The ironies:
It is about school finance officials in Oklahoma, from the State Department of Education to many of the largest school districts, who have not correctly reasoned through a numerical issue that can be understood using mathematical analysis taught in first year algebra and required for graduation from Oklahoma high schools.
It is about a State Superintendent who professes great outrage that Tulsa Public Schools financial procedures did not prevent the loss of $600,000 due to fraud by a former employee, but his own agency’s failure to correctly understand the purpose and effect of the state aid formula, i.e. simple algebra, it administers has cost Tulsa Public Schools $3.5 million (and their finance officials didn’t know it).
The Policy Implications:
This failure by the State Department of Education has cost some 270 school districts $22.7 million.
A state legislator, probably relying on the misinformation from school finance officials, sponsored legislation that cost his own district, Bartlesville, $500,000.
The Department administers the state aid statute which effectively apportions more than $4 billion in state revenues, yet those responsible apparently lack the numeracy skills to understand the formula’s financial impact on districts over time which can lead to other policy failures (there is a slow bleed that is penalizing districts like Tulsa that is not understood, but is easily fixed).
An Introduction:
Woodie Guthrie’s Pretty Boy Floyd: “Yes, as through this world I’ve wandered, I’ve seen lots of funny men; Some will rob you with a six-gun, And some with a fountain pen.
To fully appreciate this collective failure, you need to understand the mathematical mechanics involved and the best way I’ve found to explain it is with this example. You own a rental property that you lease jointly to Joy and Ryan for $100 per month. Joy and Ryan have stopped talking but have continued their practice of paying $70 and $30 per month respectively, most recently for February. When Joy pays you $70 for March you inform her that Ryan has only paid $20. Joy tells you that she will make up the $10 shortfall when she pays April’s rent. In April, Joy pays you $80. Are Joy and Ryan fully paid through April now? Using the reasoning expressed by many Oklahoma school finance officials concerning the real-life facts I’m about to share, they would say yes, absolutely, believing that Joy’s increased payment a month later corrects the March shortfall and nothing more need be known.
Using common sense and some mathematical reasoning you should say you don’t know if their shortfall is corrected until you know how much Ryan pays for April. If he has resumed paying his usual $30 then the $110 you received for April satisfies that month’s $100 rent with $10 left over to make up for the March shortfall. But if he again pays only $20, then, clearly, they still owe you $10. That’s mathematical relationship the State Department misunderstands in a nutshell.
If the previous example and analysis makes sense to you, then you have successfully mastered the second-hardest challenge to following this story. The hardest challenge is accepting that sometimes the experts who are supposed to know how something works, simply do not and fail those who depend on them to get it right, i.e. a plane falls out of the sky, a bridge collapses, or $22.7 million is wrongly taken back from 270 school districts.
The Story:
At the end of my service as CFO and attorney for Sand Springs Public Schools, I was preparing my last budget revision in December, 2015 for board action in January. I noticed that our motor vehicle collections administered by the Oklahoma Tax Commission were down substantially from my budget forecast. This source of revenue had been the most consistent, always up and never down, for the 11 years I had been preparing budgets so I had paid it no attention till then. I put on my lawyer hat and read the statute, which had been amended in the 2015 session, and learned that, in my opinion, the OTC was incorrectly applying the amended provisions to the detriment of districts like Sand Springs and Tulsa that had a lower share of statewide student population then than in the 1990s when the law was first in place.
Because motor vehicle revenues are one of five “lagging chargeables” in the state aid formula, i.e. the amount used to calculate state aid this year is the amount actually received the year before, I knew there were some in school world who believed that if you were underpaid one year it was no big deal because you would get it back the next year in greater state aid. I had never analyzed this belief because it had never mattered to my district before. So I did, using a simple table approach (same as used by opposing counsel for OSDE six years later) and confirmed that in fact the formula is not self-correcting. The gist of the analysis is that the greater state aid the following year prevents more loss of revenue when motor vehicle collections remain at the lower level, but it does not replace the revenue lost the prior year. That only is done when motor vehicle revenue rebounds to its previous level.
I calculated that the harm to Sand Springs was on track to be over $400,000 so, as lawyer and CFO for the district and with the full support of my superintendent, I took on the issue. First I presented my analysis to the statewide group of large district CFO’s and thought they understood, at least no one submitted a rebuttal. I went with the CFO of Tulsa (who moved later that year to Union, one of the overpaid districts), which was the largest loser, to present my analysis to the Executive Director of the OTC. He stood by his application of the statute. I went with the superintendent of Mid Del district, the second largest loser, to present our concern to then state Superintendent Hofmeister and the director of state aid, and asked that they advocate for a correct application of the statute with the OTC. They listened politely, never rebutted the analysis we showed, yet probably told the OTC that the formula would correct for any underpayments the next year, so no harm, no foul.
