Pennsylvania State Employee Retirement System Riskiest in the Country

This headline was a story reported on NPR on March 23rd.

Is this what happens when your pension gets underfunded? How does a pension fund try to game returns back into its favor? There are two answers: First, you can increase risk. Second, you can increase leverage.

PSERS is banking on better than 8% returns going forward to meet its obligations. With just 13% of its funds in bonds and cash, this is a portfolio allocation better suited for a 20-something whippersnapper, not a system that is expected to pay out billions of dollars of pension payments for generations! When your investment returns (or lack thereof) are guaranteed by taxpayers, why not leverage everything? Essentially, the system is one which encourages risky behavior because the pension obligations are backed by the Commonwealth (that's me an you).

To see how we got here, please take a look at this article from Mainline Media News. It presents a good history of the situation and also walks through the PSBA and Rendell proposals about how to "fix" the problem. This article points out that there is no easy solution.

See this post from 2008 on how PSERS had changed its investment philosophy to favor more private investment placements (hedge funds and real estate development).

The Day of Reckoning (see the article in that link) for the Pennsylvania plan is 2023. This is when the pension payments are scheduled to run out. From the article:

If we are going to keep providing generous pensions to state workers, taxes will have to rise dramatically in the near future to pay for them. Alternatively, public employee benefits could be limited to the extent possible under the law, and other spending could be cut. The most equitable solution is probably one in which both taxpayers and public employees share in the pain to some extent. One thing is for certain: to continue ignoring the problem until states run bankrupt is not in anyone’s interest.

This is why I asked the Board to pass a resolution urging the PA House and Senate to get pension reform on the front burner now.

Thanks for reading.

James

2010-2011 Budget Update

Update: Copy of Latest 2010-2011 Draft Budget Page 1 and Page 2
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The Audit Finance Committee met last Thursday night and went over the latest draft of the 2010-2011 budget. The Administration has been working to bring down the increase in taxes from the 14% increase outlined in the preliminary budget that was passed in January. This 2010-2011 draft budget now reflects an increase of 10.83% or an increase of 2.61 mills on top of the 24.11 mills from the 2009-2010 budget.

The largest reduction in expenditures to date has been 13 teacher retirements. The average salary savings realized this year for teacher retirements is $42,572 per teacher. This savings is realized when we replace an experienced teacher at the upper range of our pay scales with a less experienced teacher towards the bottom of our pay scales. The total savings for the 2010-2011 budget for these retirements is $553,432 or .26 mills. The District is also planning to pay for $542,444 in textbooks and program change proposals by using our Capital Budget. If this money was to be spent from our General Fund then the District would need to allocate money in the budget (and an additional .26 mills) for the expenses.

The largest increase in expenses is for the first payment of the High School Project bonds that were floated in October. There is a 109.5% increase in debt service to pay for the first set of high school project bonds. The total increase in debt service this year is $5,224,989 or 2.61 mills. There will be another round of bonds floated for the high school project in a few years. The PSERS increase for this year amounts to .37 mills or $767,891.

According to Dr. Steinhauer, this budget is the budget that maintains our existing programs. However, the Administration did create a Concept List for Possible Cost Reduction. I won't go through the entire list here but to give you a feel for it, there are potential reductions on there as small as charging fees for student parking. There are some rather big ideas as well, including pursuing a multi-community merger. I expect that there will be much discussion on this topic at our special budget meeting on April 5th.

Email me with any questions.

Thanks for reading.

James

The Most Daring Education Reform of All

I just got done reading a terrific, thought provoking essay by Diana Senechal in the latest American Educator magazine. I urge everyone to give it a read.

Here is one paragraph from the article:

The classroom that the 21st-century-skills proponents envision-a place where students are collaborating, creating, and critiquing- may not be as promising as it seems. A video by the George Lucas Educational Foundation shows middle school students comparing two magazine photos in light of gender roles; other students filming a poetry project; third-graders watching a nature film and learning how the film was made; fourth-graders making animated short videos; seventh-graders analyzing newspaper photos of the war in Iraq; and other lessons and activities. These examples are supposed to show what students should be doing in class: discussing important issues, analyzing the information around them, and creating things. Near the end of the video, the narrator comments: "As courses and projects featuring elements of media literacy find their way into more and more classrooms, writing English might become just one of several forms of expression, along with graphics, cinema, and music, to be taught in a basic course called communication". This is where the losses begin.

