that you can participate in the process.

Ignorance, apathy and silence could be very expensive.

* ADM or Average Daily Membership closely approximates the number of actual students in a school district, but includes certain adjustments meant to account for the additional resources required to educate kids with varying degrees of disabilities.

Race to the Top

Race to the Top (RttT) is a massive federal program developed by the US Department of Education to administer the billions of dollars which will be granted to America's school districts. But there are strings attached. RttT is not just about giving out money – the Federal government is using RttT to motivate states and local school districts to make significant changes to some of their fundamental modes of operation, and not everyone likes it.

The goals of RttT are summarized on the USDOE website as follows:

Through Race to the Top, we are asking States to advance reforms around four specific areas:

• Adopting standards and assessments that prepare students to succeed in college and the workplace and to compete in the global economy;
  
• Building data systems that measure student growth and success, and inform teachers and principals about how they can improve instruction;
  
• Recruiting, developing, rewarding, and retaining effective teachers and principals, especially where they are needed most; and
  
• Turning around our lowest-achieving schools.
  

Awards in Race to the Top will go to States that are leading the way with ambitious yet achievable plans for implementing coherent, compelling, and comprehensive education reform. Race to the Top winners will help trail-blaze effective reforms and provide examples for States and local school districts throughout the country to follow as they too are hard at work on reforms that can transform our schools for decades to come.

For school districts which choose to participate in the RttT program, a Memorandum of Understanding (MOU) had to be submitted to the district's state Department of Education by January 11, 2010. The MOU must be signed by the Superintendent, the school board President, and the President of the teachers' union. According to the list posted on the ODOE website, our school district has indeed filed an MOU.

Interestingly, not all of Ohio's school districts filed an MOU prior to the 2010 deadline. Colleen Grady of the State of Ohio Education blog has just posted a story reporting that the Youngstown City School District has decided to not participate in the RttT process because their teachers' union had a number of objections to the 'strings' attached to the program. The Fordham Institution's Flypaper blog had a similar announcement in regard to Dayton Public Schools.

I'm not a big fan of letting the Federal government bully us around with our own tax money, and so I could find it easy to object to this RttT process on those philosophical grounds alone (Texans apparently feel this way as well). But then you look at our Five Year Forecast, and that whopping $65 million cash shortfall we are projected to accumulate by 2014, and you have say that we have to look seriously at any opportunity to put extra money in the coffers.

I'm glad the Hilliard Education Association (HEA), the union representing our teachers and other certified members of the team, agreed to co-sign the MOU and not just reject it out of hand as did the teachers in Youngstown and Dayton. There will be a ton of dialog, compromise, innovation, and no doubt frustration required to fulfill the requirements of this process, but at least we get to have the conversations – and a shot at the money.

Time Bomb: Ohio’s Newspapers Weigh In

This article continues the discussion about the perilous condition in which the State Teachers Retirement System (STRS) finds itself. Earlier articles can be found at Time Bomb, Still ticking, and Beginning to Understand.

The January 3, 2010 edition of The Columbus Dispatch ran a batch of stories which the newspaper produced in cooperation with a group of the eight largest newspapers in Ohio. This is an astonishing feat of organization and cooperation, and should give readers a powerful indication of the seriousness of this matter.

My hat is off to the publishers of these newspapers for undertaking this important piece of work.

Here's the situation in a nutshell: The pension systems created to provide retirement income for most of Ohio's public employees are in big trouble. Without significant adjustments, some if not all of these pension funds may well go bust, potentially making it impossible to pay the benefits promised to the large number of people already retired, and those counting on that income when their turn comes to retire. These public employees do not participate in Social Security – this is all they have.

But while it would indeed be a tragedy if this happens, the public employees themselves are among those responsible for this mess. Let me explain why I say this, focusing on the larger of the two retirement funds in which our school district is involved - STRS.

First, let's examine how a pension system works, whether in the public or private sector. While there a lots of moving parts in a pension system, the basic concept is simple:

1. Money is paid into a fund. Some of the money typically comes from the employees who will be the eventual beneficiaries of the retirement program, and some is usually contributed by the employer. As more money is contributed, the balance of the fund gets larger.
2. To further increase the size of the fund, the money contributed is invested. It may be invested in CDs, US Treasury Bills, or in a Dairy Queen franchise at the North Pole.
   
