Monday, August 31, 2009

Tax Rates and the Local Economy

Some of the issues I pound on when it comes to the school board have to do with fiscal responsibility. With that comes the desire to reduce or lessen the growth of the tax burden on members of our community. That is not to say that the Board has the ability to reduce property taxes, I would never make that promise- not in an environment where property assessments are frozen at 2002 levels and where the District has contracts that increase every year. When I look out 2-5 years it is pretty easy to see what is coming down the pike. When you look at the more than $100 million high school, PSERs (which I will give an update on soon), and the contracts mentioned above, it is easy to see larger than 30% increases in property taxes here in Mt Lebanon. The only reason I say it probably won't be more than that is that I expect the State legislature will come up with a solution to address much of the PSERS expenses coming due in 2012. Call it wishful thinking if you like, but elected officials are in the business of getting re-elected and if they can't come to a solution on that single issue, there won't be many people getting re-elected in 2012. On many occasions I have opined about the coming tax increases and how we will compare to other Districts across the State. I have only touched on what the implications of such high taxes will be. It is those implications that I wish to address here.

To that end, I came across a speech given by Calvin Coolidge on February 12, 1924 in front of the National Republican Club. I don't know if I have ever read a speech by a President that so clearly illustrated the effects of high taxes on economic activity. While President Coolidge's speech was addressing the national economy, the effect of high taxes is the same whether at the federal level or local level. Below are some excerpts with my comments on sections that I think need highlighting:

In time of war, finances, like all else, must yield to national defense and preservation. In time of peace finances, like all else, should minister to the general welfare. Immediately upon my taking office it was determined after conference with Secretary Mellon that the Treasury Department should study the possibility of tax reduction for the purpose of securing relief to all taxpayers of the country and emancipating business from unreasonable and hampering exactions. The result was the proposed bill, which is now pending before the Congress. It is doubtful if any measure ever received more generous testimony of approval. Opposition has appeared to some of its details, but to the policy of immediate and drastic reduction of taxes, so arranged as to benefit all classes and all kinds of business, there has been the most general approbation. These recommendations have been made by the Treasury as the expert financial adviser of the Government. They follow, in their main principle of a decrease in high surtaxes, which is only another name for war taxes, the views of the two preceding Secretaries of the Treasury, both of them Democrats of pronounced ability. They are nonpartisan, well thought out, and sound. They carry out the policy of reducing the taxes of everybody, especially people of moderate income. They give to the country almost a million dollars every working day.
During World War I, taxes were raised to help fund the war effort. The United States still ended up borrowing billions of dollars to help fight the war, and we were also a major credit provider for our allies in that war. However, after the war ended, tax rates were not reduced to pre-war levels. President Coolidge in this speech is essentially calling for a return to the normalization of pre-WWI tax rates. As he said in his opening, he had no problem with financing a war with higher taxes, but in times of peace, he felt differently.

The proposed bill maintains the fixed policy of rates graduated in proportion to ability to pay. That policy has received almost universal sanction. It is sustained by sound arguments based on economic, social, and moral grounds. But in taxation, like everything else, it is necessary to test a theory by practical results. The first object of taxation is to secure revenue. When the taxation of large incomes is approached with that in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue. Experience is all in the other way. When the surtax rate on incomes of $300,000 and over was but 10 per cent, the revenue was about the same as when it was at 65 per cent. There is no escaping the fact that when the taxation of large incomes is excessive, they tend to disappear. In 1916 there were 206 incomes of $1,000,000 or more. Then the high tax rate went into effect.

The next year there were only 141, and in 1918 but 67. In 1919 the number declined to 65. In 1920 it fell to 33, and in 1921 it was further reduced to 21. I am not making any argument with the man who believes that 55 per cent ought to be taken away from the man with $1,000,000 income, or 68 per cent from a $5,000,000 income; but when it is considered that in the effort to get these amounts we are rapidly approaching the point of getting nothing at all, it is necessary to look for a more practical method. That can be done only by a reduction of the high surtaxes when viewed solely as a revenue proposition, to about 25 percent.