The article dives deep into the realm of what is needed for all of our students. It's not just about the skill's that are being taught. We are not here to meet the "demands of the day" but of all time. Teaching one how to blog, how to edit video, and the like, do not make for better learners. Indeed, the fact that teaching these skills necessarily takes time away from core subjects means there is less of a focus on what it is that can truly make students successful.

The article goes on:

When the frenzy over 21st century skills passes—and it will—students will see that their opportunities depend largely on their knowledge. Many will graduate with blogging experience, but those who can write a strong essay on a Supreme Court case will be better prepared to enter the fields of history, law, or journalism. Many will have online science portfolios, but those who have studied calculus, read parts of Newton’s Principia, and can prove Kepler’s second law (for example) will be much better prepared to study physics at an advanced level. …The ability to make a YouTube video or podcast will mean little in the long run, if the other things are absent. Moreover, those technologies may be obsolete in another few years, but literature, science, languages, mathematics, history, music, art, and drama will stay.

Mediocre creativity abounds, as does false innovation. Creativity and innovation require knowledge and practice. If you do not teach the latter, you will not get great results in the former.

So what is the most daring education reform of all? I will encourage you to read the entire essay to find out.

Thanks for reading.

James

Real Estate's Next Big Thing: Walkable Communities

I took the title of this post from Minyanville, a finance oriented website. The author, John Wasik argues that demographics will drive growth of walkable communities. Looks like Mt Lebanon might already be ahead of the curve. You can check out your Walkscore (the walkability of your individual address) here. I scored an 80 for my house on Academy Ave.

See the article here. Below is the text in full:

To be a savvy investor in US real estate these days, you need to look beyond the business news headlines and target human-scale developments that will grow because of long-term demographic trends.

Human-scale homes and communities feature amenities that you can walk, bike, or take public transit to without getting in a car. I live in such a development in Grayslake, Illinois, where I can walk or ride to Starbucks, the supermarket, bank, dry cleaner, library, and hardware store. I wouldn't want to live anywhere else right now.

You won’t generally find human-scale communities in sprawling urban areas dominated by highways, or what I call “spurbs.” Investing in human-scale development is a relatively new and enlightened way of buying real estate. You may be able to profit in real-estate investment trusts, or REITs, or find communities that feature this kind of construction.

Christopher Leinberger, a research fellow at the Brookings Institution and real-estate developer, says human-scale or "walkable" communities command a premium of 40% to 200 % in cost per square foot over properties in car-centric neighborhoods.

Demographics is destiny when defining the growth of human-scale developments.

Places with sidewalks, bike paths, trails, and public transit will continue to prosper while spurbs will wither. That's because millions of empty nesters among the Baby Boomers -- born from 1946 to 1964 -- are selling their large, four-bedroom-plus suburban family homes and downsizing to condos, town homes, co-ops, and apartments half the size.

While the majority of Baby Boomers won't abandon their suburban enclaves quite yet, their sheer numbers will ensure significant migration to more pedestrian-friendly areas.

There were 52 million Baby Boomers aged 55 or older in 1990. By the end of this year, that number is forecast to grow to about 77 million and to 85 million in 2014, according to the National Association of Homebuilders, a Washington-based trade group.

Empty nesters are often moving to urban enclaves in Brooklyn, Philadelphia, Chicago, Seattle, and Portland, Oregon.

In his research on this subject, Leinberger has found that the supply for these kinds of neighborhoods lags the demand in major cities. Leinberger estimates that the New York City metro region, with about 20 million people in four states, should have 80 walkable neighborhoods, but only has 21. He said the area could use more areas like downtown Princeton, New Jersey, Washington DC’s DuPont Circle, or Chicago’s Lincoln Park.

Not only do human-scale neighborhoods help you build equity over time, they're better for your health and have lower carbon footprints. Because you're walking or biking to your destinations -- usually within a mile of your home -- you’re getting more exercise and polluting less.