   Each pension system makes its own policies and decisions as to how much risk to take with their money. In the case of STRS, these decisions are made by the Retirement Board, which has eleven members – seven of whom are elected from the ranks of active and retired teachers. This is why I say the STRS members are complicit in this situation – their representatives comprise the majority of the Retirement Board, which determines investment policy.
3. Money is paid out of the fund to retirees. The fund will have its own rules as to minimum age, service requirements, and benefits to be paid. As money is paid out, the balance of the fund gets smaller.

By law, STRS offers its members three choices in retirement plans: a) defined benefit; b) defined contribution; and, c) a hybrid of the two; but nearly all members choose the defined benefit option. This means that regardless of the amount of money that is paid into the system by its members and their employers, or how much return in generated on the fund balance, the benefits to be paid to a retiree are set when the retiree enters the system, and changing the benefit structure afterward is very difficult. In private industry, it is the employer who takes the risk in regard to funding shortfalls in a defined benefit system. In the public sector, it is the taxpayer. But in neither case is it the employee – generally speaking.

Conversely, with a defined contribution plan, the benefit paid is based on the amount the worker and employer paid into the fund, and how well the investments made by the fund managers performed. But however it turns out, the retirees are paid according to the actual earnings of the fund – whatever that turns out to be. If there have been big investment returns, the retirees get big pension payouts. With meager investment returns, the pension payouts are meager as well. Consequently, a defined contribution plan can never be underfunded.

So when an employee chooses a defined benefit plan, they're taking a bet that their retirement benefits will be better than if they were in a defined contribution system, or had just invested the money themselves. An employee who selects a defined benefit plan is essentially betting that future economic conditions will not be very rosy, and therefore they would prefer the sure thing of a defined benefit plan over having a shot at getting a really big payoff in a defined contribution system.

Why? Because they don't see the potential upside of a defined contribution plan as being a good bet against the chance of working thirty years and having nothing to retire on. In other words, choosing a defined benefit plan is a risk-adverse strategy for the plan member.

However, a defined benefit plan is far from risk free for the employer – in this case the taxpayers of the school district. The employer guarantees the output regardless of the inputs, therefore it's the employer who takes the big risk. As taxpayers, we don't get a choice whether or not to assume this risk for the STRS defined benefit plan – it is written into the Ohio Revised Code that public school teachers will be offered a defined benefit retirement plan, and nearly all take advantage of it.

There is a branch of management called actuarial science which specializes in performing the financial and statistical analysis necessary to project how such bets are likely to work out. In the life insurance industry, it is the job of the actuaries to figure out how much has to be paid in premiums for a set of policies, how much the insurance company can expect to earn by investing that money, and how much – and when – money will be need to be paid out in benefits. Their analysis is crucial in setting premium rates and determining policy features, such as the death benefit and cash value. When they get it wrong, an insurance company loses money.

The STRS has actuarial advisors as well. The actuaries estimate how much money will be paid into STRS over time, what the investment return will be, and how much will be expected to be paid out over time – all for the purpose of ascertaining the fiscal viability of the plan. The elements of this estimate include projections of the life expectancy of retirees (e.g. the "actuarial tables"), as well as a set of key assumptions, such as the specific rules of the retirement plan. The rules include, for example, what percentage of salary is contributed to the fund by the employee and employer, at what age and with how much service an employee can retire, and the formula that determines what the retiree will receive in compensation.

But other assumptions are just guesses. Hopefully well thought out guesses, but still just guesses. Key among those is the presumed investment rate of return on the retirement fund. Right now, the STRS Board has told the actuaries to assume that the investment return will be 8% per year – a formidable goal in today's investment environment. If the STRS system is a time bomb waiting to go off, then this aggressive assumption of investment returns is the fuse.

One of the basic rules of economics is that risk and reward are (supposed to be) directly connected: the only reason you would take greater risk on an investment would be to have a chance of getting a greater reward. After all, if you could get a 5% return on your money by putting it in an FDIC-insured savings account, why would you ever buy a General Motors corporate bond that also pays 5%? While there is virtually zero risk of losing the money you put in the savings account, there is certainly risk that GM could go bankrupt and be unable to return the money you have invested in their bond. In fact, GM did exactly that last year.

