Sunday, January 30, 2011

Health Insurance Premium Increases Creates Fiscal Challenges for School Districts

One of the most common complaints that school districts hear from their professional educator employees is that if we ask them to pay all or a portion of employee health insurance premium increases, that increase represents a pay cut, because of course the number on their paycheck will be smaller as a result. We respond, "no, when your cost of health insurance rises, that's not a pay cut, that's the health care industry taking a larger bight out of your compensation". This difference in point of view about health insurance premium costs permeates the public education industry and contributes to a fundamental communication gap when we discuss public education finance.

I've been writing about the compensation cost drivers impacting school finance. This is the third post on the issues relating to health insurance.
In last Tuesday's post, I explained that health insurance has been an important part of the compensation covenant that public educators believed was entered into with those entering an education career. I provided figures showing that in the last several decades health costs have risen far above the rate of inflation, so that health care and health insurance costs have become a larger and larger share of the family budget for everyone in America. I discussed the stress that these rising costs have placed labor management relations for any employers who have traditionally provided so-called full insurance coverage, from the steel and auto industries, to large corporations generally, to state and local government, and to school districts.

In the last decade, the consumer price index rose 28 percent, or 2.8 percent per year. During that same time, the medical component of the consumer price index rose by 49 percent, or 4.9 percent per year. And health insurance premium costs rose even faster. What that means is that an employer simply cannot cover the entire inflationary cost of health insurance without taking a huge bite out of any increases provided in the rest of employee pay.

The measurement of medical cost inflation is controversial and complex, but however you measure it, its going up way faster than general inflation. Insurance prices are going up even faster than the rate of health care cost inflation, as I have said. All of us have been experiencing this inflationary challenge. People who pay for their own insurance --- a relatively small portion of the insurance market--have been finding insurance increasingly unaffordable, and their medical bills when uninsured increasingly unaffordable too. Employees who cost-share their insurance premiums have been finding that every year, their net paycheck after paying their share is, well, a little lighter, or shall we say, quite a bit lighter. Employers who cover the entire insurance premium have been struggling to find ways to continue giving raises in pay, while covering the cost of the growing premiums. At the same time, co-payments and deductibles are rising, taking a second bite out of pay.

Public education is one of those industries with a history of covering the entire insurance premium for professional employees. As the cost of health insurance rose dramatically, most districts required premium cost sharing for family coverage, but many still cover the entire cost of single coverage. But the rising cost of premiums puts tremendous stress on districts' ability to keep providing that coverage while also providing pay increases that seem meaningful to our employees. And, when the State freezes revenues for school districts, it is impossible to cover those premium increases without making significant cuts in school programs to make up the difference. In our school district, the built-in cost increase that will result from uncapped health insurance premium increases paid by the employer is estimated at $300,000 this year, and a second $300,000 next year, so that without increased revenues from the state, we will have to make a total of $600,000 in cuts to fund them.

As we discuss issues regarding school finance, and especially educator compensation, we need to keep in mind that it is not useful to pollute the discussion with attacks on teachers. I keep saying that school finance is primarily about arithmetic. If I were the King, I like to say, I would cut the salaries of corporate executives, football players, stockbrokers, lawyers and surgeons, and I'd raise the salaries of teachers. I'm trying to focus on is the arithmetic of school finance and to explain the factors that have led us in Minnesota to drive our costs up higher than our revenues will allow.

That brings me back to my main topic: the communication gap in our discussion about health costs and competition.

One of the communication hurdles that we struggle to overcome in this context is the commonly stated belief by many employees, and even some on the management side of public school districts, that when the employee's cost of health insurance goes up, that the employee has received a "pay-cut," unless the employer covers the increase. I admit, it sure feels like your pay has been cut, because you have less money to pay for everything else, but in fact, its the health industry taking a larger and larger bite out of what you earn, not your employer.

When the cost of something goes up, that doesn't mean that your employer has cut your pay. When the price of gas goes up, more of my paycheck goes to fuel for my car, but I haven't experienced a pay cut. If the prices of groceries goes down, I haven't received a pay increase. Suppose that I participate in one of those cafeteria plans that allows me to "flex" child care expenses. If my child care costs go up, I'm going to have to flex more, in order to pay for them out of the flex plan. My paycheck will be smaller, but the increase in child care costs didn't decrease my pay. When prices go up for something, it redistributes some of my pay away from some other things, or decreases my savings.

As I said at the outset, in the last decade, the consumer price index rose 28 percent, or 2.8 percent per year. (This is an average, so some years, the increase has been much higher, of course, and other years, lower.) During that same time, the medical component of the consumer price index rose by 49 percent, or 4.9 percent per year. But it is extremely important that we understand that the 28 percent increase includes the 49 percent. In other words, the rate of inflation (the 28 percent) is an averaging of the entire market-basket of what people buy, including their medical costs--such as insurance.

Compensation costs for school districts under the traditional model is driven by the base compensation plus steps (a reward for time of service), lanes (a reward for additional education, salary schedule improvement (an inflationary upward adjustment in everything on the schedule) and fringe benefit costs--the greatest of which is the employer's contribution to health insurance.

That brings me to the undeniable arithmetic of employee compensation:

It is not possible to hold employees harmless from health insurance inflation while providing pay increases which match the regular rate of inflation, without either going broke, or receiving revenue increases significantly higher than the rate of inflation. The 2.8 percent rate of inflation in the last decade includes health cost inflation. In fact, it is health care costs that are a significant share of that increase. Without those cost increases, the overall rate of inflation would be significantly lower. That means if public school districts are going to become financially sustainable, even if the State were to provide us with inflationary increases in revenues per student, we could not continue to cover the entire cost of health insurance premium increases.




Tuesday, January 25, 2011

Testimony in Favor of SF 0056--the temporary hard freeze

Jerry Von Korff
Bruce Mohs
School Board Members–St. Cloud District

Written Testimony of Gerald W. Von Korff
and Bruce Mohs
In Support of Senate File 0056

Please accept the following written testimony in support of Senate File 0056, the mandatory hard-freeze for employees of public school districts and charter schools. We are both entering our eighth year of service on the St. Cloud Board of Education, a District with about 9600 students. Both of us have served as board chairs. Both have served as bargaining representatives for the district. Bruce Mohs devoted his career to teaching and was an active member of his teachers union. Both of us are lifelong Democrats. Our board of education is in the process of deliberating on its legislative position and has not yet taken a stand on this legislation. We write on our own behalf, because we believe that SF 0056 is one component of a temporary fix to the financial crisis facing school districts in Minnesota. We both believe that the solution to this crisis will involve relief on the cost side and on the revenue side.

It would be a terrible mistake to support SF 0056 on the grounds that teachers are overpaid, because they are not. Teachers are on the front lines of the most important work that government has to do in Minnesota--to strengthen our economic future by assuring that the next generation is well educated. And that job is getting harder, not easier. It is getting harder, because the standards that they must comply with are getting more demanding. It is getting harder, because we have shifted to a two-earner culture, where parents have less time of their own to invest at home in meeting their traditional responsibilities towards education. It is getting harder, because more of our children live in poverty, more of them are coming to school not speaking English, more of them are coming to school without the fundamental school readiness skills, and at the same time, we need more of the next generation to do far better than the last. In the long run, we must, in Minnesota, find a way to provide the funds to keep and attract quality education professionals in the classroom.

