Kasich Budget Dominates Statehouse Debate with Education Spending & Tax Provisions Challenged

Ohio Governor John Kasich’s $72B FY 2016-17 state operating budget, House Bill 64, is dominating the debate in the Statehouse.  While state budgets are technically focused primarily on spending priorities the tax and other policy provisions in the budget can have a large impact on a state’s economy. Ohio’s budget priorities are dominated by the state’s Medicaid program that provides health insurance for the poor and continues to dramatically expand spending fueled by federal funding from the Affordable Health Care Art and a special tax levied on hospitals and health care providers since the budget of former Governor Ted Strickland.

Kasich 2015 Budget Spending Priorities

K-12 education is the state’s next budget priority and spending for Ohio’s over 600 traditional public and over 100,000 students attending charter schools and other education programs constitutes nearly $10B in spending and more than four times the state’s spending on the higher education system.  The Kasich K-12 budget is controversial as usual with traditional public school districts who focus solely on whether they got an increase in state spending from the previous budget.  The Governor’s proposal takes an important step to stop guaranteeing no funding loss to K-12 districts at least to a small extent but Ohio House members appear unhappy with the Kasich K-12 budget allocation to districts.

Even more controversial than how much money a K-12 district receives under the Kasich budget is the tax proposal suggested by House Bill 64.  Governor Kasich proposes to shift taxes from income to consumption.  In fact, under the Kasich proposal, income taxes will constitute half the total of state sales tax collections for Ohio.  Governor Kasich’s goal appears to slowly reduce to elimination the state’s income tax as a source of government revenue to compete with Texas, Florida, Tennessee and other states with no or little income tax. While many legislators support cutting taxes the list of supporters for raising taxes becomes pretty small.  House Bill 64 proposes to raises to the severance tax on oil and natural gas, increase the state’s Commercial Activity Tax (gross receipts tax) on business and the state’s sales tax.

For Statehouse pundits, the Kasich tax proposal has elements of the movie Groundhog Day—everyone has seen this before.  The Kasich Administration proposed a very similar tax package during the last General Assembly and it gained little support in the Statehouse or among the business leadership of the state.  In fact, nearly all of Ohio’s major business trade associations testified in opposition to Kasich’s tax increases on oil and natural gas companies, retailers and others on the consumption side of the tax debate. The House is unlikely to adopt the Kasich tax package in total but there will be plenty of time for debate over the next several months leading to the budget’s adoption by July 1, 2015.

Columbus’ Loss for 2016 Democratic Convention Illustrates Need for Global Airports

Infrastructure is a prime consideration when a company decides where to locate its corporate headquarters or major high wage service industry facility.  Beyond the traditional roads, water, sewer and telecommunications infrastructure, corporate headquarters and global conventions focus on slightly different infrastructure needs such as airports.  Airports have a major economic impact on a community.  Long-term corporate headquarter regional leaders and emerging regions are growing high-wage jobs in part because of the global connections provided by their airports.  Most are publicly owned and are organized as a port authority. Airports support the travel and tourism business of a community.  Airports employ thousands of workers directly through airlines, airline suppliers, and airport officials.  Finally, as port authorities, airports can be a public finance resource for a company searching for tax exempt financing.

All states have airports.  In a global economy, airports act as a link for high wage service jobs to the world.  Ease of travel matters to corporate executives not just for themselves but for their team. Commercial airports link the movement of people, goods, and services to the world.  490 commercial airports in the United States support 10,500,000 jobs, create an annual payroll of $365,000,000,000 and produce an annual output of $1,200,000,000,000.

Philadelphia’s selection as the home for the 2016 Democratic National Convention illustrates the challenge mid-sized cities like Columbus face in global competition. While Philadelphia has four times the number of Downtown hotel rooms as Columbus close to the Convention site, Columbus’ application suffered for a lack of direct commercial airline flights.  Direct commercial airline flights are a critical measure for global conventions as well as advanced service companies.

