The Show-Me Institute’s Chairman Crosby Kemper III appeared on KCPT’s Ruckus on January 26 to discuss April’s infrastructure bond proposal, the absence of the minimum wage issue on the April ballot, and other local issues. Click on the link above to watch the entire episode.
A New Mantra for the School Choice Movement
In many Eastern religions, practitioners use mantras to calm and center themselves while meditating. If the school choice movement needs a mantra right now, it just might be:
Regulating a market is not the same as regulating a monopoly.
I say this because of the huge outcry around Betsy DeVos’s putative beliefs on how to bring accountability to charter schools and schools that participate in voucher programs. Differing conceptions of accountability have become equated with being “for” or “against” the idea in toto. But which is more strict? Requiring that schools be evaluated on an A–F scale and automatically kicked out of a charter program of they fail? Or establishing a mayorally-appointed commission to decide what schools should and shouldn’t stay open? I actually don’t know.
I do know that as increasing numbers of our schools move to a more market-like arrangement, we need to rethink what we mean by accountability and regulation. I say “market-like” just to reinforce that even the most generous voucher programs or the charter programs with the lightest-regulatory touch are not in any true sense a “market.” There are regulations around who can participate and who cannot; there are rules that fix prices; and government picks up the tab.
But given this quasi-market arrangement (a term popularized by Blairites across the pond), we must change our expectations of schools that receive public dollars. Because we’re looking to manage functions differently, we need different tools in our toolbox. Here are just a few examples:
- Academic accountability. In a school system with little to no parental choice, creating standardized, state-level accountability and teacher evaluation systems makes intuitive sense. We require families to send their children to school, so we should do something to ensure that the school is of sufficient quality. But when we have parents actively choosing, accountability needs to take a different form. We shouldn’t cram the square pegs of unique private and charter schools into the round holes of current accountability systems. Schools have vastly different curricula and methods (compare Great Hearts’ classical learning approach to Academie Lafayette’s French immersion to Carpe Diem’s technology-blended classrooms) that no single set of indicators will be able to capture. We should require transparency, program-wide evaluations made available to legislators and taxpayers. If, and only if, there is strong evidence of some kind of market failure should we intervene and override the wishes of parents and forcibly shut down schools. Market failures happen, but many advocates seem to have a hair trigger in identifying them.
- Financial Accountability. Arizona’s Education Savings Account law requires “random, quarterly and annual audits of empowerment scholarship accounts.” This seems appropriate and in line with how financial institutions audit their operations. Interestingly, it seems more likely to spot malfeasance than our current system. Here in the Kansas City area alone, in the last year, we found out that the Belton School District had been getting shorted up to $500,000 per year since 1991 by improperly calculated property taxes, and, if it weren’t for a brave whistleblower, we still might not know that the former superintendent of the St. Joseph public schools had improperly inflated his salary and bilked Missouri taxpayers for over $600,000. Quasi-market or not, random, quarterly, and annual audits are looking a lot more robust now, aren’t they?
- Location and start-ups. Ex ante we don’t know which schools are going to be good and which schools are going to be bad. Even the rigorous vetting processes we see from many charter school authorizers still authorize and establish schools that don’t end up working out. This shouldn’t shock us. Research shows that as many as 3 in 4 firms backed by venture capital firms (which have their own rigorous vetting processes and are investing their own money) never return investors’ capital. Predicting the future is hard. As a result, continuing to centralize power over who can and cannot start schools, or where schools can or cannot locate, seems like a fool’s errand. If there is a case for accountability, it is much stronger for the back end, rather than the front.
The past several weeks have been nasty. That is unfortunate and avoidable. A bit of charity and reflection before dismissing someone with a slightly different conception of how schools should be funded or regulated would go a long way toward promoting civil discourse. If we in the education world can’t model it, who do we think will?
Challenges Facing Mizzou Discussed on KOMU-TV
On Tuesday, KOMU Channel 8 News, the NBC affiliate in central Missouri, covered the Show-Me Institute's policy breakfast: Stuck In The Middle with Mizzou: Evaluating the Performance of Missouri’s Flagship University. Watch the full story here.
Taxpayers’ General Obligation Bond Gamble
With an $800 million infrastructure bond package likely to go before voters in April, Kansas City Mayor Sly James recently told KCUR that when he took office, the city had $6 billion in deferred maintenance. He told The Kansas City Star that, “Basic infrastructure has to be paramount. We have to take care of some immediate needs.” James has been in office for more than five years. Why has it taken so long to address these needs?
