Thursday, July 21, 2005

Developers are Like Locusts

Our home is in a rural township on the outskirts of a reasonably large metro area. We moved here with hopes of enjoying the kind of neighborhood I grew up in. We found a 5 acre lot that was part of a little 7 lot parcel a family sold off from a larger farm. It was in the same school district our kids were already attending, only about eight miles from my office, and about the same distance for the wife to her place of business. There was a interstate highway exit about 3 miles away, giving quick access to the city center, airport and other places we might want to get to. But the thing we really enjoyed was that there was about four miles of pure farmland between our property and the outerbelt highway.

Relatively suddenly, that changed. The intersection closest to the freeway exit turned into a major retail development. It used to be that this intersection was just a four-way stop sign with cornfields all around. Now there is a Wal-Mart SuperCenter, Sam's Club, Meijers, a Ford Dealer, lots of strip-mall retails, four motel chains, and just about every chain food establishment you can think of at this intersection. At each exit of the beltway, a similar retail development has emerged. At the same time, thousands of single-family and multi-family residential developments have been constructed. This is where the problem begins.

Our metro region doesn't really have an over-arching government entity that coordinates planning and development for the whole area. There are agencies which have names that imply that they might have that authority (e.g. Mid-Ohio Regional Planning Commission), but they don't really. What we have is a bunch of independent municipalities and school systems which compete with one another for resources. But the point of this article is to say that it's not really the municipal governments or the school systems which are controlling things -- it's the residential developers.

When we first moved to Columbus in the 1970s (while attending college at Ohio State), the 'metro' area had a population of about a half-million. The population was mostly White with a significant African-American component. While there was some amount of manufacturing in the community, the major employers were the state government, the university, banks and insurance companies. Because Columbus is the state capital, there are also many lobbyist groups and associations with headquarters here. One interesting point about Columbus being the capital of Ohio: like Washington DC, Columbus did not exist as a city until the state government decided to build the capital city here in the early 1800s. There is no significant geographic reason, or wealth of natural resources, which would cause a major city to develop in this particular place. It's a big hunk of mostly flat land with an inconsequential river running through it. Much of the land around Hilliard was a swamp until drained with extensive systems of field tiles and trenches.

For reasons I don't fully understand, Columbus began to grow in the 1970s, and today the regional population is about 1.5 million. The racial and ethnic mix is richer, with much of the growth coming from Latin American (primarily Mexican) and African (primarily Somali) cultures. While I applaud the diversity in our community, the rapid growth -- regardless of the cultural makeup -- is NOT being managed well by the governments of our region. I fear that if we don't get ahead of this problem, it will develop into serious conflict, culminating in economic failure and increased violence. (update: notice what has been happening in France in the fall of 2005 – communities of immigrants segregated economically burst into riots and civil unrest. Could we see this here?)

One consequence worth talking about: the increasing polarization of the residential nature of the central city:

In the 1970s, before we had kids, the Columbus City Schools were required, by order of the court, to bus kids from poorer (mostly African American) neighborhoods to schools in more affluent (mostly White) neighborhoods. The reasoning was that the kids who lived in the black neighborhoods were getting a different and less comprehensive education that the kids in the white neighborhoods, and that race and affluence were an important reason for that difference. I guess the theory was that the presence of white and affluent kids in the classroom caused the teachers to teach better, the students to behave better, and it would influence the school board to allocate more resources -- like furniture, books and equipment -- to the schools in black neighborhoods, since there were going to be white kids there now. The desired result was to expose all kids, black and white, poor and affluent, to the same educational opportunities so that each kid gets the chance to develop their potential without a built-in handicap.

In theory, I can agree with this being a potential solution. But like all forced solutions, the people affected will try to find a way around a situation they don't like. The answer they chose in this case was obvious: those who could afford it moved out of the attendance area of the Columbus City Schools. The consequence was that the demographics of the Columbus City Schools became blacker and poorer.

If you want to move out of the Columbus City Schools, you need to either: a) find an existing house in a suburban school district, or, b) build a new house in a suburban school district. Finding an existing house is a good solution, but there is a limited supply of those for sale, and only a fraction of those would be desirable to an upper-middle class family moving out to have a better life. So one direct impact of the busing decision for Columbus City Schools was to create the demand for new housing in the suburban school districts.