When investing in human-scale areas, it’s not as simple as looking at listings and prices. Urban planners from the “New Urbanist” movement, who focus on building human-scale communities, examine “vehicle miles traveled.” The fewer number of miles you need to spend in a car, the higher the walkability.

One useful human-scale gauge is provided by WalkScore, a service that measures relative walkability (Leinberger is an adviser to the firm). In the New York metro area, for example, the highest-scoring neighborhoods were Tribeca, Little Italy, and Soho. The lowest were Howland Hook, Ardon Heights, and Woodrow.

How can an investor play this next big thing in real estate? One strategy is to buy REITs that favor human-scale developers. While these publicly traded funds of real-estate companies in general have been taking a beating in recent years, they're worth a look.

Buying REITs right now is probably the most challenging play because the market is still troubled. With the industry going through a recession plagued by ballooning foreclosures, a commercial property slump, and tight credit, it’s not known when it will recover, so consider any REIT buy a risky long-term buy and hold. Only invest a small portion of your portfolio in this vehicle -- less than 10% of your holdings.

REITs worth considering include Federal Realty (FRT) and Post Properties (PPS), according to Leinberger.

Looking to relocate? Be prepared to pay a premium for human-scale neighborhoods. While places like Soho and San Francisco’s Chinatown have a high desirability factor, you’ll find few bargains there.

Email me your walkscore. Note that I am not giving investment advice with this post. I just found it interesting.

Thanks for reading.

James

Too Many Towns, Too Much Debt

A loyal reader forwarded an article my way from today's Post-Gazette that has the title, "Too Many Towns, Too Much Debt: Welcome to Pennsylvania".

From the article:

A train wreck is coming, and, because of my position, I think it's my duty to alert people," said George Cornelius, secretary of the state Department of Economic and Community Development. "Some of these municipalities may get into a situation where they have no choice; bankruptcy is the only option left.

The article takes a look at some others states and how many townships/municipalities they have. The authors are not-too-subtly suggesting that Pennsylvania has far too many municipalities to be efficient and that at some point, a point just before or after bankruptcy, municipalities will be forced to merge in order to gain efficiencies. For an even lengthier explanation of Chapter 9 filings, see this article.

This is not too different an argument than the one made by Governor Rendell when he suggested that there are too many school districts in the Commonwealth. I posted about plan here and here. It has since died down but we must not think that it will go away. With Harrisburg about ready to file for Chapter 9 protection (along with many other municipalities across this country), we may be looking at the beginning of a move to consolidate services not just in Pennsylvania, but across the country as well. In April of 2009 I raised the alarm when Vallejo, CA decided to file for bankruptcy protection. Vallejo was granted bankruptcy protection and as a result was able to get out from under its existing union contracts.

How much longer before we see towns follow Harrisburg's lead. Too much debt has officially become too big a problem.

Thanks for reading.

James

March News and Meeting Roundup

There have been a number of newspaper clippings worthy of mention and comment.

First, let's start with the Zoning Hearing Board which ruled against the District's application for variance from two ordinances regarding total lot coverage and acceptable number of parking spaces. Below is a short excerpt from the article in the Almanac:

As for the board's next step, Kubit said, "We don't know just yet. We're still waiting on the written opinion from the zoning board and after that, we could, really I don't know and I hesitate to give an answer. We could appeal or change the design, that depends on legal counsel. We thought we had a very good case for requesting the variances."

Right now the options for the District are as Mr. Kubit suggested. Either we can appeal to Common Pleas Court or we can change the design so that it does not violate the ordinances. Personally, I have made the comment that the Board must be made aware of potential costs of any and all remedies (appeal or optional redesigns) before we make a decision on where to take this next.

For more information regarding variances, please see this document on the Municipal website. It should give you some good insight into what the Zoning Hearing Board needs to see in order to grant a variance. I do look forward to reviewing the entire transcript of the meeting and reading the full decision of the Zoning Hearing Board. That written decision should be available within 45 days.

The second clip I want to link to has to do with the high school project and is a Letter to the Editor in this weeks Almanac. The letter is written by Mt Lebanon resident Dirk Taylor. Below is an excerpt:

The current $113 million plan would be totally irresponsible in any economic environment, let alone the current recession. It will break the record for most expensive public school project in western Pennsylvania history by more than $30 million. Each of our neighboring communities have completed major high school renovation/new construction projects in recent years with the highest cost coming in at under $38,000 per student. The reconstruction plan sought by Mt. Lebanon's School Board will "raise that bar" to a preposterous $55,000 per student. And to make matters even worse, the current design is greatly flawed.