I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden. If, on the other hand, the rates are placed where they will produce the most revenue from large incomes, then the small taxpayer will be relieved. The experience of the Treasury Department and the opinion of the best experts place the rate which will collect most from the people of great wealth, thus giving the largest relief to people of moderate wealth, at not over 25 per cent.
This part of his speech perfectly illustrates the soundness of the Laffer Curve which was "discovered" in the 1970's by economist Arthur Laffer. The Laffer Curve suggests that there are two tax rates that will produce the exact same revenue. Think about it this way, at 0% tax, the government realizes no revenue and at 100% tax, there is no incentive to work and therefore the government again realizes no tax revenue. At various points along the graph coming down from 100% and up from 0%, there are points at which government can realize the same revenue. This is illustrated perfectly when Coolidge points out that tax receipts at the 65% tax rate were the same as when tax rates were at 10%.
A very important social and economic question is also involved in high rates. That is the result taxation has upon national development. Our progress in that direction depends upon two factors; personal ability and surplus income. An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if the rewards of such action are very largely taken away by taxation. If we had a tax whereby on the first working day the Government took 5 percent of your wages, on the second day 10 per cent, on the third day 20 per cent, on the fourth day 30 percent, on the fifth day 50 per cent, and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week? It is the same with capital. Surplus income will go into tax-exempt securities. It will refuse to take the risk incidental to embarking in business. This will raise the rate which established business will have to pay for new capital, and result in a marked increase in the cost of living. If new capital will not flow into competing enterprise the present concerns tend toward monopoly, increasing again the prices which the people must pay.

Taken altogether, I think it is easy enough to see that I wish to include in the program a reduction in the high surtax rates, not that small incomes may be required to pay more and large incomes be required to pay less, but that more revenue may be secured from large incomes and taxes on small incomes may be reduced; not because I wish to relieve the wealthy, but because I wish to relieve the country.
President Coolidge here is suggesting that allowing people to keep their surplus capital (and not the government) will lead to better economic growth. People will employ this capital in the most efficient way possible, in a way that gets them a return on their investment. His stated goal is to secure the largest possible amount of revenue to the federal government but not at the expense of stifling production. His plan to do this, under the guidance of Treasury Secretary Mellon, is to reduce the top marginal tax rates to 25%.

This legislation was past shortly after this speech and so began the "Roaring 20's". There were tremendous increases in overall GNP from just under $70 billion to over $103 billion in just over five years. And this happened without a jump in inflation, indeed, prices actually went down while GNP increased.

The point of this is to say that for decades (perhaps more) we have seen the impact that high taxes have on consumption and production. Many of those in favor of a large high school project here in Mt Lebanon like to say that an extra $60 per month is just a cup of coffee a day, or that its just one less dinner out per month. If that is the case then let me ask the obvious question. What if this actually turned out to be true? What if the residents of Mt Lebanon decided to give up their morning cup of joe or their monthly night out at dinner? What is the impact of that decision? How many people from Mt Lebanon do you think go to Aldo's or the Uptown each morning for coffee? How many people hit one of the restaurants on Washington Road or Beverly Road once a month or even once a week? What happens if all of these people actually DO reduce how much coffee they drink or how often they eat out? An increase of $60 a month in tax has the potential to take money directly from the productive part of our local economy (the coffee shops, the florists, the restaurants) and places it directly in the non-production part of local economy (debt service for a high school construction project).

This money will not go to hire more teachers to reduce class sizes. It won't expand programs. It won't make the District magically find ways to become more efficient. There most likely will not be an increase in student achievement and/or test scores due to a newly renovated building- although with our new Superintendent I hope this will happen anyway. The fact is that research does not show that constructing a new building will add anything to our ability to ready our kids for college and life after school. Isn't that what this should be all about?

The question that needs to be addressed has to do with how best to prepare our students for a constantly changing and ever more demanding future. Spending $100 million on bricks and mortar does not seem to be the best answer.

Thanks for reading.

James

Tuesday, August 11, 2009

August 10 Meeting Summary

There were a few interesting topics discussed at last night's board meeting. The Board was given some high school financing options and we also discussed the possibilities of relocating the 6 tennis courts that will be displaced.

During the architects update we were given a presentation on the Mechanical, Plumbing, Fire Protection, and Electrical Systems. You can find that document here. There was some good information in this presentation regarding some of the technologies we are expecting to use. Other than that, it was a nuts and bolts type presentation.

We were also presented with four options to relocate the tennis courts that will be displaced by the current design. You can view the entire document here. There are good pros and cons presented for each option. Please look through that link yourself and think of what you would prioritize. For me, the top three priorities are to 1) keep the courts on the high school campus, 2)keep the courts together as a unit, and 3) to have parking spaces next to what should be the main building entrance on Horsman.

Option One separates the courts on either side of Horsman Drive and does not allow for much parking near the new main entrance on Horsman. Option two keeps the courts together but has them facing a non-optimal direction while eliminating all parking near the main entrance. Option 3 keeps the courts on campus by moving them behind the rockpile and also allows for maximum parking spaces near the main entrance. However, this does eliminate a number of parking spaces and potentially reduces the area in which our marching band practices. Option 4 relocates the courts to Markham Elementary school.

