Monday, March 03, 2008

Founding staff skipping out on iProvo, UTOPIA

Utah’s 2 largest municipal telecom systems are struggling to maintain their senior staff. UTOPIA’s founding executives—Paul Morris (Executive Director), Roger Black (COO) and David Shaw (General Counsel)—have all left in the last six months, and iProvo has failed to hire a telecommunications manager for more than a year. Filling these positions will prove challenging. Not only will these potential executives have to solve UTOPIA’s and iProvo’s persistent financial problems posting), but qualified and interested applicants will be few and far between.

Centerville City Council member Paul Cutler and Orem City Manager Jim Reams have been hired as interim directors, but the UTOPIA board is actively seeking a new executive director and accountant. As with so many other aspects of UTOPIA’s life cycle, iProvo’s experience suggests serious problems. Initially a triumvirate of Kevin Garlick (Energy Director), Paul Venturella (Telecommunications Director) and Mary DeLaMare-Schaefer (Communications and Marketing Manager), were to run iProvo. Only Kevin Garlick remains. Venturella jumped ship in February 2007, and DeLaMare-Schaefer left in June 2007.

For more than a year, iProvo has actively sought to hire a new telecommunications manager. The problems they’ve faced are so significant that Provo’s HR manager participated in an iProvo summit last December just to announce new strategies to fill this position. Another 3 months later, the position remains unfilled.

Given the similarity of their services, there’s no doubt that they are competing with each other, and with the private sector, to fill these positions. And since iProvo’s job posting has already languished for more than a year, it’s hard to imagine that UTOPIA’s entry into the fray will make it any easier for either municipal telecom system to fill the position.

Thursday, December 27, 2007

The cost of smaller class sizes

Since the Legislative Auditor General released his report on the funds the Legislature appropriated to reduce the average class size in Utah, the pundits have been wringing their hands. Apparently to everyone’s surprise and dismay, Utah class sizes are still the largest in the nation. For anyone even vaguely familiar with Utah, this audit only confirmed what we and many in the business community have said for years about Utah education: class size reduction is an unrealistic goal in Utah.

The educational merits or demerits of class size reduction have been debated for years. Parents intuitively prefer them, but the large scale tests of class size reduction show little improvement in student achievement unless average class size gets down to about 15. The cost of achieving that average class size would be monumental. And there are a host of other education proven reforms that would provide much larger gains in student achievement at a fraction of the cost.

Utah’s average elementary class size is 26. In addition, Utah classrooms will swell by more than 160,000 over the next decade. On top of that, published reports indicate that Utah began the current school year with hundreds of vacant teaching slots.

This teacher shortage means that Utah’s current average salary and benefits package of $55,034 per year is not attracting enough applicants to meet existing demand. Those vacant teaching positions, plus the others necessary to bring Utah’s average class size to 15, would be even more expensive. For illustration purposes, however, we’ll assume the cost only goes up to $60,000. That means Utah would have to spend another $516 million every year just to hire the 8,600 teachers necessary to get Utah class sizes down to 15.

That calculation ignores the on-going surge in Utah enrollment. When the 160,000 new students hit Utah schools over the next 10 years, Utah will need another 6,222 elementary teachers to maintain an average class size of 15. Assuming the same $60,000 total compensation package for these teachers means Utah would pay $373.3 million for these teachers. All told, Utah would need to hire nearly 15,000 more teachers, at a total ongoing cost of $889 million.

Add in the capital costs necessary for each of these teachers to have their own room, and the cost of reducing class size to 15 becomes staggering. As our October study, “Education Growth Projections in Utah: 2008-2022,” showed, Utah taxpayers will have to purchase $6.365 billion in land and buildings to house the surge of students entering Utah schools. If reducing average class size to 15 requires the same proportional increase in capital costs as this analysis projects in salaries and benefits, those capital costs could easily exceed $10 billion.

How much would meaningful class size reduction cost? This analysis shows we’d have to increase ongoing education spending by nearly $900 million per year. And our capital costs would dwarf that increase. Given class size reduction’s mixed record in raising student achievement and Utah’s unique demographics, class size reduction seems a fool’s errand.

Would it be possible, even laudable to instead increase average teacher pay, and thereby attract the best and the brightest into Utah’s classrooms? When smaller class sizes are what increase the number of teacher union dues payers, don’t expect the unions to make teacher pay a higher priority than class size.