At this point, another piece of the Columbus political environment comes into play: The City of Columbus has exclusive control of the regional water and sewer system. For a developer to build a new subdivision, he must have access to water and sewer. The suburban municipalities get access to the water/sewer system by signing contracts with the City of Columbus. These contracts specify the exact boundaries to which the suburb us allowed to annex and extend the water/sewer pipes. The City of Columbus would ensure that it retained corridors of expansion between the suburbs so that it could continue to grow through its own annexation. Ohio law does not allow "islands" of land to be annexed -- each newly annexed parcel must be adjacent to parcels already part of the annexing municipality.

At first, each of the suburbs had enough developable land specified in their water/sewer agreements to allow a fair amount of expansion through annexation. Residential developers certainly took the opportunity to fill the demand for housing creating by the "white flight" from Columbus City Schools, and new suburban developments sprang up all over. But what the developers really wanted to do was get to the large parcels of township farmland around the beltway where they could build developments of hundreds of homes (it is much more profitable to develop one community of 1,000 homes than 50 communities of 200 homes). Because most of these parcels were outside the areas specified in the suburban water contracts, it would mean that for the developer to get water/sewer service, the parcel would need to be annexed into the City of Columbus. This situation is exactly what Columbus wanted, and many such developments appeared around the beltway. We built our first house in one called Golfview Woods. Our lot was within the boundaries of the City of Columbus and in the attendance area of the Hilliard City Schools. We had no kids at the time, so the school boundaries weren't all that important anyway.

The busing policy for Columbus City Schools was eventually abandoned, presumably because everyone saw the folly of it. But rather than halting the flight from the City, this had little effect. Folks saw that the courts, with a stroke of the pen, could screw up their lives, so the flight continued. The buildings of the Columbus City Schools continued to empty, and eventually they had to shut down even their most visible building -- Central High School, right in the heart of downtown. But the Columbus City Schools still had some cards to play...

The School Board of the Columbus City Schools went to the State Board of Education and made the argument that this white flight was endangering the viability of the Columbus Schools by taking away students and tax revenue and leaving their buildings empty, while at the same time the suburbs were having to furiously build new schools to absorb the thousands of new kids showing up as new homes were being built. Wouldn't it make more sense, they argued, to allow the attendance area of the Columbus City Schools to automatically move with the boundaries of the City of Columbus? The suburbs could take in all they could within their existing water/sewer service boundaries, but that space was limited, and Columbus -- City and Schools -- would get everything else. The most radical part of the proposal was that it be made retroactive: if a parcel of land had been annexed into Columbus to gain water/sewer for development, the students living in that annexed area would be required to leave their current suburban schools and transfer to the Columbus City Schools.

This argument was viewed favorably by the State Board of Education. If this became policy, it would eliminate most of the reasons people had for moving out of the City of Columbus into the suburbs. There was an uproar in the suburbs from the parents of those kids. It would also significantly curtain the demand for new homes. Not good news for those wanting to flee the city, those living in the contested neighborhoods, or, most significantly, the residential developers. So a thing called the "Win-Win Agreement" was crafted. Its major provisions are these:

All existing developments within the City of Columbus but suburban school districts would be left in the suburban school district. However, a portion of the property taxes collected on these parcels would be paid to the Columbus City Schools anyway.

Any undeveloped parcel in a suburban school district which is annexed into a suburb under the existing water/sewer service agreements would be allowed to stay in the suburban school district.
Any undeveloped parcel in a suburban school district which is annexed into the City of Columbus would automatically shift to Columbus City Schools

The local school districts and municipalities have operated under this treaty for over 20 years at this point, including at least one renewal cycle. It must be good for someone, but I'm not sure who. Certainly it affects the homeowners addressed in point #1 above. In the case of point #2, there are no homeowners. However, the owners of large parcels of farmland (who these days are often absentee owners who rent the land to local farmers) like this provision because it makes their land worth more to residential developers. Of course, the residential developers like this provision because it’s easier to sell homes when they fall into a suburban school district. Case #2 is even good for the Columbus City Schools at it allows them to collect incremental tax revenue without having to educate any incremental kids. From their standpoint, it's more like a piece of commercial property, which is the best kind of property use of all from the perspective of the municipal government and the schools (more on this later).

