Author: gary-watts@sbcglobal.net

 

My second letter to the Editor of the World was published on Sunday, October 28, 2018 and was in response to the Op Ed Kevin Stitt is the right man to shape the state’s education future by State Representative Michael Rogers of Broken Arrow outlining his reasons why Kevin Stitt should be our next governor.  I have never met Michael Rogers and knew nothing about him when I read his Op Ed, but readily knew that he didn’t know what he was talking about.  Here’s what he said that caught my attention:

In 2008, the Republicans won the House and Senate for the first time in state history. You would think this was a great time in history for Republicans, and for a short time it was, but quickly they realized they had inherited 100 years of fiscal mismanagement.

A prime example of this was the Oklahoma Teacher Retirement System, which was rated one of the worst pension systems in the country. For the 100 years leading to 2008, the Democrat-controlled Legislature stole from the teacher’s pension fund, driving it almost to the brink of bankruptcy. The new Republican majority decided that the only way to correct this mismanagement was to put a long-term education plan in place at an additional $300 million per year. It worked. OTRS has become the national model for how to fix a mismanaged pension system.

So I did a few minutes of research to confirm what I thought I knew and then penned this letter:

If Representative Michael Rogers’ rendition of how Oklahoma’s Teacher Retirement System has gone from being one of the worst funded nationally to one of the best in the last decade is any indication of how well his choice for Governor, Kevin Stitt, understands state finance then our state will be in trouble should he be elected.  Rogers implies that after Republicans won the house and senate in 2008 they added $300 million annually to OTRS to set it on the right path.  Read Appendix II, History of Major Legislative Changes, in the most recent OTRS Actuarial Report and you will see that the current revenue structure was put in place by the 2006 Legislature.  His “additional $300 million per year” is pure fiction.  It was not new revenue that has set OTRS on the path to being fully funded, rather it was the passage of HB 2132 by the 2011 Republican legislature that ended unfunded annual Cost of Living Increases for retired teachers.  Making up facts may help Mr. Stitt get elected, but it won’t help us if that’s how he intends to govern.

Before writing this post I researched a little about Michael Rogers assuming that like Chuck Strohm and Kevin Stitt he is likely a hypocrite—being for teacher pay raises but against the revenue to pay for it.  I was wrong!  Michael Rogers voted for both and is one of the three-fourths majority who were the good guys of the 2018 legislative session.  Elected in 2014, so far from term-limited, he still decided to not seek re-election this year “to spend more time with his family.”  Usually that excuse is a euphemism for withdrawing when the elected official has been caught doing something he shouldn’t, but apparently that is not the case here.  It seems Michael Rogers is acknowledging the toll being away from his wife and school-aged children has on his family—a sentiment I can relate to because it is exactly the reason I never ran for state office when I was doing the local political thing, successfully, for twenty years.

Shortly after I submitted my letter, the World endorsed Kevin Stitt about whose positions on education I’ve already commented.  Candidate Stitt gave no cover at all to the courageous members of his party like Michael Rogers who voted to fund the historic teacher pay raise, which makes it admirable that Rogers would go out of his way to support him.  So how does a seemingly well-intentioned and diligent legislator get such bad information?

Back to my history lesson for Mr. Rogers.  I have become something of an Oklahoma government pension nerd, meaning that I’ve taken the time to learn how to read and, I think, understand the annual actuarial reports performed for each pension system, as well as the analysis of those reports by the Oklahoma Pension Commission.  He credits the Republican majority that took control of our legislature with the 2008 election for providing an “additional $300 million per year” to set OTRS on its road to recovery.  The facts in the OTRS actuarial reports do not support his statement.

If you look at Table 7 for the 2008 and 2010 actuarial reports and Table 5 for the just posted 2018 actuarial report you will find these contributions numbers in millions:

Year           Total         State         Employer  Grant        Members

2007           821             244             271             21               285

2008           884             267             309             21               287

2009          907             257             339             23               288

2010          911             228             366             26               290

2017           998             279             403             23               293

2018          1073          318             416             26               313

 

The actuarial reports are based on the state’s fiscal years, so 2018 is for the year from July 1, 2017 through June 30, 2018.  Since Republicans took over following the November, 2008 election, the earliest full year report they could affect would be 2010.  That means if Mr. Rogers’ statement is true we should see, at the very least, total contributions to OTRS up $300 million in 2018 over 2009.  That increase is $166 million, so Mr. Rogers’ $300 million is just not there, no way, no how.

So maybe he’s just off by $134 million?  Nope, his Republican majority isn’t even responsible for the $166 million.  Each OTRS report has an Appendix II titled “History of Major Legislative Changes” and its facts are not kind to Mr. Rogers’ version of OTRS being saved by the Republican majority.  Here’s what that History tells us.

The 1992 legislature established the member contribution rate at 7%, fully phased in by 1997, which continues to be the member contribution rate.  So Mr. Rogers gets no credit for increases in my chart’s Members column.

The 2002 legislature established the state’s contribution rate at 5%, fully phased in by 2008, of state income and sales taxes which continues to be the state’s contribution rate.  So Mr. Rogers gets no credit for increases in my chart’s State column.

The 2006 legislature, in tandem with removing salary caps on retiring members through the Education Employees Service Incentive Program, increased employers’ contribution rates to 9.5%, fully phased in by 2010, which continues to be the employer contribution rate.  So Mr. Rogers gets no credit for increases in my chart’s Employer column.

The facts are that the Republican controlled legislature, from its first 2009 session through 2018, took no action that the OTRS actuary recognized as adding any revenue to the system, much less “$300 million per year”.   Take a look at this table which I have maintained for several years:

The most significant information is the “Years” column, which is the number of years to full funding.  Ideally this number should be 0 with smaller being better.  Seemingly small changes in the actuarial assumptions can make a huge difference in the outlook for the system.  Notice that the 2007 report, under the “mismanagement” by Democrats, showed 21.6 years, not too shabby, which was better than the 23 years in 2016 under Mr. Rogers’ watch.  The “brink of bankruptcy”, shown by the Years column for 2008 through 2010, namely 54.4, infinite and infinite, was caused by the assumption that, going forward, COLA’s of 2% per year would be given instead of the previous 1% assumption.  Simply stated the Democrats had voted funding that would support 1% COLA’s, but not 2%.

When the Republicans took over with the 2009 legislative session OTRS could not support 2% COLA’s indefinitely without an infusion of additional revenue.  To place the system back on a path to full funding, the choice was clear:  increase revenue or get rid of COLA’s for retired teachers.  Their answer came in 2011 by amending the 2006 Oklahoma Pension Legislation Actuarial Analysis Act to effectively end unfunded COLA’s.  That is what changed OTRS from headed nowhere to headed to full funding.  Republicans deserve credit for that, but it wasn’t because they voted more revenue as Mr. Rogers believes, rather they ended the expectation of cost of living increases for retired teachers.  There has been no COLA for retired teachers since then (there was a one-time stipend voted this last session).  That is what righted OTRS.  The same action, I suspect, would balance Social Security overnight.

Again, how does a seemingly well-intentioned and diligent legislator get such bad information?  Mr. Rogers wrote an Op Ed in the state’s second largest daily newspaper containing a demonstrably false claim that Republicans acted after 2008 to infuse the teacher retirement system with “an additional $300 million per year” which was his lead-off example of the governance to expect if Kevin Stitt is elected.  He ought to issue a retraction and should be furious with whoever fed him this false information.  I doubt though that either will happen—we seem destined for the time being to be governed by many who either don’t know how to determine what is true or just make stuff up themselves.

As always lunch is on me for the first to ID the photo location.

Lake Hefner, OKC ID’d by Kevin Berry.

I enjoy our morning paper for reasons that are too personal to elaborate and because I want to stay abreast of local news and events.  I also enjoy the editorial page, including the letters, and the Ask Amy column, both of which take me out of my personal bubble and help me keep in touch with what others are thinking.  Occasionally commentary on the editorial page inspires me to write a letter to the editor, but never before two in one week.

The first was School funding formula needs to let local cities contribute published October 8 which commented on the work of an interim legislative committee reviewing possible changes to Oklahoma’s state aid funding formula.  Here’s the letter I sent that has not been printed:

The World’s praise for recommendations to improve our schools’ state aid funding formula is premature.  Oklahoma Watch gave a good explanation of the formula and then summarized three proposed changes.  Combining foundation and incentive aid makes sense if done correctly, but the proposals for increasing the low income weight and altering the funding for virtual schools need more explanation, especially funding virtual schools the same as traditional schools when they are not responsible for the safety and transportation of students. 

The World then pivots to advocate for allowing “municipalities to add financial support to local schools without it impacting state aid” for which recent proposals would rely on options to increase local property taxes–nice if you live in Tulsa where it takes half the effort it would in Collinsville, or one-tenth the effort needed to do the same for students in Adair County.   The World must value its Bixby and Jenks readers twice as much as those in Glenpool and Sand Springs or it would not continue to disparage Oklahoma’s state aid formula that is a good faith effort to assure that educational opportunity for children is not determined by the wealth of their communities.

