School Finance

In a provocative new school funding case, a federal court judge in Kansas City ruled against parents from the suburban Shawnee Mission school district who had wanted to increase property taxes above the state mandated limit. This is a local control debate that is sure to heat up as we stumble through the current financial crisis, with more and more proposals to increase the centralization of school governance and financing.? (See Lou Gerstner's 70 super districts proposal.)

According to an Associated Press report?on the Kansas?decision,? allowing individual jurisdictions to set their own tax ?could bring down the state's entire school financing system.? The parents in Shawnee Mission wanted just the right to ask local voters if they wanted to pay more. The court said No. (Read the 21-page?order here.)

As the pressure to hold down school costs mounts, property tax caps have become a favored option because they remain a favorite form of funding local government agencies, including school districts.??But the objections from wealthier communities, which can afford to pay more, are also mounting. ?Twelve towns in New Jersey have announced plans to have votes on exceeding the Garden State's new property tax cap, a local opt-out option that the new cap law allows.?

Though there is more to learn about this case and its legal implications,??if the press reports are accurate, the Kansas ruling appears to mean that there can be no opting out of the cap, even if local voters...

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This morning, economist and education policy expert Eric Hanushek testified in a joint meeting of the Ohio House and Senate education committees. His testimony ? which focused on the importance of ensuring that all education policies, including school finance policy, create incentives for achievement ? comes less than one week before Gov. Kasich's budget will be introduced.

The most debated education-related policy changes here in Ohio over the last month have been about Senate Bill 5, the Buckeye State's controversial attempt to weaken public sector collective bargaining in the state. (Terry testified in support of the aims of the teacher personnel provisions in the bill, not expressly on rolling back collective bargaining rights.)

Hanushek's presentation today helped reframe the debate in a necessary way: undoing LIFO, or changing teacher salary schedules, or including value-added data in teachers' and principals' evaluations is not about weakening unions but about incentivizing performance, driving student achievement, and ultimately improving the quality of Ohio's future labor force.

Given the highly politicized environment surrounding the capitol lately, it was good to hear an outside expert explain the research and remind lawmakers that the need to move toward achievement-focused policies predates the Midwest's turmoil over collective bargaining and will certainly go on long after. Hanushek explained:

As important as the fiscal issues that motivate current discussions are ? they are actually secondary in my mind to other policy concerns about our schools, although we shall see that there is also overlap.

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I know it's an article of faith in the school-reform community that we should "differentiate" among teachers and pay them "differentially" too. Highly effective teachers should get paid more than mediocre ones; individuals willing to work in poor schools should get bigger paychecks than those serving the well-to-do; those in high-demand fields (like math and science) should get more than their peers. I get all of that, and generally agree.

I also understand that the "single-salary schedule" is seen as the nemesis to smart teacher policy. And that's also true. But what makes the single schedule so pernicious isn't just its uniformity; it's its growth curve. Twenty-five years veterans are paid a lot more than five-year veterans even though, on average, they are equally effective. Changing that curve is at least as important as introducing more differentiation in pay.

This isn't my idea, or a new idea. Two years ago, Duke economist Jacob Vigdor published an excellent article in Education Next, "Scrap the Sacrosanct Salary Schedule." His analysis can be summed up in the graphic below.

In all professions, new hires get paid significantly less at the start. But in fields like medicine and law, pay rises rapidly--as soon as employees boost their effectiveness and productivity from on-the-job experience. In education, on the other hand, pay rises slowly, even though teachers' effectiveness plateaus after as little as two (and no more than five) years...

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Take a look at this graph from Robert Costrell and Mike Podgursky's new report on pensions for the TIAA-CREF Institute:

?Figure 1, Podgursky and Costrell report for TIAA-CREF Institute

The blue line is pension wealth accumulated by a teacher under Missouri's teacher pension plan who begins work at age 25. Note that the teacher earns essentially nothing until their 12th year of service and only five figures past their 20th year of service. Over the five years after that, the teacher's retirement wealth increases five-fold.

Lest you think this insanity is particular to Missouri, take a look at neighboring Illinois, where a new law revamping teacher pensions was just passed:

New teachers in Illinois can only hope to get their money back (at best) until they've been teaching for 26 years.

As I've mentioned before, this system can't help but attract highly risk-averse workers to the detriment of others. It creates a situation where the handful of teachers who never leave the profession or work outside the area covered by a given retirement system take money out of the pockets of everyone else. Unless you're one of those teachers, you'd be far better off with a higher base salary and a defined-contribution plan where your retirement wealth increases steadily as a function of your salary.

The Atlantic's Megan...