As for case #3, this would seem to be no good for anyone. The current landowner would have few if any developers interested in buying the land. Without a developer, there would be no one to seek water/sewer service and hence no reason to request annexation into the City of Columbus. That means no new affluent homeowners and their kids for the Columbus City Schools. Nonetheless, there is now at least one massive housing development in its first stages of construction which exactly fits this situation. What's going on? I have my theory, but first some more (excruciating) background.

Over the past couple of decades, there have been several lawsuits heard in the state courts regarding the constitutionality of the current process for funding schools in Ohio. By law, school districts have very few options relative to mechanisms for generating funds. The universal approach taken is to collect property taxes, both residential and commercial. This approach has some political problems. In the case of rural school districts, most of the property is in use as farmland. Farmers have enough of a problem making a living without being taxed out of existence by the schools. So it's very hard to get a tax levy passed in the farmlands, and it’s very hard to get the State Legislature to increase the burden on the farmers since so many of the representatives come from rural districts.

In the urban districts, the residential property base continues to erode as dwellings are abandoned by their owners and taken over by the slumlords that let the values continue to slide. In Columbus, a particularly difficult problem is erupting: many of these low rent properties are being occupied by new immigrant families who have children with limited English proficiency. So not only is the tax base eroding, but the difficulty and cost of educating the kids is escalating dramatically.

If there is commercial development in the urban district, the property taxes are often been abated as part of the deal to attract the corporation buying or upgrading the property. While these abatement deals might have provisions to provide replacement school funding, such is not always the case.

Prior to the 1970s, there was no state income tax in Ohio. But when the tax was enacted, a primary use of the funding was to provide aid to the poorer school districts in the state, predominately in the urban and rural districts. This is clearly a classic "Robin Hood" program, taking money from the wealthier districts to help support the poorer districts. In principal, I have no problems with this. But on many occasions, lawsuits have been brought by individuals and school districts in the state courts claiming that the current funding system is failing to ensure that all children get a good education, and consequently violates the state constitution. On four occasions, the Ohio Supreme Court has agreed, but not offered any remedies.

Lots of people are confused on this point. They think it is the system which the Supreme Court says is unconstitutional, and that something radical needs to be done to change the way it works. In truth, the issue is not that the algorithms are wrong (although they certainly cater to regional issues); it's that the state legislature fails to allocate enough money to fund the program to levels which the algorithms specify.

Here's a synopsis of the way the Ohio School Aid program is supposed to work:

An assessment is made of the performance of all public schools in the state. This is akin to the "report card" process, in which school systems are ranked Excellent, Continuous Improvement, Academic Emergency, etc, but is of course a little different.

The set of schools who are rated in the highest performing category are sorted by the amount of money the system spends per student each year. The N systems (I forget the number) which spend the least have their per student spending averaged together, and this number is declared to be the minimum amount that a school system needs to spend to achieve the standard of excellence required by the state Constitution. So if there are 20 school systems in the state that achieve the highest performance rating, and N is set to 5, and the 5 lowest schools spend $8000, $8100, $8200, $8300 and $8400 per student per year, then the declared minimum funding is set to $8200.

Local school districts are expected to take responsibility for taxing themselves at least to a minimum standard, which I believe is 17 mils ($0.017 per dollar of assessed property value). Let's pick an example district where these 17 mils would raise $6000 per student (from residential and commercial property taxes). This is called the "charge-off," and is deducted from the State Aid regardless of whether the local district is actually raising the 17 mils locally.So if the school district does actually raise the 17 mils, which generates $6000 per student, the state would add the other $2200 as State Aid, and the district would have $8200 per student to spend. The theory is that there are other districts which achieve excellence for this amount of money, so this school district should too.What if a school district raises more than the minimum? Let's say another school district has great support, and the community has voted to pay 50 mils in levies, which generate $9000 per student per year in funding?

Theoretically, they would receive no State Aid at all. In fact, there are no districts in Ohio which collect so much local property tax that they receive no State Aid. But some are close.You see, the money that funds the State Aid is our income taxes. In wealthy districts, which are typically the suburbs of large cities, the residents pay much more income tax than they get back in school funding. The rest of their money goes to support the urban and rural schools. In very real terms, the cost suburban residents bear for having their kids in nice schools is that they get to pay for the urban schools anyway.