The state aid formula is no “great mystery”; it can be understood with basic arithmetic and an hour’s concentration.  With that understanding perhaps the World might advocate proposals that would empower all who want to improve education, not just those living in wealthy districts.

I’ve requested a copy of the final recommendations by the committee which had not been completed at the time of the editorial.  When I see them I’ll have more to say so for now just a couple of quick comments.  Recently I wrote a two-part explanation of basic Oklahoma school finance; Follow the Money–Step 2 is about the state aid formula.    Combining the Foundation and Salary Incentive programs together is a good recommendation that will help simplify a process that the good editors of the World find “a great mystery”.  Hopefully the recommendation will get the math correct.

The second mentioned change, increasing the Economically Disadvantaged pupil weight from 0.25 to 0.5, deserves scrutiny for two reasons.  First, is there evidence that low income students require 50% more to be educated successfully rather than the current 25% enhancement, or is the recommendation primarily the result of effective advocacy by school districts that will receive more funding if the change is made?   Second, how the number of Economically Disadvantaged students is measured needs to be explained and transparent.  The current standard is qualification for a free or reduced price lunch under the federal school lunch program.  But new programs that allow districts to provide free lunches for all students may have altered the accuracy and fairness of this as a marker for Economically Disadvantaged.  The committee report should clarify this.

The third mentioned change, equalizing funding for virtual charter schools with traditional brick and mortar schools, needs special scrutiny.  Much of the general fund revenue that is to be equal for traditional and virtual schools is used by the traditional schools to provide a safe, suitable place (brick and mortar) where children, many of whom are also transported with this funding, can be supervised by responsible adults while their parents are gainfully employed.  Virtual schools do none of this.  Hopefully they provide an educational service that is comparable to traditional schools (I’m not holding my breath), but they don’t transport children or keep them physically safe while their parents are working.  Call it babysitting or child care or school, but the reality is traditional schools provide more than just an education service for children and families.  Why is the cost of the bundle of services provided by a traditional school the measure of what a virtual school should be paid?  Seems like taxpayers would be better served if virtual providers were required to submit bids, including price, before being chosen.

The rest of my letter is once more taking the World editorial board to task for its advocacy of allowing municipalities to raise taxes, presumably property taxes, for local schools.  I addressed this more at length in Cockamamie and will continue to call them out until they acknowledge that using local property taxes, without something like a state aid formula to balance wealthy and poor districts, is simply a huge step backwards in our obligation as Oklahomans to see that all children are educated.  Legislation that makes it easy for wealthy districts to increase their funding without providing a similar opportunity for poor districts is not good public policy.

Oklahoma’s state aid formula is complicated when you get into the weeds, though it is much less complex than other states have, like Texas.  But its purpose and basic structure is not “cockamamie” or a “great mystery”.  Our state constitution sets forth our collective obligation to educate ALL of Oklahoma’s children.  Our legislature has determined that “State support should, to assure equal educational opportunity, provide for as large a measure of equalization as possible among districts. The taxing power of the state should be utilized to raise the level of educational opportunity in the financially weakest districts of the state.”

The local funding that is provided to local school districts by our constitution is property taxes and the amounts that individual districts can raise per student vary wildly depending on the property valuation within each district.  So the state aid formula simply provides that the more a district can fund per student with local revenues, the less it will receive per student from state aid, and the less a district can fund per student with local revenues, the more it will receive per student from state aid, so that each district will have approximately the same revenue per student to provide for their education.  The math involved is simple arithmetic; the principle of equal opportunity for all children is pretty American.  There is nothing cockamamie or mysterious about either.

By all means, Tulsa World, advocate for the ability of local citizens to do more than the state is willing to do, but do so in a way that does not blatantly favor children living in districts with great property tax wealth over those not as fortunate.

Next time I’ll post my second letter; in the meantime lunch is on me for the first to ID the photo location.

Crystal Bridges in NW Arkansas; ID’d by Sue Haskins.

Don’t Ignore Teacher Retirement Benefits is the actual title of a recent article on the website of the Oklahoma Council of Public Affairs (OCPA) by fellow Curtis Shelton.  He suggests that Oklahoma teachers receive generous retirement benefits that should be taken into consideration when discussing teacher pay, implying they can be paid less salary because the state is providing such a nice retirement for them.  After providing some important background I’m going to rewrite his article.

I agree that retirement benefits, just like health insurance and other fringe benefits, need to be considered when comparing teacher compensation with other labor markets.  $50,000 a year with no benefits is not necessarily better than $45,000 a year with paid health insurance and a 2 for 1 employer match of your 401(k) retirement plan contributions.   We’d have to do the math.  So let’s do it for Oklahoma teachers’ retirement.

Contributions to the Oklahoma Teachers Retirement System (OTRS) are actuarially divided into two parts:  first, a “normal cost” percentage that is the current value to the employee for whom the contribution is being assessed, and second, the balance of the contribution which goes to retire or amortize the pension plan’s “unfunded actuarially accrued liability” (UAAL) that is simply catching up, or paying for, past commitments that were made to retired and active employees.  To more fully explain I’ll use the information from Table 1 and Table 5 of the 2017 OTRS Actuarial Report.

For 2017 total payroll for active OTRS members was $4,115,686.767 and the system received contributions totaling $998,158,208 which was 24.25% of the payroll.  Here’s a helpful summary:

Don’t be distracted by the deviations from 7% and 9.5% contribution rates for employees and employers, respectively; the reasons are not important.  What is important is that the state and federal grants are contributing at a combined rate of 7.34%, over $300 million.  Those “contributions” are really just revenue flows to pay off the systems $6.5 billion UAAL which, legally (Baker decision), is the state’s obligation.  The “Grant” amount is a kind of “in lieu” assessment the state is allowed to take from federal grant payroll to do the same thing.

The normal cost rate is 10.24% but I’m going to use 10.34% which includes all the system’s expenses.  That’s the actuarial calculation of the combined contribution rate from the employee (7%) and employer (3.34%) needed to sustain the benefits promised, going forward, for active employees’ current year of service.  3.34% of 2017 payroll is $137.5 million which, together with employee contributions of $293 million, is the annual revenue needed to sustain the system’s current benefit structure for current employees.  Another way to say it that might help is if the OTRS were beginning from scratch this year, i.e. no past promises, only future promises, then that’s the amount it would take to support the year’s promises.  If the annually calculated “normal cost” is faithfully paid in each year, that’s what it takes to sustain the system and keep the promises made.  That is the value to current teachers/employees for the current year—10.34% of which teachers are paying in 7%, so at best enhancing their stated compensation by 3.34%.

The rest of the story, as summarized by this chart, is that the balance of contributions and state direct revenues, almost $568 million, went to pay down the UAAL of the system, being legal and contractual promises already made and mostly for teachers already retired and which is on track to be fully funded in 17 years.  Those payments are not new compensation to current employees.

Simply stated then, if average teacher salary is now $45,000, it would be fair to account for the OTRS benefit paid by employers as adding 3.34% for an average salary of $46,500.  Here are other articles I’ve posted about this.  What follows is his article with my edits.

Don’t Ignore Teacher Retirement Benefits

Teacher compensation debates tend to focus on average salaries. A recent report from the American Enterprise Institute shows that just 3% of media coverage during 2018’s teacher walkouts quantified pension benefits.      That’s probably a good thing because if they’d relied on the AEI, the OCPA, or a similar “conservative” think tank in their area, they likely would receive misinformation that exaggerates the current cost of pension benefits.  Now, after reading articles about pensions on OCPAThinker.org, I know how to correctly quantify pension benefits.

While annual wages make up the largest portion of teacher compensation, they are not the whole picture. Examining data from the Oklahoma Teachers Retirement System (OTRS) allows for a more complete look at teacher compensation.

First, a comparison of contribution rates between the average 401(k) account (according to Vanguard’s How America Saves) and the OTRS aggregate rate shows a considerablelittle difference. For private 401(k) accounts, the combined employer and employee contribution rate was 10.3% of the employee’s annual salary. OTRS recipientsmembers contribute a rate of 7% while the actuarially determined employer rate that benefits current employees is 9.5%. This gives OTRS participants an aggregate contribution3.24%, making the combined rate, adjusted for system expenses, also 10.3%. The balance of 16.5% of the employee’s annual salary.employer contributions, about 6.2%, goes to pay for past unfunded pension promises and is not compensation for current employees.

Second, data from the Vanguard report and OCPA’s data tool allow for a loose comparison of the total benefits between OTRS benefits and 401(k) account holders. The average retirement age for OTRS recipients is 59.7 while the median potential benefit is $278,963. The median 401(k) account balance for retirees of a similar age (55-64) is $71,105.     It appears that the savings discipline and the advantages of pooling teachers’ contributions into a large, professionally managed, retirement system that can invest for the long-term, generates a much better retirement outcome for teachers than do the individualized, high cost, do-it-yourself plans imposed on private sector workers.

