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Everybody’s Favorite Economist Explains the Fiscal Cliff

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I have long been neglectful of Prof. Larry DeBoer’s (Everybody’s Favorite Economist ™) Capital Comments. November’s installment explains the “fiscal cliff” and why going over it is a bad idea.

Come Jan. 1, the Bush-era tax cuts expire, so everyone’s tax rates will increase. The two-year cut in the Social Security payroll tax will expire, raising taxes some more. The Alternative Minimum Tax won’t be adjusted for inflation, so millions of people will see their taxes rise still more. Automatic spending cuts will kick in, reducing both defense and entitlement spending. Extended unemployment insurance will expire; so two million people will lose benefits. And Medicare payment rates to doctors will be cut.

All told, it yanks about $500 billion out of the economy. That’s bad. But it cuts the deficit, that’s good, right? Well, yes, but it’s a matter of competing priorities. Pick you poison – slow or receding economy on the one hand or large deficits on the other. Right now, the deficits are the lesser poison because there is a lot of idle capacity in the economy. Demand created by the government isn’t pushing out or competing much with private sector demand so, at the moment, printed money isn’t driving inflation. In fact, interest rates are very low.

Yank the deficit money out of the economy, and businesses will have less reason to produce goods and services, will cut production, and you probably end up in vicious circle territory.

It’s a nasty choice: recession and unemployment now, or high interest rates, inflation and slower growth later.

DeBoer recommends coming up with a plan now that tackles deficits when the economy has recovered, not while it’s in the process of recovery.

Everybody’s Favorite Economist

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Larry DeBoer, long known in these parts as “Everybody’s Favorite Economist” gets a little recognition from Maureen Hayden with CNHI.

He is a professor of agricultural economics at Purdue University, but he also works part time at the Indiana Legislative Services Agency and is a go-to guy for lawmakers and other groups who want to get a handle on the finer points of Indiana state and local government financing. His monthly Capital Comments column is definitely worth a read.

Everybody’s Favorite Economist Speaks in Muncie

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Douglas Walker of the Muncie Star Press has an article about a speech given by Everybody’s Favorite Economist, Larry DeBoer. Professor DeBoer is an economist at Purdue and frequently assists the Indiana General Assembly with property tax matters.

He suggested that Delaware County got hit third hardest by property tax restructuring behind St. Joseph and Lake Counties. The combination of high property taxes and a loss of manufacturers results in Delaware County getting hit hard, and once the impact of the recession ripples through the tax system, the county is going to get hit like a ton of bricks. They have not, apparently, implemented a local option income tax which is the tool given to local governments by the General Assembly for local governments to deal with the General Assembly’s property tax changes. That’s a neat trick by the General Assembly, by the way — they get to “cut” your taxes and leave it to local government to raise them again.

Dealing with the loss of revenue, Muncie has closed two library facilities, closed a fire station, anticipates closing a second fire station, and anticipates laying off 32 other firefighters. So, in a way, Muncie is a little like ancient Alexandria which lost its Great Library to fire. But, in most other respects, obviously, it’s not. I’m sure Alexandria did not have very many great Pizza Kings.

Larry DeBoer on inflation and local government finance

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Larry DeBoer, Everybody’s Favorite Economist (TM), has a good post on the subject of how inflation might impact local government finance in Indiana. If inflation caused property values, assessed values, income, and permitted levies to all increase at the same time, it wouldn’t be that much of a problem. But the system isn’t structured to allow that to happen. There is a lag between properties increasing in value, the properties being assessed for that increased value, and the increased assessment hitting the tax bill. Permissible tax levies are allowed to increase by the state’s growth quotient which takes into consideration the previous 6 years, so low inflation years prior to a high inflation year will limit the inflationary effect on the growth quotient. There’s also a 6% limit on the increase in maximum levies, so such levies could not catch up to inflation that exceeds 6%.

Larry explains the issues better and in more depth than I do, so his post is definitely worth checking out directly.

West Lafayette School Board: Local Government Finance and Policy Options

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One of the reasons I am asking folks to vote for me as a candidate in this West Lafayette School Board race is that I have some experience with local government finance. A school board’s policy options are tied to its funding options. This stuff is opaque (to put it charitably) and it takes awhile to get up to speed. Understanding the twists and turns of the state’s regulations on local government finance ends up being important not just because it helps you understand what the board can and can’t do, but also because it helps you explain the board’s choices to constituents who might otherwise find the school’s choices arbitrary or wrongheaded.