Minnesota faces catastrophic destruction in public education. In the last four years, the funding formula rose 2 percent, 1 percent, 0 percent and 0 percent respectively. After a brief respite, the special education deficit is on the rise. At the same time that education revenues are stagnant, school districts all over the state – including school districts that have already engaged in massive program and staffing cuts-- nonetheless agreed to settlements with their education professionals that will wreak another round of financial destruction. Here are some examples of the total package cost of settlements as reported by MSBA. The percentages reported by MSBA are lower than the actual percentage increase, because MSBA has adopted a formula for reporting increases that intentionally understates the increase, and the understatement is more significant for the higher percentages.

Total Package Cost Increase
(MSBA Understatement Method)
2009-2011 Settlements

Albany 3.3 percent
Alexandria 4 percent
Anoka-H 4.19 percent
Burnsville 5 percent
Hopkins 5 percent
Lakeville 5 percent
Little Falls 5.8 percent
Melrose 5.8 percent

Milaca 4.1 percent
Rochester 5 percent
Roseville 6.4 percent
Sauk Centre 4 percent
St. Cloud 2.4 percent
Stillwater 6 percent
Virginia 5.3 percent
Wayzata 6.8 percent

While some of these districts are taking money out of their reserves to fund these settlements, others have already implemented huge cuts that have already shocked their citizens. Even the Districts that have used reserves will discover, of course, that when you grant compensation increases out of reserves, the following years, huge cuts will follow. Under the current bargaining system and the current ethic in Minnesota’s educational governance and leadership, school boards have been unable to withstand the bargaining pressure that drives them to pay what they cannot afford.


The Opponents of SF 0056 say that it represents an assault on local control, but that argument ignores the overwhelming pressures that cause local boards to increase compensation costs beyond what they can afford: Among these pressures are the following:

Automatic Continuing Contract Increases: While public education labor contracts extend for two years, so that they can take legislative appropriations into account, most school district contracts contain significant built-in compensation increases that extend beyond the two year contract term, because of provisions of PELRA. The amount of these increases can be very significant, and in tough times, will exceed substantially the amount of revenue increases provided by the legislature. The district can charge the cost of these increases to the total package agreed to, but doing that when the state gives us zero, would require actual wage decreases to recover the unaffordable increase. If the continuing contract costs exceed what the District can afford, at the table, labor takes the position that “we already have these increases, so you have to give us more.” When you look at the total package increases above, you should ask, how much of this was agreed to, because of the continuing contract costs imposed by PELRA.

School Board’s Believe in their Educators: Overwhelmingly, we school board members believe in our professional educators. The worst part of our job, is sitting across the table and arguing with them about compensation. As I said above, we know that their job is getting harder. We know that we are asking for better results, even while in many districts more of the students we are putting in their classrooms present greater challenges. We cannot look them in the eye and say, you don’t deserve this raise.

The Strike Threat is far more powerful under open enrollment: Under open enrollment, the threat of loss of students to neighboring districts, charter schools, and private schools threatens long term financial destruction. If garbage workers go on strike, the garbage business doesn’t move to a neighboring city. In addition, in today’s two-earner environment, the strike threatens to leave children at home unattended.

The Shroud of Secrecy Surrounding Collective Bargaining avoids public review of the consequences of settlements. For many reasons, school boards and labor refrain from discussing the true consequences of the compensation increases that are granted. In order to understate the cost of settlements, we refer to a settlement that increases compensation costs substantially as a “freeze.” In order to make a deal, there is extreme pressure on the negotiators to structure agreements with hidden long term costs.

Pay Structures Place Enormous Pressure on Negotiators to Drive Compensation Costs Upward. The step and lane system does not provide increases to all teachers. That means that if a district grants steps, lanes, and health insurance increases, at tremendous cost, a significant number of teachers receive no increase. That forces negotiators to demand an increase in the entire pay schedule, on top of steps and lanes in order to deliver increases to all members. In addition, teachers nearing retirement, many of whom have used up their steps, see their last five years compensation as critical to the calculation of their pensions.

A pay freeze is not a permanent solution. We cannot attract quality education professionals to the teaching profession if we announce that our long term plan for the future is to freeze pay. The central fact that must be addressed, is that the State budget is currently shifting heavily towards medical care costs and custodial care costs for seniors. As a state, we must confront the fact that we must reward teachers appropriately, and that is going to require substantial increases in the education budget over the long haul. Reforming the step and lane system is a good idea, but reforming it by reducing the total cost of compensation will not achieve the educational improvements that we need. If the purpose of the freeze is to reduce teacher compensation over the long run, then it is a terrible idea.

We face, however, an emergency that requires us to take drastic steps to bring revenue and costs.

We want to close with some examples of the kinds of issues that school districts are facing.

St. Cloud: Our special education deficit is over $8 million and growing, despite the fact that we have virtually frozen special education spending for four years. Based on current projections, our special education deficit will rise by $350,000 per year, $700,000 for the biennium, even if we continue to freeze special education expenditures another two years. Approximately one million dollars of that deficit is accounted for by state special education mandates that exceed the requirements of IDEA. Our “continuing contract” costs, if agreed to in bargaining, will include $300,000 annual increases, $600,000 for the biennium, in health insurance cost increases and lane improvement costs of $180,000 per year, $380,000 for the biennium. Many school districts have significantly higher automatic continuing contract increases. The increased TRA and PERA costs imposed in the last session will increase our pension contribution cost by $500,000 for the biennium. All of these cost increases would occur if we impose the “hard freeze” under S.F. 0056. Our district has faced rising child poverty and significant increases in the population of non-English speaking students.

We have tried to confront theses challenges by cost containment measures as well as the imposition of an OPEB levy (which we could impose as a result of comprehensive post-retirement sunset agreements). We are cushioning children from the impact of the financial crisis, in part, through use of stimulus and other one-time funding. As of 2003-2004, when we joined the Board of Education, our unreserved fund balance was negative. We have restored some of that balance, but as a result of the fiscal impact of the special education deficit, we still stand as a district with one of the lowest unreserved fund balances per student.

We are not alone in St. Cloud in facing a crisis that derives from funding shortfalls, unfunded mandates, and labor settlements that are fair in the abstract, but which outpace our revenues. Here are some other examples of what school districts are facing.

Lakeville settled its teacher contracts at well over 5% last time. That’s 5% out of nothing. So, the combination of large compensation increases and frozen revenues has been an even more massive cut this coming year, even before the next legislative session. If Lakeville experiences more compensation increases next year, catastrophe is going to ensue:

Lakeville School District, with a student population of about 11,000, is facing a $15.8 million budget deficit for the next two years. District administrators have proposed to cut the equivalent of 100 full-time jobs next year, as well as eliminating programs ranging from fifth-grade band to "Early Bird" classes offered to high school students before the regular school day. “Class sizes would go up, students would choose from fewer electives, and funding for some sports and clubs would be cut under the plan. The "team-teaching" class structure of middle schools would be gutted. To save money on busing, start and end times at some schools would change.”

In 2007, Anoka-Hennipen took a referendum to the voters seeking $30-$50 million per year in new taxes. The voters approved question 1, providing $29 million a year for five years. It also passed question 2, providing for $15 million per year. According to campaign proponents, the two levies together would provide funds necessary to prevent precedent-setting cuts: School closings, hundreds of teachers laid off, and hundreds of dollars added to activities fees. However, Anoka Hennipen followed that levy with a 4 plus percentage compensation increase for the last biennium.

