Month: August 2016

 

I watched the Tulsa Channel 6 program “Educate Oklahoma” on Monday and Tuesday this week.  Scott Thompson is a loyal member of the Sandite community where I had the pleasure to work the last 12 years and he recognizes the value of public education in building our state’s economy and fostering strong communities.  The program is good journalism.

Of course my mission here at OCPAThinker.org is to comment on what the other OCPA’s write and say, one of whom appears on the program.  His name is Dave Bond and he is OCPA Impact which is some kind of branch or twig of OCPA.  His comments on the program are to the effect that it looks like Oklahomans may well vote themselves a tax increase, State Question 779, and that is a shame because there is plenty of money in the state budget to give teachers a raise.  He gives two or three examples but the one that caught my eye was “$100 million savings on employee health insurance going into effect October 1.”

Of course I had to chase that.  I have scoured, or at least looked diligently, at both his OCPAImpact.com and the OCPAThink.org sites and can’t find anything that resembles that.  I even went to the OMES/EGID site for state and education employees’ health insurance to see if there was some kind of announcement–nothing.  So yesterday and today I have emailed and called, leaving voicemail, at the OCPA Impact contact information on that site and am waiting to hear back from Dave Bond.

In the mean time I saw this displayed on his site:

“FACT: As Oklahoma gradually reduced its personal income tax rate from 2005 through 2012, our state’s economy grew faster than the national economy and faster than many of our surrounding states. This, along with other positive economic factors, helped grow new jobs and increase individual opportunity in our state. (Source: U.S. Bureau of Economic Analysis)”

To which I ask Mr. Bond why, since the rate was again reduced after 2012, is our state economy now in recession? Could it be related to the low price of oil—one of those “other economic factors”? I suspect if the U. S. Bureau of Economic Analysis looked at the relative impacts the state income tax rate in Oklahoma pales as a driving “economic factor” compared to changes in energy prices. So you will notice that when there is good economic news in Oklahoma the little twigs of OCPA will go on and on about how that is the result of income tax cuts; but when there is bad economic news, such as a failing state budget, then that is solely the result of low energy prices.

And this:

“FACT: Oklahoma’s total state government spending has reached record highs each of the past dozen years, even through two national recessions.” (If true, don’t have time to fact check, is only so because of Obama’s stimulus package, ARRA.)

“Total Oklahoma tax collections, coming out of the most recent recession, have also hit record highs in each of the last three fiscal years. Available funds, per-pupil, in our state’s public education system have reached record highs, as well. Oklahoma government does not have a revenue problem, but we do have a spending problem. Income tax reductions have not depleted funds for schools, roads, bridges, infrastructure or public safety. (Sources: Oklahoma Office of Management and Enterprise Services, Oklahoma Tax Commission, Office of the State Treasurer)”

I’ve only had time, and interest, to check part of this, namely “Available funds, per-pupil, in our state’s public education system have reached record highs, as well.”  For reasons I addressed in two earlier blogs I’m not going to give Mr. Bond credit for carry forward balances, funds that may look like new and recurring revenue to him, but simply are not.  Nor am I going to give him credit for bond funds, student activity funds, school lunch program revenues or gifts to school districts.  These are all funds that are absolutely not available for teacher salaries and are never intended to pay for the operational costs of providing basic education services to our students.  The revenues that are recurring and intended to support basic educational costs are included in the general, co-op and building funds.

FY 2008 was the last year the legislature provided additional funding for across the board teacher pay raises.  FY 2015 is the most recent year for which apples to apples numbers are available on the SDE site for comparison, plus FY 2016 was no improvement.  I compared the two and here’s what I found:  the new revenue per ADA (per student) in those three funds increased from $7,495 in FY 2008 to $7,551 in FY 2015—whoop dee doo, maybe I have to say he is right which would hurt so bad.

But let’s look further, remembering he was arguing on the program that funds are available for teacher pay increases.  Maybe that 56 bucks per kid should allow us to give teachers something, but also maybe we need to see if operational costs have gone up for any other reasons—utilities, motor fuels and insurance come to mind.  Someday I’ll dig into those but suffice it to say that what the OCPA twigs present is just the “fact” that revenues are higher in current dollars than they were eight years ago so PRESTO there is money available; they make no mention of what other costs may have risen in the meantime.