Each year, the State Legislature must pass a budget which funds the State Aid for schools, plus all the other programs and obligations of the state government. This is where the Supreme Court decision comes into play: the state has been consistently failing to fund the State Aid program to the degree specified by the funding formula. In our example above, the school district is doing its duty to tax itself the 17 mils, but the state isn't holding up its end with the $2200 in aid. Maybe the state only provides $1500 in aid. Now the district only has $7500 per student to spend. If there are 1,000 students in the district, this is $700,000 less per year, and in a small district this is a meaningful amount of money (maybe 20 teachers for example).

There are a couple of 'adjustments' which make things a little weirder. Many years ago, the legislature passed a law that said when the county assessor raised the value of a piece of property, that reassessment could not automatically cause the tax burden for the homeowner. This was passed at a time when some areas of the state had a hot real estate market, and some homeowners, notably the elderly, were being taxed out of homes they had lived in for years. The mechanism of this law is that if the assessed property value increases, the millage rate applied to that property would be decreased by an amount equal to keep the dollar amount of the tax bill the same.

For example: a house had been appraised at $100,000 and taxed at 17 mils. This would generate $1700 per year in property taxes. A couple of years later, the property is reappraised at $120,000. The law requires that the $1700 tax bill not change, so the assessor would be required to adjust the effective millage rate on that property to $1700/$120000 or 14.167 mils.The weirdness is a thing which has been called "Phantom Revenue." It's just an inconsistency between the funding formula and the constant tax mechanism described in the prior paragraph. What happens is that for purposes of calculating the 17 mil charge-off, the full assessed value is used. The effect on our example house above is that the state aid formula would deduct $120,000 * 17 mils = $2040 from the aid necessary, while only $1700 in actual taxes would be collected. The difference of $340 is the Phantom Revenue. It causes a noticeable reduction in aid, but is NOT the key problem in the suburban districts.

There are other miscellaneous adjustments made to the basic funding formula to account for disproportional costs a district might have for educating kids with physical, behavioral and learning disabilities. Transportation costs can be supplemented with State Aid as well.

School funding comes from three primary sources: 1) State Aid (which we just discussed); 2) residential property taxes; and, 3) commercial property taxes. In our school district, it costs about $9000/yr to educate a kid, and currently about one third comes from each source. So what's the problem?
When a new house is built, the experience in our district is that around one school-age kid comes with it. That means $9000 in incremental cost. The house the kid lives in generates about $3000 in incremental residential property tax revenue. The state will kick in another $3000 in State Aid. BUT NO NEW COMMERCIAL PROPERTY TAX REVENUE HAS BEEN GENERATED!! This is the key to the funding shortfall, and why rapidly-growing school districts have to keep going back to the voters to increase taxes.

Folks move into the rural areas and suburbs because they like the residential nature of the area, and often resist the creation of commercial developments, especially those which can generate high tax revenues in small land parcels (e.g. multi-story buildings, or manufacturing operations). They're okay with doctor's offices and the occasional convenience store, but please nothing that looks too industrial or draws outsiders into their neighborhoods. Folks just don't understand that a residential-only community is very expensive to live in if they want all the trappings of an upper-middle class neighborhood too. Things like great schools, attractive public facilities (parks, community centers), low densities, and responsive police and fire services. The cost of having these things is lessened by designing integrated communities which have an appropriate balance of residential, commercial and public development.

One would think the municipal governments would use their power to manage this balance. As servants of the citizens of the community, their job would be to provide the services required and desired by the citizens using as few of the citizens' tax dollars as possible. The best way to do that is to attract desirable businesses that will pay substantial taxes without putting a commensurate burden on the infrastructure of the community. Certainly, a business does not add children to the school system. Mayors and City Councils who fail to attract such businesses need to be held accountable for their (lack of) performance, and replaced with competent leadership. But we also have to empower the Mayors and City Councils to limit the pace of residential development when it threatens the economic viability of the municipality AND the school system.

For whatever reason, the suburban municipal governments around here seem to have little power, or perhaps desire, when it comes to controlling residential development. I understand the point that the large landowners around the perimeter of the city want to cash in on the development value of their land, and that the large residential developers need to acquire that land and build houses on it to keep their profits flowing. But what's good for those individuals and corporations is not necessarily good for the community. Balancing that tension is not easy, and it takes leadership with guts, business acumen and great communications skills to pull it off.