A subject that often seems to come up when money is tight has to do with funding building projects. It’s pretty common to see a citizen who doesn’t really understand the process (or a disingenuous anti-education legislator who probably does) respond to calls for increased funding for teacher pay by grousing about how schools are wasting money on “cathedrals.” (My first exposure to this argument was about twenty years ago when I lived in White County – someone was complaining about a new baseball field when the subject of having to let an assistant band director go was being discussed.) On the surface, it’s a pretty common sense argument. Don’t spend the money on “x.” Spend it on “y.”

The reason that argument falls apart has to do with state law. The tax rate that supports capital construction projects (i.e. buildings) is distinct from the funding sources for teacher pay and other operating expenses. This is further complicated by the maximum levy imposed by the State and the fact that local units of government have their tax rates tied together, in a sense, through the state imposed tax caps. More on that below, but the upshot is that reducing your tax rate for capital projects doesn’t mean that you’ll have lower taxes or more flexibility to spend money on non-capital expenses. It might just mean that another unit of local government gets more money from its tax rate.

(And, by the way, a quick note to acknowledge that just because I have a fair amount of background in this area, doesn’t mean my knowledge is anything like perfect. There are probably mistakes in this post. But my experience is usually good enough to allow me to separate the real issues from the non-issues. And I know when to go lean on people with expertise in the area: we’re fortunate enough to have Everybody’s Favorite Economist ™ in the district, a long-time CFO working for the corporation, outside contractors like Baker Tilly, or in my County work, our County Auditor.)

Looking at my 2019 tax statement for illustration, the tax rate attributable to the West Lafayette Community School Corporation was $1.2762 per $100 of assessed valuation. In 2019, the certified rate attributable to debt service was 0.5375, the rate attributable to operations was $0.3687, and the rate attributable to the referendum was 0.37. Add those all up, and you get the $1.2762 on my tax statement. That debt service amount crept up a little between 2015 and 2016 (from 0.5322 up to the 0.5375 where it’s been since) but it’s held pretty steady at around that rate as far back as I can see. That $0.5375 rate seems to generate in the neighborhood of $5 million per year. The rate has held steady despite the additional debt the school corporation* bonded for to fund the new construction at West Lafayette Intermediate School, improvements at Cumberland, and additions to the Jr./Sr. High School.

(*Technically the bonds were issued to the West Lafayette School Building Corporation. This is not some sort of arcane end-run around local government finance rules. This is routine practice for units of local government using bonds guaranteed by property taxes to fund capital improvements. In the case of schools, the procedures are set forth in IC 20-47-3. In the case of other units of local government, the procedures are set forth in IC 36-1-10. I believe there is some artifice here, but it’s not local or recent. It’s a legal fiction of long-standing (since the 1920s), used nationwide. With respect to Indiana, my understanding is that the State was scarred by its experience with the Indiana Mammoth Internal Improvement Act of 1836. The State defaulted on bonds related to those internal improvements in a big way, leading to adoption of Article 10, section 5, of Indiana’s 1851 Constitution which has a general prohibition on the State (and by extension political subdivisions of the State) incurring debt. However, as it turns out, it’s not terribly practical to fund long-term assets with cash on the barrel head, so these building corporations were devised as a way to create a bit of legal separation between the government and debt while still providing bond holders the security they need to lend money.)

So, back to our hypothetical citizen or legislator criticizing spending on facilities (and forgetting for the moment that adequate facilities are important to education).

Why not spend the debt service money on teachers instead of buildings?

The General Assembly says we can’t. IC 20-40-9-6 lists the uses of the debt service fund, and paying school operating expenses aren’t on the list.

If you spend less on debt service, won’t that let you lower the debt service tax rate and increase the operations tax rate?

No. The two aren’t really tied together under state law. Lowering the debt service rate won’t increase the amount available for the operations fund. That amount is capped by something called the maximum levy and generally that amount will increase each year based on the assessed value growth quotient —  which is a multiplier calculated using the non-farm personal income growth for the previous six years. The growth quotient for 2021, based on the average income growth from 2013 to 2019, is 4.2%. For what it’s worth, due to COVID, there is a good chance that there will be some low or even negative personal income growth years baked into that formula for years to come, reducing the growth quotient and limiting the maximum levy for the operations fund.