As a result in 2009, Anoka-Hennipen found itself $10 million short in funding just a year after receiving that levy support. . To produce the 7 million dollars in “savings” last year, Anoka-Hennipen had to cut 73 licensed positions and 42 non-licensed positions. Thus shortly after passing a levy to prevent crippling cuts, A-H started making the very crippling cuts it had hoped to avoid, but nonetheless increased compensation well beyond its means.

South Washington School District. A few days ago, the Woodbury Bulletin reported on budgetary problems in the South Washington school district, (District 833), one of our state's larger school districts. The Bulletin reports that District 833 may tap most of its reserve funds, rather than cut programs, to balance next year's budget. The article continues:

The district will face an $11.7 million deficit if the School Board makes no cuts to projected spending in the 2011-12 academic year and the Minnesota Legislatures leaves aid to South Washington County Schools goes unchanged.

Now in its last bargaining round, South Washington County settled with its teachers for a MSBA reported total package increase of 4.16%. For that biennium, the District received no increase, and it raised compensation by a MSBA reported 4.16, which translates to close to 5 percent in real money.

Rosemont Apple Valley

Roseville Apple Valley increased its compensation by 7 percent in its last settlement thrusting the District into a severe crisis. "One of the largest cuts was eliminating 144 full-time equivalent staff for $7.65 million in savings. The district also reduced its supply budget by 10 percent, eliminated middle school sports including football, baseball and softball and reduced energy costs."

A recent article in the Rosemont Patch reports on the another impending crisis in the Rosemont-Apple Valley school district, another of Minnesota's largest. According to the Patch:

Superintendent Jane Berenz said at Monday's meeting that even if the state doesn't make any cuts to education this session, the district still will have to cut or find revenue for $14 million for its 2011-12 budget.

Minneapolis

Just recently the Minneapolis School District, after holding out for nearly a year past the bargaining deadline of last January 15, finally settled its labor contracts. The teacher settlement alone will cost an additional $10.9 million. The District's refusal to pay these increases, originally, had cost it an $800,000 fine. Before settling for these increase, the District had projected "a huge looming budget deficit of $30 million to $45 million next year." Once the tentative settlement is approved, if it is approved, "negotiations will have to start again this summer for the next school year's contract."

This pattern repeats itself across the State, in district after district. We are supporting SF 0056 as a temporary solution because Minnesota needs a time-out from these massive public education cuts. The only way this is going to happen is for there to be a time out from compensation cost increases and a time out from revenue reductions. If a machine constantly injures people, we don’t say that we don’t need to fix the machine, because the workers who use it are careless. We fix the machine. The machinery of Minnesota’s education finance is broken, and it is broken in two ways. The State has refused to fund education adequately, by failing to provide regular and reliable increases to the funding formula and to special education while mandating increased costs. . But at the same time, the last decade proves that school districts cannot withstand the bargaining pressure that forces them to increase compensation faster than they can afford. Both aspects need to be repaired.

Monday, January 24, 2011

Bridging the Communication Gap on Employer Provided Insurance

I've been writing a series on the cost drivers in public education. I took a detour, however, over the last few posts to discuss SF 0056, the hard freeze bill being considered by the Minnesota Senate. Now, I want to return to the health insurance topic, where I left off. Before I get to the meat of the topic, however, I'd like to put the issue in context. As we discuss the cost of employer provided benefits in public education, one finds a tremendous communication gap in how we look at employer provided health insurance, depending in part on whether we have it at all, or whether we pay for it directly out of our wages.

The development of our nation's employer-based health insurance system may be traced to the period of 1929 through 1955. Between 1940 and 1950, the number of Americans with private health insurance increased from 20.6 million to 142.3 million. During this time, it became increasingly common for school districts to provide full health insurance coverage for teachers, but in doing that, they were adopting practices common amongst private employers of that day. Teachers entering the profession became accustomed to the idea that one of the financial benefits of becoming a teacher would be health insurance provided entirely at the cost of their school district. It is foolish to blame them for this expectation. They entered a profession that professed to provide strong health insurance coverage as a key component of compensation.

School boards recognized that they could provide this benefit at a reasonable cost, a benefit that was, and is, completely tax sheltered. Some districts may have felt, as well, that they could provide a deserved benefit that would not be added to the publicly discussed teacher salary. We cannot enter the public policy discussion about health benefits for professional educators without giving this fact its due: if you became a teacher thirty years ago, everyone understood that part of what you were receiving in your profession was high quality health insurance.

However, in recent decades, health insurance premium costs began to rise significantly. As health costs, and the cost of employer provided insurance rose, employers began to feel that they had to cost-share with their employees. That created equity issues among employees with families and families. Single covered workers argued that they should not have to cost-share as to premiums, because they do the same job as their family-covered peers. Why should they receive a benefit worth less, or costing less? And that explains why, in many public and private employer plans, the employer provides free single coverage, but requires its family covered employees to cost share.

The reasons that health insurance premiums have been increasing are quite complex, but one of the major cost drivers is that health care is growing significantly as a share of the private and public budget. This growth in the percentage of what we all spend on health care has challenged public and private employer's ability to provide the same coverage, as before at least without making corresponding reductions in wages or salary. Here's a chart I took off of a New York Times article from a couple of years ago. As the table show, health care costs in the United States have been mushrooming since 1970. This growth trend continued apace after 2004.

Percentage of Gross Domestic Product Spent on Health Care

19702004
US7%15.3%
Canada7% 9.9%
Germany6.2%10.6%
United Kingdom4.5% 8.1%


The cost of health insurance premiums has consequently grown way faster than other parts of the family budget. From 1988 to 2004, health insurance premiums rose at about 11 percent per year, many times higher than the rate of inflation. Employers, many of them, responded by restricting coverage, raising co-payments, imposing larger and larger premium cost-sharing, or in some cases eliminating coverage altogether. However, high quality coverage remains a standard benefit for education professionals and other public employees. I'm not writing about something my readers don't understand, of course. We are all living through the cost challenges of the health care system.

Now this provision of health insurance to public employees creates tension and jealousy when we discuss the compensation for education professionals. I often hear from constituents who think that public employees get special treatment. Partly, that's because there is a large-employer small employer divide in the provision of health insurance that the average citizen doesn't usually understand. See Rand Corporation Report. According to the Rand Corporation in 2004, about 2/3 of American companies offered insurance to their employees, but the size of the employer is a major factor in whether insurance is provided. Only about 24% of companies with 50 or fewer employees provided group health insurance, whereas most companies with greater than 50 employees did provide that coverage. Partly, it reflects the ability of public employees to protect themselves more effectively because they are organized. Partly, it reflects a shared belief that there was an unwritten understanding that quality health insurance was one of the compensating benefits for accepting the challenges of the teaching profession.

If we are going to have a realistic policy discussion about the challenges that face us in public education finance, and if we are to bridge the communication gap, we must ever keep in mind the clash between the rising cost of health care, on the one hand, and the expectation in the profession that protection against those costs was a part of the employment covenant. I'll discuss more about this in the next post.

Sunday, January 23, 2011

Senate File 0056 a necessary first step

The Minneapolis Star and Tribune carries an editorial today (Click Here) endorsing Senate File 0056, which calls for a two year temporary hard pay freeze for public education and charter schools. You can find the text of the bill by clicking here. The public debate surrounding this bill continues to center, wrongly, around whether public educators deserve the pay that they receive, or whether they have sacrificed already, or whether we should tax the rich, and so on.