Leaving retirement benefits out of the conversation on teacher compensation in Oklahoma ignores an important selling point to those considering entering the cost to taxpayers.profession.  According to the fiscal year 2017 Comprehensive Annual Financial Report, taxpayers contributed $715705 million to Oklahoma’s teacher retirement system., of which $568 million went to fund the system’s unfunded liabilities for past promises.  In about 17 years those liabilities will be fully funded and that revenue can be used for other state priorities.  Just like discussing teacher shortages, having all the facts is crucial to finding the best way forward.

As always lunch is on me for the first to ID the photo location.

Subject is Picasso, on exhibit at Nelson-Atkins in KC; ID’d by Marianne Boshuizen.

The full picture:  401(k) plans vs. public pensions, a recent article by fellow Curtis Shelton at the Oklahoma Council of Public Affairs, illustrates only that he does not understand how pension plans work and are analyzed by actuaries.  Looking past his irrelevant swipe at retired Oklahomans who have faithfully served their state in many capacities, his announced effort to compare individual 401(k) plans to public pensions is a worthy task, but he isn’t up to it because he doesn’t know how to read a pension system actuarial report.  The relevant report is the 2017 OPERS Actuarial Valuation Report, the most recent, and available here for Mr. Shelton’s study.  If he wants to provide accurate information with sound analysis, he will do so before tackling the topic again; but he likely will not because the fellows at the OCPA rarely engage in thoughtful analysis since it distracts from espousing the predetermined script they’re hired to spout and echo about.

He uses a recent Vanguard study, How America Saves, for average data about individual 401(k) account contribution rates and performance.  I’m choosing to accept that data because what he reports is reasonable and Vanguard is my investment company of choice.  Here’s what he writes:

Starting with employee and employer contribution rates (measured as a percentage of the employee’s salary), you find significant differences between DC plans and the OPERS plan. According to the Vanguard analysis, the average DC employee deferral rate was 6.8% with an aggregate participant and employer contribution rate of 10.3%. The contribution rates for the OPERS plan must equal 20%. State employees have a contribution rate of 3.5%, which means the state contributes at a rate of 16.5%. Local government employees contribute between 3.5-8.5% and the employer then matches whatever the difference is to reach a combined 20% contribution rate.

Amusingly he goes on to ask, What do these numbers mean?, and then proceeds to demonstrate he hasn’t a clue.  Look at this table from page 6 of the OPERS report:

A perfect defined benefit pension system will always have assets (investments from past employee and employer contributions) equal to its accrued liability (how much is needed to assure payment of all future benefits previously earned by employees; better definitions are in the report).  OPERS as of July 1, 2017 was pretty damn close, lacking only $540 million against a need for $9.8 billion.  A perfect board of directors of a perfect system will always have a plan for closing that gap; here’s the plan from page 22 of the Report:

Translated so perhaps Mr. Shelton can understand, the board wants the Plan fully funded by 2027, just nine more years from now.  What that further means is that not every dollar being contributed is going to the benefit of the employees who are now actively paying in because part of the contributions are paying for the future benefits of former employees who are now retired, drawing benefits, but not making contributions.  Some of the unfunded liability may also be attributed to past promises to current employees that were not funded.  It’s my understanding that mostly the past sins had to do with COLA’s (cost of living increases) being granted without increasing the contributions.  Regardless, it is clearly stated in every actuarial report for a pension system that is not fully funded how much of contributions is going to fund the future benefits of current contributing employees and how much is going to pay off what is owed for past promises, largely for those already retired.  And here it is from page 7 of the Report:

None of the fellows at the OCPA have any business writing about Oklahoma’s public pensions until they understand what “Normal Cost” means.  I didn’t know until former Executive Director of OTRS James Wilbanks explained it to a group of school district CFO’s several years ago.  I’ve written about its importance for policy analysis in three earlier posts.  Simply stated it is the contribution, as a percentage of compensation, that is required to fully fund the additional pension benefit earned by all active employees for the valuation year, i.e. it’s the contribution rate needed to pay for the pension benefits promised for working the new year.  For OPERS that rate is 10.24%.  Combine that with the 0.40% above for “budgeted expenses” and you get 10.64% which I believe is the “apples to apples” comparable number to Vanguard’s reported 10.3% referenced by Shelton, not the 20% he uses.

He is correct that 20% is being paid in for each active employee, but to state, as he clearly does, that the 20% inures entirely to the benefit of the contributing employees is false as demonstrated above.  The Table uses a blended 4.14% employee rate, rather than 3.5%, which is consistent with Shelton’s note that employee rates vary from 3.5% to 8.5%, so its total is actually 20.64%.  Here’s how the Table divvies it up.  Normal Cost (the value to current employees) is 10.64% which is paid 4.14% by employees and 6.5% from employers.  The remaining 10% is going to pay off the UAAL, unfunded liability, which is a legal obligation of OPERS and the State regardless of whether there are active employees or not.  That 10% is clearly shown as the 3.5% listed which is estimated to eliminate the UAAL in the remaining ten-year target set by the board, and the 6.5% “surplus” at the bottom which is the amount of “overpayment” into the system meaning it’s not going to take anywhere near 10 years to fully fund.

I didn’t readily see an estimate in the Report but looks to me like it will be fully funded in less than half that time, maybe in four years around 2022.  After that happens OPERS could rock along with its existing benefits structure keeping employee contributions at their current levels and reducing employer contributions 10 percentage points to 6.5% which would free up about $170 million or so for other state priorities.  The simple math is four more years at $170 million each is enough to fund the $540 million UAAL; but simple math is outside the reach of the fellows at the OCPA.  They’d rather have you believe it takes a 20% contribution to fund today’s OPERS benefits when in fact it takes only a little over half of that.

The remainder of Mr. Shelton’s article is pretty worthless since it is based on a wholly inaccurate foundation.  The state pension benefit he claims has a value at retirement age 62 of $323,200 to a private sector worker does not require a combined contribution rate of 20% of that state worker’s compensation; it only requires 10.64%.  And he tells us the state worker’s private sector counterpart with a slightly smaller contribution rate of 10.3% ends up with a retirement nest egg at age 62 of only $71,105.  If I could follow his logic we’d probably find that’s not apples to apples either, but it’s kind of fun because it looks like to me the private sector pension world could learn a thing or two from the OPERS and other public systems.  More on that shortly, but one more demonstration of how Stink Tanks like the OCPA operate.  Here’s how Shelton finishes:

Oklahoma taxpayers paid more than $1.2 billion into public pension programs in fiscal year 2017. In all, Oklahoma public pension programs received $1.7 billion in contributions, with $443 million coming from employee contributions. Oklahoma legislators have done a good job ensuring these pension liabilities are adequately funded. According to a Tax Foundation report, Oklahoma’s public pensions had a funding ratio of 72% in fiscal year 2016. This ranked Oklahoma 20^th among all 50 states. Having a clear and full picture of public employee compensation is important when debating government employee pay and the tax burden on Oklahomans. 

I’m being a little picky but why does he go to the Tax Foundation for dated information when the Oklahoma State Pension Commission’s 2018 Actuarial Report was published six months ago and shows our state plans had a funding ratio of 78.6% in fiscal year 2017.  Is it because it makes government look a little worse?

By passing the Oklahoma Pension Legislation Actuarial Analysis Act (OPLAAA) the legislature did place our state’s public pensions on the path to full funding by stopping the practice of approving unfunded COLA’s (like Senator Inhofe does with Social Security).  At the same time the legislature moved new state employees out of OPERS assuring that many of our future public servants will face the same underperforming, high cost, individualized retirement plans that are failing workers in the private sector as Shelton’s corrected analysis above demonstrates.  That move was fully supported and advocated by the OCPA.  Here’s a comment from the OPERS Actuarial Report, page 6:

I think this comment is preparing the OPERS Board for the inevitable higher cost per benefit dollar of operating a pension plan that is going to steadily dwindle in size.  As the paper If Ain’t Broke, Don’t Break It published by the Oklahoma Policy Institute during the 2014 legislative debacle that ended OPERS for new state employees pointed out, a collective pension plan has advantages of higher rates of return, lower transaction and administrative costs, and greater annuity payouts than individualized, do-it-yourself, 401(k) style plans advocated by Stink Tanks like the OCPA.  While OPERS will continue on, it’s smaller size will reduce its efficiency meaning taxpayers pay more per dollar of pension benefit realized by our state workers.  Shelton’s $71,105 to $323,200 comparison above, rightly viewed, illustrates the result of pooling retirement contributions into a huge collective plan that can invest for the long term and in asset classes not available to individuals (think limited partnerships, commercial real estate and private stocks) for higher returns, demand lower transaction and administrative costs, and amortize higher benefit payouts.  Those are the advantages the OCPA pushed the legislature to throw out the window.

What is left is an opportunity for a real research group, or maybe the State’s Pension Commission, to test what I just said and plagiarized from If It Ain’t Broke, Don’t Break It.   New state employees are being forced into individualized plans where they have the “freedom” to participate in the “competitive markets” of the investment world, i.e. they get to be overcharged and misled by professionals who are compensated not based on performance, but based on often misunderstood fee structures.   I hope not, but it does happen.  Even if every state employee is honestly advised, still they will struggle to match the higher returns and lower costs inherent in a large, collective pension plan.  So Mr. Shelton, why don’t you figure out a way (not holding my breath) to measure over the coming decades just how well new state employees are faring with their retirement accounts.  It’s a state plan and the collective information is available.  I’ll buy you dinner each year their returns are greater, adjusted for annuity costs, than the Oklahoma Teachers Retirement System’s, if you’ll buy me dinner each year they are not.  Real research is on my side.