Generally speaking, if you want to take the minimum risk with your money, you put it into Treasury Bills, but you also accept getting paid very low interest rates. Next you might consider Certificates of Deposit at an FDIC-insured bank, which is substantially the same as being insured by the full faith of the US Government. An FDIC-insured bank will pay a slightly higher interest rate than the US Treasury, but generally not much.
If you want to make a significantly higher return than T-Bills or CDs, you have to take more risk. For most of the last twenty years, the choice for those seeking higher returns has been to risk it in the stock market, mostly via professionally managed mutual funds, and mostly with retirement money placed in IRA and 401(k) accounts.

But it isn't just individual investors who were pouring money into the stock market – the pension funds got into the stock market in a big way as well. You could even observe that the pension funds became the most important buyers and sellers of stocks, precisely because they had so much money to throw around, all controlled by a small number of investment managers. I bet it's a lot of fun to play around with tens of billions of dollars of someone else's money, as is the situation for the STRS investment managers.

Returns in the stock market remained so high for so long that a bizarre thing happened – people began to perceive stock investing as risk free. It seemed like everyone was making money in the stock market, and there for a while, pretty much everyone was. So it looked pretty stupid for pension funds to limit their investments to US Treasury and high quality corporate bonds when there was lots of money be made in the stock market, at little perceived risk.

Eventually – despite showing their risk-adverse nature through their overwhelming choice of the defined-benefit retirement plan – the leadership of STRS gave into this temptation, and invested substantial portions of the STRS fund in stocks and the other darling of the last decade – commercial real estate. In its 2008 Investment Plan, the STRS leadership said it would allocate 65% of its money to stocks (40% domestic and 25% foreign), 19% to government and commercial bonds, 8% to real estate, and 3% to 'alternative investments.' In this plan, the STRS leadership said they expected to achieve a 7.42% return on their investment, growing the fund from $75 billion to $78.5 billion.

The numbers geeks out there will observe that a 7.42% return on $75 billion should cause the fund to grow to $80.6 billion. But remember that benefits are also being paid out to retirees. New money comes in as a result of working members and their employers making contributions. The pot is sweetened by the returns on the money as it is invested. Then money is taken out of the fund to pay benefits to retirees. The trick is making sure that the fund always has enough money to pay its future commitments.

Fiscal year 2008 didn't go exactly as planned for the STRS. Instead of growing the fund balance to $78.5 billion, it actually fell to $70.8 billion. Of that $7.7 billion loss, $4.2 billion were investment losses. Where did the rest of the money go?

There is a very significant statement at the bottom of page 10 of this report: "Pension benefit payments and health care costs exceed member and employer contributions. Investment income generally compensates for the difference between benefit payments and contributions." In other words, the level of benefits paid out by the system cannot be sustained by the contributions made by the working members and their respective school districts – the viability of the system depends on making an aggressive return on their investment portfolio. It didn't work out that way in FY08, when the investment losses and net outflow of benefits combined to amplify the loss.


FY09 appears to have been worse. While I have no official source to confirm these numbers, according to numbers published by retired STRS member and activist Kathie Bracy, at its lowest point in March 2009, the value of the retirement fund had dropped to $46.5 billion. Her numbers show the FY09 year end balance to have bounced back to $54.5 billion, and continuing to grow to $59 billion by the December 2009.

The reason for the dramatic drop in value and (partial) recovery is simple – nearly two-thirds of the pension fund is invested in the stock market. When the stock market went down, the pension fund went down with it. As the stock market has regained some of its losses, the fund has risen with it. 'The rising tide floats all boats,' as they say. I suspect that their real estate portfolio is still in the dump however.

So has the STRS Board and management learned a lesson about risk and return?

It doesn't seem so. Their FY10 Investment Plan indicates that they intend to seek total return of 7.7%, and will do so by achieving in excess of 8.5% return on their stocks and 4.8% on their government and corporate bonds. They will keep 65% of the fund in stocks and 18% in bonds – pretty much the same allocations as the past several years. In other words, they're doing little to change their risk profile. If the stock market takes another tumble, they'll get whacked again.

I can understand why they are doing this. There is another statement in the FY10 plan which must terrify the STRS Retirement Board: "With a projected total fund return of about -25% for fiscal 2009, the amortization period for the unfunded liability is likely to increase to an undetermined amount for July 1, 2009, from 41.2 years on July 1, 2008."

