Tuesday, March 29, 2011

Measuring up education

A common complaint about education reform is the slow pace with which it takes place. I've often heard the analogy, "Improving a school system is like turning a battleship." In contrast, political changes can occur quite rapidily, as this state has witnessed over the past several months. And while the Forum's mission is to conduct timely and topical research, sometimes the policy world moves faster than we had anticipated. Such is the case with the report we release today.

The report, entitled "Measuring Up Education: Community-Driven Accountability in Milwaukee," was commissioned last summer by the Greater Milwaukee Foundation (GMF) in a quest to find community consensus on a dozen or so simple metrics that could be used to measure progress in the Milwaukee Public Schools.

Since that time, the voters have elected a new governor, and the state legislature has enacted new laws dramatically changing the landscape for local governments and school districts. These changes affirm the need for consensus when it comes to holding the district accountable, yet they also make consensus more difficult to achieve. And, in this case, they perhaps make consensus on turning the ship around less of a priority than simply keeping it upright.

Nonetheless, we believe the report contains important information for those seeking a simple framework through which to view the district's momentum. We suggest several metrics that could find consensus in Milwaukee based on experiences in other urban districts, the priorities Milwaukee education reformers have voiced, and the district's internal and external goals (as reflected in the MPS strategic plan and state and federal regulations).

In the end, while reasonable people will disagree about the specific strategies needed to improve the quality of teaching and learning at MPS, it would be constructive for community leaders at least to agree on how we will measure whether those strategies are succeeding, and how to ensure accountability if they are not.

Wednesday, March 23, 2011

Diminishing returns to public sector employment

Most local governments in Wisconsin have certainly given their employee compensation packages a closer look over the last few weeks as the budget repair bill receives judicial consideration in Madison. The eventual implementation of what now has passed as Wisconsin Act 10 may soon be approaching, and elements within it are certain to help governments in some respects, but may tie their hands in others.

One knot that has yet to be fully assessed is the effective decline in salary growth for public sector employees resulting from new compensation guidelines. Limited salary growth paired with elevating fringe benefit costs will eat into take home pay. Though this diminished growth may be a fiscal necessity, locking it into perpetuity raises some difficult questions.

Under the budget repair bill, total base wages for all public employees would be prohibited from growing annually beyond the increase of inflation (measured by the national average CPI-U), unless approved by referendum. This measure of inflation has averaged a rate of 2.5% over the last 10 years.

While an annual salary increase of 2.5% does not appear unreasonable, it is important to recognize that most public sector workers also will be asked to pay more for their pension and health care costs year after year. Those costs, incidentally, have grown far faster than the CPI-U. The inability of salary growth to keep pace with the rise of fringe benefit costs may cause public employees to experience successive years of increasingly stagnant compensation.

A quick look at fringe benefit growth historically reveals the potential for diminishing growth in public sector pay. The table below shows five years of pension contributions and health care premiums for general employees working for the State of Wisconsin.

This information shows that the growth in annual pension contributions has been relatively flat, as the contribution to the Wisconsin Retirement System (WRS) has averaged a 1.9% increase annually from 2007 to 2011. This would signify that annual salary increases allowed under the new law could be sufficient to offset the growth in the employee share of pension costs. However, it has been suggested that pension contributions to WRS may need to increase significantly in the future to reflect more realistic interest rate assumptions and other factors. If that development does occur, employees could see pension costs grow more rapidly than inflation, resulting in take-home salary growth that does not keep pace with inflation.

Health care costs pose an even bigger problem for public sector employees, as premiums have steadily climbed far faster than inflation. Premiums for the state’s Tier I family plans, for example, have grown at an average of 8.3% from 2007 to 2011. Because it appears unlikely that health care inflation will be reduced to a level equivalent to general inflation, public employee salary increases are unlikely to keep pace with growing health care contributions.

While a compelling case can be made for the need to require public sector employees to contribute significantly more to their health care and pensions costs, and while many private sector workers face similar salary and benefit pressures, public sector administrators face several important long-term questions.

For example, what tools will administrators have at their disposal to attract and retain valued employees if pension and health care cost increases negatively impact earnings potential? Will the repeal of most collective bargaining rights allow administrators new liberties in shifting salary dollars to ensure they can recruit for priority positions, whether it be through altering salary schedules, adjusting position classifications, or offering bonuses? And if so, what would such a shift mean for the rest of the employees, given that total salary expenditure increases are restricted? In light of the many retirements projected in response to Wisconsin Act 10, state and local government administrators may be seeking answers in the very near future.

UPDATE: It has been correctly pointed out that the inflationary limit on public sector pay increases applies to public sector workers who are subject to collective bargaining agreements only. However, the compensation changes of non-represented employees often mirror those granted to represented employees.