And out of the exercise might come a meaningful idea that I first heard from James Wilbanks years ago, namely that Oklahoma could have a very efficient, high performing, low cost retirement system for public employees that is operated as a Defined Contribution plan, but retains the significant benefits of a large, collective plan.  Maybe even ordinary, private sector citizens could participate.  Oh, but that wouldn’t serve the interests of the “investment advisers” who populate our legislature or members of the OCPA board who fear large, efficient public entities making investment decisions.

Unless Shelton corrects his more recent article Don’t ignore teacher retirement benefits soon, next time I’ll be forced to provide another lesson in Normal Cost demonstrating more clearly how the Limited Thinkers at the OCPA continue to fall short of a reasonable standard of competence.

As always lunch is on me for the first to ID the photo location or the subject of the “half picture” displayed.

 

 

 

Pete’s Place Restaurant in Krebs, OK ID’d by David Tinker

I had not looked at the Oklahoma Council of Public Affairs website for a couple of weeks while preparing for a presentation on school finance so was unaware they had again ventured into the arena of Oklahoma’s public pension systems with not one, not two, but three new posts.  This subject is near and dear to my heart because I receive an Oklahoma public pension system monthly retirement payment and because the OCPA’s past distorted advocacy for eliminating state public pensions is why I began vetting their so-called “research”, thereby discovering how they consistently distort or make up facts and use faulty reasoning to support the conclusions their funders and readers already believe.  These three posts are no exception and its amazingly easy to expose significant flaws in facts and analysis.

I’ll begin with the first which is Retirement Provision Boosts Superintendents’ Pensions by their President Jonathan Small.  It should be titled We Hope You Don’t Understand Compound Interest So You’ll Think You’re Being Ripped Off By Superintendents.  I’m not sure but possibly his article is the debut of another Data Tool.  Unlike their last Dat A Tool? I reviewed, this one appears to have accurate information, though I’m not sure for what public policy purpose.  He leads off by telling us that retired Union Public School superintendent Cathy Burden is expected to draw over $3.1 million during retirement but only paid in $342,000, the current employee contribution rate is 7%, while conceding that “the districts that employed her contributed somewhat more.”  The other facts he shares are that she retired at age 65, worked 41 years, and had an ending salary of about $270,000.  So how does $342,000 become $3.1 million unless she’s ripping us off?

First, in recent years as I’ve explained before and will again in my next post, much more than “somewhat more” is being paid in by school districts AND the state being about 17% or so in recent years.  So the state/employer “match” for her $342,000 is way more than double that amount, being over $47,000 just her last year.

Second, it doesn’t take $3,100,000 to provide her with 21 years (her life expectancy at 65) of benefits; at the OTRS current expected 7.5% rate of return the system’s trust fund needed about $2.16 million to secure her future payments when she retired, still a lot, but much less than the $3.1 million eventually paid out.  That’s how compound interest works.  If you need a dollar next year and can earn 7.5% investing, you only need 93 cents today; but if you can wait 21 years for that dollar, 24 cents today will get you there.

Third, her $342,000 and “somewhat more” than that in state/employer match has been paid into TRS and invested for over 41 years.  Without replicating her exact work history here’s a plausible scenario that illustrates how steady investing along the way can get to that $2.16 million.  I’m not sure but believe she and I are both TPS graduates from the sixties a year apart so she retired in 2014 and may have begun contributing in 1974.  If contributions by her, her district and the state were only $1500 (on about $10,000 income) that year then 41 years later, at 10% annual growth in her compensation as she earned her way up the ladder, her final total contribution is $67,900 which is darn close to the 24% share of her final salary that was collected by TRS from her, Union and the state that last year.  The total paid into the TRS trust fund on her behalf under this scenario over the 41 years is $732,000, including her $342,000 with the difference being Mr. Small’s “somewhat more” ($390,000) paid by her employers and the state.

Fourth, that $732,000 invested as it came in (nothing needs to be paid out) over the 41-year period at the long-time TRS realized rate of 8% yields a starting nest egg for her retirement of just over $2.13 million which is very close to our target $2.16 million (besides Oklahoma female life expectancy is falling).  That, Mr. Small, is how $342,000 becomes $3.1 million over a lifetime with promises kept and prudent investments made.  Here’s my calculations.

What has Mr. Small in a jazz is that the TRS retirement formula for us old timers is based on our highest three years compensation.  As he notes that has already been changed to five years but he seems to pine for the Social Security standard of highest 35 years.  He puts it like this:

OTRS members are awarded two percent of their average final salaries for each year of service. But unlike Social Security, which uses the average of one’s best 35 annual salaries to compute pension payouts, OTRS uses the top three years for Rule of 80 participants and the top five years for those under the Rule of 90.

There is an important fact here that Mr. Small omits, either because he is uninformed or because, wrongly, he doesn’t find it relevant.  Those 35 years of Social Security wages are indexed to inflation.  Something the OCPA loves to do when it fits their narrative that schools have too much money (a frank distortion) but conveniently omit if it shines a light on low teacher pay.  Here’s the Social Security calculation sheet.

According to my SSA earnings record my 1974 tax year compensation was $9,965 working as a classroom teacher for Tulsa Public Schools with a Masters and going from 4 to 5 years of experience.  The SSA inflation multiplier is 6.06 which results in that 1974 salary being $60,388 for calculating Social Security retirement in 2018.  I note that by the just improved Oklahoma Minimum Salary Schedule a classroom teacher with a Masters at 4 and 5 years of experience will be paid $39,728 moving to $40,200.  On the TPS current schedule that same teacher fares a bit better at $41,004 moving to $41,476.  So, Mr. Small, bring it on!

In effect the TRS, and other defined benefit plans, final three, now five, years highest salary is a simple proxy for compensation growth and inflation that is admittedly less precise and that can favor late bloomers over steady earners as Mr. Small alleges.  But he makes no serious effort to discern the actual impact because that would require real thought and research which seems beyond the capacity of the fellows at the OCPA.  Instead he simply scans the data for shocking numbers to cite, spanning over 60 years of time, without any attribution to the investment earnings that largely, if not entirely, close his implied “rip-off” gap.  Then he offers up Social Security’s methodology as being more fair without bothering to mention that it relies on inflation indexing that is absent from the TRS formula (and benefits!).

A personal note.  He also cites my former superintendent Lloyd Snow’s pension benefit as presumably another example of this shocking rip-off he’s discovered.  Lloyd Snow served the children of this state for 43 years, working every day with passion, energy and integrity.  39 of those years he served as superintendent so he was no late bloomer but was a steady performer making a difference for each school district he served.  If he made a mistake he would own up to it and try to correct it.  If he had employees who did shoddy work below recognized professional standards he worked to correct them.  If Mr. Small would do the same in his leadership role at the OCPA maybe it would perform useful, fact-based public policy analysis instead of rearranging facts and concocting arguments to fit its pre-determined conclusions—public school administrators are paid too much and public pensions are bad.

As always lunch is on me for the first to ID the photo location.

Children in Oklahoma are entitled to a free education from 4 year-old programs through 12^th grade.  With a few exceptions like charter schools, families avail themselves of this state service by attending schools operated by locally elected boards of education.  As we saw looking at OCAS data most of the cost is paid for with revenues generated by statewide taxes and by local property taxes levied within each school district.  This post is mostly about how the state revenues are allocated among school districts.

The revenues generated by property taxes vary wildly among school districts mostly because the value of taxable property within districts varies greatly depending on local home values and what business operations are located there.  Such disparities have been the subject of litigation here (Fair School Finance Council v State of Oklahoma) and elsewhere (San Antonio Independent School District v. Rodriquez ).  Oklahoma has in place a state aid formula that allocates state revenues to school districts in a way that equalizes most operational funds roughly based on student population.  The primary provisions are found at Title 70, Okla. Statutes, Sections 18-200.1 & 18-201.1.  Look at our State Revenues chart with some highlighting and a couple of additional columns for a simple explanation of how this works:

Look at the second column from the right highlighted and titled Formula.  It totals up the revenues that go into the formula, namely the 35 mills of local property taxes in the general fund, 75% of the county 4-mill tax, the four yellow highlighted state dedicated revenues, and the gorilla amount that is appropriated by the state legislature each year from the state’s general fund and some dedicated amounts (courtesy of HB 1017).  Each of these revenue sources has its own history and idiosyncrasies, like the county 4-mill was the original funding for segregated schools, like the volatility of gross production, and like both property taxes and motor vehicle being subjects of recent statewide litigation.  So there’s a lot of ifs, ands and buts in the process but the bottom line is those revenues all totaled together accounted for 76% of all school districts’ operating funds new revenue in 2016 and for 61% of all new revenue.  So if it in fact fairly allocates that much of the state’s school funding it’s doing pretty well.  Add to that the insight from the last column, highlighted in blue, which lists the revenues from all funds that either follow the employee (health insurance) or the students and we find that over 95% of the general/co-op funds and almost 82% of all funding is pretty fairly allocated among school districts.   Let’s see how the actual formula works by reviewing the FY 2016 State Aid Allocation sheet for the entire state; here it is (omitting some minor adjustments at bottom):

There are three parts, Foundation, Transportation and Incentive Salary.  Transportation is very small compared to the first and the last which allocate $1.8 billion, so we’ll ignore it.  Next notice the revenue sources listed under Foundation–ad valorem (property taxes), 4-mill, school land, gross production, motor vehicle and REA–are the same ones highlighted in yellow in the first table and are called “chargeables”.  The chargeable for Salary Incentive is a bit harder to discern being the $30.3 million at item 2 then multiplied by 20.  Let me explain why.