Here’s an example that is easy to do.  The revenue that is earmarked for education employee health benefits is a separate line item in the OCAS data which in turn is a very close measure of the actual cost to school districts.  By subtracting that revenue from the totals for FY 2008 and FY 2015 we can then get per pupil comparisons of revenue available for everything but employee health insurance.  The result is FY 2008 is $7,036 compared to FY 2015 of $6,961.  Translated, net of employee health insurance costs school districts have $75 per pupil less new revenue now than in FY 2008 with which to operate schools.  Tell me again how they are supposed to raise salaries, Mr. Bond.

Of course now I have played right into the leaves of the OCPA twigs by giving them an opening to blame all our woes on Obamacare (and thus ignoring the huge stimulus Oklahoma’s economy would have received by accepting the Medicaid dollars years ago).  And they will wax eloquent about how much lower health costs would be without state provided/mandated health insurance by simply relying on the free market.  Perhaps they will buy each teacher an EpiPen or, better yet, hire Martin Shkreli as a consultant to explain how market pricing works in the health care industry.

A final word.  State new revenues only, per pupil, fell from $4,694 in FY 2008 to $4,424 in FY 2015.  Public education remains primarily a state responsibility yet our state leaders are not doing their share by any calculation.  Also lunch is still on me for identifying the location of the photo for this or any earlier post except June 20 and July 5 which have been ID’d.

Here’ my crude spreadsheet. ocpa impact fact check

The data comes from here:  https://sdeweb01.sde.ok.gov/OCAS_Reporting/StateReports.aspx

 

Summer for me came to an end Friday when I lost my summer job being chauffeur and companion for my two 11 year-old grandchildren.  They have returned to school so I’m beginning to have more time to review the OCPA’s postings.  I started browsing a bit but my eye caught the “Featured Links” section with an enticing “Oklahoma Pension Bomb”.   As I said in my first post on this blog, “Hello World”, my interest in exposing the shoddy “policy research” performed by the OCPA came out of my study of Oklahoma’s public pensions and particularly the largest and one I now happily draw from—Oklahoma Teachers Retirement (OTRS).

Clicking on the link takes you to an outside site maintained by the Manhattan Institute which is an older and likely better funded version of OCPA based in New York City.  The page you arrive at is the “Oklahoma Pension Calculator” and is described as this “…tool is intended to inform the pension debate. In addition to estimating the pension that you would collect after a career in government, the calculator will also provide an estimate of the total annuity cost, or how much someone would need to save to replicate that guaranteed income stream in retirement.”  Translated we’re going to show you how much better lazy government workers will be off when they retire and how much it’s going to cost you.

Here’s an example that I tried.

What is your target retirement age?  65

How many years of service will you have at retirement?  30  (most teachers are females and have some career interruptions along the way)

When were you hired?  On or after 7/1/1992, but before 11/1/2011.

What is your final average salary?  $50,000  (imagining a teacher who began in the 90s and will retire in the 2020s and hoping for salary increases some time soon)

Here is the response:

Your Pension Benefit:  Monthly, $2,500; Annual, $30,000.

Your Lifetime Annuity:  The amount of cash you would need at the same retirement age to yield the same annual income as this public pension.

Male:  $453,494                      Female:  $496,609

Half a million!  How am I ever going to save half a million?!  Damn teachers!

At least that’s how OCPA and Manhattan want you to react.  Let’s take a closer look at these “Statistics”.  Don’t get real hung up about the choices I made above.  The mathematics that follows will apply to any example.

First, a compliment.  Manhattan could have made this seem “worse” by using retirement formulas other than OTRS (i.e. OPERS, Firefighters, Judges, etc.) that may be more generous.  However, OTRS is the largest and that choice is best if trying to keep this simple.

Next a lesson on how annuities work.  A pension is a lifetime payment that in its simplest form lasts as long as the pensioner lives and ends as soon as she dies.  The cost of providing an annuity is driven by two primary factors:  life expectancy and rate of return.  The longer the life expectancy the more it will cost to provide for; the shorter the less it will cost (which is why the Male cost is lower above).