If you spend less on debt service, won’t that at least reduce our overall taxes?

Probably not. In many cases, the effect will be to send more money to the City of West Lafayette or the County. Property taxes in Indiana are capped at 1% for residential property, 2% for rental and agricultural property, and 3% for commercial property. Any given parcel has taxes from a number of local units stacked on top of each other. Using the 2019 tax statement again for reference, the total tax rate on the property was $2.7603 for every $100 of assessed valuation. As I mentioned, $1.2762 of this was attributable to the school. The City, the County, the township and the library all added their rates on top of that. It’s not as easy as just multiplying that tax rate times assessed valuation because there are things like homestead deductions and the fact that the referendum tax rate doesn’t fall under the cap, but generally, that tax rate is going to take you over the tax cap for a lot of properties in the West Lafayette school district. When that happens, the taxpayer gets a “circuit breaker credit” which is deducted from all of the local units tax revenue.  If WLCSC reduces its debt service tax rate, the total amount of the circuit breaker credit is reduced, generally to the benefit of the other taxing units. In other words, if the School reduces its debt service tax rate, the County and the City have a smaller amount of their tax revenue reduced by circuit breaker credits. So, the taxpayer pays the same amount of tax on the property, the school doesn’t have the money to use on capital projects, and the City and the County get a bigger piece of the pie.

Is the referendum tax rate used on debt service?

No. Legally, it can be (because referendum money is legally allowed to be used for any purpose on which the school can otherwise spend money), but for the West Lafayette schools, referendum money is not used for debt service. It’s used to supplement the education and operations funds. For 2020, there was a filing with the Department of Local Government Finance that created the impression that maybe the referendum money was being used for debt service. (In fact, the form showed $4.5 million used for debt service). But, this appears to be from some kind of glitch caused by how the school’s software communicated with the State’s Gateway software for financial filings. If you look at the same report for the debt service fund,  it shows $6.5 million on debt service and lease rentals (these “leases” are from the building corporations we discussed above.) The school corporation simply isn’t spending $11 million per year on capital expenses.

If you look at the 2019 report for debt service it’s similar to the 2020 debt service report. Meanwhile, in 2019, the referendum fund shows nothing for debt or leases. Our bonds and leases for building construction are being paid from the debt service fund which, as we discussed above, can’t be used for non-capital expenses like paying teachers.

Was there some shuffling of referendum money between the education fund and the operations fund?

All right. Our hypothetical citizen or legislator isn’t asking this, but I wanted to mention that the General Assembly passed legislation saying that 85% of State money has to remain in the education fund with not more than 15% going to the operations fund. The education fund is to be spent on student instruction and learning (e.g. teachers). The operations fund is for non-instructional operating costs of a school (e.g. human resources, utilities, food service, and other non-classroom expenditures.) The referendum fund money can be used to supplement either or both of these. It used to be that the referendum money was allocated among both instructional and non-instructional uses so that the school could keep track of what would likely have to disappear if the referendum money ever dries up. Due to the State’s 85% rule, the school shifted more of its referendum money to operations so that less State money counted as operations. The substance didn’t change, but the school had to do a bit of rearranging to comply with statutory requirements.

So, the take away is that: a) debt service tax rate money can’t be used for teachers; b) our debt service tax rate is the same now as it was before the new construction; c) foregoing new construction would not have given us any flexibility to raise other money for teachers; d) foregoing new construction would not have reduced the tax bill for most residents; and e) referendum money was not used on the new buildings.

Anybody who has made it this far, thank you! This stuff is about as exciting as watching paint dry. My main point is that it’s useful for a school board member to have familiarity with this type of thing so that he or she can walk a constituent (or legislator!) through the issues and hopefully be able to identify which complaints are well-founded versus those that are based on a misconception. Then, hopefully, folks can focus their attention on the former without wasting too much time on the latter.

I believe my background will allow me to get up to speed as a school board member more quickly and be a productive part of the board. So, in conclusion, Vote Masson!

94.27% of Voters Support West Lafayette School Funding Referendum

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I think I mentioned a few weeks ago that I was actively working on the school funding referendum for West Lafayette Schools. I’m not looking up dates, so I might get some of this slightly wrong, but in 2008 or thereabouts the State shifted the school funding model. Instead of coming mostly from local real estate taxes, most school general operations would be funded from the State’s general fund. This was partially in response to some more generalized property tax problems. (Here is a post from 2007 with some of the history to that date — quoting, in part, Everybody’s Favorite Economist ™ Larry DeBoer.) Almost immediately thereafter, the national economy hit the skids. The State cut school funding.