I urge you to read the entire letter as Mr. Taylor has been involved with the project quite intimately for some time. He was a member of the CAC and has done work for the District as a structural engineer. I point out this letter not because I want to revisit any of our past votes (you can review my blog for that), but because Mr. Taylor's sentiment on how this Board has acted is shared by a number of people in our community. There is a level of trust that is missing and must be rebuilt.

Speaking of trust that must be rebuilt, there has been recent discussion of Right to Know requests. There was an article in the Post-Gazette regarding some issues that Mt Lebanon has had with regards to requests. Please see the article here. Below are two short excerpts:

Under the new Right to Know law, signed by Gov. Ed Rendell on Feb. 14, 2008 and effective Jan. 1, 2009, the burden is on the government agency to explain why a document should not be released. The burden was formerly on the requester to explain why the information should be public.
...
At this week's meeting, school board member Daniel Remely suggested the district make the names of the requestors and the costs of performing the requests available for public review.

Really, that first paragraph is the important one. We are buying hardware in order for us to more easily comply with the Right to Know law signed in 2008. The hardware should reduce the time it takes to search for information requested from residents. According to our Director of Technology, other school districts in Allegheny County are also shelling out money to help them comply with the RTK changes from 2008.

I made two points on Monday night related to RTK requests. First, if the District wants to reduce the amount of RTK requests then it needs to have a focus on being as transparent as possible with all business before the Board. Decisions like ending a superintendent's contract without explanation, early bird teacher contracts, cost overruns on elementary school renovations, high school project reimbursement amounts reduced by 50% just weeks before Act 34 hearing, high school project costs less than 2% below referendum levels, and claims that 20-year enrollment figures were used to justify a HS project when such 20-year enrollment figures do not even exist, do not facilitate the kind of trust that the Board needs to have in order to reduce the amount of RTK requests. It is incumbent upon each board member and the administration to do what they can to keep the entire District on the correct open, honest, and transparent path. We have a pretty bad history and it is up to us to start to make changes. We must not view the RTK requests as nuisances but instead as opportunities to improve our communication with our residents.

The second point I made at the meeting was in relation to the comment made above by another board member. The only reason someone might want to publish the names and costs of RTK requests is if that person wanted to try to make people think twice about making those requests. If the Board was to follow this to its ultimate conclusion, then it would most likely have a "chilling effect" on people who would otherwise make a RTK request. This is not the type of District I want to be. My suggestion would be that if the Board makes the names and costs of requests public then it ought to make the information that was requested public as well. My hope would be that the empowerment felt by getting the information published online for all to see would neutralize the chilling effect mentioned earlier. Quite honestly, if the Board decided to move in the direction of publishing names and costs of RTK requests, I would most likely make this blog available to those residents that wish to publish the information gathered by their request.

There is no such thing as one-way transparency.

Thanks for reading.

James Fraasch

Municipal Zoning Hearing Board Tonight

One of the next steps in the process for the high school is to request and receive a variance from the Municipality for various out-of-compliance construction items for the high school. This is not atypical of many large construction projects.

To that end there will be a Zoning Hearing Board meeting tonight at the Municipal Building at 7:30pm to address these variances.

Please see the agenda on the Mt Lebanon Municipal Website here:

Teacher Quality- Some Perspective

There was an interesting post on The Core Knowledge blog which I wanted to share regarding teacher quality and the current focus on it as the saving grace of the education system.

Title: Teacher Quality: The New Magic Bullet

It’s official. Forget accountability. Forget choice and charters. Forget mayoral control, standards, class size and universal pre-K. Teacher quality has now been annointed The Answer for what ails American education.