Rate of return is also important because the problem Manhattan poses is how much money do you need at the beginning of retirement to purchase a lifetime benefit.  The money is available now but will be paid out over the retiree’s lifetime.  No pension plan manager or insurance annuity provider will keep the money in a shoe box, rather it will be invested.  The higher the return on investments over the retiree’s lifetime the less that is needed up front; the lower the return the more needed up front.

Gratefully Manhattan has the integrity to state the assumed rate of return—by clicking the “i” encircled in blue we get this information:  “Estimated payment for a Single Premium Immediate Annuity, indexed to inflation on the same basis as the simulated public pension, with an insurer who assumes a 3% rate of return.”  The comment on inflation does not apply since there is no automatic cost of living adjustments to OTRS benefits, not since about 2011.

Now we turn to two data sources to check out Manhattan’s $496,609 needed for our school teacher at age 65.  I found what seems like a pretty credible life expectancy table on the CDC site, “National Vital Statistics Reports, Vol. 57, No. 1, 8/5/2008, Table 3” which is a Life table for females:  United States, 1999-2001.  It shows the life expectancy for a female at age 65 is 19.12 more years.  The other data source is my trusty C. R. C. Standard Mathematical Tables published in 1959.  It provides a table for calculating The Present Value of Annuity for various periods (the number of years our teacher will receive the $30,000 pension) and rates of return.

First I tried 20 (life expectancy is 19.12) and the factor for a 3% rate of return is 14.8775 which multiplied times $30,000 tells us $446,325 will be needed.  So I am close.  To get closer I find the factor for 23 years is 16.4436 which results in $493,308 compared to Manhattan’s $496,609.  Makes sense to me that the insurance company is going to cushion the risk by a couple of years (plus there are commissions, profit, etc.) and consider this from the Economic Policy Institute cited in my retirement study “Ten Facts” linked in my first blog post “Hello World”:

“DC plans (what OCPA advocates) do not pool longevity risk. When individuals convert their accumulated savings into an annuity – a fixed payment until they die – their annuity payment is lower because the provider of the annuity knows an individual is more likely to purchase an annuity if they are in good health and have a longer-than-average life expectancy. Since defined benefit plans do pool longevity risk across tens of thousands of plan members, they can base annuity payments on the average life expectancy of the population.”

OTRS assumes a return of 8% and over the long run has managed that rate.  Even during the most recent 10-year period which included the Great Recession OTRS achieved over 7%.  Investing billions over a very long term horizon simply generates a much greater return than individuals can do on their own and apparently much better than the annuity companies that Manhattan shopped.   So let’s be nice and use 7% over the same 23-year period as above.  The amount OTRS needs to have to support our teacher’s pension is $337,166 (factor 11.2722).  At 8% it is $311,133 (factor 10.3711).  And, if I want to really drive home the point, how about having OTRS use 20 years, much closer to our teacher’s real life expectancy, and their long, long run rate of 8%:  $294,543 (factor 9.8181).  An eye-popping 40% savings from what OCPA recommends.

Translated so maybe even the “research fellows” at OCPA can understand, using Manhattan’s numbers, OTRS can deliver the same retirement benefit to our teacher at 60% of what it costs to do it the OCPA/Manhattan/Free Market way.  To this taxpayer that sounds like pretty smart government.

It’s too bad the OCPA’s and Manhattan’s want to frame this retirement debate as DC vs. DB.  What makes OTRS a better vehicle for school employees retirement is because it is big, it is mandatory and it can continue to invest for the long term while still annuitizing individual pensions.  Those characteristics don’t have to be unique to DB plans.  But as long as the discussion is “informed” by lies, damned lies, and (especially) statistics, the strategy for those of us who appreciate how the public benefits from well managed public sector pension plans is, unfortunately, to oppose change.

By the way, Mark Twain is one of those who uttered those words.

Lunch on me if you can name the photo location.  Has to do with amazing statistics!

 

Mark Twain said, “Get your facts first, then you can distort them as you please.” At least that’s what an internet site says he said and ought to be posted inside the offices of the OCPA to remind them of their mission.