Our state constitution provides for levy of 35 mills in support of school districts’ general fund operations.  15 mills were always permanent while the remainder, up to 20 mills, had to be voted annually for most of the state’s history until districts were allowed to vote making it permanent also.  So when the Incentive Aid was put in place it was structured mathematically to require a district to vote the maximum 20 mills to receive the maximum available aid.  Notice on the statewide form line 4 the (00.0), that would be (20.0) for most all districts.  For right now suffice it to say that the only Salary Incentive chargeable revenue is 20 mills of local property tax; the other 15 mills is listed under the Foundation section.  Later on we’ll simplify this greatly.

Now let’s circle back and compare what shows on this State Aid Allocation sheet with the revenue highlighted in the summary chart above.  That total is $3,500,870,848 being the revenue actually received in FY2016 from the seven revenue sources that are part of the state aid calculation.  From the Allocation sheet these are the projections used:

$1,066,821,517 from the “Total Chargeables” line which is the total of the prior year collections from the dedicated sources and the current year projection for 15 mills of local property taxes.

$606,435,690 which is the current year projection for close to 20 mills of local property taxes and is the result of multiplying the Adjusted District Valuation of $30,321,784.516 X 20; this statewide calculation is not exact for reasons too in the weeds even for me, but is close enough to see how this all fits together.  This amount is also a “chargeable”.

And $1,826,404,722 which is the “Basic State Aid” total shown to be paid out according to the state aid formula; this money comes from the annual state appropriation and I think is the largest single line item of our state government’s annual budget.

$3,499,661,929 is the total of these three and is amazingly close to the actual collections of $3,500,870,848—as they say “pretty good for government work”. 

Now that we know what revenues are included and their total amount we turn to how they are apportioned among school districts.  Essential to understanding this part of the state aid formula is how school districts’ “weighted average daily membership” (WADM) is calculated, because it is on that basis, primarily, that the $3.5 billion is divvied up.  At the core of WADM is ADM, average daily membership, which is simply how many students were enrolled, on the average, over the 175 or so school days in the school year.  In the initial count, ADM, each student has a weight of 1, so for a district having an average daily enrollment over the year of 1,000 its ADM is 1,000.

Now comes the real fun.  Because it is believed that different students cost different amounts to educate, certain categories are given weights in an attempt to allow for the expected higher cost.  First there are Grade Weights, which include the 1 for each student, from 1.0 for grades 4-6 to 1.2 for grades 7-12 and 1.3/1.5 for Kindergarten and 1.5 for Out of Home Placement.  So a thousand students in the sixth grade start out weighted 1,000, but the next year as 7^th graders they are weighted 1,200.

The highest weights are for students receiving Special Education services which range from speech services only at .05, to Learning Disability at .4, to intellectual disability at 1.3, to severely emotionally disturbed at 2.5, to deaf at 2.9, and to blind at 3.8, as examples.  Therefore, a blind 7^th grader has a weight of 5.0 and a sixth grader receiving speech therapy is weighted 1.05.

Other weights added on are for Gifted at .34, Bilingual at .25, and Economically Disadvantaged (determined by qualification for a free or reduced price lunch under the federal school lunch program) also at .25.  To summarize, a ninth grade student with a learning disability who qualifies for a free lunch is weighted 1.85.  Here’s the statewide totals for our example year FY2016:

Divide the total WADM of 1,108,650.14 by total ADM of 686,281.45 and we see that the average Oklahoma student carries a weight of 1.62.  Anyhow the state aid formula provides that our goal is for every school district to receive from the seven revenue sources that totaled $3.5 billion in FY2016 the same amount per WADM.  The formula then generates a state aid factor which is the total expected revenue from the Allocation sheet, not actual because we don’t know that in advance, being our $3,499,661,929 total less the stuff like transportation that doesn’t go through the formula, so something like $3.47 billion divided by the WADM (higher than actual because districts can use highest of three years) shown on the Allocation sheet of 1,122,952.01 suggests a factor of about $3,090.  The factor actually shown on the sheet is $3,034.60 which is calculated thus:  $1592 + $72.13 X 20.  We’re not exact, but again close enough to know we see the forest without getting lost in the trees (I love trite banality).

Here’s how a school district can estimate its state aid in five steps:

1.  Calculate your WADM, example 5000

2.  Calculate the total state aid factor, $1592 + 20 x $72.13 = $3032.60

3.  Target Revenue then is 5000 x $3032.60 = $15,163,000

4.  From the Target subtract chargeables which are the sum of:

          35 mills local property tax   $2,000,000 (current assessment X millage)

          75% of county 4 mill             $480,000 (prior year)

          Gross production                  $220,000 (prior year)

          Motor vehicle                        $1,250,000 (prior year)

          Rural Electric                          $190,000 (prior year)

          State land earnings               $510,000 (prior year)

Total Chargeables then is $4,650,000

5.  Result is State Aid amount for that district calculated like this: 

$15,163,000 – $4,650,000 = $10,513,000 in state aid.

Let’s check out how this looks for three real school districts now at the beginning of FY2019, with WADM’s near this example of 5000.  Here are the Allocation sheets for Collinsville, Western Heights and Pryor.

For each, Step 1 uses its prior year WADM which will be adjusted mid-year.   Step 2 calculates the FY2019 initial state aid factor, being $1751.44 + 20 x $83.53 = $3,422.04, which is a huge increase over FY2016 due to the pay raise funding.  Step 3 multiplies Step 1 times Step 2 to get the Target revenue for each district which is in proportion, of course, to its WADM since the factor is the same for all.  Step 4 totals the chargeables estimates using approximately 35 mills times the district’s current valuation and the prior year’s actuals for the other five.   Finally, Step 5 is the difference between Steps 3 and 4, being the amount the chargeables total is shy of the Target Revenue, which is the amount that needs to be made up in state aid. 

Even though Collinsville is smaller than Western Heights by almost 1700 WADM, it will receive more state aid, $9.134 million compared to $5.605 million, because its chargeables are predicted to be much less per WADM.  Without state aid it cannot begin to pay its teachers or offer educational services anywhere near to what Western Heights is able to do.  But, if the projections are accurate, then they each will have about the same total revenue passing through the formula per WADM.  In this way state aid balances out the disparity in local and state dedicated revenues and makes it possible for teachers to be paid and students educated with comparable resources across the state.

Then there’s Pryor.  Because its chargeables total more than the Target Revenue (thanks to Google locating there) it will get no state aid, but still will have more revenue per WADM than the other two districts.  It is “off the formula”.   There are several districts that do not receive state aid and usually it is their property tax wealth, i.e. Valuation Per Student, that sets them apart.  To  find this statistic I go to the School Profiles Reports from Oklahoma Office of Educational Accountability

https://www.schoolreportcard.org/report-card

The statistic is Valuation Per Student, i.e. the district’s total ad valorem assessed valuation divided by its average daily membership.  Statewide the number is $49,471.  Here is Union’s report showing a very close to average $50,422. 

On the chart following is the amount for each of the three districts and my FY2016 example.

Next time we’ll see how to use what we’ve learned.

As always lunch is on me for the first to ID the photo location.

My friend Peggy, retired educator of many including a child of mine, invited me to talk with a group about Oklahoma school finance.  I agreed and decided to incorporate my preparation into three posts leading up to that discussion.  Hopefully this information will guide a patient reader, with further study, to more fully comprehend Oklahoma school finance.  Sadly, such a reader would be well ahead of the fellows at the Oklahoma Council of Public Affairs who seem destined to uselessly flail away without real progress toward understanding and being baffled by what is a pretty straightforward regime.

The first step, and the focus of this post, is to learn how the Oklahoma Cost Accounting System (OCAS) works.  The manual is available on the State Department of Education website here.  The system uses understandable codes to classify all school district revenues and expenditures.  Every school district is required to report its revenues and expenditures, properly coded, to SDE within two months after the end of each fiscal year.  You can find abbreviated versions here on the SDE site.  School districts are also required to have their revenues and expenditures, properly coded, audited by an outside auditor.  School district audits are posted online by the State Auditor and Inspector’s office.  Audits have their purpose and place but I recommend the OCAS data as the place to begin.