Mayor James resists making commitments on how a proposed $800 million bond issuance will be spent. In a December 16, 2016 radio interview, Mayor James said the following (starts at 17:34):
I don’t know how [the proposal is] a blank check when you can sit and look at the stuff that we’re planning to do. You can’t sit down and specify what’s going to happen in 2029. You can say, “we’re going to be fixing roads and here is a list of road that we’re going to be fixing.”
So there is a list of projects city leaders want to address; they just don’t want to commit to which projects will get first priority (18:10):
We can give them a list; we have the list. The list is available. But to sit around and say we want absolute specificity—that’s not going to happen; it’s an impossibility. And here’s the problem with it, because the same people that are complaining that it’s not specific enough–if we put it in a list and say, “we’re going to do this, it’s going to cost X number of dollars and we’re going to do it in 2018,” and then we have to come up with $50 million for the Buck O’Neil Bridge, then what we’re going to be hearing is, “Oh, the city broke its promise because they said they’re going to fix the road that near my house and they’re spending the money on this bridge.”
Kansas City voters can understand the need to address unforeseen circumstances. But what Mayor James and city leaders seem to want is a fixed, concrete commitment from voters for 20 years of tax revenue without providing a fixed, concrete commitment on how they’ll spend it. The recent debate in the Council about roads, sidewalks and animal shelters is evidence of this. (The companion resolution the Council has offered is nonbinding.) If the goal is to maintain flexibility given an uncertain future, why not ask for smaller, shorter-term tax increases to address the spending needs that can be specified?
Kansas Citians are very aware of how poorly the city has maintained infrastructure; they have reason to be skeptical of city promises of fiscal restraint. After all, the crisis we are in now occurred because leaders did not address immediate needs or make basic infrastructure maintenance paramount—including for the first five-plus years of Mayor James’ tenure. Why should voters now believe that that city leaders will act any more responsibly? Are taxpayers willing to gamble with another $800 million on the city's roulette wheel of debt?
A Sober Look at Development Subsidies
Marketing professionals and politicians alike will tell you that framing is everything. A half-carat diamond ring looks huge if you zoom in close enough. Tom Cruise looks tall on camera. And a public policy looks successful if you focus on the benefits but not the costs.
Things are no different when assessing the city’s massively expensive economic development programs.
A report released last year turned an objective and critical eye toward the city’s incentive practices and found that “[w]hile there may be disagreement about the value of some [incentive] packages, it is clear that the city gains no net benefit from an extremely costly program with no real economic development impact” (pg. 6). That’s about as damning as any finding could be. But, remember: framing is everything.
Otis Williams, Director of the city agency which administers development subsidies, wrote that the “study was conducted to show us what we’re doing well and where we can improve.” When framed this way, things don’t sound so grim.
But don’t be fooled. When the bigger picture shows that the city spends hundreds of millions of dollars—more than $700 million from 2000 to 2014—for naught, a bleak reality emerges. Incentive policies don’t need to be improved; they need to be jettisoned or comprehensively reformed.
When we look beyond the ribbon cuttings, temporary construction jobs, and consultant reports, we see that development subsidies like tax increment financing and tax abatement do not strengthen our economy. If they did, St. Louis would have a thriving downtown and there wouldn’t be a growing operating budget deficit. At worst, these subsidies are a flat-out waste of taxpayer dollars. At best, they meddle with the market, getting developers hooked on taxpayer handouts. When we see prime property at the busiest intersection in the Delmar Loop declared “blighted,” can’t we agree that our policies are missing the mark?
At their core, St. Louis’s incentive policies suffer from two fatal flaws. First, they assume politicians and bureaucrats know which investments are better than others. Second, the pols act as if they are spending “free money.” when in fact a dollar spent on quixotic economic development projects becomes one less dollar that is available for public safety and other purposes.
But how will St. Louis stay competitive when surrounding jurisdictions use incentives? Well, before policymakers worry about how to lure companies from just over the county line—which is about all that incentives accomplish—they might do well to focus on, say, improving schools and basic infrastructure, maybe even retiring the City’s debt and thereby improving its credit rating?
And if policymakers really want to attract business, why not incentivize everything—i.e., cut everyone’s taxes—instead of just the projects of politically-connected developers? If city officials and staff are right, and incentives truly grow the economy and boost tax revenue in the long run, just imagine what a broad-based tax cut for all residents would do!