I've supported Senate File 0056 as part of what I call the win-win legislative agenda. The win-win legislative agenda would include a hard pay freeze in public education, but it would also include an unwinding of some of the damage done in the last legislative session by increasing the unfunded mandate load heaped onto local school districts. It would require each party, democrats (i.e. Dayton) and republicans, to make painful concessions to their core principles, for the benefit of children. The win-win legislative agenda would put kids first, not just as a slogan, but in deed.

But it would be a grave mistake to support Senate File 0056, on the grounds that teachers are overpaid, because they are not. Teachers are on the front lines of the most important work that government has to do in Minnesota--to strengthen our economic future by assuring that the next generation is well educated. And that job is getting harder, not easier. It is getting harder, because the standards that they must comply with are getting more demanding. It is getting harder, because we have shifted to a two-earner culture, where parents have less time of their own to invest at home in meeting their traditional responsibilities towards education. It is getting harder, because more of our children live in poverty, more of them are coming to school not speaking English, more of them are coming to school without the fundamental school readiness skills, and at the same time, we need more of them to do better. So, anybody who claims that we need to freeze pay in public education because educators are overpaid, is well, out-to-lunch in my book.

No, the need to freeze our growth in compensation arises instead, from simple arithmetic. Minnesota faces catastrophic destruction in public education. In the last four years, the funding formula rose 2 percent, 1 percent, 0 percent and 0 percent respectively. After a brief respite, the special education deficit is on the rise. In our school district, that means that despite freezing special education for a number of years, the State will take $350,000 in revenues away from us, even though the State prohibits us from cutting spending by that amount, and another $350,000 next year, for a total of $700,000. In our District, state mandated TRA and PERA contributions will rise $250,000, per year for the next four years, to a total of $1 million per year, without a compensating increase in revenues.

At the same time that education revenues are stagnant, school districts all over the state – including school districts that have already engaged in massive program and staffing cuts, nonetheless agreed to settlements with their education professionals that will wreak another round of destruction. Again, this is not about underpayment or overpayment, it is about finance 101. Here are some examples of the total package cost of settlements as reported by MSBA. (The percentages reported by MSBA are lower than the actual percentage increase, because MSBA has adopted a formula for reporting increases that intentionally understates the increase, and the understatement is more significant for the higher percentages.) The true percentage increases in total compensation costs to the districts, ranges from one half to one plus percent.

Total Package Cost Increase (MSBA Understatement Method)
2009-2011 Settlements

Albany 3.3 percent
Alexandria 4 percent
Anoka-H 4.19 percent
Burnsville 5 percent
Hopkins 5 percent
Lakeville 5 percent
Little Falls 5.8 percent
Melrose 5.8 percent
Milaca 4.1 percent
Rochester 5 percent
Roseville 6.4 percent
Sauk Centre 4 percent
St. Cloud 2.4 percent
Stillwater 6 percent
Virginia 5.3 percent
Wayzata 6.8 percent



While some of these districts are taking money out of their reserves to fund these settlements, others have already implemented huge cuts that have already shocked their citizens. Even the Districts that have used reserves will discover, of course, that when you grant compensation increases out of reserves, the following years, huge cuts will follow. Under the current bargaining system and the current ethic in Minnesota’s educational governance and leadership, school boards have been unable to withstand the bargaining pressure that drives them to pay what they cannot afford.

Adoption of Senate File 0056 will inflict pain, it is true, but the truth of the matter is that while the pain is necessary to prevent the financial destruction of public education, it is only half of what needs to be done. Because finance 101 tells us that you need to put revenues and costs into balance. The last legislative session imposed significant new costs on public education without compensating revenues. The legislature needs to step up to the plate and pay for the increased costs.

Friday, January 21, 2011

Join the Win-Win Legislative Agenda, to put kids first in education

Public education faces a financial crisis this biennium that threatens our ability to provide a high quality education that Minnesota children deserve. In the last four years, the funding formula has gone up a total of 3 percent, with the last two years frozen. The special education deficit has begun to grow significantly again, and more districts are experiencing larger special education cross subsidies. Districts that had adequate reserves are losing them. More and more districts are reducing teachers and other staff, closing schools, raising fees, and cutting important programs. At the same time, over the last four years, the bargaining system in Minnesota has caused most school districts to increase compensation costs far beyond their capacity to pay.

The win-win legislative agenda says that we cannot solve these problems
without both cost controls and adequate revenues.

We call for:

  • Support for Senate File 0056 or its equivalent, which imposes a statewide hard freeze for public education employees through June 30, 2013
  • Support for House File 0092 which permanently repeals the bargaining penalty.
  • Support for a modest formula increase to assist school districts so that districts can recover from the last four years of funding neglect
  • Support for a legislative appropriation to cover the increased costs attributable to the four year ½ percent annual increase in district contributions to TRA and PERA
  • Support for repeal of special education mandates that exceed the federal requirements of IDEA or for State funding to cover those excess costs. Support for a statewide review of the cost drivers in special education leading to proposals to assure that special education is fully funded and sustainable.
Our support for a hard-freeze is not anti-labor or anti-teacher. We believe in our teachers and want them to be well-paid. The win-win legislative agenda is based on putting children first.

We are in the process of listening to our fellow board members and other citizens across the State to determine if there is widespread support for the win-win legislative agenda. We believe that it offers an opportunity for Governor Dayton and the legislative majority to compromise in the interest of children. We know that the DFL will struggle with the temporary hard freeze, and we know that the legislative majority will struggle with finding modest new revenues, but we believe that the win-win agenda offers a compromise that provides public education with a reprieve from destructive cuts, and puts our children first.

To provide input, comments, suggestions for revisions, or to offer your help....contact me at jvonkorff at charter dot net

Wednesday, January 19, 2011

What does it mean to "do what's best for kids."

In today's post, I want to talk about two ideas that are sort of related. The first is our propensity to explain all of the things we do in public education as doing what's best for kids. Then, in the second half of this post, I want to provide a couple more examples of school districts that are about to make huge cuts after having agreed to settlements way beyond their means. Then I want to argue that putting kids first means controlling costs and providing appropriate revenues, both. If we really mean to put kids first, then we can't take anything off the table, because that's what putting kids first means.

In the last couple of weeks, I heard the Minneapolis Superintendent of Schools interviewed on public radio, and then in a later program, I heard an interview with the new Commissioner of Education. Each of them, when asked about an important decision they made as administrators in Minneapolis said that they made their decision based on "what's best for kids." The Superintendent was referring to a decision to close a high school in North Minneapolis. The Commissioner was referring to a controversial school restructuring. Now I have no reason to believe that either decision was bad; on the contrary, I have to assume that those decisions had lots of good reasons behind them. Then, at the beginning of the legislative session, I heard a Republican leader say that when it comes to education, the majority is going to put kids first.

This idea that we "do what's best for kids" is pretty standard lingo for us in the education business.

But I want to suggest that we, in the education business, tend to use the phrase "what's best for kids" as shorthand for something that we agree with, or at times, something that is really terrible for kids, but that we have decided to do anyway, because we lack the courage to do what is really best for kids. It's a way of defending something without having to explain why its a good idea. Why is building a new school, or closing the school a good idea? Why did we cut 100 positions in our budget? "Because its good for kids."

We close a school because its best for kids. We get rid of a program and put in a new one in its place, because its best for kids. We select the new textbook series that's best for kids, and we choose K-8 programming, or middle school programming, or K-4 programming, because, yes, that's good for kids too. If there's a great big debate between two factions, each of which has opposing views on a decision, well, we make the choice that's best for kids, of course, and that means that the other faction's point of view was, well, not in the best interest of kids, I guess.