In 2012 (I believe), West Lafayette’s school superintendent, Rocky Killion, wrote a column entitled “The Demise of Indiana Public Education” that speaks to the history as it pertained to West Lafayette Schools up through 2010. This history was echoed in a December 2016 presentation (pdf) by Dr. DeBoer. The upshot was that over the course of about 25 years, just about every decision made by the General Assembly in terms of school funding, sometimes by design / sometimes by happenstance, worked against West Lafayette schools.

That said, the General Assembly did make available the referendum process as a tool to help West Lafayette right the ship. So, in 2010, there was a hard fought referendum battle on the question of whether to permit imposition of a local property tax increase of up to $0.43 per $100 of assessed valuation. A lot of money was spent on both sides. A group of local landlords were the primary opponents of the measure. But, after the dust settled, the community supported the measure by about 2 to 1. The money was well spent. West Lafayette has a lean administrative staff (probably too lean, truth be told) and our schools are consistently rated among the top (if not *the* top) school corporations in Indiana.  I suppose the argument could be made that we could make due without referendum money and settle for average performance. But, as a community, we embrace education in a big way.

The way the referendum law is set up, we had to renew the rate authority after seven years. Taking a look at the past budgeting, even though the school board had authority to impose a rate of up to $0.43, it had never gone above $0.37. So, when seeking to renew their authority, the school board lowered the requested authority from $0.43 down to $0.37. As some of you might remember, I lost my run for school board by 4 votes in the November 2016. One of my last acts as a lame-duck school board member was to vote to proceed with the renewal referendum. Then I joined the campaign to get the renewal passed. (I should note that the vote to proceed was unanimous and the member who replaced me was active in the referendum effort as well — so it would have proceeded regardless of my vote.)

I can’t say I campaigned that hard for my own school board seat. I should have done more. But, I had never campaigned for anything before (I had been appointed to fill out an existing member’s term) – and self-promotion isn’t something a Midwestern kid is raised to be comfortable with! The referendum campaign was very different. It was a lot more important than my board seat, I had just received a lesson on close campaigns (with the Presidential election — a lot of us are still receiving that lesson), and campaigning for an issue like this was much more in my comfort zone.

A pro-referendum PAC called “Friends of West Lafayette Schools” was formed with some local dignitaries at its head. (For example, former  West Lafayette mayor Sonya Margerum (Democrat) and former state representative Sue Scholer (Republican) were co-chairs.) Being a part of that effort was educational, gratifying, and enjoyable overall. I got to knock on doors with a number of people (including Sue)  — which turned out to be something I unexpectedly got a kick out of.  But my favorite co-campaigners were my kids. We had a data-entry app. I’d talk, and they’d thumb-in the results.

(One of the best moments was when Harper caught on to an oddity of my canvassing pitch: She pointed out that, when someone said they didn’t support the referendum, I didn’t mention where the voting locations were. When someone said they did support it, she says I probably mentioned the voting locations two or three times. Busted.)

I was able to meet or get to better know others involved in the campaign. Developing relationships is an underappreciated aspect of community efforts. The community is strengthened not just because of the goal that is the focus of the effort. It’s also strengthened by the act of working together with your friends and neighbors.

Ultimately, as the headline indicates, the school funding question passed in a landslide: 94.27% of those voting. Those are third-world dictator numbers! Of 2,233 votes cast, 2,105 were in support while 128 were against. I’m told that’s a state record of some sort. The strong support of the community is good to see, but it does strongly suggest that this effort was something of a waste: kind of make-work imposed by the state. There was no real appetite to eliminate the current tax rate. The burden is reasonable and the results of that funding have been very good.

But, that’s all the complaining I’ll do for now. The result was very positive, I made some new friendships & strengthened some old ones, and I got to walk around my community while chatting with my kids. I’m definitely putting this one in the win column.

And, in closing, I’m sharing a picture of a Kirk-gnome being attacked by a wee-Gorn that I saw in a rock garden while I was canvassing.

Kirk needed a little convincing to vote “yes” on the school funding question.

