School Finance

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...

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...

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

Say you're a top-performing senior majoring in chemistry at Lawrence or Ripon. You're thinking about becoming a high school science teacher. Would you prefer a $35,000 salary with two pensions and health care benefits in retirement, or would you rather have a 25% higher salary and benefits similar to those your friends going into the private sector receive? Odds are you'd prefer the latter ? especially if, like most young grads, you realize the vast majority of people do not have a 30 year career in one profession these days. You'd rather have more cash to pay down students loans and make your own decisions about how to plan for retirement.

Yet most teacher compensation systems look like the first option. According to an oped in today's Wall Street Journal by the University of Arkansas' Bob Costrell, for every dollar Milwaukee teachers receive in salary, the public is spending another 74 cents on gold-plated benefits ? almost three times the cost of benefits in the private sector. The cost of those benefits, which are skewed dramatically in the direction of older teachers close to retirement, lowers starting salaries and takes choices away from workers.

This tradeoff between benefits and salary doesn't come up much in our discussions of teacher quality, but it should. Most young workers are not attracted by low starting salaries and the faint promise of retirement benefits long into the future. The growing mobility of workers argues for more flexible compensation systems.

The...

As union protests in Madison, Columbus, and elsewhere loop continuously on cable TV, it cannot be easy to be an education-reform-minded Democrat. They're honorable folks; their commitment to bold education reform seems genuine; and they've generally been willing to push for a host of promising changes in policy and practice that rub teacher unions the wrong way. (Well, not vouchers!) They've been reasonably candid in fingering those same unions as obstacles to programs and initiatives that put kids' interests first.

At the same time, most of them have labored?especially the elected officials and wannabes?not to burn all their union bridges. Some of the most prominent of them (starting with Messrs. Obama and Duncan) have even created opportunities to ?reach out? to union leaders with encouraging words if not actual hugs. And the many billions shoveled from Washington into public-education coffers these last two years?billions devoted almost entirely to preserving teacher jobs?have gone a long way to salve whatever wounds were caused by support for charter schools, achievement-linked teacher evaluations, etc. The basic stance of reform-minded Democrats vis-?-vis the unions seems to be ?tough love??and it's no stretch to observe that the signs of love have exceeded (certainly in cash value) the tough bits.

Now it's getting harder for them. The 2010 elections combined with staggering federal and state deficits to spell a ?new normal? for reform-minded Democrats. The ?tough love? strategy is vastly harder to pull off?especially the love part?and they've now got to choose...

The Midwest is in turmoil over proposed changes to state laws that deal with collective-bargaining rights and pensions for public-sector employees, including teachers and other school personnel (as well as police officers, state employees, and more). Madison looks like Cairo, Indianapolis like Tunis, and Columbus like Bahrain, with thousands demonstrating, chanting slogans, and pressing their issues. (Fortunately, nobody has opened fire or dropped ???small bombs??? as in Tripoli.) Economics are driving this angst: How should these states deal with their wretched fiscal conditions and how should the pain be distributed?

To address these problems, Republican lawmakers and governors have proposed major changes to collective-bargaining laws and pension systems. In Ohio, Senate Bill 5 would continue to afford teachers the right to bargain collectively over wages, hours, and other conditions of employment. But the bill would also make profound alterations to the status quo, including: requiring all public-school employees to contribute at least 20 percent of the premiums for their health-insurance plan; removing from collective bargaining???and entrusting to management???such issues as class size and personnel placement; prohibiting continuing contracts and effectively abolishing tenure; removing seniority as the sole determinant for layoffs and requiring that teacher performance be the primary factor; and abolishing automatic step increases in salary.

Not surprisingly, these changes are being fiercely resisted by the Buckeye State's teachers, their unions, and their political allies. Battle lines are forming, and we at Fordham???as veteran advocates for ???smart cuts??? and ???stretching the school dollar??????have been drawn...

More bad news for charters in DC ? according to the Post's Bill Turque, Mayor Vincent Gray will hold the city's Uniform Per Student Funding Formula constant and cut the facilities allowance to public charter schools by $200 a head in order to help close a budget gap of over half a billion dollars.

Of course, school funding in Washington is far from "uniform." Retirement funding for DCPS teachers falls outside the formula, the city spends hundreds more per student on capital projects for traditional public schools than the $2,800 per student available to charters, and DCPS receives revenue from other city agencies outside the formula. Last year's Ball State study of charter school funding assessed the gap between DCPS and the charter sector in DC at over $12,000 per student in the 2006-07 school year.

Despite this sizable funding gap, the District's charter schools have performed at least as well as traditional district schools, with several star charter operators doing much better. They're doing more with a lot less and should be encouraged both for the choices they provide to parents here and for their admirable efficiency. Instead, Mayor Gray has decided it's "fair" to cut support for highly efficient schools of choice as much or more than support for less efficient district schools. That seems like a missed opportunity to save money in the long run and drive better outcomes for kids.

?Chris Tessone...

Education politics just got weirder: liberals are now for "local control," and Tea Party conservatives are against it. At least that one's way to read the situation in Madison. [quote]

Everyone knows that school reform has long foundered at the local school district level. Powerful teachers unions, with the help of state and national behemoths, get their friends and allies elected to the boards with whom they negotiate. Those boards--whether out of niceness, naivete, or negligence--make promises that taxpayers can't afford. Education spending goes up, and productivity goes down.

Governor Scott Walker wants to change that equation by taking certain issues off the bargaining table. This has been characterized as union-busting or political advantage seeking--and perhaps it is. But fundamentally it's a vote of no confidence in local school boards--for if they could be counted on to put the public's interest first, the state of Wisconsin wouldn't need to tie their hands in terms of the salaries or benefits they could offer.

It's true that Walker's proposal isn't the only solution to the problem of political imbalance at the local level. Instead, he might have called on his Tea Party supporters to take local boards by storm by getting themselves elected--and then pushing a harder bargain at the negotiating table. Alternatively, he might have called for a statewide teachers contract, as one prominent commission did a few years ago, so that the public could be represented by a serious advocate (himself).

But his approach--defanging the...

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