Everybody in education has the best of motives. But when we assert that our decisions are, by definition, good for kids, we are going down the wrong road. Some of the things we do in education aren't all that good for kids really. Sometimes, the decisions that we make are flat out rotten for kids, and maybe that's because we have gotten into the habit of believing that if we do it, it must be good for kids.

I've been giving some examples of school districts that are about to make major cuts, lately, as examples of the fiscal chaos that we are going through in Minnesota. When I do that, I mean no disrespect to the fine superintendents, HR leadership, and school boards that find themselves in difficult straights. I understand how they got into these binds, because the pressures that lead us down this road are enormous. The reason that I provide these examples, such as Anoka and Lakeville, is not because I believe that the leadership of these districts are incompetent. I'm providing these examples, rather, to show that the current system forces good people to do some terrible things that they don't really want to do.

A few days ago, the Woodbury Bulletin reported on budgetary problems in the South Washington school district, (District 833), one of our state's larger school districts. The Bulletin reports that District 833 may tap most of its reserve funds, rather than cut programs, to balance next year's budget. The article continues:

The district will face an $11.7 million deficit if the School Board makes no cuts to projected spending in the 2011-12 academic year and the Minnesota Legislatures leaves aid to South Washington County Schools goes unchanged.

Now in its last bargaining round, South Washington County settled with its teachers for a MSBA reported total package increase of 4.16%. For that biennium, the District received no increase, and it raised compensation by a reported 4.16%. Keep in mind, however, that the MSBA total package cost indicator understates the actual increase in costs, so it is likely that the South Washington increases were actually higher than 5%. Just to give you an example, our own district, St. Cloud, settled for a real total package increase of 3 percent, but the MSBA reported our rate of increase at 2.46%.

Is there anybody out there that believes that the leadership in South Washington would provide these increases if they had a choice, or that they believe that the cuts that they are about to make as a result are "good for kids?" These increases are happening because school leadership is so totally resigned to the inevitable annual cuts, that they cannot even conceive of the possibility that school districts budgets could ever go one or two years staying in balance. They have given up all hope of keeping costs and revenues in balance, in good years and in bad.

A recent article in the Rosemont Patch reports on the another impending crisis in the Rosemont-Apple Valley school district, another of Minnesota's largest. According to the Patch:
Superintendent Jane Berenz said at Monday's meeting that even if the state doesn't make any cuts to education this session, the district still will have to cut or find revenue for $14 million for its 2011-12 budget.
These impending cuts follow on last year's cuts in the District. "One of the largest cuts was eliminating 144 full-time equivalent staff for $7.65 million in savings. The district also reduced its supply budget by 10 percent, eliminated middle school sports including football, baseball and softball and reduced energy costs."

If you look at the settlement information on the MSBA website for Rosemont A-V, you find that the District's total package compensation increases were reported at 6.14 percent, which translates into an actual increase that is likely over 7 percent, for a biennium in which the formula was frozen without increase.

Just recently the Minneapolis School District, after holding out for nearly a year past the bargaining deadline of last January 15, finally settled its labor contracts. The teacher settlement alone will cost an additional $10.9 million. The District's refusal to pay these increases, originally, had cost it an $800,000 fine. Before settling for these increase, the District had projected "a huge looming budget deficit of $30 million to $45 million next year." Once the tentative settlement is approved, if it is approved, "negotiations will have to start again this summer for the next school year's contract." A school district official blamed the state of Minnesota's failure to provide enough revenue:
"It's been going on basically for the last eight years—the state of Minnesota hasn't kept up with the rate of inflation, let alone funding all of the mandates or the laws," Madden said. "It gets old to look in the rear view mirror and make all these cuts as opposed to looking forward and saying, 'How can we make sure all these kids are achieving.'"
We don't know where the $50 millions of cuts will occur, in the Minneapolis District which has repeatedly endured a series of painful cuts, but I'm sure that the choices made by the school board and superintendent will be made in the spirit of "doing what's best for kids."

If we are really going to put kids first, then we can't take the things that are good for kids off the table before we start. Democrats can't. Labor can't. School boards can't, and Republicans can't. If controlling labor costs will help education serve kids--that can't be off the table, even if it is painful, if we are going to put kids first. If additional revenues and, yes, taxes, would prevent destructive cuts in education, then putting kids first--doing what's good for kids--requires considering them too. Putting the education of our children first, requires just that, putting everything else aside, and doing what we need to do, to maintain a financially sound education system.

Tuesday, January 18, 2011

Pay Freeze is not about whether teachers are overpaid--its about fiscal sanity

The other day, I had a discussion with two colleagues regarding Senate File 0056, which freezes public school employee salary and benefits for the next two years. My two colleagues began to argue. The first said that the bill is insulting to teachers, because teachers are underpaid. The second said that the bill is necessary, and that teachers are paid pretty well, considering the financial condition of school districts. The first said that without the right to strike, teachers would fall vastly further behind financially and that suspending the right to strike, or freezing wages is unthinkable. As we talked, my two friends kept coming back to the debate over whether teachers are getting paid enough, or whether they are paid too much.

I look at this issue quite differently. I don't think that teachers are overpaid, but I support the freeze, because it puts children first. I think that teachers provide as much value every day, and more, as do certainly lawyers, stock brokers or, say, actuaries and accountants. This question, in my mind has nothing to do with whether teachers are overpaid, or underpaid. Its about whether we should increase their pay when our revenues aren't increasing. Its about whether public education can survive, if we continually fund teacher pay increases by making program cuts.

The education finance system in Minnesota is fundamentally broken. Some of you say, well that is because the State hasn't increased funding enough. But that is only half-right. To fix our education finance system, we need a reliable source of revenue, without ever-growing unfunded mandates, true, but we also need the ability to control costs so that they balance with revenues. The evidence shows that when the State increases school funding significantly, school employee compensation goes up far faster. When Pawlenty and the legislature increased the funding formula by 8 percent, that is 4 percent per year, all over the State of Minnesota, school districts were increasing compensation at a far higher rate. When Pawlenty and the legislature increased the general funding formula by 3 percent (two percent and one percent) all over the State, school districts were increasing compensation and a significantly higher rate. And, during the last two years, when funding was frozen, school districts still granted substantial increases in compensation. Surely, it must be clear, that this is the road to permanent financial ruin.

The truth of the matter is that our school bargaining system is so out of whack, that school districts are making cuts to fund compensation increases when the legislature provides exceptionally large increases, and they are making cuts to fund compensation increases when they receive no revenue increases at all. Some folks say this is about local control, but its not. Its about a dysfunctional system in which the entire education community across the State has lost the capacity to balance school district budgets. To fix this problem, I believe, we need to take a time out, freeze pay, examine how we got here, and how we are going to bring the school finance system in balance. The outcome of a repaired system will not disregard the need to pay teachers well. If it ignored that requirement, it would still be fundamentally broken.

The system is so far broken, that the public education community has lost the ability even openly to discuss the true nature of our problems. We readily discuss the lack of revenue, the unfunded mandates, the forced spending on special education and other programs that exceeds the revenues provided by the State. That is an important part of the financial catastrophe that is Minnesota's school finance system. But we refuse to talk openly about the other part of the problem, which is compensation increases that persistently outpace our revenues. We need a time out to take a deep breath, look at what we have been doing across the State, and fix this problem systemically.