Initially I’m going to use statewide data, however even though complete summary data is presented for individual districts, SDE does not provide complete statewide summary data for FY 2017 expenditures (capital expenditures are excluded) so I’m going to use FY 2016 tables as examples for both revenues and expenditures.   Here’s the first of three pages for FY 2016 statewide revenue.

Across the top are separate funds, namely General, Co-op, Building, Child Nutrition and Maps, which organize revenues and expenditures for particular purposes.  General fund moneys can be used for most everything except capital expenditures.  Co-op funds account for activities jointly financed by more than one district.  The Building fund collects part of the district’s local property taxes and must be used for the construction, operation, repair and maintenance of facilities.  The Child Nutrition fund accounts for school lunch and breakfast operations.  Maps is one of five funds that are tiny, about 1% of the total, and can be ignored to keep our review simple.

On the left side are revenue sources listed with OCAS codes in the thousands.  The codes organize revenues broadly by the level of government from which they come.  1000s are Local District Revenues, 1100 is property tax collections; 2000s are Intermediate, usually through the County Treasurer; 3000s are State Revenue with three subgroupings:  3100s are state dedicated revenues that are paid directly to districts, 3200s are State Aid and direct payment for employee insurance, and 3300 and above are other state grants and revenues; 4000s are Federal Revenue; 5000s are “nonrevenue” flows, primarily transfers from other funds where the revenue is already accounted for; and 6000s are fund balances.

Look at the remaining two pages and then I’ll suggest how to greatly simplify the revenue summary.

The General (11) and Co-op (12) funds for school districts are available for general operations, i.e. teachers, principals, counselors, teacher assistants, custodians, bus drivers, maintenance workers, utilities, gas and diesel fuels, insurance, etc., but not construction of facilities.  So we can simplify by combining General and Co-op.  The Building Fund can also pay for operations, but we’ll leave it separate for now.

As I said above several funds are specific to only a few districts and are insignificant in amounts so we can set them aside for now, namely 24, 25, 26, 50 and 81-86; these are just 1.1% of total revenues.  Also the Student Activity Fund (60) is easily distinguished because it does not receive tax revenue and is limited to the activities that generated the revenue; it is 4.1% of total expenditures.  Removal of these funds decreases the total FY16 revenues by $419,078,744 to $7,642,007,347 including the fund balances. 

Another adjustment that makes sense is to move Child Nutrition revenues, namely 1700, 3700 and 4700, from the General and Co-op funds and add to the same sources in the Child Nutrition fund.  Districts have the choice to record child nutrition revenues and expenditures in the General/Co-op or Child Nutrition Fund.  There is no significant policy decision involved so we can simplify the overall picture by having all Child Nutrition financial activity in the same fund.  What is there are revenue sources 1700 for local (family payments for lunches), 3700 for state (the small state match that is required) and 4700 for federal (the federal funds that drive the school lunch and breakfast programs).

Next we can consolidate similar and/or minor revenue sources to further simplify our revenue summary.  Local, 1000, can be just property taxes (1100) and everything else (1200-1600); remember 1700 has been moved to Child Nutrition and 1800 and 1900 are removed with the Student Activity fund.  Minor County sources, 2300, 2400 and 2900, can be consolidated as can minor dedicated State sources 3111, 3150, 3160 and 3190.  Similar sources for Alternative Education 3310 and ICTE 3360 can be combined; remember 3700 amounts are in Child Nutrition now.  Lastly federal minor sources 4400, 4500, 4600 and 4800 can be consolidated, while 4700 also is now all in Child Nutrition. 

The result is a statewide school district revenue summary that fits neatly on one page and captures all revenue sources that should arguably be part of policy discussions.

I’ve included a few percentage calculations for each fund of its total new revenue.  Here are the essential take-aways:

Operational expenditures, such as paying for teachers, principals, bus drivers and diesel/gasoline, are supported from the General and Co-op funds primarily with State tax revenue (60%) and Local property taxes (26%).  The largest single entry is almost $2 billion for State Aid which will be the topic of my next post.

Additional local property tax revenues are available in the Building fund (92%) for operation, maintenance and acquisition of school facilities and equipment.

Child Nutrition (school breakfast and lunch) services are paid for with special Federal (75%) revenue and local charges (19%).

The Bond funds work in tandem with the Sinking fund.  Expenditures, as we will see, are recorded as Bond projects which are paid for with local property tax collections through the Sinking fund.

We can now turn to the expenditure side.  Here are the broad OCAS “Function” categories used along the left side of the following statewide FY 2016 expenditure tables for certain funds:

 1. Function 1000 Series – Instruction (teachers, teacher assistants, textbooks, etc.)

 2. Function 2100 Series – Support Service/Students (attendance clerks, counselors, nurses, OTs & PTs, speech path, etc.)

 3. Function 2200 Series – Support Service/Instruction Staff (library & staff, training, instructional labs and software, etc.)

 4. Function 2300 Series – Support Services/General Administration (superintendent & assistants, board, legal, audit, etc.)

 5. Function 2400 Series – Support Services/School Administration (building principals & assistants, school secretaries, etc.)

 6. Function 2500 Series – Central Services (financial and technology operations, insurance, etc.)

 7. Function 2600 Series – Operation and Maintenance of Plant Services (custodians, maintenance staff, utilities, etc.)

 8. Function 2700 Series – Student Transportation (school buses, drivers, mechanics, fuel, etc.)

 9. Function 3100 Series – Child Nutrition Program Operations (cooks, servers, food, kitchen equipment, etc.)

 10. Function 3200 Series – Enterprise Operations

 11. Function 4000 Series – Facilities Acquisition and Construction Services

 12. Function 5000-8000 Series – Other Uses and Repayments

Across the top are broad Object series codes; 100 is for employee compensation and 200 is for benefits like health insurance and Social Security.  100 and 200 added together are the cost of personnel. 

Let’s look for the largest dollar amounts in each of the major funds.

The largest function total for the General fund is upper right, $2.8 billion for Instruction.  Scan clear to the left and you see the 100 and 200 personnel costs, i.e. classroom teachers, account for almost all of the total.

The largest function total for the Building fund is toward the upper right, $140.8 million in 2600 Operation and Maintenance of facilities.  The largest Object column totals are 300-500 which include water/sewer/refuse utilities and contracting for custodial and maintenance work, 600 which includes electricity and natural gas utilities, and 100 & 200 personnel costs for custodians and maintenance employees.  All of these expenditures could, if there was enough revenue, instead be paid for in the General fund.  Note how little is actually used for construction, Function 4000.

Child Nutrition, as you would expect, is about Supplies, i.e. food, in Object 600 and the workers who prepare and serve the meals, again Objects 100 and 200.

Bond fund expenditures are dominated by Function 4000, construction and acquisition of facilities and building improvements, with most of that being paid to outside contractors as recorded in Object 300-500.  These expenditures are made with the proceeds from selling general obligation bonds, i.e. borrowing money.  The borrowed funds, plus interest, are paid back from Sinking Fund revenues.  Because the actual expenditures have already been recorded in the Bond funds, in the Sinking fund the bond payments are recorded as Function 5100 Debt Service and are NOT included in any traditional totaling of school district expenditures.  The value received by the district is through the expenditure of the bond funds; to include the bond payments, other than the interest cost, counts the same spending twice and exaggerates the overall total.

Next time we’ll see how the State Aid Formula affects the major funds.

As always lunch is on me to the first to ID the photo location (sorry about the graffiti, not). 

 

 

In my last post I took Joel Griffith with the American Legislative Exchange Council (ALEC) to task because I convinced myself he was doctoring his “research” by including spending with federal funds to show how Oklahoma “taxpayers” would have saved billions if only TABOR had been in place.  His totals were like Oklahoma government expenditures, including federal funds, that I’m used to seeing (which I showed using a table from the Comprehensive Annual Financial Report for 2017) for recent years, about $16 billion, with the two largest parts being state tax revenue and federal transfers/grants to Oklahoma.  I am so used to the fellows at the OCPA doing sloppy work that I just stopped there thinking I got them again and didn’t even look at his source to double check my conclusion.   Confidently I included Mr. Griffith’s email address on my distribution list and suggested he make a correction to his article.

As he pointed out in his reply, which was respectful of his elder (haven’t verified that but very safe assumption) his numbers did NOT include spending with federal dollars.  I was wrong.  He uses data from the National Association of State Budget Officers (NASBO) which is reasonable to do.  Comparisons among states, like comparisons among school districts I’ve submitted data for, can never really be apples to apples but using a consistent methodology over time is about as good as you can do—though you should try to get the right numbers.   Here’s what one of the pages he used looks like:

Oklahoma is down toward the bottom in the Southwest, just above Texas.  The most recent report does not have actual data for 2017, only “estimated”.  So when he whined about the growth in state expenditures from $11.5 billion in 2011 to $16.5 billion in 2017 he was comparing actual to estimated, presumably.  Of course I have now checked his source and transcribed the data from all the NASBO reports going back to 2000.  I put the estimated numbers for 2017 and 2011 in italics so there are two entries for 2011, actual and estimated.  Here’s my table:

The first five data columns mirror the NASBO reports; the last two are my calculations, first removing the federal amount from the total and then also removing bond amounts.  Notice that the $16.1 billion for 2017 (estimated) shows up as $16,134 million.  That’s the number he used.  But notice that nowhere for either 2011 actual or 2011 estimated does $11.5 billion show up, the closest being $11,596 million by also subtracting the bond amount, but that wouldn’t be apples to apples.  So on this alone I think Mr. Griffith owes a correction.