Friday, March 11, 2011

Proposed new transportation policy mirrors national debate

A key transportation provision in the governor's proposed budget that may have huge implications for mass transit also reflects a larger ideological debate that's raging in the nation's capital.

The provision stipulates that effective in 2013, state operating assistance for local transit systems no longer will be provided from the state's transportation fund, but instead will come from General Purpose Revenue (GPR). According to the Budget in Brief, the move is designed to "strengthen the relationship between user fee revenues and investments in transportation infrastructure." In other words, motor vehicle-related taxes and fees should be used exclusively for highways and roads, leaving other transportation modes to seek assistance from the general fund.

Wisconsin's transportation fund collects about $1.7 billion annually from transportation-related fees and taxes to help fund the state's transportation infrastructure. In the 2009-10 fiscal year, about $970 million of the fund's revenues came from the state's 30.9 cent per gallon gasoline tax, while another $610 million was derived from vehicle registration fees. The remaining $120 million came from other transportation-related fees.

In 2009, the fund provided $112 million in assistance to local transit systems, including $65 million to the Milwaukee County Transit System (accounting for more than 40% of its operating budget). The proposed budget would cut local transit assistance by 10% in 2012, then make the shift to GPR funding in 2013, freeing up an extra $116 million for highway needs.

The long-term impact of the proposed budget provision on local transit systems could be substantial. Rather than having to compete with the relatively small universe of transportation-related programs that currently receive support from the transportation fund, transit would have to compete with the much larger array of programs that vie for GPR. Considering the state's overall budget challenges, it is possible that local transit assistance could suffer dearly under such a scenario.

In the end, whether the provision is appropriate public policy may depend on one's definition of a user fee. And, interestingly, that's a debate that is now playing out on a national stage.

In Washington, the federal Highway Trust Fund (HTF) essentially has run out of cash. With the 18.4 cent per gallon federal gas tax frozen since 1993, and substantial gains in vehicle fuel efficiency, the ability of the gas tax to keep up with the country's infrastructure needs has been exhausted. In fact, more than one bipartisan blue ribbon commission has urged prompt action to rectify the situation.

Because both congressional Republicans and the Obama administration have said a federal gas tax increase is off the table for now, attention has now turned to how HTF dollars are being spent.

In an August 2010 report entitled "Restoring Trust in the Highway Trust Fund," two researchers from the Reason Foundation argue that the diversion of 2.86 cents per gallon of the federal gas tax for mass transit operating assistance - first initiated in 1982 - is an inappropriate use of a motor vehicle-related user fee and has weakened public support for the gas tax. Consequently, they recommend "shifting non-highway programs either to general revenues or to the states" and using HTF funds only to rebuild and modernize the Interstate system.

A few months later, two researchers from the U.S. Public Interest Research Group issued a rebuttal entitled "Do Roads Pay for Themselves?" The paper argues, among other things, that the federal gasoline tax is not a true user fee, as the amount an individual driver pays in gasoline taxes has no relationship to the frequency with which he or she uses interstate highways. The authors also contend that the notion that highways pay for themselves via user fees is a "myth" used by highway advocates "to secure access to scarce government revenue for their desired public policy ends—distorting transportation decision-making."

The debate on this issue will heat up soon, as Transportation Secretary Ray Lahood recently predicted Congress would have a new federal transportation bill on the president's desk by August. Given the change in policy in the new Wisconsin state budget, might this be another instance in which a debate in Madison will drive groundbreaking debates occurring on a national level?

Wednesday, March 9, 2011

Will an expanded voucher program cost more or less?

Gov. Walker’s proposed 2011-2013 biennial budget calls for an expansion of the Milwaukee Parental Choice Program by repealing the enrollment cap, allowing private schools anywhere within Milwaukee County to participate, and expanding eligibility to all City of Milwaukee families by eliminating income limits.

During tough budget deliberations, it would be good to know whether the expanded choice program is likely to save or cost state taxpayers over the long run. Either is possible—taxpayers save if the students who join the expanded program otherwise would have been students at more costly public or charter schools and taxpayers lose if the new voucher users would have otherwise been free to the state as tuition-paying private school students.

There is a debate over the likelihood that the program will be able expand considerably, as capacity for new students in the county’s existing private schools appears constrained at this time. However, the debate so far has overlooked the fact that the proposed budget would allow new voucher users to be existing private school students starting in the 2012-13 school year. There is a real concern that the expanded program may, in fact, increase costs for the state over the long run by increasing the total number of Wisconsin K-12 students who receive state support for their education.

Analyzing data from other years in which the legislature expanded the program can give a sense of how likely it is that significant growth in the program will come from existing private school students. When the choice program expanded to include religious schools in 1998, the state Department of Public Instruction (DPI) collected information regarding the type of school each voucher user had attended the previous school year. From that data, we know that 50% of the new voucher users in 1998-99 were already enrolled in private schools—2,512 of the 4,995 new voucher users.