With no relief in sight, my superintendent agreed we needed to take legal action. I sent the analysis to all 270 affected districts (the remaining 140 were all being overpaid), and seven districts, including Mid Del, agreed to join us in litigation. Because of the way the formula mechanics work, our strategy was only to ask that the OTC get it right going forward, because that would bump back up motor vehicle revenues for the underpaid districts effectively correcting for the earlier losses. Again, the changes in state aid alone would not correct for the losses. The litigation was filed using the Riggs, Abney firm in June, 2016 at the same time I retired from full time employment with Sand Springs. I also started a blog, OCPAThinker.org, where I wrote extensively about the issue and the litigation.
Here is that litigation: OSCN Case Details
We won in District Court in December, 2016 with Judge Parrish ordering the relief we requested for the eight plaintiffs. The OTC appealed so the wrongful underpayments continued for the second fiscal year (Oklahoma fiscal years are July to June) resulting in more financial losses for the underpaid districts. Then, led by Representative Earl Sears of Bartlesville, the Legislature again amended the statute converting the motor vehicle revenues for districts from the method based on apportioning at least the amounts received the year before, to the current method based on each district’s share of statewide student population. I’m sure Representative Sears was advised by finance officials that there would be no losses because the formula would correct with greater state aid the following year. I’m sure legislators thought they were enacting a fairer system, based on student population which was probably supported by the State Department, when in fact all that matters in fairness is that districts actually receive in the current year the amounts that are used in the formula to calculate state aid (an example of why this matters going forward). Therefore, even if the court’s order was upheld on appeal, motor vehicle revenues for the underpaid districts would not be restored to their prior levels and no correction would happen.
The Court of Appeals in February, 2018, sustained the district court order and expanded it to include all districts, ordering the OTC to calculate the amounts that should have been paid and base future payments on those recalculations. The Court acknowledged the 2017 amendment to the statute but said that didn’t affect the OTC’s duty. The OTC appealed and the Supreme Court declined to take it, which left the order in place June, 2018.
Here is the Court of Appeals case: OSCN Case Details
That same year I became aware that the OTC had made an error in apportioning motor vehicle revenues one month and then corrected the error in a later month by adjusting that month’s apportionments up for districts underpaid by the error and down for districts that were overpaid. We reasoned that since the 2017 amendment had taken away our original plan for corrections, this provided a precedent for how OTC could administratively correct for the underpayments made in FY 2016 and FY 2017.
When the OTC completed its recalculations of what should have happened before the 2017 amendment went into effect, we made demand that they administratively correct the underpayments they had made. They refused, so we asked the District Court to order correcting payments be made over a thirteen month period, the length of time needed to be sure overpaid districts would receive enough to offset the corrections. The OTC then made us and the Court aware of the Stroud decision and argued, for the first time, that the underpaid districts had not been harmed because the underpayments of motor vehicle revenues were offset by greater state aid in the subsequent year. Needless to say I panicked.
The facts in Stroud involved underassessments of property taxes, but unlike motor vehicle revenues and the other four lagging chargeables, property taxes are charged in the formula based on current year assessments. The Supreme Court got it right for the formula’s impact on a district’s general fund, namely an incorrect assessment is offset in the same year by state aid. We showed the District Court, using the table analysis, that a different result happens when the incorrect payment is for one of the lagging chargeables like motor vehicle revenues, i.e. the change in state aid comes a year too late to offset the loss. So Judge Parrish gave us the relief we requested, that the losses the OTC had caused by the underpayments to 270 districts be offset over thirteen months with correcting payments that would come by deducting the amounts overpaid to the other 140 districts.
Her order in November, 2018 was not appealed by the OTC and we were faced with the happy question of when should the payments begin. I had to figure out if the timing of the payments mattered and what to recommend. For the first time, incredibly, I put the analysis in algebraic form and the answer became very clear. The resulting equations and proof is what math nerds would say is elegant. What it showed is that the timing of the payments didn’t matter. All that mattered was that the corrections not be treated as part of current year motor vehicle revenues when state aid is calculated the following year. If the corrections are included, then effectively the relief given by the court would be taken back by the State Department through the formula mechanics.
The first correcting payments were made in February, 2019. But, then several overpaid districts, including those whose CFO’s had seen my analysis for three years without ever presenting a different analysis or asking to discuss the matter with us, filed suit with the Supreme Court arguing that the correcting payments were unfair to them because they had received less state aid the year following their overpayments and underpaid districts had received more. They provided no multi-year analysis as I had done documenting the cumulative shortfall underpaid districts had suffered when compared to the Foundation Program amounts they were intended to receive. They simply said that the subsequent year adjustments were all the correction that was needed.
