kitchen table math, the sequel: above-inflation spending

## Thursday, March 8, 2012

### above-inflation spending

re: no exit

Budget season has heated up, and I'm finding that virtually no one thinks that annual above-inflation spending increases are unsustainable.

The union contract requires something in the neighborhood of a 4% increase in total compensation every year. (Employee salaries make up approximately 80% of the total budget.)

Meanwhile the tax cap requires us to hold spending increases to inflation, which is 2%.

The only way to stay within the cap is to cut jobs.

It's obvious to everyone that you can't cut jobs forever, but it's not obvious to everyone that you can't increase taxes above the rate of inflation forever.

Frankly, I'm confused myself.

There's no way out, right?

If you have permanent above-inflation spending increases while taxpayers aren't having concomitant above-inflation increases in their own incomes, eventually you run out of money, right?

Same for cutting jobs. Each year individual compensation goes up 4%, so you cut enough positions to average out at a 2% increase overall. (This year we need to cut 10 FTEs - "full-time equivalents" - to stay within the cap.) But you're not done. The next year individual compensation goes up by 4% again, so you have to cut more positions to average out at a 2% increase overall.

Am I figuring this wrong?

I know only two people who see things this way.

As far as I can tell, the only answer that makes mathematical sense is to persuade the union to agree to a contract that stays within inflation.

Or am I missing something?

SteveH said...

It will be tough to argue that money spent in one area is more important than another. If you worry only about the total cost of education, then you are stuck arguing that less money can produce the same or better result. It could be that the average income level of people in Irvington increases faster than the inflation rate. Then you have the argument that the teachers in your town should be paid enough to be able to live in your town.

I don't think inflation is a good argument. You have to look at the cost per student. This always looks bad in small towns that have their own high schools. In our town, we have our own K-8 schools, but send kids to the high school in the next town. The general feeling is that it's worthwhile to pay more to keep younger kids nearby, but the older kids benefit from the larger high school with more money, classes, sports, and activities. Other small towns compete for our students. We pay less than \$12K per student for a good high school.

It seems to me that you have to approach the problem from a different angle than just money. For small towns, combining high schools can save money and offer more classes and opportunities.

Marna said...

And then there is always the worry about how inflation is actually calculated. Is inflation really only 2%? Federal inflation calculations do not count food or gas increases and includes the deflation electronics. Food inflation has gone up MORE than 2% this year, and food expenditures are the second largest line-item in my personal monthly budget (with a family of four and 2 teenagers to feed). The cost of home heating and running a vehicle for sure has gone up more than 2% this year. If I am going to cut anything out of the household budget, electronic devices are certainly at the top of the list, even if they are cheaper, not food or gasoline.

So, if teachers (or anyone) is held to a 2% cost of inflation increase, while actual inflation is much higher, in real purchasing power, their wages are decreasing.

Who can sustain that either?

SteveH said...

I went to a few of the meetings when our town went through one of the 5-year reviews of the "high school of record". The one we use has 1600 students, and we send about 300 students from our town. Another town, that has their own high school with only 400 kids, was/is desparate to get our students. They came and made a big presentation. Our school committee made a big list comparing details of the two high schools and proclaimed that it was "viable". (It clearly wasn't better.) Some liked the smaller school environment, but overlooked what might happen to that environment if our students caused the school to almost double in the number of students. There is definitely a big school versus small school bias with a lot of parents. It's clear, however, that smaller schools pay a price in terms of academics, sports, and extracurricular activities.

Irvington seems to have about 600 students, which is not small, but it's not large. One of the indicators we use to judge high schools is the number of AP courses taught each year. I don't find any AP classes on the Irvington High School web site, unless they are hidden away or they don't have the AP label.

SteveH said...

"Irvington public schools spend \$20,176 per student. The average school expenditure in the U.S. is \$5,678. There are about 9 students per teacher in Irvington."

I read somewhere that Irvington has a population of about 6600, and that the number of kids in the high school is 622. That seems high for the size of the population. Our town's population is about 5500, but we only have 250 in the public high school. It looks like it's only going to get worse for Irvington as the residents get older. As our town gets more expensive, young families can't afford to live here.

The median home price in Irvington is \$725K. Our median home price is \$473K. Slowly but surely, all of the old-timers are selling out and leaving town.

If you isolate inflation as a contract cost issue (and I'm sure it is), you still have to show what affect it has on the cost per student. The 9 students per teacher probably has a much greater effect.

lgm said...

There are other areas that they want to go after for cost cutting before their own salaries. The big one this year is sped mandates beyond federal law. Supposedly that's 4% of our \$100 million budget. Last year transportation and shared services were the areas they gnawed out money from - sped students now share a vehicle when going to out of district schools on a day placement rather than one child, one aide, and one driver each. Considering some of the routes are 100 miles each way, this added up to be significant.

We are continually told that if we can't afford the increase in taxes, then we should move. Where, I don't know as it seems that teachers throughout the whole state are making Manhattan wages and trying to collect from senior citizens and folks on nonManhattan pay scales.

Anonymous said...

I don't know which measure the Federal Reserve is using for its 2% inflation target, but "Federal inflation calculations do not count food or gas increases." is not entirely true.

What is included in the consumer price index: http://www.bls.gov/cpi/cpifaq.htm#Question_7

This answer discusses the all together too often quoted, "Core CPI" that excludes food and case:
http://www.bls.gov/cpi/cpifaq.htm#Question_13

Catherine Johnson said...