Given the above options I would choose option 3. If this is the option chosen then I would expect that we are early enough into the design process to figure out a way to add back as many parking spaces as possible through this project while also figuring out an alternative practice space for our marching band. The combination of having parking where we need it (near the main entrance), having the tennis courts all together, and keeping the courts on campus make me believe that this option is the best one. During the meeting last night I asked Dr. Steinhauer to take the lead in figuring out alternative practice spaces for our teams during the construction phase of this project. Hopefully we will have some options shortly.

The other topic of interest was the financing options for the high school project. You can view the presentation here. As you may know, this project is too large to fit under our current debt limit. This requires us to do two floats of bonds to fund this project. In 2006 prior to Act 1, the Board passed a resolution to allow for the floating of $69 million of pre-Act 1 Debt. This means that when that bond is floated, the millage increase required to pay for that debt will not be counted against our Act 1 maximum allowable millage increase (which has been about 4% per year). The structure and payment of those bonds has already been set. The only thing about those bonds not set is what interest rate we would get when we go to auction.

The second set of bonds is where things get a little trickier. The presentation linked to above really is a discussion of the options regarding floating these bonds at a level payment (like your mortgage) versus a wrapped issuance (like an interest only loan for the first number of years). It has been my contention from the start that we ought to have a level payment of the debt. Pushing out the principal payments simply burdens taxpayers with $10 million in additional interest payments (see page 5) and burdens future boards with lowered borrowing capacity since the debt would be repaid at a slower rate.

Having the bonds wrapped simply puts us in the same position where we are now. In 2005 we wrapped the $55 million in elementary school construction bonds. To this date we have paid down very little in principal on those bonds. If memory serves me correctly we still have almost $54 million in outstanding debt on those bond floated back in 2005. This means that our current borrowing ability has been restricted by that wrapped bond schedule. It also means that our taxpayers will be paying excessive interest on those bonds because the principal has been pushed back to the later years of the debt service. As long as we keep wrapping bonds, the district will continue to burden taxpayers with millions of dollars of unnecessary interest costs.

While I have no doubt that we will have the ability to go to the market for the first $69 million in bonds and also the second $47 million, I do have concerns about the Act 1 limitations on the second bond issuance. As I mentioned before, the first bond float is exempt from Act 1. Even if millage needs to increase above an Act 1 limit, we will not be forced to referendum. However, with the second float, that might not be the case. If we did a straight float at $47 million that resulted in over a 1 mill increase, then along with any other kind of budget changes, I would expect that our 2011-2012 budget would be over the Act 1 millage increase limit. It would be the worst of all scenarios to have to go to referendum at that point in the high school project to get the final $47 million to complete a two-thirds completed project. I did ask our financial adviser about this and he admitted that it "could" be an issue. But he also said that there are ways around this. Essentially, what he said is that there are ways to avoid the Act 1 referendum at that point which would include structuring the bonds in such a way that they have minimal up-front impact on millage- essentially recommending that if we were expected to exceed Act 1 limits then we should just wrap the bonds to avoid a referendum.

Why are we trying so hard to avoid a referendum every time we turn around? It seems to me that if we know that the taxpayers would vote down a project of this size (or $500,000 more), then we ought to be planning to do a project of significantly less size and scope.

More on that in a future post.

Thanks for reading.

James

Tuesday, August 4, 2009

Response to Constituent Email

First, let me take a moment to thank all my friends around the area that helped with a job search that was recently completed. Losing a job is a humbling experience, however, the compassion and willingness to help shown by my friends and neighbors was even more humbling. This experience has forever changed me for the better. On to the blog.

As has been recently blogged on BlogLebo, there is much public discussion about an analysis of the Mt Lebanon High School project that was done by structural engineer and Mt Lebanon resident Dirk Taylor. The documents have been posted by BlogLebo on the link provided above.

As one of the two members of this Board that have over the last year been consistently voicing a dissenting opinion in the pursuit of such an expensive and questionable project, I have been silent about the Taylor Report in the hopes that other Board members would take the opportunity to publicly respond to its content and questions. Perhaps other members will choose to respond at a Board meeting, perhaps they will respond later, or perhaps they will not respond at all. I will take this opportunity to give some feedback on the report. As always, the opinions are mine and may not reflect the opinions of others on the Board.

First, it is important to understand who the author of these documents is. Dirk Taylor is not just a regular structural engineer that happens to live and work in Mt Lebanon. Mr. Taylor has done extensive work for the District over the last number of years. He understands the needs of the District and more importantly understands the architecture and the guts of our buildings. I believe he fully understands the risk he has taken in putting this type of a report out into the hands of the public.