Here is the Supreme Court Case: OSCN Case Details
We intervened and made our argument that the subsequent year adjustments in state aid do not correct for the prior year underpayments, unless motor vehicle revenues rebound to their previous levels. And that was exactly why the District Court ordered the one-time correcting payments. I believe the hearing officer understood our argument and that she recommended the Court not take the case. That was the result and in June, 2019 the OTC was ordered to make the remaining 12 correcting payments all in FY 2020.
I expected that the State Department of Education was under the same misunderstanding as were the large school CFO’s about the formula’s effect, but I assumed that if they confronted our analysis with actual data, the tables we had shown the courts, and the algebra that proved there was no automatic correction, then they would understand and would not include the one-time payments when calculating state aid. Unfortunately I was wrong.
My first letter to Superintendent Hofmeister was answered by the Department’s attorney and stated their intent to include the correcting payment made in FY 2019 in calculating aid for FY 2020, which they did. I had a year to convince them otherwise before they included the remaining 12 payments when calculating aid for FY 2021. I sought help; if they wouldn’t pay attention to me, perhaps they would to someone with credentials. I found Matt Hendricks, an applied economist teaching at the University of Tulsa with research interests in public school finance. He readily saw how underpayments of the lagging chargeables are not corrected by subsequent year increases in state aid. Together with one of his students, we three co-authored an academic article that was published by the Education Finance journal at the University of Oklahoma.
Hendricks-Reaves-Watts-Full-Report.pdf (oucreate.com)
We showed using the actual data for all Oklahoma school districts, using the table analysis and the algebra, that the state aid formula does not correct for underpayments of a lagging chargeable. To date no one has rebutted our findings which were made available to the Department’s finance officials and school district CFOs.
The superintendent of Mid Del Schools, one of the plaintiffs in the OTC litigation, arranged meetings with Department finance officials in December, 2019 and January, 2020 where they listened as I showed our analysis and data. They had no substantive response other than knowing that state aid was greater the year after an underpayment was made. They did not engage our mathematical analysis or attempt to refute it. Their minds were made up entirely with the knowledge that state aid is higher a year later, which was always part of our analysis showing the losses still remain. We later learned from discovery that their attempt at analysis was done with using data from the wrong years.
With the pandemic in full swing and districts’ attention elsewhere than four-year old underpayments, we were left with five districts willing to pursue the matter. I was granted a meeting with Tulsa Public Schools finance officials to again show them the district had $3.5 million at stake in the matter, but they too, without data to show, were believers that the formula had made them whole. We filed suit against the Department in June, 2020.
Here is that District Court case: OSCN Case Details
The litigation with discovery, the pandemic, having to change attorneys from one whose “head was spinning” with the analysis and wouldn’t move the case, to one who did (Gable Gotwals), resulted in the District Court judge January, 2023, “adopting” the analysis presented by the Department which remained only that any earlier underpayments were corrected by subsequent year greater payments of state aid. I believe her head was spinning with the arguments made and at the end of the day sided with the Department which absolutely should know how to analyze the effect of the formula, even though they don’t.
Along the way the Department was represented by an attorney from the AG’s office who was also an engineer. I was delighted that he was involved, naively believing he would see the light and advise the Department to correct its thinking. He didn’t take our analysis seriously until I told him after a hearing on procedure that the Department’s position was like telling the court 2 + 2 = 5 and he should use his math skills to prove otherwise. In his next filing he adopted the same table method of analysis as I had done, but his hypothetical included having the motor vehicle revenues return to their higher and beginning level, which had not happened for the underpaid districts. In other words, he had the correct method of analysis, but assumed the wrong facts.
We pointed this out in our response to that pleading, but he had left the case for a different assignment and later became a staff attorney for the Department under superintendent Walters. I think he knows the error he made, but won’t acknowledge it since they are now winning the case. His successor at the AG’s office evidences no ability with math analysis, but is very convinced, and convincing, that all one needs to know is the subsequent year adjustment in state aid.
We have appealed the District Court decision and await the appellate court’s decision, which could be given tomorrow or a year from now. In the mean time I puzzle over how CPA’s, maybe an engineer, and others who are believed to be good with numbers, can be so easily misled by numerical relationships that are demonstrated using methods of analysis taught in beginning algebra. It has introduced me to a field of study called numeracy and the fact that so many adults lack skills that supposedly were learned in school. An OSU professor who has published about numeracy has suggested to me that it may be more a matter of psychology, such as not wanting to admit one is wrong and/or research that suggests those who know less think they know more and those who know more are more aware of what they don’t know (the Donning-Kruger effect). In any case, writing about this would be a real challenge since the audience will probably struggle to follow the analysis, as have more than one attorney and a district judge, possibly with heads spinning. My imaginary title is “Why can’t Oklahoma school finance official do algebra, or How I became the world’s worst math teacher.”
Further background on this website: The Grift that keeps on Grifting – Oklahoma Councilor for Public Accountability (ocpathinker.org)
Lunch on me for the first to identify the location of the photo.