From 2009 to 2016, the tax revenue annually handed back to developers has more than doubled from $17.9 million to $38.1 million. Yet, today, most of our economic, social, and governmental woes persist. The answer is not more of the same. It’s time to reframe the discussion on incentives.
MOSERS Wisely Reconsiders Past Assumptions
In elementary school I learned about the power of compounding from a book titled One Grain of Rice. The story is about a king who promises to give a girl one grain of rice, and to double his gift every day for thirty days. Initially the gifts seem small, but by the end of the month more than one billion grains of rice have changed hands.
Similarly, an investment that initially seems negligible can go a long way given enough time to compound, and this lesson applies when saving for the future. In June, the Missouri State Employees’ Retirement System (MOSERS) decided to reduce its assumed return rate from 8% to 7.65%, meaning that altogether, the amount members will need to contribute next year will increase by almost $50 million. This extra cost today is hardly ideal, but in the long run it helps avoid a much larger bill.
Even though MOSERS made a mere 0.35% change to their expected return rate, the long-term impacts are huge. With a lower rate of return on its assets, a pension plan’s initial contributions must go up in order to keep benefits constant. In other words, a plan compensates for slower investment growth by putting more money in initially.
This change in funding highlights the risks associated with promising high investment returns. If a pension plan’s actual returns are lower than predicted, the result is a gap between available funds and the amount that has been promised to retirees. In the case of a guaranteed public employee retirement fund, taxpayers can be asked to cover this difference, and as the gap grows, so does the burden on taxpayers.
With a current funding ratio (current assets divided by the net present value of liabilities) of 67.8 percent, the plan (according to a Columbia Tribune report) will require $394.5 million this year to cover promised benefits. But this contribution amount will only be sufficient if investment returns match the 7.65% expectation. If investment growth is lower (in FY 2016 MOSERS generated a time-weighted return of only 0.3%), then the funding gap will widen over time. It’s easy to project high investment returns today, but making those predictions come true tomorrow is another story.
Slight adjustments in return assumptions can have tremendous impacts over an employee’s lifetime, so properly estimating investment returns is essential to a plan’s sustainability. (This essay by Andrew Biggs provides a comprehensive discussion of public employee pension funding for readers who want to explore this topic in more depth.) If pension benefits are guaranteed to employees, then the cost of these promised future benefits should be priced using returns on very low risk assets like government securities, which are currently far below 7.65 percent. Lowering the assumed return is a step toward greater transparency regarding the true costs of pension liabilities.
A Developer’s Market
The Delmar Loop is one of the most vibrant areas in the Saint Louis region. It’s even been listed as “one of 10 Great Streets in America.” On any given day or evening, sidewalks and storefronts bustle with activity in the popular University City neighborhood. Yet policymakers seem convinced that development won’t happen in the Loop without taxpayer subsidies.
As the St. Louis Post-Dispatch reports, a $26 million multi-use development planned for a busy intersection in the Loop was recently awarded some $4.4 million in tax increment financing (TIF). This means the developers will pay $4.4 million less in taxes over the next few decades because, apparently, the project isn’t financially feasible without tax breaks.
As with all subsidies, there is a question regarding the prudence of funneling taxpayer dollars to specific projects on the grounds that they could not be profitable on their own. I also can’t help wondering why incentives are still “needed” in the Loop when the $51 million trolley is supposed to spur economic growth. But I don’t want to focus on these issues here. Instead, I want to focus on a much larger lesson we can learn from the widespread use of development subsidies in Saint Louis and elsewhere.
The handing out of subsidies in one of the most lucrative Saint Louis is evidence that policymakers have created a “developer’s market.” In short, subsidy-granting agencies have given away so much in taxpayer money that developers are rarely willing to invest without public help. And not because their projects aren’t financially viable, but because they know policymakers will grant their requests for subsidies. Incentives are no longer about eliminating blight, or making tough projects feasible. Instead, incentives are an ordinary part of doing business, because policymakers have repeatedly shown developers that subsidy dollars are there for the taking. The use of incentives has transformed the real estate market—and not for the better.
Despite spending hundreds of millions of taxpayer dollars on developments, Kansas City and St. Louis continue down bleak economic paths. In fact, there’s evidence that incentives have reduced private investment in Missouri cities. It’s time policymakers enact meaningful incentive reforms to ensure that taxpayer money isn’t wasted and that development occurs according to the free market principles that grow the economic pie for everyone.