That's gobblety-gook to most of us, but what it means is that based on the key elements and assumptions, the fund is in serious trouble – so serious that the Ohio Revised Code calls for special action, namely that the pension Board must file a report within 90 days indicating what they're going to do about it. They need to figure out how to put more money in, take less money out, and/or earn more on their investments. This aggressive investment strategy is meant to address the least painful of those three choices. It's a high-risk bet.

Or is it?

STRS Executive Director Michael Nehf recently issued a public statement on the issue (which can be read here), knowing that these stories would soon appear in the newspapers across Ohio. He mentions a key distinction between STRS and private pension plans – STRS is created and governed by Ohio law, which describes most of the rules under which its members and their employers must operate in regard to STRS.

Those laws don't come out of thin air. They are the result of the political process, including heavy lobbying by the STRS and the Ohio Education Association, the union which represents nearly all Ohio teachers. That political process has been engaged, with the first draft of a new piece of legislation having already been drafted, per Mr. Nehf's announcement.

A cornerstone of this legislation is expected to be an 18% increase in the amount of the employer (taxpayer) contribution, from 14% of each teacher's salary to 16.5%. The teacher's contribution will also increase from 10% to 12.5% - with both increases phased over several years. There will almost certainly also be reductions in retirement benefits as well, although it appears that those changes will be applied to teachers yet to retire, protecting those teachers already retired.

By the way, under the current retirement plan, a Hilliard teacher who retires in 2010 with 30 years of service and a Master's degree will receive a lifetime annual pension of $54,976. A teacher with 35 years of service and a Masters degree plus 15 additional hours of study would receive a lifetime pension of $76,787.
The public will have no vote in this matter of increased employer contributions. The politicians in the Statehouse will work out their deals, a new law will be passed, and one day the people of Ohio will have the cost of running their school districts jacked up by another painful increment. As an unorganized set of individuals, we will again lose out to the highly organized and well funded special interest groups, led by the STRS and the OEA in this case.

I am reacting strongly to this not because I think the teachers don't deserve a decent pension. The pension was part of the deal when they hired on, and the deal they have continued to serve under, and we need to honor that commitment.

But we have already funded these pension liabilities once.It was the decision of the STRS Board to invest most of their money in risky investments which have tanked – not mine. They took our money in the form of taxes and were expected to be good stewards of our money as well as the teachers', investing it in a way that protected and grew the fund so that reasonable benefits could be paid to those teachers later when they retired.


Instead they got greedy – both the STRS leadership and the teachers who are its members – and put the money into risky investments such as the stock market. There has never been a time when the stock market was risk free, although some have always believed they could mitigate the risk. Those techniques don't usually work in a general crash. A rising tide may lift all boats, but in the same way a falling tide can leave all boats high and dry.

We understand completely what happened – many of us made the same choices with our own retirement savings. The difference is that when we, as employees in the private sector, take a hit in our IRA or 401(k), there is no one we can force to kick in more money to recoup our losses. In fact, many companies which had been contributing some level of matching funds to their workers' 401(k) accounts have significantly cut their matching programs, if not discontinued them altogether. Millions of American workers who thought they were headed for a comfortable retirement in their young 60s are now faced with working indefinitely to preserve a reasonable standard of living. That's our version of an unfunded liability, and the Ohio Revised Code doesn't contain one word of help.

But the STRS, on the behalf of the active and retired teachers, can influence our lawmakers into transferring the cost of their risk-taking to the taxpayers. And that's exactly what they intend to do.

If this situation with the STRS is all okay with you, then relax – you can just sit back and let things happen.

But if you see things the way I do, you need to take action. Write Governor Strickland, State Senator Jim Hughes and State Representative Cheryl Grossman and tell them that if the people of Ohio are expected to bail these pension funds out when the rest of us suffer, some significant things have to change. There has to be limits on the amount of risk these guys are allowed to take going forward, and adjustments made to the retirement benefits commensurate with a more conservative and sustainable rate of return on the investments.