 

Anyhow just can’t stop thinking about Mr. Anderson’s silliness I partly critiqued in my last post “Where to Begin?”. Gratefully I’m saved the trouble of addressing his concern about the 27% sitting in school district bond funds by the great comment written by my friend Kevin Berry of Choctaw-Nicoma Park Public Schools; as Kevin says:

 

“Great blog, Gary. To expand further, we don’t get the proceeds of our series bond issues until June of each year. Since most of it goes to pay the revenue-lease financing payment which is due the following fiscal year, we don’t encumber this bond money until July 1. So it looks like we have millions of dollars in bond fund carryover on June 30. The OCPA’s website says we had $13.5 million in total cash forward in all funds. If you actually look at the cash forward amounts by fund, nearly $9 million was bond funds, $7 million of which we received just prior to the end of the fiscal year. We had nearly $2 million in the Sinking Fund’s carryover. That left only $2.5 million in carryover in all the rest of our funds, including the General Fund. We were hardly sitting on a bunch of cash.”

 

Translated, each school district will have its own rhythm and reasons for the bond fund balances that are shown each June 30; same is true for the 11% that is in their building funds. What is important for the public to know, which is not disclosed by Mr. Anderson, is that these funds are restricted by law for the purposes of constructing, maintaining and repairing facilities and for the purchase of necessary equipment as determined by the voters who approve the issuance of the bonds and the elected school board members who approve the budgets. These funds are not available for teacher salaries and most of the other expenses necessary to operate our schools.

 

Now for another reason school districts must maintain fund balances for operations—the Paradox of Thrift. This is a well-established observation of behavior noted by economists since its early years as a discipline (I wonder does the OCPA employ any real economists?), namely that when individuals and businesses are uncertain about their future income they tend to save now at higher rates to prepare for the likelihood of having less in the future. The Paradox that economists worry about is that the increased savings by individuals and businesses in turn decreases demand and spending which can in fact reduce future income for individuals and businesses, i.e. a recession. The rational behavior of individuals and businesses can be exactly the opposite of what the economy as a whole requires for recovery—a self-fulfilling prophecy.

 

So what does this have to do with Mr. Anderson’s silliness? When school district revenues become highly uncertain (go to http://sde.ok.gov/sde/notice-allocation and compare how many “adjustments” were made to state aid in FY 2016 to the number in FY 2014) as they were last year and continue to be, then what rational school board would rely on the amount of state aid promised for FY 2017 to actually be paid? The effect of this uncertainty, caused in no small part by the fiscal policies promoted over the years by OCPA, is to cause rational school boards to plan for greater uncertainty by increasing their savings. This year though rational thought likely will butt into the reality of diminished resources so fund balances will diminish. However, the fact remains that one rational reason for Oklahoma school districts to maintain fund balances in their general fund greater than their cash flow needs is to guard against the kind of revenue uncertainty that has become the norm in Oklahoma school finance due to both economic fluctuations and to failed fiscal policies promoted by the OCPA.

The photo is not in San Diego; lunch on me if you guess where.

I really do want to be a blogger but my first summer after retirement has been more hectic than I expected.  Most of my time is happily spent with my two 11 year-old grandchildren, products of a fine public school system and great parents, and working pro bono on the HB 2244 litigation in Oklahoma County.  I figured I could really get with it once school starts again but this latest drivel from OCPA Research Fellow Steve Anderson, “WHY ARE SCHOOL DISTRICTS SITTING ON SO MUCH CASH?”, begs an earlier response.  The only difficult part of writing this is having to read Anderson’s silliness a second time.

He states:  “The schools need to explain how they can be sitting on nearly $1.9 billion of unencumbered cash–cash that is not promised to any obligation currently–that they did not expend during the prior school year.”  For the purposes of this post I’m not going to fact check his numbers, risky but easier.  Of that $1.9 billion he says 34%, being about $646 million, is in the general funds of school districts.  With the exception of the few that are paid out of co-op funds, teachers and other certified employees are paid out of school districts’ general funds.  Mr. Anderson alleges that as of the end of the fiscal year, June 30, 2015, $646 million was “unencumbered cash–cash that is not promised to any obligation currently…”  may be hyper-technically correct at a ten year-old level of understanding, but factually wrong, wrong and stupid at a “research fellow” level.