Retooling Missouri’s Economic Engines
Dave Helling at The Kansas City Star recently wrote a piece about how Kansas City and St. Louis might fare under Missouri’s new governor. Helling wrote,
Kansas City and St. Louis interests have been nervous about Jefferson City for years, of course. Rural Republican lawmakers have long looked askance at big-city projects and have turned back city efforts to raise the minimum wage or tighten gun control laws.
In January, Kansas City Mayor Sly James testified before the Missouri Senate Ways and Means Committee that the legislature should “leave us alone.” Conversely, Kansas City Councilwoman Jolie Justus, a former state senator, strikes a more diplomatic and productive tone when she told The Star, “I want to make sure we start off on a good foot with Gov.-elect Greitens, because I want to go down and explain to him … that frankly we’re the economic engines of the state, for the most part.”
Kansas City and St. Louis are the economic engines of Missouri; but recently those engines have been failing the state badly. Kansas City and St. Louis are more likely serving as obstacles to economic success, not engines. Consider the following:
- Missouri is falling behind; our economic growth rate is 48th in the nation, and has lagged the national average for some time.
- Missouri is shedding population, and Kansas City and St. Louis are the biggest contributors to the decline. Recall that Missouri recently lost a seat in Congress in the last Census.
- High taxes in Kansas City, notably the earnings tax, are an incentive for people to leave.
- Kansas City has given away so much taxpayer money to developers that they cannot provide for basic city services without borrowing money and raising taxes, despite an already high tax burden.
- Both Kansas City and St. Louis are saddled with immense debt due to years of poor financial management.
- Those two cities also are weighing down job growth from startups; a key sign of economic health (or lack thereof).
If Kansas City and St. Louis are the economic engines of Missouri, they are either stuck in neutral or reverse. No state legislature should stand by idly while so much economic opportunity is wasted. Reformers in Jefferson City would do a great deal to improve things if they reined in cities’ abilities to levy taxes, reformed economic development incentives, and greatly increased transparency at every level. Cities can be a great economic engines, but not without occasional tune-ups.
Want to Improve Mizzou? Look East
Last fall, at the same time the University of Missouri announced the first decline in enrollment in 15 years, Purdue University in West Lafayette, Indiana, announced record-breaking enrollment. Tuition at Purdue has been frozen since 2012–13 and will remain unchanged through the 2017–18 school year. The cost of room and board has actually gone down since 2012–13.
T.S. Eliot said that “Immature poets imitate; mature poets steal.” The same can be true of universities. If Mizzou wants to be great, it can learn a lot from Purdue.
Under the leadership of President Mitch Daniels, Purdue has undertaken a series of projects designed to keep education affordable, research productive, and the college experience relevant in the 21st century. In addition to more traditional reforms like better budgeting and leveraging economies of scale to shave costs, Purdue continues to push the innovation envelope.
An easy way to lessen the burden of student debt is to reduce the amount of time that students must spend in the classroom altogether. Purdue has experimented with competency-based education (CBE) to achieve this. CBE is an accreditation system that grants students credit once they demonstrate mastery of a subject. Rather than waste time in the traditional 15-week classroom, students earn credit after demonstrating expertise in eight broadly defined primary competencies.
An expedited education can help more than just the student’s wallet, and Purdue’s Polytechnic Institute lets students work through a customized course of studies at their own pace. If they need to spend more time in a course that is especially challenging, they can. But if they can graduate faster, they face a smaller tuition bill and a quicker entrance into the workforce to earn income.
But that’s not all—Purdue is also experimenting with income share agreements (ISAs) to help students finance their education. Through the “Back a Boiler” program, students can commit a percentage of their income for a set amount of years to pay back their college costs instead of taking out a lump sum loan.
ISAs protect students who find themselves graduating but unable to secure a high-paying job. If their salary is lower than expected, they aren’t buried in unmanageable debt. Likewise, if students are more successful after graduation, then the school (i.e., the initial lender) will make back more money. Inherently, ISAs incentivize lenders to maximize the value a student gains from their degree, because both the school and graduates will benefit from post-graduation success
Third, Purdue embarked on an unprecedented partnership with Amazon to provide products at a much lower cost to its students. In fact, Amazon’s first-ever pickup store was launched on Purdue’s campus. Students are offered discounted products with expedited shipping, Purdue is given a percentage of the total profits to invest in scholarships, and Amazon is introduced to a fresh wave of users each year.
Eliot also said that “anxiety is the hand maiden of creativity.” As Mizzou reels from fears of enrollment decline and a tarnished reputation, it can redouble its efforts to innovate.