Here are the articles referenced, as they appeared in the January 3, 2010 edition of the Columbus Dispatch:

• About
  
• Good as Gold
  
• Cities Quaking
  
• Highlights
  
• Projections (graphic)
• Fixing will be expensive
  
• How the Estimates were done
  
• Public pension plans are superior
  
• Investment performance (graphic)
• Crackup is near
  
• Health coverage burden
  

Additionally, this editorial appeared in the January 7, 2010 edition of the Dispatch. I couldn't agree more…

Time Is Of The Essence

I wrote a piece in October called "Rabbits & Hats" which addressed the fact that the leadership of our District had decided to use what is likely to be one-time Federal stimulus money to fund current operations, allowing Superintendent Dale McVey to make the declaration during his 2009 State of the Schools speech that there would be "no levy in 2010." While the Superintendent attributed this levy interval to 'stretching the dollars' from the last levy, the numbers in the latest Five Year Forecast show that there has been no overall decrease in spending. Indeed, there has not even been a decrease in the rate of the increase in spending from the historical trend, as can be clearly seen in this chart, drawn from the official Five Year Forecasts.

Don't get me wrong – I'm all in favor of maximizing the interval between operating levies if the lengthening of the interval is a result of significant and permanent spending reductions. But that is not the case here. Had we not received this Federal stimulus money, and were not planning to spend our cash reserves down to threadbare levels (in conflict with the Board's policy to maintain a 10% cash reserve), there would absolutely have to be a levy on the ballot on 2010 in order for all of our programming and services to be preserved, precisely because there have been no significant and permanent spending reductions made.

It is certainly true that some cost savings have been instituted – the Superintendent outlined a number of them in his speech, reporting that reductions totaling $7.5 million had been implemented in the past two years, although it is not clear whether this $7.5 million would be eliminated over one year, three years or a hundred years. However, we should note that the total operational spending by the district was $146 million in FY08, $150 million in FY09, and is projected to end FY10 at $158 million. In other words, annual operational spending has increased by $11 million in just three years. Even though our student enrollment has been essentially flat, from 15,150 in FY08 to our current 15,523, our annual operating expenses have risen by 7.7%.

There is no mystery as to what causes the increase in spending: it's the cost of compensation and benefits for the teachers, staff and administrators, which I most recently addressed in an article titled "Teacher Raises = Levy Size." Of the $11 million in expense growth over the last three years, over $8 million, or 73%, is attributable to compensation and benefits.

We may be able to make it to 2011 without putting a levy on the ballot if there are no hiccups in revenue and no surprises on the expense side. But by spending down our cash reserves, we'll have little capacity to absorb surprises without having to take drastic action.

Notice that there haven't been any official hints about how large that levy might need to be in 2011. It's not that hard to come up with a ballpark number. A key factor is the amount of revenue that is generated each year by a one mill levy. This factor is different for every school district, but is readily available from the Ohio Department of Education's website, via the "CUPP Report." In our case, 1 mill = $2.4 million/yr in revenue. Knowing that, all you have to do is look at the Five Year Forecast and see how many mills it takes to fill the gap between projected revenue and projected spending, while never letting the cash balance get below zero.

With no new levy, we'll run out of cash in FY12, so we'll need to pass a levy no later than Nov 2011 (which is in FY12), and it will require at least 4 mills to get us through FY12 – just that one year. If we go with only 4 mills in 2011, then to fund FY13 we'll need another 12 mill levy in Nov 2012, which would keep us afloat through FY14 with $5 million in cash in the bank at the end of that year. Or we could go for 10 mills in 2011, but would still need another 10 mills in 2013. Or we could go for 12 mills in 2011, and not likely need to put another levy on the ballot until 2014.

I know you must think I'm nuts saying that our tax rates would have to increase by 16 mills or more in the span of 3 years. This would add $491/yr per $100,000 of home valuation, meaning many HCSD homeowners would see their annual tax bill go up on the order of $1,000 – about 15%. But that's how the numbers come out. We can play with the size and timing of the levies (the sooner we add a levy, the smaller the millage can be), but the fundamental truth is the same – our spending is rising at a rate which will continue to require levies of increasing frequency and size.

Note that I'm not the only person saying this – in its December 14 report to the School Board, the Audit & Accountability Committee also said that having the Compound Annual Growth Rate (CAGR) of expenses be greater than the CAGR of revenue is a fundamental problem – worsened by the fact that the CAGR of expenses is double the increase in the Consumer Price Index over the same period. In their conclusion, the Audit & Accountability Committee said: "Most concerning is the fact that Hilliard's growth in spending [per student] from 1995 to 2008 is the highest of the six local districts" used for benchmarking, which were Dublin, Gahanna, Pickerington, Westerville, and Worthington.