Flight_Chart

Ohio is clearly suffering from global airline consolidation.  Industry consolidation has made air service expansion difficult. According to a recent City of Columbus report, over the past 14 years, American airlines have consolidated from ten major carriers to four with these carriers capturing nearly 90% of the domestic air market, and,  from 2007-2012, these practices have resulted in cuts of 1.4 million domestic flights and the elimination of nearly 100 million domestic seats. Booming regional airports in Cleveland and Cincinnati are suffering with the decline of the status as a hub for United and Delta respectively.  Columbus’ airport is illustrating steady but slow growth and, of greater concern, airports in Dayton, Toledo, Akron-Canton and Youngstown are suffering dramatic losses of air service.  The economic success of Ohio’s mid-sized cities and their surrounding rural communities is very much in question based upon the struggles of their airports.

The deregulation of the airline industry creates opportunities and threats for regions working on building advanced service and travel and tourism based economies.  Many airports are looking to develop strategic plans focusing on financing direct air service with local business and government funding, developing direct links to key spots in the community such as Downtown or the convention center from the airport, developing a package of economic development incentives targeted at commercial airline related companies, developing logistics initiatives around intermodal facilities, developing aviation industry workforce training programs and creating economic development districts in and around regional airports to capitalize on special tax exempt benefits of port authorities.  FAA restrictions impact the recruitment of airlines to airports but the region itself can impact the development of more direct flights through these range of programs.

Lessons from Germany Offer Pathway for Successful Workforce Development

American manufacturing is at a crossroads that has nothing to do with outsourcing jobs to cheaper labor markets.  The challenge of today is the lack of a quality workforce.  The availability of a reliable, high quality workforce was a given for many companies when deciding whether to grow and where to expand.  Those days are gone. 600,000—that is the total number of jobs in the manufacturing sector waiting for skilled workers.  Manufacturing jobs are coming back to the United States but the world’s global manufacturing leader is not ready to fill all the positions.

The retirement of the Baby Boom generation, low performance of America’s schools, a welfare system not creating workers and a lack of alignment between industry and higher education is creating widespread qualified workforce shortages even in times of high-unemployment.  Regions successful with the retention of a high-quality workforce start with a strategy of targeting good jobs using initial upfront training and job-matching services and create support for workers such as child care and transportation networks plus financial incentives for companies to take such an approach.

Germany offers lessons for regions, states and America as a whole related to strengthening manufacturing through its workforce.  According to a recent Brookings Institute report, German manufacturing accounts for 20% of the jobs (double the US total), 22% of the GDP and 82% of the exports—all of which creates a $425B trade surplus for the Germans compared to America’s $667B trade deficit. Germany is not a cheap production center—a recent Boston Consulting report ranked Germany’s manufacturing costs of production far above the U.S..

Germany’s workforce development program offers critical lessons for developing a strong workforce.  First, Germany tracks the performance of its students from an early age and guides them into one of three tracks for their professional careers.  By the age of 12, German students, parents and educators decide on one of three common schools that set the student on the pathway of the dual system spending time in the classroom and workplace (45%), vocational education (15%) or the university route (30%).   Students entering the dual system route enter into direct apprenticeships in over 300 occupations with local employers—over one million German students participated in apprenticeships with employers in 2011 according again to Brookings. The German government plays the role of funding much of the training and providing overall occupational certification.

Many American states are learning the lessons from Germany to create a strong manufacturing based workforce.  The Michigan Economic Development Corporation working at the direction of Governor Rick Snyder built a partnership with community colleges to enroll students in a capital-intensive mechatronics program to meet a growing need for workers in this field.  Ohio’s other neighbor to the south, Kentucky, offers another workforce lesson built on German innovations.  Kentucky’s Bluegrass Community and Technical College created the Advanced Manufacturing Technician program focused on electricity, fluid power, mechanics, and fabrication to develop the workers needed for the state’s auto industry.  Kentucky’s program resembles the German approach to dual-track training with participating companies recruiting from a pool of high school students that must meet a stringent set of requirements.