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Reading yesterday's New York Times editorial about the Empire State's fiscal crisis, I couldn't ?help but think of the last days of the USSR. I'm sure there were many Soviets scrambling to move the deck chairs around while that?ship was sinking.

The Times does not paint a very pretty picture of New York:

At a time when public school students are being forced into ever more crowded classrooms, and poor families will lose state medical benefits, New York State is paying 10 times more for state employees' pensions than it did just a decade ago. ?.

In all, the salaries and benefits of state employees add up to $18.5 billion, or a fifth of New York's operating budget. Unless those costs are reined in, New York will find itself unable to provide even essential services?.

And the Governor's?mandate relief commission, a politically astute way for Mr. Cuomo to deliver bad news, just reported that:

  • New York has the second highest combined state and local taxes in the nation;
  • New York has the highest local taxes in America as a percentage of personal income - 79 percent above the national average;
  • Median property taxes paid by New Yorkers are 96 percent above the national median;
  • Property tax levies in New York grew by 73 percent from 1998 to 2008 - more than twice the rate of inflation during that period.

Whether you call it Empire State exceptionalism or the canarie in the mineshaft, you have...

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Statewide survey of Ohio school district superintendents (and other education leaders) on the most critical issues facing K-12 education in the Buckeye State, including budgets, school effectiveness, and troublesome laws.

Ohio Education Gadfly Biweekly

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The Elusive Search for Stability and Objectivity

My friend E.J. McMahan at the Empire Center in Albany has a great headline for his blog post this morning: ?Volatility, thy name is `income tax.'? ??Though no one in government these days should need reminding of the problem in predicting public revenues, McMahon cites a new study from the Pew Center on the States and the Nelson A. Rockefeller Institute in Albany which calls incomes taxes ?the biggest culprit? in thwarting government's prognostic powers.?

Quoting from the report:

Traditionally, personal income taxes are a more volatile income stream than the sales tax. That is in large part because many states rely heavily on non-wage income such as dividends from investments, which can rise and fall with the performance of the stock market.

McMahon then notes:

As if on cue, on the same day that the Pew-Rockefeller report was released, [New York State] Assembly Speaker Sheldon Silver said his 99-member Democratic majority will push for a budget bill that makes New York more dependent on the income tax?.

Also, as if on cue, Silver scuttled a bill -- passed by the Republican-controlled Senate by a vote of 33 to 27 ? that would have allowed districts to lay off teachers based on factors like performance and disciplinary records, rather than seniority. ?Silver, according to the New York Times, said that he wanted to wait until the Education Department, in collaboration with the teachers union, ?creat[ed] an objective...

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Education Sector's Chad Aldeman has posted the results of a thought experiment he ran trying to prove that states' assumptions about 8 percent returns on their pension portfolios are not overly optimistic. He seems convinced that states are being conservative in assuming 8 percent returns; I'm not so sure. I don't think it's wise to brush aside the results of academics in finance and accounting in favor of a simplistic analysis that misses some key factors.

First, the mantra of investment professionals is: past performance is no guarantee of future returns. In order to determine whether pensions are adequately funded, we need to understand how markets will perform going forward. This is tough to do reliably ? if Chad or I knew the answer, we wouldn't be working at think-tanks. Many academics are fretting about whether American capital markets will continue to outperform other countries going forward, however.* Second, the 1926-present time period used in Ed Sector's analysis? includes the post-WW2 boom years, which are unlikely ever to be repeated. Third, pension funds look nothing like the balanced portfolio Chad uses in his analysis. In particular, they are heavily weighted in the direction of private capital investments that behave very differently from public markets.

The most important question is whether defined-benefit pensions are good for teachers at all, though. We know that politicians are prone to skip pension contributions to fill other holes in state and local budgets. Illinois has provided us a perfect example of...

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I nearly choked on my morning coffee when I read this quote from Mayor Michael Bloomberg's New York Times op-ed on public sector unions:

But unions also play a vital role in protecting against abuses in the workplace, and in my experience they are integral to training, deploying and managing a professional work force.

Bloomberg made his billions with Bloomberg LP, his financial data and analysis firm. Are the programmers and financial analysts there unionized? I bet not. Historically, unions protected minimally skilled workers; outside of the public sector, they've had little to do with protecting and developing professional workers. Now that public-sector unions have enormous leverage over state and local governments, however, they're not going to roll over and take a back seat because Democratic politicians ask nicely.

The rhetoric from some progressive politicians and policy wonks on public-sector unions is verging on the absurd. The message seems to be "we need strong unions, but let's get rid of all the costly practices they fight for." Good luck with that, Mayor Mike.

—Chris Tessone

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