Those who pay attention to the life cycles of ideas will note that the tipping point occurred on or about March 8, 2010 when the New York Times Magazine and Newsweek simultaneously devoted their covers to teacher quality–guaranteeing that the issue has achieved escape velocity, breaking out of the education bubble and into the mainstream. Elizabeth Green’s “Building a Better Teacher” is a lengthy article about efforts to describe and quantify what makes good teachers effective, and it’s unfair to compare it to Newsweek’s cover story, which is classic example of the newsmagazine formula: take bits of data and pieces of string that have been rattling around — the bit about how “2, 3, or 4″ (which is it?) good teachers in a row close the achievement gap; the bit about how teachers come from the bottom third of students – and combine them into a single piece of received wisdom. Newsweek’s cover pronounces in stentorian tones: “We must fire bad teachers.” Lest the point be lost, the magazine tells us in bright yellow letters that this is “The Key to Saving American Education.” And that’s subtle compared to the article itself which declares: ”The problem with education is teachers.”

Well, thanks for clearing that up.

“Getting rid of bad teachers and hiring good ones is the solution to turning around failing urban schools,” Newsweek tells us. Note the definite article. Not “a” solution, but “the” solution. The Answer. The Way. The True and Only Heaven. Cue choirs of seraphim and cherubim. No more calls, we have a winner. If we want to fix schools we must fire bad teachers. That’s it. Period. Full stop.

Let me say this clearly: teacher quality matters. I’ll say it again. Teacher quality matters. Did I mention that teacher quality matters? Because it’s really true. Teacher. Quality. Matters. Are we clear?

But let’s be clear on something else. The very worst phenomenon in education is the True and Only anything. Pondiscio’s First Law states there is no good idea in education that doesn’t become a bad idea the moment in hardens into orthodoxy. And teacher quality now threatens to become the latest good idea that we will follow off a cliff.

Curriculum? Doesn’t mean a thing without a great teacher. School leadership. Sure. That’s how we hire great teachers. Testing? That’s how we identify great teachers. Merit pay? We need to compensate great teachers for delivering results. Class size? A great teacher can handle 50 kids more effectively than a mediocre one can teach five. Choice? Parental support? What part of great teacher do you not understand?

But enough of all that. We now know — we know — what it will take to fix education. Great teachers.

And only 3.2 million of them.

I love this blog because its authors often challenge the conventional wisdom when it comes to fixing the national education system. The above post certainly does that.

The author of the above post is suggesting that simply having great teachers does not equal great test scores or a great education. The content of what is taught is quite important as well.

Thanks for reading.

James

School Board Meeting Agenda for March 8 2010

We have some interesting items on the agenda for tonight's meeting. You can find the agenda in full here. Below are some topics that might generate some thoughts:

1) Revisions to the 2009-2010 Calendar- We have had a ton of snow days this year. So many so that we are going to have to eat away at some future school days that we would normally have had off. It is inconvenient, but necessary, to make the changes to the school calendar. I would urge any parents/students that may be affected by the changes to the schedule to reach out to their teachers as soon as possible to figure out how best to move forward through any scheduling conflicts.

2) Resolution on PSERS Projected Rate Increases- As you may know, the Pennsylvania State Employees Retirement System is projecting tremendous increases in expenses going forward. While Governor Rendell has presented in his budget a way to reduce the immediate impact of these increases in the very near term, his budget would make later year increases worse than current projections. In the Audit/Finance Committee I made the recommendation that we pass a resolution urging the State Legislature to pass meaningful and lasting pension reform that would lessen the projected tax impact on local school districts. The wording of this proposal before the Board does not advocate for a particular type of reform, but instead asks more generally for the State to address the issue soon. Any suggestion of a particular type of reform (such as the PSBA recommendations) has the potential to create conflict with with our teachers union, and quite frankly, the PSBA solution may not be the best solution out there. I don't know what the right solution is, but what I do know is that the projected tax increases will bankrupt a number of Districts statewide.

3) Turf replacement- Since we received word that the District was to get almost $2.5 million in liened taxes from the sale of the Covenant, the Audit Finance Committee recommended that some of that money be used to replace the stadium turf. We budgeted $750,000 just last month for this replacement. Bids came back in at $432,900.

4) Single Prime Mandate Waiver- The school board is asking for a waiver from using multiple prime contractors for the high school project. This has the potential to save money on the high school project. Actual dollars will be hard to quantify.

That's all for now. Sorry about the long delay between posts. I went on a trip that threw off my schedule a little bit.

Thanks for reading.

James