Getting this Federal stimulus money doesn't change the underlying reality – it just lulls us into believing that the revenue vs. spending problem can be dealt with later – that we have the "luxury of time," as the Superintendent stated at the October 12, 2009 Board meeting, when the latest Five Year Forecast was presented by Treasurer Brian Wilson. I think this is a perilous frame of mind, unless the community is well-informed about the big picture. Here is an article just published by the Associated Press on this very point.

One part of the school funding story that almost everyone misses is that by the time a levy is next put on the ballot, the real fight will have been long over. When 88% of the total operational spending of the District is for compensation and benefits, the single most important recurring event in the life of our community is the renegotiation of the labor agreements with the teachers' union – the Hilliard Education Association (HEA) – and the union representing the bulk of the staff – OAPSE Local #310. Both of these agreements will be renegotiated in 2010, and will determine the labor rates in our District for a number of years following.

And so when we next see a levy on the ballot, the only thing we as a community will be deciding is how many people are employed by the district, and therefore what programs and services are offered. If the labor rates negotiated in the next contract end up being about the same as the assumptions used in the preparation of the Five Year Forecast, then we will be able to keep all the programs and services we have now – provided we are also willing to pass the 16 mills worth of levies described above. We can't have one without the other.

I personally believe there is just about a zero chance of the people of our community supporting a 15% increase in our property taxes in three years, much less a perpetual rate of increase of this magnitude, and therefore a slim chance that the School Board would even consider putting levies of this size on the ballot in the first place.

So what is to be done?

The answer is painfully clear – the only way to preserve all of our programming and services is for the employees of our district to accept a substantially reduced rate of growth in the cost of compensation and benefits. I am not now, nor have I ever, advocated pay cuts. Last year I asked the two unions to forego one year of base pay increases – a request which was met with complete silence by all members of school leadership – School Board, Administration and the union leaders.

There are only so many knobs we can turn: e.g. base pay increases, step increases, and contribution to health coverage costs – and all of these things need to be on the table and negotiated in concert so that the pace of property tax increases can stay within a range that has a chance of being supported by the people of our community.

There is one more knob we can turn of course – cutting the breadth of programs and services available to our kids. But note that this is dependent on the cost of labor as well. In almost all cases, program costs are cut by laying off the personnel associated with that program. The way this really works is that the youngest teachers in the district are laid off first so that more senior teachers in any discontinued programs can take the younger teachers' positions – a practice called "bumping." A highly effective young teacher could easily get bumped by a more senior teacher who has "retired on the job," as they say. This doesn't make sense to most of us, but that's what the labor agreement specifies, at the demand of the HEA and with the approval of the School Board. As long as the younger teachers continue to accept this provision in their union contract, that's the way it will be going forward as well.

So the point is simple – when you have an organization in which the operating expenses are primarily labor costs – 88% and growing our case – then negotiating the cost of labor is one of the key responsibilities of the governing body of the organization. Corporate executive pay has become insane not simply because those CEOs demanded the big bucks, but also because their Boards of Directors acquiesced to the demands of those CEOs. Those corporate Boards came to view their responsibility as being to keep the CEO happy, rather than to represent the interests of the shareholders. I've seen this happen first hand as a member of corporate Boards of Directors.

Our School Board has the same kind of responsibility, to first represent the interests of the people of our community, not be the friends of the administration or the union leadership. The next major action the Board has before it is to negotiate these labor agreements, and we need your input now, as well as your support when the negotiations get tough – which they almost surely will this time around.

Tell us what rate of property tax increases you would be willing to support in order to grant raises and increase benefits to our corps of teachers, staff and administrators? Will you vote to increase our taxes by 5 mills every three years? How about 12 mills every 5 years? What would be acceptable? Your answers will tell us what can be tolerated in terms of raises and benefits changes in the new contracts. What goal should we have for the average annual raise for an HCSD employee? What fraction of the health coverage costs should be contributed by the employees?

By the way, one of the things we learned via the most recent community survey is that 71% of the 500 people randomly interviewed were very wrong in their beliefs about what our teachers are paid. Those interviewed gave answers which averaged $47,770, while the district website reports that the average salary for a teacher is actually $68,058. In other words, the people of the community underestimate what teachers are paid by more than $20,000 (see Survey Question 19, page 9). We're not going to get valid guidance from the community until key numbers – such as teacher compensation – are more universally known.