The public education community has adopted a number of devices to deceive ourselves as to the true extent of the financial imbalance in our system. One subtle deception is that school advocates have invented a special inflation measure, called the "price of government" index. The price of government index measures the inflation in government costs--primarily the increase in government employee compensation. According to the advocates of this measure, we should not measure our cost increases by looking at the traditional CPI --Consumer Price Index. Instead, we are supposed to use the price of government index, which shows that the State is not increasing our revenues as fast as the price of government. But this is just another way of saying that we are raising compensation costs faster than the true rate of inflation.

Another device we have begun to use to deceive ourselves in Minnesota, is to change the way that we measure the calculated percentage increase in our compensation packages. Several years ago, the Minnesota School Boards Association changed the way that these percentages are calculated to make the cost increase lower than it really was. Under the new formula, if you divide the new compensation cost by the original compensation cost, the true percentage increase is higher than the percentage that the MSBA reports. When you systemically understate increase costs in this way, how can you even come to grips with the causes of your financial problems?

Many school districts have taken to separating the cuts that they make from their settlements. One way of doing this is to cut lots of teachers in April, but say that many will be called back in September. Then, in between April and September, if the school district settles its contract for more than it can afford, it isn't as clear to the public why half of the teachers "temporarily" laid off never came back. In this way, nobody ever focuses on the amount of the cuts that are coming from compensation increases, and the amount that are coming from revenue shortfalls. And, in the last four years of the Pawlenty administration, there has been a whole lot of both: compensation increases beyond our means, and a gross insufficiency in state revenue increases to cover our legitimate increasing costs. The two together, a lack of proportion in compensation costs, and a failure to provide reasonable funding increases, have combined to throw school districts into financial chaos.

As we discuss these issues, and try to confront them head on, we simply cannot solve them by pretending the issue is whether teachers are overpaid or underpaid. Teachers are not overpaid in my opinion, but that's not the issue. The issue is whether the industry that funds their paychecks, public education, can survive if it is constantly making cuts, year after year, to fund compensation increases that it cannot afford. Teachers earn their pay. Administrators earn their pay. Their work is hard, and they work dang hard. People who think that this issue is about whether public educators are overpaid are just plain wrong. The issue is about running public education based on simple principles of financial sustainability. If we want to pay our employees more, and I believe that is a good thing to do, then we cannot accomplish it by cutting school libraries, eviscerating our textbook supplies, cutting needed programs and raising class size. Once you go down that road, the cutting never ends, and the compensation problems never get solved. The more cuts you make, the less the public wants to support their schools.

If we want the legislature to fund public education adequately, I believe we must begin by creating a structure that assures long term financial stability in the balance between costs and revenues. The proposed pay freeze gives us a needed time out, a reprieve, during which we can all work together to put public education on a new path to sustainability.

Some people argue that, well, the governor must veto a pay freeze, out of loyalty to labor. That would be a tragedy for the Governor, for public education, and for children. If public education goes through another four years, like the last four years, we will be on the brink of moral and fiscal bankruptcy. Whoever allows the cycle of crippling cuts to continue, is going to carry as well the political price of being responsible for school closing, increasing class sizes, massive teacher and staff layoffs, and a reduction in educational quality. The Governor would be better off to stick to his guns on revenues, and insist that education receive sufficient funding, and buy that adequate funding, by signing a the proposed pay freeze. That's what both parties will do, if they put children first.

Sunday, January 16, 2011

Who should foot the multi-million dollar bill for increased public pension contributions?

This year, the legislature increased the rate of local school districts' contributions for public employee pension plans by one-half percent of compensation for each of the next four years. In our district, that represents an increase of $250,000, each year, until in four years, our new unfunded pension contribution costs will reach $1,000,000. Where should this money come from? When I discuss this issue, I'm amazed that almost everyone has a visceral answer to this question, as if it were simple. The state increased the rate of the District's contribution, so logically, the District should pay the contribution, right?

The problem is that the District doesn't have a printing press for money. So, saying that the District should pay, doesn't really help at all. When the State of Minnesota increases a mandated spending level for the District, there are several choices:
  • (a) the increased cost could be paid by the children of parents who send them to public school, in the form of reduced programs--increased class sizes, lower textbook budgets, or other reductions,
  • (b) the increased cost could be factored into our compensation budget: the District could say, look, we only have so much money for compensation costs, if we have to raise our spending here, we have to lower it there, so the employees indirectly pay the cost of their pensions. This is generally how we handle all compensation costs. In times when TRA contribution costs go down, it frees up more money for other forms of compensation; in times when they go up, it reduces our ability to pay other compensation costs;
  • (c) the increased cost could be paid by a local levy (if the State were to give us one), and absorbed by the local taxpayers in a locally imposed property tax, and
  • (d) the State could provide increased revenues out of the State general fund, on the theory that, by golly, if the State is going to make us spend more for a State managed retirement program, then the payments are a state obligation, and should be paid out of state revenues.

I have to begin by saying that my view is that it makes absolutely no sense for the cost of a state pension plan to be carried by children in schools. This question, as unpleasant as it may be, is going to repeat itself over and over again, in the next quarter century. Our current pension obligations, especially in the public arena, haven't taken the change in the dependency ratio into account. As more and more of us retire, in comparison to the number of productive workers, we are going to have to decide again and again, whether we pay the cost of increased dependency by reducing our investment in children. This is something I touched on in a prior post.

I think its worth pausing, before we answer the question "who should pay," to look at the genesis of public pension plans for educators and other public employees.

Public pension programs in Minnesota are close to a century old, and they thus predate federal social security.
You can find a history of the teachers retirement fund on the web by clicking here. TRA history you will find at this link begins with this entry:

A precursor to TRA was established in 1915, as the first statewide plan providing retirement benefits for Minnesota public school teachers. Both St Paul and Minneapolis had established City teacher retirement funds in 1909. Contributions to the 1915 fund were $5 to $10 per year, with benefits of around $100 paid per month. The minimum vesting requirement for a monthly benefit was 20 years, with no minimum age requirement. The 1915 Fund, also referred to as the Pioneer Teachers Retirement Fund, was liquidated during the Great Depression but payment of prorated benefits continued from the State General Fund.
Several of the employee retirement funds were locally created, by cities or local school districts. But the largest of our retirement funds were created by the State: the payment rules are set by the state; the investments are managed by the State; the rates of contributions are managed by the State, and the State takes responsibility to monitor and audit the investments and payments to make sure that the payments and contributions are managed effectively. The obligation--the actual legal responsibility to pay lies with the State of Minnesota. The St. Cloud School District has not promised to pay its employees a pension: the promise is made, and the benefits set, by the State of Minnesota.

When the social security act was first passed, it did not include State or local employees. Social security is a form of modified "defined benefit" plan which is designed to pay a benefit that is based on earnings history. (Social security differs from a true defined benefit plan, because the promise to pay the defined benefit is not based upon a contract with the government, but rather upon a legislative promise.) Social security imposes a tax on the employer and on the employee: the funds, however, go into the government treasury, with a separate accounting, called a trust fund, but is not really a trust fund. The money is not held in trust; it is not separately invested; there is no lock-box filled with bonds and treasury bills representing the social security trust.

Because social security is funded by taxes on employer and employee, the authors of the social security act were, at first, reluctant to require that state and local employees would be subject to mandatory coverage: one primary reason was a constitutional concern, that the federal government might not have the power to impose taxes on governmental employers, and that concern has raised special issues as to federal taxation of the State itself, as opposed to local entities. If school district and local government employees were going to have a retirement fund, then, states or local districts would have to take the responsibility. Back in the days when social security was first founded, teachers salaries were pretty minimal, and without State pensions, it would have been pretty difficult to attract qualified people into the profession.