But you know what the REAL problem is? It's that most of our fellow citizens won't invest the time and intellect to understand all this. While I admit that this essay is long and a bit tedious, trust me when I say it is the very much condensed version of the whole situation. Nonetheless, few of my fellow citizens will take the time to read something like this essay, or sit through a 30 minute presentation to get educated on these matters. If your point cannot be reduced to a sound bite or a couple of pictures, it's just blah-blah-blah to most folks...

... And the developers are counting on this situation. You ever hear the joke about the college professor who noticed that one of his students sat through every class with a blank stare? He asked the student if he was ignorant or apathetic. The student answered that he didn't know and he didn't care. That what Americans have become. We react to sound bites and video clips pretty much at an emotional level, forming opinions based on how much we were entertained or annoyed by the style rather than the substance.

Politicians get elected on the same basis. Once in office, the citizens are an annoyance, not the people you serve. The real customer is the residential real estate developer. No other entity stands to harvest more profits in a suburb than these guys. I'm not saying our politicians take direct bribes, but there's definitely something in it for them. Otherwise, why would they let the schools and the city government get in such financial trouble without making these developers share the burden?

There's an easy answer: Impact Fees. Remember from the analysis above that when a new house is built, there is a $3000 shortfall in funding for the school district. In the past, the only way they get fixed is to raise the property taxes on everyone in the district. So in a very direct way, everyone else in the community subsidizes the funding shortfall created every time a house is built. The great way to change this is to impose an up-front, one-time fee on the homebuyer that is their "buy-in" into the community. The fee should be the cost to build a new high school building divided by the fully-utilized population of that building. Right now that number is about $10,000. In exchange, there would be no new taxes raised to build schools. Residential property taxes would be used to fund operations, but not construct school buildings.

Here’s another oddity of school funding in Ohio: When a district puts a bond levy on the ballot to construct new school buildings, what it is actually doing is asking the community to agree to make the principal and interest payments on bonds the district will sell to raise the cash to build the buildings. Essentially, the district is taking out a mortgage on the new buildings and asking the taxpayers to make the payments.

So when a bond levy passes, the voters are agreeing to pay off that particular debt. It's a fixed amount, paying interest only during the life the bonds, then repaying the principal when the bonds mature -- just like an interest-only mortgage. Let's fantasize and say that the bonds carried zero% interest. If there are 10,000 residential parcels in a school district, and a $30 million high school is going to be built. The bond levy would specify that each of the 10,000 parcels would be taxed $100 additionally per year for 30 years to pay off the bonds. But what happens if another 200 houses are built? The answer is NOT that those folks are also taxed $100 each per year, putting $20,000 per year away in a future building fund. Instead, the same payments on the original bonds are spread out over 10,200 people, dropping the tax burden to $98 per year.

So this seems like it's a good thing when more houses are built, at least in terms of paying of the building bonds. But if the district is growing rapidly, it won't be long until other building needs to be built. Then ALL the homeowners in the district will have to sign up to pay a new bond levy, even though they have been paying off bonds for the existing schools (which their kids attended) all long.

Of course, the developers hate the idea of impact fees. They can make a lot of money in suburban areas with thousands of acres of developable land, and these fees seem like nothing more than a substantial price increase for their buyers, and they don't get any of the money!

There is another solution, which I first heard from State Rep. Larry Wolpert: An earned-income tax. Currently schools can assess an income tax if approved by voters, but the definition of income for these taxes causes our senior citizens on pensions and social security to be drawn into the net. Larry wants to find a way to let those folks live out their senior years without getting taxed into poverty while the community around them expands. Larry's proposal would place a tax only on earned income, which excludes things like pension and social security income. The thing I like about it is that once implemented, each new resident has to pay it without having to go back to the voters for approval. If property taxes are lowered commensurate with the new income tax, then current residents see little change in their tax burden, and new residents automatically get assessed their fair share. It can work.

Oh, and the line about "Developers are like Locusts." I think that neither locusts nor developers are evil. They are simply organisms which seek to maximize their own lives. They aren't out to do us harm, but they don't care if they do either. Developers, like locusts, cause damage when they aren't controlled.

That's the point.

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