Companies, regions and states looking to address workforce challenges develop and implement regional apprentice training programs to create workers in high-demand occupations through the development of a public-private-partnership following these critical steps:

  1. Identify regional industry clusters and the labor shed pool of available workers to create the list of occupations;
  2. Create a regional industry workforce committee that includes local company and educational (K-12, community college and university) leaders;
  3. Development of student aptitude measures to identify suitable students for particular occupations;
  4. Development of curriculum for the vocational training from high school through college;
  5. Recruitment of companies who are willing to commit time and energy to the apprenticeship program; and
  6. Identify and gain funding for the regional apprentice training program from business, local, state and federal funding sources.

Private companies, local governments, state community colleges, state K-12 education programs and federal agency funds such as the Department of Labor, Education and Health & Human Services all can provide the funding for these regional industry-based training programs. As an example, The Department of Labor is making $100M in existing H-1B funds available for American Apprenticeship Grants to reward partnerships that help more workers participate in apprenticeships. This competition will help more Americans access this proven path to employment and the middle class: 87 percent of apprentices are employed after completing their programs and the average starting wage for apprenticeship graduates is over $50,000. The new American Apprenticeship Grants competition – which will be launched in the fall – will focus on partnerships between employers, labor organizations, training providers, community colleges, local and state governments, the workforce system, non-profits and faith-based organizations that: launch apprenticeship models in new, high-growth fields, align apprenticeships to pathways for further learning and career advancement, and scale apprenticeship models that work.  25 grant awards are expected for the American Apprenticeship program with application due to the Department of Labor by April 30, 2015.

Ohio’s Straight A Fund offers another source of start-up funding.  Straight A Fund is an idea of the Governor John Kasich to promote innovation and shared services among the state’s education systems.  Projects that promote innovative, workable ideas that could advance student learning, achieve significant funding reductions, or reduce administrative overhead are eligible for funding and local governments, school districts, educational service centers, charter, STEM, higher ed or private companies are eligible.  Two rounds of Straight A Funds have been awarded and 570 applications representing approximately 720 organizations made grant requests totaling $760M million in Round One– of these, 24 grant applicants received a total of $88.6M to more than 150 school districts and partnering organizations.  In Round Two, 339 applications representing 662 organizations made grant requests totaling more than $233M with 37 grant applicants received a total of $144.6M for more than 200 school districts and partnering organizations and will affect more than 400,000 students.

Millions of Dollars on the Line with Filing of Annual Economic Incentives Reports

It is that time of year again in economic development in Ohio- time to fill out annual reports for state and local incentive programs.  The state of Ohio and its local governments offer a range of economic development incentives.  They are often grants or loans but they can also be “performance based” awards which usually take the form of tax credits, tax abatements or Tax Increment Financing (TIF).  These performance based economic incentives offer millions of dollars for companies who gain the awards.  However, tax credits and abatement awards do not happen automatically.  They require the filing of annual economic development incentive reports with the local or state governments.

The purpose of these annual economic development reports is to determine the amount of the tax credit, tax abatement or infrastructure financing a company may gain.  The reports require gathering of historical and current data on employees, payroll, investment, income tax withholdings, and property tax depending on the program in question.  Finding the data often requires companies to reach across several different divisions to secure and validate the data; HR, real estate, legal, and tax just to name a few.

The value of submitting these annual reports should not be overlooked.  Ohio’s Job Creation Tax Credit (JCTC) in particular requires submission of an annual report to get a tax certificate to use against the company’s or individual’s Ohio tax filing.  Failure to submit the reports can lead to the loss of hundreds of thousands of dollars in tax savings, not to mention the fines that can be levied by the Ohio Development Services Agency (DSA) for not submitting on time.  Companies have the ability to go back and file amended reports to receive benefits in years they did not file, but the DSA may levy fines for late submittal, thus reducing the level of credit the company was entitled to for creating new jobs.