However, eventually, states and the federal government came to an accommodation which would allow states to put their employees into social security program with consent of the State itself. But the existing state programs had significantly different benefits rules, and so they had to find some way to get the two programs to work together. The result in Minnesota was a coordination of benefits agreement which put teachers in social security and in TRA, but created a complex set of offsets to prevent duplication of benefits.

The Social Security Administration's website says:

Most employees have Social Security protection because their states and the Social Security Administration entered into special agreements called “Section 218 agreements.” Others are covered by a federal law passed in July 1991 when Social Security was extended to state and local employees who were not covered by an agreement and were not members of their agency’s public pension system.
The result of these changes in social security were to make coverage available to state and local public employees, as I have said. Minnesota eventually entered into the coordinated system which makes teachers part of the social security system and the TRA or PERA retirement systems, with the benefits and contributions "coordinated" in a way that is designed to prevent double coverage. The way in which the two systems work together, in terms of contributions, benefits, and retirement or disability eligibility is a topic I'm not at all qualified to explain.

Now TRA is a defined benefit plan, but the contributions are place in a real trust fund, and the money held by the fund is invested in bonds or other market instruments by the State Board of Investment. For some detailed information about the system, you can click here.

Now when I talk to business folks about TRA, one of the first things they want to tell me is that the business world has moved away from defined benefit plans. Most of us in the private sector, they say, have pensions that promise only to pay the actual return on the funds that have actually been invested in our 401(k), IRA, or other account. But that is not entirely correct, is it, because folks in the private employment system have social security, which is, after all, a defined benefit plan. The real difference is the supplemental part--the part beyond social security, and there we have a substantial difference, for sure. When your 401(K) takes a loss, you take the loss, not the government or your employer. If your funds were invested unwisely, you can be wiped out, even.

The advantage of a defined benefit plan like the TRA or PERA is the definite security of a promised benefit, but that security is also its biggest problem from a public policy standpoint. With a defined benefit plan it is really impossible to predict that the money invested in the trust fund will produce a rate of return sufficient to produce the promised benefits. If the funds are invested aggressively, they can realize an excellent return in good times, but the fund can take a huge loss in really bad times. So the essence of a State defined benefit retirement fund is that the State makes a promise to pay a fixed pension on retirement, provided that the employee earns enough years of service. That means that it is possible that the earnings of the investments in the trust fund may be insufficient to cover the total of the promised benefits accruing in a particular year.

After the huge market declines that occurred in 2007-2008, the State's defined benefit plans were adjudged actuarially insufficient to provide the benefits that were to accrue in the future. We can grouse and sputter and complain about that fact, but its a fact nonetheless. After a great deal of controversy, the governor and legislature responded last year by increasing the rate of contribution at the rate of 1/2 percent of compensation each year for both employers and employees. But, as usual, the State made no provision in funding for local districts to cover the increased cost.

Hence my question--who should have to pay the shortfall?

The answer, in my view, is that the State of Minnesota created the obligation--the State of Minnesota should have either solved the problem with reduced benefits (for non-vested participants) or it should have met its obligations out of the general fund. The decision to pass the problem along to local school districts was irresponsible, because it represented a significant new unfunded mandate. School districts don't have an extra pot of money, or extra revenue source,s to cover these increased contributions. And, the legislature provided no increased revenues to school districts in the general fund formula, and it created a larger deficit in special education. In my view, as difficult as it may be in these tough times, the legislature should step up to the plate and assume the increased costs, because it is the State of Minnesota's obligation.

Failing that, then we are left with the choice between taking the million dollars from children, through reduced programs or increased class size, or we can subtract it from the funds that we have available to compensate staff. Generally, when we calculate the revenues that we have available for staff compensation, we add salary plus the cost of benefits (including social security, health insurance and retirement costs). We charge all of those costs against total compensation. If we follow that course, then the increased TRA and PERA costs would indirectly result in reduction in the funds available for other forms of compensation. That's a painful solution, and its painful to discuss. But the other course, taking the money out of programs for children in school seems all the more painful.

Saturday, January 15, 2011

House and Senate Bills Promise Compensation Freezes for Public Education

Some time ago, I wrote a post calling for a two year reprieve for public education. Two of those ideas coincide with bills introduced in the House and Senate. (See,"Eight Legislative Ideas to Provide a Two-Year Reprieve to Public Education"). Senate File 56 proposes one of those ideas, a two year compensation freeze for public and charter schools. It has been introduced in the Senate by Senators Thompson (Assistant Majority Leader); Olson (President Pro Tem); Hann (Assistant Majority Leader); Gazelka ; and Hall . The Bill would bar school districts from implementing compensation increased through the end of the next biennium.

The core text reads as follows;
From the effective date of this section through June 30, 2013, a school district or charter school must not increase the 2.24 rate of salary or wages for any employee. This section prohibits any increase including, but not limited to, across-the-board increases; cost-of-living adjustments; increases based on longevity; increases as a result of step and lane changes; increases in the form of lump-sum payments; increases in employer contributions to deferred compensation plans; or any other pay grade adjustments of any kind. For purposes of this section, salary or wages does not include employer contributions toward the cost of medical or dental insurance premiums, provided that employee contributions to the costs of medical or dental insurance premiums are not decreased.
The Bill contains a variety of complex provisions designed to accomplish the intended objective, which is to implement a comprehensive "hard freeze" for public school employees. You can see a full text of the Bill by clicking here.

A second proposal is contained in House Bill 92, with a lengthy list of co-sponsors, ( Downey ; Benson, M. ; Banaian ; Bills ; Beard ; Kiel ; Shimanski ; Petersen, B. ; Kieffer ; Kelly ; Anderson, S. ; Myhra ; Crawford ; Leidiger ; Fabian ; Kiffmeyer ; Barrett). House Bill 92, if passed, would repeal the bargaining penalty deadline. This penalty has cost our district a total of 1/2 million dollars in the last two bienniums, because the District has refused to agree to pay compensation which would require massive employee layoffs.

Together, these proposals would provide a major element of the relief needed for two years of breathing space on the cost side for school districts across the state, a reprieve from the persistent downward financial spiral that has gripped school districts, in which every two years, districts feel forced to agree to compensation increase that they cannot afford. The other form of relief that school districts will need to bring their budgets into balance, is for the legislature to fund the increased mandate costs that are coming from the State itself. The two most significant of these State imposed cost increases would be increases in special education mandated deficits and the substantial increases in the teachers' retirement contributions which the legislature imposed on school districts.


While the sponsors of these bills are currently in the majority party, I would hope that the minority party and the Dayton administration would join in the effort to bring fiscal stability to public education. Returning financial sustainability to public education requires adequate revenues, true, but it also requires the ability to keep costs and revenues in balance. Under the system as it exists today, that balance no longer exists, because of deep structural problems with the way in which schools are funded, the way in which mandates are distributed without compensating funds, and the way in which compensation is set . We need a time-out so that all parties concerned can step back and arrive at a new and sustainable system.