What else, besides just using the wrong amount, about his numbers fits with my experience reviewing the work by Stink Tanks like OCPA and ALEC is how they are oh so clever in selecting a base year from which to describe a change.   He says “total state funds expenditures are expected to smash records in fiscal year (FY) 2018 for the seventh consecutive year, after rising from $11.5 billion in FY 2011 to $16.1 billion in FY 2017.”  Not only, as I’ve shown, is the $11.5 billion $600 million less than the number from the NASBO data and we don’t know if the $16.1 billion estimated actually happened, but you could also describe the data this way:

Total state funds expenditures, after taking five years to catch back up to the 2007 pre-recession total of $13.6 billion, was at $15.1 billion for 2016, being a paltry 10.5% increase over that decade and well below the combined increases in population and inflation.

His other big revelation from his look at the data was telling us that total state funds expenditures, since 2000, blew right through the cap of 56% (42% inflation plus 14% population growth) that having TABOR in place would have imposed.  He could have saved us over $3 billion.  But look at the data table.  Here are the percentage increases from 2000 to 2017 (estimated) for three columns:  “less fed” (which is total state spending) is 107.6% which clearly does blow the top off the 56% TABOR cap (his calculation, not mine); “general” is 35.7% which is way less than his cap; and “other” is 213.1%.  Even a limited thinker can see that his heartburn can’t be for our general fund state spending, but rather should be focused on our “other state funds”.  Figuring out what those are led me to Oklahoma’s deep state.

Here’s the NASBO definitions and a great national chart:

Remember I got off on the wrong track because I was used to data sets where federal funding was close to half of our state spending.  But now I’m seeing a data set where the total is much larger, $23.3 billion for 2017 estimated, and has this “other state funds” category being a big hunk as well.  So what is it?

Read the definitions above.  Right off the bat, if I’m concerned about taxes, it seems I should be more focused on the “general fund” totals that are paid for mostly with taxes—and TABOR wouldn’t have limited Oklahoma’s growth (except it can ratchet you down in a pretty stupid way) as Griffith calculates it, because 36% is well under 56%.  On the other hand, “other state funds” include tuition, fees, donations, assessments, provider taxes, etc.–provider taxes appear to be a way states can game the Medicaid system to have the federal government and patients pay some of the state’s match and Oklahoma plays in that game so they are not what most think of as taxes.  I’m very skeptical that Colorado’s TABOR includes most of these revenue streams.

Still I went looking for Oklahoma’s “other state funds” and here’s what I think is the best representation from Page 48 (cafr16 p48) of the 2016 (so can be compared to the most recent actual NASBO data) Oklahoma Comprehensive Annual Financial Report:

I think it’s obvious that the general fund and federal funds shown in the NASBO data are within the $17 billion for “Primary Government” above, though removing the $900 million for higher education makes sense because it is used to cover the $867 million Higher Ed deficiency below and we shouldn’t double count (though stink tanks like to).  So that brings us to $16 billion or so with, see at the bottom, $8 billion from taxes and, second and third columns at the top, the rest from charges ($1.7 billion) and grants, $7.8 billion, virtually all federal I bet.

What I conclude from this exercise is our “other state funds” (Oklahoma’s Deep State) will be found almost entirely in the “Component Units” described in the middle of the Table, of which Higher Education is the largest, but notice it (tuition and fees) and the others are very dependent, not on tax revenues, but on user charges.  Perhaps some also comes from the list of “Business Type Activities”.  The largest of these is the state’s health insurance program for state and education workers.  And that’s another story—one that also doesn’t involve taxes unless you want to double count.

For my money, and thinking, if we want to use the broad NASBO data and if we’re interested in arbitrarily constraining state spending to keep taxes low, which is Mr. Griffith’s mission, then I don’t think you use “other state funds” in your argument.  But if you don’t, then your argument goes away for Oklahoma and you don’t get to publish your drivel on the OCPA’s site.  However at least you wouldn’t be adding to everyone’s confusion about how state services are financed and what they cost.  Still I enjoyed learning more about our state’s deep state.

As always lunch is on me for the first to ID the location of this photo (selected in recognition of the recent passing of a true American hero and statesman).     

Bison sculpture at Tallgrass Prairie Preserve, Osage County, ID’d by Peg Gotthold.

(Note:  Have had correspondence with Mr. Griffith and likely I will be following up with a significant correction; appears he did NOT include federal funds.  So now I need to find another $8 billion our state expends according to NASBO, and will comment on other aspects.  Enjoy.)

The Latin phrase Labor Omnia Vincit is Oklahoma’s state motto—“Work conquers all”.  TABOR is an acronym for Taxpayer Bill of Rights, a legislative proposal pushed by Stink Tanks that would limit increases in state and local government spending to no more than the rate of inflation plus the rate of population growth.  Colorado enacted this as an amendment to its state constitution in 1992.  So when I read “Spending restraint would save Oklahoma taxpayers billions” now posted on the website of the Oklahoma Council of Public Affairs I had to learn more, very little more, about Colorado’s TABOR to check this claim by author Joel Griffith, supposedly a TABOR expert for the American Legislative Exchange Council, a national stink tank, and a lawyer.  I also exhausted my Latin vocabulary from two years’ high school study so had to finish the title by exhausting my French vocabulary (sadly had to use Google).

Mr. Griffith leads off with this claim about Oklahoma:

According to the National Association of State Budget Officers (NASBO), total state funds expenditures are expected to smash records in fiscal year (FY) 2018 for the seventh consecutive year, after rising from $11.5 billion in FY 2011 to $16.1 billion in FY 2017.

Right off the bat I knew this would be an easy one.  I lived through FY 2011 to FY 2017 budget preparations with an Oklahoma school district and immediately suspected two problems with his numbers.  First, to get to $16.1 billion that would include federal funds flowing through the state and I doubted that TABOR would restrict federal spending since it is a state measure.  Also I was pretty sure that Colorado, unlike Oklahoma, had accepted Medicaid expansion under Obamacare demonstrating their common sense that you don’t deny your citizens a federal benefit they are paying for.  And second, the increase from $11.5 to $16.1 billion simply didn’t jive with the state aid cutbacks school districts had experienced during that time.

I easily confirmed my suspicions by viewing the Comprehensive Annual Financial Report issued by the State of Oklahoma for both FY 2011 and FY 2017.  This is from page 54 from CAFR FY 2017:

I’ve been around our state numbers and other financial reports enough to know that, with some effort, we could probably tie into his $16.1 billion with the numbers on this page.  Regardless of how close we could get I’m very confident that his $16.1 billion must include federal funds passing through the state because that $6.7 billion in federal grants is over 40% of the total—the very thing that had an OCPA fellow in a tizzy about which I commented in my last post.

Now that I have a credible source for FY 2017 let’s look at the same report from page 52 of CAFR FY 2011:

These numbers don’t even begin to support his assertion that Oklahoma’s state expenditures were $11.5 billion in FY 2011.  He is simply wrong, wrong, wrong—and shame on the fellows at the OCPA for publishing this slop.  Later I will reveal what I think this new Limited Thinker has done, though I’m not going to prove it in this post.

For FY 2011 you see that federal grants made up an even larger share of the state’s revenues, probably the result of the ARRA stimulus that helped move our economy out of the Great Recession of 2008 and set us on the path to a steady expansion that continues today.  This brings us to the second reason Mr. Griffith is a Limited Thinker—he’s including federal funds in his calculations. Here’s his “billions” conclusion:

What would TABOR have meant for Oklahoma? Since 2000, total state funds spending would have increased just 56 percent rather than 108 percent if limited to just the combined growth in inflation (42 percent) and population growth (14 percent.) Failure to adhere to such basic constraints created a budget blowout of $16.1 billion in FY 2017, a whopping $3.6 billion higher than the $12.7 billion in spending the state would have had with TABOR-constrained growth.

Even though Mr. Griffith purports to being an attorney, apparently he has not read TABOR in the Colorado Constitution.  If he had he would find this language at Article X, Section 20, subsection (2):

(e)  “Fiscal year spending” means all district expenditures and reserve increases except, as to both, those for refunds made in the current or next fiscal year or those from gifts, federal funds, collections for another government, pension contributions by employees and pension fund earnings, reserve transfers or expenditures, damage awards, or property sales.

This language defines the spending limitations imposed at subsection (7) of Colorado’s TABOR.  It clearly does not limit Colorado in any way from expending whatever amount of federal grants or funds come its way.  A proper analysis, performed by a true researcher who is able to think clearly and has the necessary reading, writing and arithmetic skills, of TABOR’s impact on Oklahoma state expenditures would begin by subtracting from its total spending all “gifts, federal funds, etc.” as defined above.  No way would the resulting numbers for FY 2011 or FY 2017 be the silliness used by Mr. Griffith.  Based on the numbers above FY 2011 will be less than $9 billion and FY 2017 less than $10 billion.   So between the two he is only off a whopping $8.5 billion or so.