A similar process is in place for filing annual reports at the local level for Enterprise Zone (EZ) and Community Reinvestment Area (CRA) tax abatement programs, and for TIF districts.  Communities that have one, or multiple incentive districts in place must compile, on an annual basis specifics of establishments, employment, and capital investment within each district.  Communities must compile information on the entire incentive district and also file information on each incentive agreement within each district.  All of this information must be reviewed by the local Tax Incentive Review Council (TIRC) or Housing Council, depending on the type of incentive district.  The TIRC or Housing Council will determine if entities within the incentive district are in compliance with the terms of their agreement and recommend to the governmental entity that created and approved the agreements if action needs to be taken for non-compliance.

Companies, communities, and developers go through plenty of time and negotiation on the front end to secure these tax incentives and with good reason, the benefits often provide significant savings to the project and make it financially viable.  What sometimes gets lost in the shuffle of day-to-day operations is following through on those incentives on the back end by filing annual reports.  The projected savings on the front end can only be realized with proper compliance, filing and due diligence on the back end.

Kasich Budget Proposal In-depth

Ohio Governor John Kasich introduced his FY 2016-17 $72B state operating budget and five core areas are primed for debate: K-12 education, higher education, health care, taxes and economic development. This special edition of the Montrose Way focuses on these five key budget categories for Governor Kasich’s proposed budget that will dominate the Ohio Statehouse debate for the first half of 2015. The Kasich budget is contained in Ohio House Bill 64, sponsored by House Finance Committee Chair Ryan Smith as is the tradition.

Annual Budget

The dominance of Medicaid spending compared to all other state government programs continues with the availability of substantial federal dollars and a special hospital tax covering the majority of the expenses. While K-12 education gains another substantial increase, higher education is becoming a smaller and smaller portion of the state budget. More troubling for higher education, state government leaders are also focused on reducing tuition rates while at the same time not making up for billion dollar past cuts in funding. Ohio’s higher education system is being starved of cash and will face challenges developing the workers’ Ohio company’s need.

Governor Kasich proposes substantial changes in the state’s tax code that will shift a larger share of tax collections against consumption rather than income producing activities and benefits small business over larger companies. The clear goal is to reduce the state’s reliance on the income tax for its spending and shifting more to the sales tax and special taxes on tobacco and oil and natural gas exploration. In fact, income tax revenues will drop from $9B to closer to $6B under the Kasich proposal while sales tax shifts from providing almost $12B under the proposal compared to $10B in past budgets.

The state’s General Revenue Fund is the largest state fund supporting state government and receives the largest share of state taxes. However, federal funding for targeted programs such as Medicaid also dramatically impact state policy decisions as they provide billions in financial support for programs the federal government wants supported.

Debate is raging on the Kasich Administration budget both from a spending and revenue standpoint. Tax increases on businesses will prove a challenge as many of them have been rejected in the past; however, the Republican dominated General Assembly is likely to support the general notion of shifting the state’s tax policy toward consumption and away from income producing activity.

House Bill 64’s K-12 Education’s $10B Spending Proposal is an Ohio Record

House Bill 64 will increase spending for K-12 institutions, make major policy changes geared toward improving the performance of the state’s charter schools and continue to embrace school choice to better serve Ohio’s students. The Ohio Department of Education oversees an education system comprised of 613 public school districts, 49 joint vocational school districts, 52 educational service centers, and 381 community or charter schools. Each public school district is governed by a locally elected school board that exercises taxing authority subject to voter approval and Ohio’s traditional public schools are funded by a mix of a substantial state subsidy supported by locally vote property tax. The department also oversees the chartering of nonpublic schools governed by charter school sponsors. The Department of Education is governed by a 19-member State Board of Education with eleven of the board members are elected by the citizens, one from each of 11 districts composed of three contiguous Ohio Senate districts. Eight board members are appointed by the Governor. Day-to-day administration of the department is the responsibility of the Superintendent of Public Instruction, who is hired by the State Board of Education. The department has approximately 530 full-time employees.