If you want the Board to play hard ball and demand no raises for the employees in the next contracts – then you had better be willing to tolerate a strike by both the teachers and staff, as it would surely come to that.

Or if you want us to continue to be generous with raises, but won't support the levy necessary to underwrite such raises, then be prepared for significant programming cuts – on the order of what we saw happen in South-Western City Schools.

This stuff is all connected – you can't take a position on one thing without accepting the consequences on the others.

The time to make you wishes known to the Board is not when the next levy appears on the ballot in 2011.

It is now. Right now. Before the labor negotiations begin.

Union Contracts: Where Do We Go?

As our School Board prepares to negotiate a new contract with the teachers' union – the Hilliard Education Association – we need to think about whether it is time for some fundamental changes to take place. I came across this posting on the blog of the Fordham Institute which speaks to that question.

Your thoughts?

Teacher Raises = Levy Size

As Justin, Don and I pointed out during our campaign, 2010 is the year in which the School Board will engage in negotiations with the teachers' union – the Hilliard Education Association (HEA) – as well as with Local #310 of the Ohio Association of Public School Employees (OAPSE), representing the staff of the District. In my opinion, this is the single most significant act undertaken by a school board, and there is only one chance every few years to get it right.

Many of us believe that these negotiations happen in a room with teachers sitting on one side of the table and school board members on the other. Indeed, Article 2, Paragraph B.1 on the very first page of the current agreement between the HEA and the School Board specifies that each side may come to the negotiating sessions with a team of no more than five people – exactly the number of School Board members.

In reality, some of those spots on each side of the table are taken up by others, including professional negotiators. That means that not all five members of the School Board actively participate in the negotiations. I don't personally have a problem with this. Even though this will be the first time I have had any connection with collective bargaining and union employees, I understand enough about negotiating in general to appreciate that having an experienced professional negotiator representing the interests of the School Board is a good thing.

This group of ten people – five on each side – must go into the negotiations with a clear understanding as to the goals of their respective constituents. The negotiators also need to understand how far the constituents might be willing to push a point of contention.

You may recall that during the 2007 negotiation, the last point of contention was the employee contribution to the cost of health insurance premiums. This issue hung up negotiations for months, leading the teachers' union to call for a 'work to the contract' action, and even to authorize a strike. The contract was settled before that happened.

The teachers' union holds a great deal of power in these negotiations, and they know it. Listen to what the chief counsel for the National Education Association (of which HEA is an affiliate) has to say about the power of the teachers' union:



What is the source of that power? The aforementioned authority to strike is one of the keys of course. Not every state grants public school teachers this right, but Ohio does. This power to strike gives the teachers' union a nuclear weapon in a conflict with the School Board, who has no corresponding power. And of course standing in the middle of such a conflict are the innocent victims – the kids who attend our schools.

From a practical standpoint, all the School Board can do is pick at little things at the margin, like the health insurance contributions, while the teachers' union can blow up the whole District with a strike vote.

So if they have so much power, why does the teachers' union ever concede anything to the School Board – like this health insurance thing?

I think it must be because the teachers know a sustained strike is not in their best interest either. For one thing, they don't get paid anything by the School District while they are on strike (ORC 4117.15C). They may receive some strike benefits from their union, but it is unlikely to be the full amount of their normal pay, and their strike fund certainly would have a limited life before being exhausted.

I also believe that the teachers know that a strike would immediately and drastically change their relationship with the people of the community, creating wounds that would take years to heal. Kids would be harmed, from the little special needs pre-school children who would have an interruption in their programming to the high school kids who are getting their academic resumes fleshed out in preparation for college applications. School Boards and teachers unions can think in a timeframe that spans many years, but as a parent, you know your kid is on a once-in-a-lifetime K-12 journey that you definitely don't want messed with. Parents would be unlikely to forget the harm done to their kids by striking teachers. Or by a School Board who lets it get that far out of hand.

And so we end up with a kind of cold war that neither side wants to escalate to a full-blown strike.

Except that's not completely true. There is some number of people in our community who are so tired of paying the ever increasing taxes necessary to fund each successive teachers' union contract that they would support letting the teachers strike if that's what it takes to 'break the power of the union.' I heard from a few such folks during the campaign, although clearly a minority.