 

 

 

Third House (Tippecanoe County)

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I attended my first “Third House” meeting in Tippecanoe County today. I’ve been eyeing the program for years but for whatever reason, never signed up. (Might have something to do with the 7:30 a.m. Saturday morning meeting time.) Seems like it’s right in my wheelhouse. It’s an event conducted every couple of weeks on Saturday mornings during the legislative session by Greater Lafayette Commerce where local legislators attend along with an interesting cross section of the community to discuss legislative matters. I knew a number of the people there personally and a number of others by reputation.

The main part of the initial meeting this morning was a presentation by Everybody’s favorite economist ™, Larry DeBoer. Not a great surprise, but it looks like school funding is going to be the main or at least one of the main issues this session. K-12 funding makes up about half of the state budget. The school funding formula has a base per pupil component and then schools get additional funding using (I think) the number of kids getting subsidized textbooks as a proxy for determining which schools have kids who need extra help. In Tippecanoe County, West Lafayette Schools are near the bottom of per-pupil funding and Lafayette Schools are near the top. Tippecanoe School Corp. is in the middle. So, the joke went, if our Third House can figure out a formula that makes all the Tippecanoe schools happy, we’ll probably have the state budget mostly solved.

Another issue he mentioned had to do with taxes on agricultural land. Those taxes have been rising pretty sharply, mostly in response to the fact that agricultural land values have been going up, and agricultural commodities are doing pretty well. That’s fine so far as it goes. Your income and wealth increase, you pay more in taxes. However, the agricultural valuations are made in arrears. That’s generally good news when prices are trending upward. Your income and assets are going up while your taxes are based on previous years when things weren’t so good. That’s generally bad news when prices are trending downward because you have less money to pay taxes with, but your taxes are assessed based on the better years.

Anyway, I’ll be interested in seeing how the process works as the session progresses. I’ve been assigned to the courts and criminal code committee. So, I guess my role at Third House will be more focused on bills affecting the judiciary and helping to make recommendations on those issues. More specifically, I’m probably going to be focused on civil legal matters because the committee is stacked with people way more experienced in criminal law than me. Should be interesting.

Local Government Finances Not Expected To Get Much Worse

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Dorothy Schneider, writing for the Lafayette Journal & Courier has an article entitled New mayors expect to face steadier conditions which features Everybody’s Favorite Economist, Larry DeBoer.

New mayors won’t, apparently, have rosy financial circumstances under which to begin their terms, but conditions seem to have plateaued. He makes an important point about local finances:

“In this day and age, you’ve got to watch everyone else’s budget as well as your own. Where tax caps are in effect, your city could be being frugal and keeping its tax rate down, but then if the schools or the county go above (the limit), you lose money.”

And then there is this:

Given that tax caps now are in the state constitution, DeBoer said local leaders shouldn’t expect any relief on property tax revenues coming down the line. The only hope for mayors is to add to the property tax base through new developments in the community.

DeBoer expects more municipalities and counties will have to adopt Local Option Income Taxes in the next decade to help offset revenue losses.

“They’ll probably also be looking at user fees,” DeBoer said. “I expect once the economy gets going again … we’ll see more of that.”

I think what we’ll find is not so much a reduction in the tax burden from property tax caps but a shift in the burden from property owners to income earners. (Obviously, there is a lot of overlap in those categories.)

Homestead Credits Set to Expire

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Amanda Iacone, writing for the Fort Wayne Journal Gazette, has an article (featuring Everybody’s Favorite Economist(tm), Larry Deboer) on the anticipated expiration of state funded homestead credits. This will cause pretty much everyone’s property taxes to go up unless they are already up against the tax cap.

The homestead credits, if memory serves, were funded by selling slot machine licenses to the horse tracks, (and got us through the 2008 elections with lower property taxes.) According to the Journal Gazette article, rural property owners benefited most from the homestead credits (as compared with tax caps) because those areas typically do not pay as many taxes as more urban areas – and therefore don’t hit the caps.

DeBoer: This Is Gonna Hurt

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(I’m paraphrasing). According to an AP story, Everybody’s Favorite Economist ™, Larry DeBoer, says that 2011 is going to be the year that the recession hits local governments, with an 18-20% drop in income tax revenue for counties statewide.

Professor Larry DeBoer told a meeting of Allen County officials on Tuesday that 2011 will be the year the recession hits local governments in Indiana. DeBoer warned that with less money from property tax, local governments will have to rely more on unstable revenue such as income taxes and fees.

(It’s worth noting how we got to where we are.)