I won’t take up my space with his silly chart that displays his foolishness, except to quote the legend:

Source:  Author’s calculations based on data from NASBO, Federal Reserve, Census Bureau.

To apply TABOR you need to make calculations using three data sets:  population growth for which the Census Bureau is the best source; the Consumer Price Index for the state for which the Commerce Department is the source, but possibly the Federal Reserve republishes the numbers; and accurate amounts, as defined in TABOR, for expenditures and revenues in actual dollars, i.e. no adjustment for inflation, for which I would go to that state’s official records for the data.   But note that he uses NASBO, a source I’ve not explored, but my hunch is that the data he pulled for Oklahoma, in addition to making no effort to adjust for federal funding, probably is adjusted for inflation, which would explain some of the huge difference for FY 2011.  Just a hunch, but I have already demonstrated that my hunches are better informed than his “research.”

Finally, what about his calculations.  Maybe he knows how to, maybe he doesn’t.  I can’t tell because “garbage in, garbage out” defines his work.  Until Mr. Griffith takes the time to understand what TABOR provides and to understand a state’s financial reporting he has no business alleging “billions” would have been saved.  Again shame on the fellows at the OCPA for publishing such rank garbage.

As always lunch is on me for the first to ID the photo location.

Central High School in Topeka, KS, which the Thinker wrongly thought was the school involved in Brown v. Board of Education; ID’d by Clark Frailey.

I’ve been commenting on gubernatorial candidate platforms and other matters of interest to me which has taken me away from my usual foils, the good fellows at the Oklahoma Council of Public Affairs, for over two months.  So it’s past time to see what silliness they have been up to.  Three articles caught my attention.

The first by Mike Brake, Official Says Some Assessors Shortchange Schools, Counties, reports on a study done by the Oklahoma County Assessor’s office that looked at valuation practices in 12 of Oklahoma’s 77 counties.    The study finds wide variations in assessment practices that are consistent with the 2013 Equalization Performance Audit commissioned by the State Board of Equalization which found 35 counties out of compliance.  Since the OCPA seems otherwise to be on a tear to greatly increase property tax revenues in Oklahoma as a way to fund public education, a state responsibility, it is a good thing that they take an interest in making sure assessment practices are consistent across all 77 counties.  Simply stated, if assessment practices are allowed to vary widely then the whim of individual assessors will thwart efforts to achieve fairness among taxpayers and adequate funding for schools statewide.  I’ve requested a copy of the Oklahoma County Assessor’s study and may have more to say later.

The second, Distorting Facts To Fit A Narrative, by Jonathan Small could be funny if it weren’t so disingenuous.  Mr. Small is annoyed by a politician half a continent away who probably did distort facts and misuse terminology, but Small, who lives in a house made of glass, should not talk like a kettle because he need only look down the hall, or in a mirror, to find examples of authors “distorting fact to fit a narrative”.  As I’ve repeatedly documented in this blog, he and his colleagues so consistently distort facts and misuse terminology that it is notable only when they don’t.  In the recent two-year run up to the teacher pay raise this spring the fellows at the OCPA, and sister Stink Tank the 1889 Institute, consistently pushed the narrative that there was plenty of funding available for raises by distorting the facts in a variety of ways, including counting the same revenue twice, referring to teacher aides and cafeteria workers as “administrators”, implying that fund balances are recurring revenue, inflating numbers without disclosure and, my favorite, just making stuff up.

The third, Flood Of Federal Dollars Damages Accountability, by Trent England is arguably another example Mr. Small could use of distorting facts (“Nobody is ever on the hook”) to fit a narrative (Government wastes the money it spends), but it’s hard to argue he is distorting facts when he presents little of them.  He includes the State Department of Education as one of those agencies receiving the corrupting hundreds of millions of dollars so let’s look at some facts about those programs.

Here’s the total federal revenue, $693 million (out of the total $6.091 billion from all sources–local, county, state and private) flowing through SDE to Oklahoma school districts for the 2016-2017 fiscal year.

Three programs clearly dominate and fit the “hundreds of millions of dollars” that concern Mr. England.  The largest is $239 million for breakfast and lunch programs in school cafeterias statewide; the mandatory state match for this program was $3.1 million that year.  Our poor legislators were bullied by the U. S. Department of Agriculture into spending almost a penny and a half for every dollar of food Oklahoma’s neediest children consumed.  To quote a most compassionate commentator, “womp, womp”.  Mr. England, the accountability here is pretty simple, if you don’t like how the school lunch programs is run at your school, take it up with your school district, or if you don’t think there should be a school lunch program, take it up with your elected representatives in Congress.

The next largest is $191.7 million for “disadvantaged students”, a program which began as the Elementary and Secondary Education Act of 1965 as part of Lyndon Johnson’s War on Poverty.  The funding is allocated to school districts nationwide primarily based on the incidence of poverty as measured by U. S. Census Bureau, specifically their Small Area Income and Poverty Estimates.  To my knowledge there is no significant financial match, or distortion of priorities, caused by this funding at either the state or local level.

I taught remedial mathematics for two years during the early 70s in a Tulsa junior high school program that was funded with these dollars.  With my faithful assistant Alice (who humiliated me on the tennis court) and a class size of twelve we were able to teach students, often one on one, who otherwise would have been buried in a classroom with over thirty other students.  It seemed to work well with many returning to the “regular” classes the next semester.  Mr. England, the accountability here is pretty simple, if you don’t like how these programs are run at your school, take it up with your school district, or if you don’t think this federal program should exist, take it up with your elected representatives in Congress.

The third largest is $136.1 million to support compliance with the federal “Individuals with Disabilities Education Act” first enacted in 1975.  This is the law that requires school districts throughout the nation to serve students with disabilities according to federal standards.  Working at a public high school as I did in 2005 was in marked contrast with my experience as a student at Nathan Hale High School in 1965, my senior year.  I don’t recall interacting with any students with disabilities and don’t even know if they were allowed to attend.

I suspect that the educational services provided to students with disabilities across the country varied widely, with some states and districts working hard to educate all children while other states and districts were doing as little as they could get away with.  Regardless, for whatever reasons, Congress determined in 1975 that there should be a national standard for the educational services to be provided to students with disabilities at all public schools.  That is what Congress does, whether Mr. England likes it or not, it passes laws that it believes are necessary and proper for the good of the nation.

According to public school world which I’ve inhabited as a teacher, an administrator, a school board member and a lawyer for almost 50 years, part of the bargain in 1975 was that the federal government would help fund the costs of providing the additional services for students with disabilities mandated by the new law, and that it would do so at the approximate level of 40%.  According to the National School Board Association the actual level is now about 16%.

Let me translate that for Mr. England, who might go to the OCPA’s silly data tool and calculate the total of program 239 expenditures statewide in FY17 and subtract from that the $136.1 million in federal funding for education of Oklahoma students with disabilities to see how much Oklahoma school districts, with state and local funding, expended to meet this federal law mandate.  He might then search for a school board member, administrator, parent of a student with a disability, who thinks Oklahoma school districts receive too much from the federal government to help meet the mandate.

Mr. England, just like the other two programs that spend hundreds of millions of dollars, the accountability here is pretty simple, if you don’t like how educational services for students with disabilities are provided at your school, take it up with your school district, or if you don’t think educational services for students with disabilities should be a federal mandate, take it up with your elected representatives in Congress.

I hope I’ve provided some transparency about the education programs guilty of using federal funds.  I suspect it would be fairly easy to do the same for the other programs he mentions, those administered by the Department of Health and Health Care Authority, using hundreds of millions of dollars.  So I spent less than ten minutes perusing the Governor’s FY17 budget proposal and quickly found that the Health Care Authority is dominated by Medicaid programs, namely health insurance for low income families and the disabled, and long term (nursing home) care for the elderly.  It’s pretty damn transparent that Mr. England would rather whine about accountability than just simply state that he doesn’t think taxpayers should help finance health insurance for children or provide long term care for the elderly who can’t pay for it.  Let them beg in the streets.

The Department of Health operates a myriad of programs that readily appear to be efforts at prevention, like nutrition for infants, immunizations to prevent contagious diseases, medical services for pregnant women, and many more that doubtless help avoid much greater costs to us all in the future.  What is Mr. England’s vision–a return to a time not so long ago when infectious diseases killed more people than cancer, when a high percentage of children died before reaching adulthood (check your family history), when childbirth was a major cause of death for women?  These advances in public health we’ve accomplished, some of it even during my life time, are not without expense, without laws that restrict our “freedoms” or even without bureaucrats administering public health programs.

If your narrative is that federal funds corrupt state level decision-making, then be transparent (give us the facts) about the programs those federal funds pay for and tell us which ones you’d be willing to eliminate and how the state would pay for the ones you’d keep.  Now that would be accountability and transparency by example.  Otherwise you are just “distorting facts to fit a narrative.”

As always lunch is on me for the first to ID the photo location.