On the functionality of the School:
Mr. Taylor points out some of the biggest misconceptions that I believe the public has had regarding the need for this project. Information has been given to the public that says that our high school buildings are falling down creating a safety issue for our kids and that our current building is not able to adequately educate our students. On both counts I agree with Mr. Taylor. One cannot prove that these statements are true. The public has been shown pictures of broken pipes and has been given tours of the building that show where water has been leaking and where ceiling tiles are missing and these visual anecdotes are used to convince the public that the need for new construction and huge expense is great. However, our architects came back and said that they were perfectly willing to renovate Building B at an EXTREMELY reasonable cost of about $14 million. B Building is the second oldest building at the high school and is also the building that contained some of the oldest plant (water and electric) in the complex. With proper repair and maintenance over the years we might not have some of the issues that are presented as being dire today. Despite its age and its antiquated plant, we have been assured that this building will be renovated in a “like-new” fashion that will better prepare our students for the future at a cost that is far less than construction/renovation at any of the other buildings. Think about this renovation of B Building the same way we thought about renovating our elementary schools a few years back. As for how well our students are performing in our existing buildings, what more do we need to look at than our test scores. We have consistently been comparable to other high-performing districts in both SAT and state standardized tests. While we do have room to improve in areas, I have complete confidence in our new superintendent to take us in the right direction on this front no matter what decision is made with the high school construction project.

On Travel Distance:
I went through the most current drawings and tried to figure out exactly where this design criteria has been met. I didn’t see it and this topic makes for a great question to present to the architects.

On Classroom Size:
Pennsylvania Department of Education says that a classroom needs a minimum of 25 sq ft per student. That is their standard. Apparently the renovation of B Building will meet this standard. Mr. Taylor’s description of how the walls are reconfigurable in C Building is new to me. If I did hear it before, I didn’t put much thought into it. Mr. Taylor’s description of how things can be reconfigured in this building to meet PDE standards is very intriguing and has the potential to significantly impact this project in my opinion. Mr. Taylor does address the issue of asbestos later in his report and I think it important to get the facts on what condition ALL of C Building is in from our current architects. I think many in the public and on the Board have been convinced by the architects that C Building needed to be torn down because it has too much asbestos and because it would be more expensive to renovate than it would be to simply replace it with a new academic wing. Mr. Taylor’s report at the very least raises some good questions that ought to be asked of our current architects with regards to the possible re-use of C Building.

On Building Size:
What more can I add? The building size we are being shown today is much larger than other area projects at Bethel Park and Baldwin despite us not having many more students. It is much larger than what has been recommended for the number of students we have. I have pointed this out on my blog on more than one occasion. Mr. Taylor’s comments regarding ways to manage the construction of a renovation project using underused or unused space seems very logical to me. Since eliminating temporary classrooms has been a top priority of the design team to this point, perhaps there is a way to incorporate Mr. Taylor’s suggestion into the renovation of the building.

On the Sports Facility:
There is a pedestrian walkway connecting the new academic wing to the sports wing because the property is zoned for a single building. I know, a pedestrian walkway doesn’t seem to be part of a contiguous building but according to the law it is. It is my understanding that without the pedestrian walkway the sports facility would be in violation of current zoning laws. But, that is small potatoes. Mr. Taylor’s suggestion about re-orienting the pool and then building additional levels for wrestling and fitness on top of the extended pool complex seems very well thought out. Can it be done? It’s another great question for our current architects. If by chance this solution is selected, we cannot ignore the need to then do upgrades and/or expansions to the current field house and locker rooms. I understand the design team is working on figuring out where to put the two displaced tennis courts under the current design. I have not seen if there was a similar effort underway for the softball field. If you have followed the Board and Commission closely, you know that we already have a rather serious issue with having enough field space for our athletes. Removing another practice field from the mix will simply complicate things further.

On LEED:
Again, great points on destroying a perfectly good building to build another like-use building. I can see how that defeats the spirit of LEED/Reusable design.

On Some Omissions:
One omission was mentioned above. What the new athletic complex would have given us is some new locker rooms and space that would have taken the place of the field house. Without that complex we would then need to do something with our existing field house and locker rooms. This work could end up being significant. The second difficulty is figuring out how to improve band/music instruction in the building under Mr. Taylor’s solution. While our current staff and students seem to make the current environment work, I wonder if there is any way to improve it outside of a simple stale renovation of existing space

Conclusion:
All in all I find the report very helpful in trying to determine what direction to take the high school project. The report confirms some of the concerns I have had for some time. I trust Mr. Taylor’s experience and insight and hope the rest of the Board will not take this analysis as simply another email from a disgruntled resident.

Thanks for reading.

James