So what is the answer? As a community, we need to address this straightforward question: How much are we willing to tax ourselves to fund future pay raises for our school employees?

We have no one to turn to for help with this question – we'll be lucky of the State of Ohio doesn't cut our funding any further than they have already. Every additional dollar our teachers, staff and administrators get paid is going to come out of our own pockets. And not just the pockets of the two-income power couples who are doing fine in this economy – but also the pockets of the households where a job has been lost, bills are piling up, and retirement accounts are being drained.

Part of the problem in developing an answer to this question is that many people in our community don't actually know what teachers are paid. In a community survey taken in September, 30% of the people said that they feel our teachers are underpaid, but 80% of those same people also think the average salary of a Hilliard teacher is on the order of $43,000, when the real average teacher salary is more than $68,000.

Similarly, nearly three-quarters of the people who think that teacher pay is "about right" also believe that the average teacher pay is about $49,000. Only 15% of the people surveyed know (or guessed) that the average teacher salary is actually $68,000/yr.

In other words, about 85% of the public thinks teachers are underpaid or paid about right, but the public's perception of what teachers are paid is around $19,000 lower than the actual average. I wonder what kind of response there might have been had the survey included the question: "If you knew that the average salary for our teachers is $68,000/yr, would you say they are underpaid, overpaid, or paid about right?"

The story is quite different when the question is about the administrators. Only 4% of the community members believe administrators are paid too little, while 42% say they are paid too high. This is a common refrain in our community: "There are way too many administrators and they get paid too much!" It may not help that the public's perception of the average administrator salary is $12,000 less than the actual average of around $87,000.

So that's one problem we need to address – the lack of knowledge the people of our community have about these basic economic facts – the problem I've been trying to get addressed for nearly a decade.

But let's assume that everyone in the community has accurate knowledge about our teacher, staff and administrator pay scales. We still have that same critical question to answer:

How much are we willing to pay in additional property taxes to fund raises for the teachers, staff and administrators?

In his October 2009 Five Year Forecast, Treasurer Brian Wilson built an estimate of future costs based on these assumptions:

• In 2010, the average base pay increase would be 3%, plus average step increases of 2.3%. Additional staffing at Bradley would add about $1 million to spending, but nearly the same amount of staffing costs would be eliminated elsewhere. A one-time shot of Federal stimulus money would provide $650,000 in funding this year and next.
  
• In 2011, there would be no base pay increases, and the average step increase would be 2.3%.
  
• In 2012 and 2013, the average base pay increase would be 2%, and the average step increase would be 2.3% and 2.4%, respectively.
  

So here's the punch line: If these assumptions – and the others in Mr. Wilson's forecast – hold true, I calculate that we will need operating levies on the order of 10 mills in 2011, 2013, and 2015. These will increase our property taxes by $300 per $100,000 of market value in each of those years. In other words, in the span of six years, our property taxes would increase 40%.

And that's if the teachers' union agrees to raises similar to what Mr. Wilson has assumed. If the HEA demands more, and our school board agrees to pay them what they demand, our taxes will go up at an even greater rate.

A serious and respectful dialog needs to take place between the people of the Hilliard Schools community and the employees of our school district if we are to arrive at a balance of taxes and raises that are acceptable to all. It has to happen before the ten negotiators for the school board and the teachers' union sit down to begin formal negotiations. We can't wait until a new union contract gets signed, then try to get an operating levy passed to cover costs that have already been determined.

Instead, we should have a dialog so inclusive and thorough that we will (nearly) all agree when it is time for another operating levy, and how large it should be. The tangible indication of a successful dialog between the community and the teachers, and the school board and the union, is a levy that passes with a substantial majority of the vote – perhaps 75%?

Having a levy pass 51% to 49% is not success – it's barely passing. Is 'barely passing' the best we can do as a community? This seems way too risky to me – a few votes the other way and the levy fails and our school board has to cut programming and staff (because the cost of labor is already negotiated into the union contracts). We saw this unfold a couple of years ago when the 9.5 mill levy failed. I most definitely do not want to be put in that position during my four year term on the school board, and I'm sure the other school board members feel the same way.

Nor do we want to slide into the mode of so many other districts – putting levies on the ballot time after time until they pass. Just look to South-Western City Schools to see how ugly that can get.

So will you participate in the dialog and help find the solution? This is no time to be an arm-chair quarterback.