A couple important notes on charter schools:

  • Stanford University’s Center for Research on Education Outcomes found that about a third of the charter school students were doing better than their traditional public schools counterparts;
  • Following Hurricane Katrina, Louisiana created a Recovery School District that serves over 80% of New Orleans students and is producing higher graduation rates than the rest of the state;
  • Ohio’s charter school law born in the 1990s has crept regulation into the operation of Ohio’s charter schools while offering half the funding of traditional urban public schools; and
  • Nationally, according to the University of Arkansas, charter schools receive $3,059 less per pupil than traditional public schools but, in Ohio, public charter schools receive far less than the national average.

Governor Kasich’s proposed operating budget proposes funding for fiscal year 2016 is $10.8 billion (or a 1.4% decrease from fiscal year 2015) and funding for fiscal year 2017is $11.1 billion (or a 3.2% increase from fiscal year 2016). The budget increases funding for traditional, joint vocational, and community schools and makes improvements to the student centered funding formula that will more appropriately measure the capacity of a district to raise revenue and direct additional resources to districts with the least capacity. $23M and $31M for school choice voucher scholarships are provided and a 144% increase in charter school facility funded is provided in the Kasich Budget. Special education constitutes over $500M annually for Ohio’s school from the state budget.

It also provides over $300M in targeted funds for special needs, career-technical, and K-3 students which constitutes roughly flat funding against prior years. Direct additional funds for chartered nonpublic schools to support the purchase of secular services and materials as well as to reimburse nonpublic schools for mandated administrative and clerical costs are also provided. Kasich’s Straight A Fund, which provides schools with grants to make innovative and transformative changes in the classroom to meet the learning needs of all students, will continue with $100M in funding for both fiscal years. In addition, to encourage Ohio students to attend college, the Governor proposed funding for the College Credit Plus to help teachers in economically disadvantaged high schools get the credentials needed to teach college level courses and reward districts and schools who increase student participation in College Credit Plus and Advanced Placement courses. The Kasich budget also provides over a 20% funding increase for early childhood education and increases the number of opportunities for economically disadvantaged students to enroll in high quality preschools. Fund summer literacy camps and early literacy training to ensure schools and disadvantaged students are prepared for the Third Grade Reading Guarantee. In addition, many traditional public schools will receive more funding and some will receive less money. However, the Governor’s budget contains a guarantee that traditional public schools will not take more than a 1% cut in funding from previous years.

The Kasich budget also contained substantial reforms geared toward improving the performance of charter school sponsors to create a sponsor metrics, additional funding for successful sponsors and then the ability for successful charter sponsors to gain access to additional facilities funding and local property taxes connected to traditional public school districts. The per pupil ‘opportunity grant’ amount for Ohio charter schools in HB 64 is $5,900 in FY 16 and $6,000 in FY 17, up from $5,800 currently. The K-3 literacy funding increases by $15 per pupil in each of the next two school years and HB 64 provides $200 per FTE for community school facilities. Charter sponsors would be approved of and ranked by the Ohio Department of Education and provides additional benefits for highly ranked or ‘exemplary’ sponsors and the closing of sponsors ranked ‘poor.’ Charter schools sponsored by ‘exemplary’ sponsors can access a $25M in facilities grant funding, be eligible to seek local property tax dollars by asking the local school board to place a ballot issue before voters, and be eligible to offer preschool under HB 64. These additional construction dollars would be for the purchase, construction, or renovation of facilities of highly ranked charter schools with innovative approaches. HB 64 also prohibits a sponsors from selling goods or services to the schools they sponsor and eliminates current law which permits operators to appeal a governing board’s decision to terminate or not renew its contract with an operator. HB 64 also promotes fiscal independence for charter schools and require charter school governing authority contracts with an attorney, accountant or entity specializing in audits that they be independent from the school’s operator and loans from a charter school management company would need to be documented and made at a fair interest rate.

HB 64 has substantial budget and reform agenda items for traditional public schools and their charter school counterparts.