Inflation has been well below 2% since the crash -- Sumner says inflation has averaged 1%.

They don't use CPI....I think I read that the other day.

Catherine Johnson said...

So, if teachers (or anyone) is held to a 2% cost of inflation increase, while actual inflation is much higher, in real purchasing power, their wages are decreasing.

Our teachers are receiving increases above inflation no matter how you calculate it.

The average salary now is \$100K, and that doesn't count the money they would need to save to have \$1.6 million accrued by retirement age or the amount of money they would have to save each year to pay for \$20K/year for health benefits after retirement.

Average teacher salary here, when you include pension and retiree healthcare, is probably around \$125K. Average **household** income in Irvington is \$117K. So, at this point, teachers here are earning more than the average household.

The contract calls for approximately 4% annual increase in wages. Everyone I know has either had a wage freeze, or is now receiving increases at around 1%. We're also paying more for health care every year.

There's no question that Irvington school district employees are having salary increases much, much higher than many of us.

Irvington teachers do live here. One member of the school board is married to a high school teacher; a member of the budget task force is the husband of a teacher in the district, etc.

Catherine Johnson said...

We're at \$27K per pupil, not \$20K

Catherine Johnson said...

We are continually told that if we can't afford the increase in taxes, then we should move.

Really!??

Unbelievable.

Who tells you that?

In fact, that's where we are. The young parents are richer than my cohort, and if they have the numbers to vote to override the cap we'll all be pushed out.

We've been pushed out in any event. We can't afford to stay, and that is due to school taxes.

Catherine Johnson said...

We have lots of AP courses. AP courses have huge support in the community, so I don't think any administration we bring in will be able to get rid of them unless the new super supports IB, in which case all bets are off.

Catherine Johnson said...

I'm looking at food inflation ... Here's Bloomberg: "The all-food CPI increased 0.8 percent between 2009 and 2010, the lowest food inflation rate since 1962."

During that year, I believe we paid something like a 5% increase in compensation on average.

Catherine Johnson said...

And then there is always the worry about how inflation is actually calculated.

It doesn't matter how inflation is calculated in this situation because the issue is comparative wage increases.

As taxpayers, we are paying salary increases significantly higher than anything we are receiving (and many of us are receiving cuts as housing prices continue to decline).

Irvington bid up the union contracts when times were good, and now that times are not good we can't un-bid them.

There's no turning back, not unless the union agrees to limit itself to inflation.

ChemProf said...

Right, if the district income is capped at a 2% increase, then a 4% increase every year in the wage budget can't possibly work (and teachers who complain that really they are falling behind inflation aren't going to get much sympathy in this climate. At my institution, we are coming off of a three year wage freeze followed by this years salary cuts. And things are better here than many other places.)

Catherine Johnson said...

My income is way down; Ed's was frozen for I think two years & now he's getting .... maybe a 1% increase. We pay more for health insurance each year.

Because of the Triborough Amendment, since the crash we've been paying raises negotiated during the boom.

SteveH said...

"So, at this point, teachers here are earning more than the average household."

From IES, we have:

"In 2007–08, the average annual base salary of regular full-time public school teachers (\$49,600) was higher than the average annual base salary of regular full-time private school teachers (\$36,300)."

There doesn't seem to be any correction mechanism or supply and demand control. When companies give out big raises during good times, employees know that they could go from a high salary to nothing overnight. At least now they do. I call it high salary nervousness.

Legislators in our state are once again trying to pass laws for binding arbitration without any controls over whether a town can pay or not. The union is trying to prevent towns from imposing any conditions without contract negotiation. The position I've always heard is that towns agree to a contract, so don't blame the unions. With binding arbitration, ultimate control is taken out of the town's hands. The union could force arbitration every year. The arbitrator could rule against the union, but why is the union falling all over themselves trying to get these bills passed? Because everything will be negotiated by contract, even things that were never in the contract.

So, here you have a large organization (union) and state legislators working on behalf of teacher salaries and working conditions. All of this is pitted against weak, individual school committees, some of whom are teachers and most of whom see more money = better education.

So now we have towns like Irvington where you can buy a simple raised ranch on a half acre for \$600K and pay \$21,757 a year in taxes to pay for schools that use curricula like Everyday Math. I had to double check that tax assessment. How about a split level on a quarter acre (on the market for \$800K) with taxes of \$27,150.

Irvington might be an outlier, but it's scary how far things can go before a correction is made. Can Irvington's school committee come to grips with the budget? Apparently not. So the only correction that can be made in terms of supply and demand is for people to move out of town and for people not to move in.

Catherine, doesn't anyone in town even mention that \$27K per pupil can buy a lot of private day schooling? Is that talk taboo? The downside to something like vouchers is that you then have to pay for all of the students already driven out of the public schools and paid for by their parents.

One affluent town in our area has so many kids going to private schools that many vote against town budgets and school budgets. However, lower budgets don't translate into lower teacher salaries and better education. At the town where my son goes to high school, there is now a lawsuit that's trying to give the town council control over exactly what should be cut in a school budget. They want more than a yes/no vote on a school-selected choice of cuts. Do I trust these people to make better choices? Not necessarily.

In any case, the most realistic option that Irvington has is to combine their high school with one or more neighboring towns. Dobbs Ferry has a high school with about 450 students and their taxes are huge. There are huge economies of scale, and you don't have to get very large to achieve them. However, many have a bias towards smaller schools. In searching for some papers on economies of scale, I came across one study that supported smaller schools by saying that the cost per "graduate" was lower even though the cost per student was higher.