Cluck, Cluck, AB 394 comes home to roost?

Chickens Roosting

A quick review:  Nine Republican members* of the Nevada Assembly introduced AB 394 in the last session, the bill would create a process for breaking up the Clark County School District into smaller, separate, districts because – “…Reconfiguring the structure of the Clark County School District into local school precincts will offer an educational system that is responsive to the needs and concerns of the residents of that school district;..”   (*Gardner, Fiore, Jones, Silberkraus, Hickey, Dickman, O’Neill, Seaman, and Trowbridge)

The bill passed in the Assembly on a 35-5 vote, and the Senate on a 13 to 7 vote, with one excused.  It was signed into law by Governor Sandoval on June 11, 2015.

The Numbers Game

For a party, the members of  which take umbrage at any suggestion they aren’t the party of fiscal responsibility, fiduciary trust, and conservative financial values, AB 394 demonstrates a level of financial naïveté that could easily be categorized as sophomoric. 

There is a inkling in AB 394, during its preliminary discussion of rural district consolidation in which there’s a hint that the Assembled Wisdom understood the principle of Economies of Scale.  However, the venerated Assemblage turned right around in the same bill and pretended these didn’t exist for the one district in the state actually large enough to benefit from those economies of scale.  For the uninitiated, here are some of the babes pitched out with the bath water in the interest of creating “responsive” little districts:

(1) The larger the operation (business) the more individual employees are able to specialize in various tasks creating technical expertise which in turn creates greater efficiency.  For example, a larger school district might be able to finance a specific office that focuses on testing and the administration of examinations.  In a smaller district these tasks might be assigned to a ‘curriculum director’ whose office is also responsible for the development of course content, the in-service training of teachers in that content, and the mapping of the curricular content throughout the district.  In the business domain, larger firms can separate tasks in the offices or on the shop floors that allows specialists to develop proficiencies in technical or production tasks.  

(2) Bulk purchasing.  Think of the difference in pricing between supermarket chain stores and the local corner bodega.  Volume, plus reduction in packaging and transportation costs, mean lower per unit expenses. There are approximately 24,286 first graders in the Clark County School District.  There are approximately 4,869 first graders  in the Washoe County School District.  [CCSD and Washoe SD]  Which has the better capacity to buy in bulk?  Which can negotiate for more discounts?

(3) Spreading overhead expenses.   Republicans, often supportive of mergers and acquisitions, note that the mergers of private sector firms allow for the rationalization of operation centers. or to put in more simply – it’s better (more efficient) to have one main office than two.   Again, the schizoid nature of AB 394 says that the rationalization of overhead expenses is fine for the rural districts, but CCSD is “just too big?”  By this logic, Goldman Sachs, Chevron, and JP Morgan Chase would have been broken up long ago.

(4) Let’s get to one economies of scale factors that’s extremely important for a large metropolitan population, the concept of Risk Bearing Capacity.  Again, the larger the enterprise the higher its risk bearing capacity.  The most common example of this factor is in the pharmaceutical industry wherein large corporate firms are able to finance (borrow for) research because profit lines in popular products provide investors with the assurance that the debts incurred can be paid off at the agreed interest rate.  Now, take a look at the Debt Service reported in the CCSD financials:

CCSD debt service

What we’re looking at above are all the bonds issued by the Clark County School District on which the district is paying off principal and interest.  Nor it is too difficult in a rapidly expanding population to have to issue bonds for school construction or renovation.  Schools aren’t  cheap to build and equip.  Constructing an elementary school for about 600 youngsters, at $190 per square foot will cost about $14,800,000.  A middle school for just over 900 students costs $215.14 per square foot, with a total cost of approximately $30,000,000.  High schools are even more expensive.  The total cost: $54,900,000 (1600 students) [NCEFAt this point one of the largest AB 394 egg layers  comes back to her nest.

“Moody’s Investors Services hasn’t downgraded the Clark County School District’s construction bond rating — yet.

But the credit rating firm late Monday issued a report warning a bill Nevada Gov. Brian Sandoval recently signed that could lead to the breakup of the nation’s fifth-largest public school system “poses uncertainty” and “a credit negative” to the district’s ability to repay debt.”  [LVRJ]

Investors who buy bonds (lend public & private institutions money) want their money back + interest.  The greater the risk the higher the interest rate on the bonds.   The ratings agencies, no saints themselves as we witnessed during the financial sector collapse of 2007-2008, are in the business of telling investors how much risk is involved – the lower the rating the higher the risk, therefore the higher the interest rate demanded for the loan.

The Clark County School District currently has an A1 rating from Moody’s.  The outlook was “stable” as of February 17, 2015.   What has “de-stabilized” this projection is – AB 394 – which creates “uncertainty.” Without spending the usual $150 Moody’s charges for smaller reports, let’s guess the nature of that “uncertainty.”   The Clark County School District’s report on its financials assures bond holders:

“Maintenance of the current property tax rate will be sufficient through fiscal 2015 to retire the existing bonded debt since the District issued previous bonds based upon the factors of growth in assessed valuation in addition to increases in student population. The Capital Improvement Program provided authority to issue general obligation bonds until June 2008 and will be repaid from a fixed tax rate of 55.34 cents per $100 of net taxable property. [CCSD pdf

Translation: The Clark County School District – as it is currently functioning – has the financial capacity to retire (pay off) existing debt, and the ability to repay Capital Improvement bonds from its property tax base. A property tax base of the present 8,012 square miles comprising Clark County, which according to the Nevada Department of Taxation has a final assessed value (property) of $69,258,468,466.  A number large enough to assure investors in CCSD bonds that they’ll get their money plus interest, since the ad valorem revenue is calculated at $495,059,633 for the county.   We can use the old reliable Red Book to determine what the Clark County School district can expect from its share of the property tax revenue: $819,903, 015 from a total 2014-15 assessed valuation of $62,904,942,089.

By now it should be getting obvious why Moody’s is getting nervous.  Under the terms of AB 394, there must be a plan in place to chop up the school district by the 2018-2019 school year.  Thus, we’d have an advisory committee and a technical advisory committee contracting with a consultant for the grand purpose of carving up the district – but how?

If the notion is to create “neighborhood schools” then would we amalgamate current high school attendance zones? [map]  However, a quick look at the obvious north/south or east/west divisions compared to the assessed valuations of the areas involved quickly demonstrates that not all school districts would be “created equally.”

Perhaps the “Performance Zones” could be used as a basis?  Where do we put the rural schools, from Moapa Valley to Laughlin?  Again, how does the dissolution of the district help any of these financially?  

Unfortunately for those who would be new map makers, Clark County, like so many other major metropolitan areas is comprised of various zones – residential, industrial, and commercial.  As long as the financial foundation of a school district is based on property taxation, then we have to live with the fact that while upscale residential property comes with high tax bills, there isn’t all that much of it.    A district carved out of a major commercial zone with a rather smaller number of residential properties in that zone might have resources in abundance compared to an area of high residential properties – and therefore higher numbers of students, but a lower total assessed valuation.  Geography can often be a real pain in the derrière and in this instance it’s going to be.

At the risk of petulantly pounding the dais – there appear to be only 12 members of the Assembled Wisdom in the last session who understood the gravity of separating school districts within a diversified metropolitan area, one with an overall assessed valuation currently capable of keeping investors optimistic about bonding capacity and bond retirement.  The remaining 48 – not so much – maybe one more round of Econ. 101 is in order?

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