Title 70 O. S. Sect. 6-101(E) states:  “A board of education shall have authority to enter into written contracts with teachers for the ensuing fiscal year prior to the beginning of such year. If, prior to the first Monday in June, a board of education has not entered into a written contract with a regularly employed teacher or notified the teacher in writing by registered or certified mail that a recommendation has been made not to reemploy the teacher for the ensuing fiscal year, and if, by fifteen (15) days after the first Monday in June, such teacher has not notified the board of education in writing by registered or certified mail that such teacher does not desire to be reemployed in such school district for the ensuing year, such teacher shall be considered as employed on a continuing contract basis and on the same salary schedule used for other teachers in the school district for the ensuing fiscal year, and such employment and continuing contract shall be binding on the teacher and on the school district.” Even the Oklahoma Constitution at Article 10, Sect. 26, comes into play giving a one of a kind exemption from the prohibition against incurring debt without a vote of the people for “any school district …contracting with certificated personnel for periods extending one (1) year beyond the current fiscal year…”.

Translated so perhaps even Mr. Anderson can understand, before June 30 every school district has become contractually obligated for the bulk of its certified employee salary and benefit expenses for the next fiscal year.  Following State Department of Education OCAS requirements those obligations are not technically encumbered until after July 1 and before the first payroll for the certified personnel.  Using the OCPA’s handy little OCAS tool we see that statewide regular certified personnel salaries, those that must be fully encumbered at the beginning of the fiscal year and most of which became a contractual obligation in June of the year before, totaled about $2.1 billion for FY 2015.  Also the benefits that were part of those contracts exceeded $500 million.  So, Mr. Anderson, unless certified personnel costs for FY 2016 were dramatically less than in FY 2015, school districts, by June 30, 2015, had clearly promised all of that $646 million to the certified personnel under contract for the next fiscal year.

He also dismisses the real concern districts have with managing cash flow in their general funds:  “They don’t seem to understand that the accrual of those expenses incurred but not paid should already have been made.”  I managed a $40+ million budget for an Oklahoma school district for ten years and I don’t know what he means, probably because he doesn’t.  I think his “accrual of those expenses” is referring to encumbrances under Oklahoma law–and yes those expenses, like salaries, are encumbered fully before they are paid.  The problem that Mr. Anderson chooses not to understand is that revenues are also “accrued”, in our language budgeted, before they are received.

Under Oklahoma school district budgeting law and practice a district can encumber total expenses up to the total amount of revenues approved by the board of education as projected for the year.  But, “duh”, the revenue doesn’t necessarily come at the same time as the actual expenditures, most notably property tax revenues, the third largest revenue source on Mr. Anderson’s list.  Property taxes for the current fiscal year upon which school district budgets are based are due and payable by December 31 to the county treasurer who in turn makes payment to districts about two weeks later.  Thus school districts receive very little from this source until over half the year has passed; this affects some districts greatly and especially affects technology districts.

Districts handle this very real problem in different ways, some by using non-payable warrants, a legal form of getting a short term loan from a bank, and others by moving money among funds, a practice that some might question.  This reality is an example of what frustrates me about the OCPA, that they pay people like Mr. Anderson to do shallow “research” regurgitating their preconceived premise that if government is doing it then it is inept if not actually stupid.  Instead wouldn’t it be nice if the OCPA would do real research, like how do school districts actually manage the real cash flow challenges many face into December and are there some better “smart government” ways of managing?

But I digress in expecting that OCPA will ever be a real research entity.  Let’s close by looking at one more–sinking funds that collectively had 19% or about $361 million of the $1.9 billion.  At my school district we used an auditing firm and a bond advisory firm that each do business with many Oklahoma school districts so our practices mirror much of the state.  Our fund balance on June 30 in the sinking fund was a function of how our auditing firm prepared our Estimate of Needs, which sets the sinking fund levy as required by Title 62 of Oklahoma Statutes using a form and process established by the State Auditor and Inspector, and the timing of our bond sales and payments as recommended by our bond advisors.  Short of stiffing our bond holders or violating Oklahoma law I’m unaware of how else our district should have managed its sinking fund balance.  Maybe Mr. Anderson will put down his copy of Atlas Shrugged long enough to enlighten us.

OK, that disposes of over half of his heartburn so I’m going to return to a better and more thoughtful world of 11 year olds.  Remember it’s lunch on me if you figure out the location of the photo on this blog–and the one on HB 2244 is still up for grabs.