We can also look at growth in voucher use compared to total growth in private school enrollment. In 2006, when the enrollment cap was raised, more private school students took advantage of the opportunity to use vouchers than public school students. In fact, 60% of new voucher users were existing private school students in 2006—1,408 of the 2,355 new voucher users. In the Catholic and Lutheran schools in particular, new voucher users tended to be students that were already attending these schools. The Lutheran schools, for example, had 467 more students using vouchers in 2006-07 than the previous year, but total enrollment in Lutheran schools grew by only one student during that time.

If these previous experiences are a guide, it is not unreasonable to expect that about half of the new voucher users in 2012-2013 will come from within the private schools joining the program. A quick analysis of private schools located outside the city limits that may be enrolling significant numbers of Milwaukee residents indicates at least six such schools: Indian Community School, St. Thomas More High School, Dominican High School, Milwaukee Jewish Day School, St. Bernard School, and St. Robert School. The likelihood that the student populations of these private schools could generate significant demand for new vouchers is quite high; these six schools enrolled a total of 1,729 students in 2009-10.

It is clear that assuming all, or even most, new voucher users in the coming years will save taxpayers money by switching from public or charter schools is not realistic. There will certainly be growth in the total number of elementary and secondary students receiving state taxpayer support. The debate should be about the affordability of these extra costs in the short- and long-term, whether these higher costs can/should be considered an investment in a better future, and what the effects of a more costly choice program might be on the public and private schools.

UPDATE: To clarify, low-income private school students who reside in Milwaukee and attend a participating private school in Milwaukee are currently eligible to use vouchers. The budget bill does not change the income limits for these students. However, it does expand their schooling choices to include participating schools throughout Milwaukee County.

Friday, March 4, 2011

Mixing it up: Exploring hybrid pension systems

The economic downturn has thrown even the most fiscally prudent governments for a loop. Dollars are stretching thin and new approaches to employee compensation are spreading across the nation. In light of the effects of the economic downturn, and as a measure to prevent similar fiscal vulnerability in the future, governments are particularly honing in on the manner in which they provide pension benefits. Everything from employee contributions, to retirement ages, to benefit levels are being reconsidered.

One concept receiving new attention is the use of hybrid pension systems. Hybrid pension systems are not new, but a lack of regulatory guidelines and several legal ambiguities suspended interest. In the last few months, greater clarification of federal guidelines for establishing hybrid plans has taken place. This may be what is needed to reinvigorate the hybrid conversation. Just this week, California’s Little Hoover Commission has suggested such a shift for California’s pension system.

Unlike private sector employers, most governments have stayed loyal to "defined benefit" pension systems. In such a system, regardless of the pension fund’s investment earnings, an employee can have confidence in receiving a certain pension payment upon retirement. This approach shelters government employees from unfavorable economic realities and requires the government to shoulder all the risk. When exposed to the downside of the risk, governments typically reallocate money away from other public service areas to appropriately fund their pension systems.

Most employers in the private sector have responded to market declines by switching to "defined contribution" (usually 401(k)) plans, which put the risk on the employee with benefit levels dependent on investment results. Many governments have contemplated similar moves, yet wrestle with whether or not switching to defined contribution plans will eliminate one of the key attractions to government employment and whether those plans provide for appropriate retirement security for their employees.

With federal regulations now better established for hybrid systems, pension options could be less polarized, a sentiment echoed in this Wall Street Journal article. Hybrid pension systems have gained traction because they remove some of the risk from governments, providing them with more shelter from poor stock market returns. However, unlike 401(k)-style systems, hybrid systems do not transfer the entire burden to employees. The risk is spread, instead, between both the government and its employees. This compromise could serve as a tool to both lessen the impact of market decline and protect an attractive benefit of public sector jobs.

There are various forms, but hybrid systems have the same basic composition – part defined benefit (usually a lower fixed benefit than the prior defined benefit plan) and part defined contribution. Benefits are viewed as hypothetical account balances and the accrued balance is portable, meaning it can be moved when an employee leaves government service to 401(k)s of his/her subsequent employers.

Hybrid plans often differ in the defined benefit formula, employer and employee contributions, and participation (voluntary or mandatory). The degree of shared burden, savings, and appeal depends on plan characteristics in addition to how those components differ from the current or proposed alternative and the subset of employees to which the change will apply. The Little Hoover Commission provided several examples of hybrid plans currently in place at the federal, state and local government levels, including Washington, Utah, and Orange County, California, shown in the table below:

Given that market uncertainty has caused defined benefit pension systems to significantly strain public services, as well as fierce public pressure to put public sector compensation in line with that of the private sector, hybrid plans are likely to continue to attract the attention of policy makers across the country. That attention has not taken shape in Wisconsin, however, with hybrid plans having yet to be picked up in the swirl of discussion surrounding local pension reform.