The cost relief provided by this proposed legislation will not completely solve the financial crisis confronting public education. But it would represent a giant first step. In a previous post, I explained the need for a two year reprieve by pointing to the experience of the Anoka School District. As I explained in that post

In 2007, Anoka-Hennipen took a referendum to the voters seeking $30-$50 million per year in new taxes. The voters approved question 1, providing $29 million a year for five years. It also passed question 2, providing for $15 million per year. According to campaign proponents, the two levies together would provide funds necessary to prevent precedent-setting cuts: School closings, hundreds of teachers laid off, and hundreds of dollars added to activities fees.
But in 2009, Anoka-Hennipen found itself $10 million short in funding just a year after receiving that levy support. It solved this problem by taking $3 million out of its budget reserves and making $7 million in budget reductions. To produce the 7 million dollars in “savings” last year, Anoka-Hennipen had to cut 73 licensed positions and 42 non-licensed positions. Taking money out of reserves is a temporary solution. When you take money out of reserves, you are maintaining programs at a level that are unsustainable. You must eventually make that up with $3 million in additional cuts. That means, even if the State were to “hold education harmless,” whatever that means, A-H has another $3 million in cuts to make, even if it provides no compensation increases whatsoever. Thus shortly after passing a levy to prevent crippling cuts, A-H started making the very crippling cuts it had hoped to avoid.
A-H’s fiscal problems can be traced to two major problems, an unaffordable settlement, and massive increases in its special education cross subsidy. Last year, although the State provided no formula increase for the biennium, and imposed major cuts in special education on Districts like A-H, Anoka-Hennipen settled its contracts with increases that were measured as having “total package cost” increase of 4 percent for the biennium. This 4 percent represents an understatement of the amount of the increase, because for several years now, the MSBA has intentionally understated the percentage increase in bargaining settlements, so as to make school boards appear more frugal than they really are.
But I also pointed out that the rising teacher compensation costs is not the only problem faced by school districts. State special education funding requirements are also blowing a hole in public school budgets. According to the MDE, in the last reporting period, Anoka Hennipen’s Adjusted Special Education Cross subsidy was $28 million, or $614 per pupil. Two years before, the Anoka Hennipen cross subsidy was $427 per pupil, or $22 million. There was a 50 percent increase in the deficit over a two year period, and the current state budgeting plans for further substantial increases in that deficit. Minneapolis' deficit has skyrocketed to $985 per student in the last reporting period. If the State had fully funded A-H’s Special education expenditures, A-H could have avoided all $7 million of the cuts it made, kept its $3 million in its fund balance, and added $18 million back to its fund balance. Of the $7 million in cuts that A-H made last year, all but one million could have been eliminated if the State had merely held A-H harmless from the increase in special education cross subsidy that has occurred in the last two years.

To fix the public school financial crisis, then, the legislature must do more than impose a two-year freeze. It must take action to close the funding gap in special education. I have argued that it should freeze special education spending statewide, again to give public education a two year reprieve, and at the same time provide revenues to reduce the current state mandated deficit. The two actions together, stopping the growth in special education costs, and funding the existing deficit with additional revenues, would bring the first period of financial stability to public education in a long time.

The changes proposed in this new legislation will not solve the financial problems of public education permanently. They do not address the fact that health expenditures are growing at an unsustainable rate. They do not address the fact that we must provide adequate compensation to our staff over the long run. They do not address the need for compensation reform that really works for teachers, nor do they address deficiencies in the way we evaluate. But they do give us a time to take a break from the compensation wars, and work on a permanent fix.

Thursday, January 13, 2011

School Finance Cost Drivers: Health insurance, part I

I've been trying to explain some of the cost drivers that confront us in public education. Today, I'm going to talk about health insurance contributions made by the district to our public employees. I apologize that this material isn't simple. I can't help that. When I joined the board of education, it was complex. It's still complex. One of the reasons that I write these posts, is that I believe that its really important for citizens to understand how the finance system works. Our Board of Education has been working really hard to involve members of the community, average citizens and community leaders, in understanding how we budget, and the budget challenges that we face. My thinking is that providing factual detailed information about school finance assists in that purpose. As I share this information, I'm not trying to justify increased spending, or decreased spending, or increased compensation or decreased compensation. My belief is that the facts, once you understand them, speak for themselves.

In a prior post in this series, I explained that in the last year, the legislature raised school district contributions by one half percent per year for the next four years, raising our costs by $500,000 per year, for a grand total unfunded cost increase of $2 million. I explained next how the funding formula for special education reduces our funding by $350,000 per year, so that during the biennium, our funding will be cut by $700,000. I explained, however, that federal law prohibits us from cutting special education expenses to balance the special education budget, requiring us to transfer that out of regular education. Then, in my last post, I explained that lanes increase employee compensation by about $190,000 per year, for a total cost increase of about $380,000 for the biennium. Now to health insurance.

The district has two kinds of coverage agreements with its employee groups. Some groups have fixed dollar contribution agreements--that is, by agreement, we pay a fixed dollar amount towards their premiums, no matter what the premiums will be, until we agree to a higher amount. Some employees, typically licensed employees with single coverage, have their full premiums paid, and our cost of coverage rises with the premium increase, no matter how much the increase.

The District's cost for health insurance contributions rise in two ways. With respect to most of our employees, we make agreed fixed dollar contribution amounts towards family or single health insurance. When we enter into our bargaining agreement with, for example, our custodians, our clerical workers, or our paraprofessionals, the agreement designates a fixed contribution, specified for that particular bargaining unit, towards the total health insurance premium for each employee. Now different bargaining units have different preferences for the level of insurance contribution that we provide. Sometimes, the negotiator for a group will say, we'd like to take some of the total cost of our compensation in this year's agreement, and move some of the dollars off of salary and move it over to health insurance contribution. When they do that, its cost neutral, and we would be foolish to refuse to do that, since we're not changing the total cost to the district.

Now for these bargaining units, the ones with fixed dollar premium contributions, our costs stay the same throughout the two year term of the bargaining agreement. When the bargaining agreement comes to an end, our health insurance costs for these employee groups stay exactly the same. We know exactly what our premium costs will be during the contract, and then under the "continuing contract" provisions of PELRA, we continue to pay that same dollar amount towards insurance for these employees during the period when we negotiate the contract.

What happens under a fixed dollar contribution agreement, when the cost of health insurance rises. That will happen in the second year of the contract, around October, when the insurance carrier announces its rate increase, which may be anywhere from 5 or 6 percent to 20 percent. For employees covered by the fixed dollar contribution agreement, the employee covers the increase. If the employee's insurance premium is $1000, and the District contributes $500, then if the premium goes up to $1100, the District still contributes $500, and the employee has $100 more deducted out of the paycheck. It is easy to estimate the total cost of the package, because we have not agreed to pay the increase.

When employees work under a fixed dollar contribution agreement, they push us very hard to keep their insurance coverage economical and affordable. When the insurance company announces its premium increase, the employee group often wants us to bring those costs down, because they don't want to pay more for their insurance premiums. Indeed, at times there is a bit of friendly friction between the employees with full premium coverage and those without over what kind of group policies we should buy.

I want close this post by emphasizing several things. Sometimes folks rail against health insurance costs for public employees. But providing these benefits is an important attractor --an asset for us in encouraging qualified employees to work for us. The cost of health insurance, paid on behalf of employees is tax exempt, so a dollar of health insurance coverage provides more than a dollar's value to the employee. Providing coverage that employees value represents a wise use of the public's money. The issue for those of us who are involved in the decision making process is to make sure that the plans we select are cost effective, and that we provide coverage that is financially sustainable. Because the cost of health care is going up so fast, this is a great challenge to all governmental units, and I'll have more to say about that in the next post.

OK. That's a lot for one post. I've started in this post to explain the difference between fixed dollar contribution agreements and full premium agreements. I'll continue this discussion in tomorrow's post.