Thursday, December 06, 2007

Why the Cottonwood Mall RDA is just plain wrong

In our last post, we noted why the Cottonwood Mall RDA is such a risky gamble. In this post, we’ll describe why the Cottonwood Mall RDA isn’t just risky—it’s just plain bad policy.

The proposed Cottonwood Mall RDA will not create one job, not one residence. Not one. Every square foot of retail and residential space General Growth Properties (GGP) plans on putting in this space will be built somewhere by someone without a subsidy. That’s because residential and retail development follows population and disposable income. Houses and retail developments will naturally go where people are and have money to spend. Subsidizing a developer to build residential or retail space in this place simply rearranges where this retail and residential space goes. In essence, GGP wants to take nearly $100 million—most of it from the Granite School District. In exchange, they’re not giving a single thing—because this retail and residential space will be done whether a subsidy is provided or not.

Holladay says the revenue stream they are projecting amounts to “found” money. That is simply not true. Holladay City and GGP didn’t discover hundreds of thousands of dollars just waiting for a right-thinking “investor” to pick up. They want to steal this retail and residential development from another city, perhaps Taylorsville, South Salt Lake, West Valley City or Magna, and put it on their land.

GGP says that this is the only project that will allow them to earn the kinds of returns on their investment that they expect, and even then they aren’t going to receive the double-digit return they typically aim for. That may be true—but should education taxes be used to subsidize GGP’s profits? We already spend less per student than any other state in the nation.

GGP and Holladay say that this site will remain vacant, or nearly so, without this RDA. GGP has even gone so far as to say that without it, they’ll tear down the buildings, challenge the property valuation, just to reduce their tax liability. To a certain degree, they’re being disingenuous on this point: GGP told the Taxing Entities Committee (TEC) that they wouldn’t sell this property for the approximately $30 million the site is currently valued at, even if the RDA doesn’t go through. (We’ll return to this point in a minute.)

We’re not engineers, so we’ll take their word when they say there are substantial infrastructure costs that have to be borne before that land can be built on. But to assume that no one will build on that site for the next 20 years is just absurd. As Holladay Mayor Dennis Webb noted at last Wednesday’s TEC meeting, the LDS Church is putting $1 billion into the City Center project without any taxpayer subsidies. GGP and Holladay city have noted that Larry Miller might be interested in building on that property. A big box retailer might go on that property. Both of these are plausible uses for that land, and neither of them would require an RDA.

Of course, GGP “doesn’t sell properties,” as they told the TEC last Wednesday. At least, not usually. However, they were quite clear that there are circumstances in which they have sold properties, and would sell this property. The fact that GGP has contemplated a price at which they wouldn’t sell the land means that there is a price at which GGP would sell the land. And for discussions of Larry Miller to mean anything, even as something Holladay would prefer to avoid, they have to mean that GGP would sell the land to Larry Miller, for the right price. In other words, GGP has no more interest in letting that land go undeveloped, giving them no return, than Holladay, Salt Lake County, or the Granite School District does.

Finally, let us point out that this RDA is just the first of 6 or 7 RDAs already in the pipeline that the Granite School Board will be asked to approve in the next several months. On Tuesday Taylorsville asked for another $15 million RDA. If the Granite School Board approves the Cottonwood Mall’s $100 million subsidy, how will they be able to oppose any of these other RDAs?

RDAs can be an appropriate economic development tool. When cities use them to steal residential and retail development from each other, as Holladay is trying to do with this one, they are nothing but a drain on taxpayer dollars. This RDA creates no economic benefit, and will cost taxpayers and school kids tens of millions of dollars. We encourage the Granite School Board to vote no on the proposed Cottonwood Mall RDA.

Thursday, November 29, 2007

If all goes as planned . . .

Holladay is proposing to subsidize retail activity and residential construction that will occur on its own in Salt Lake County even without a subsidy. Using tax dollars to stimulate this type of activity makes absolutely no sense: retail and residential construction respond to local demand, which is a function of population and disposable income. Taxpayers are the losers when cities use tax incentives to steal retail from each other. If this RDA is approved, the Legislature will have to once again consider reforming RDA statutes.

Holladay Mayor Dennis Webb is the foremost cheerleader for the proposed Cottonwood Mall redevelopment. Under the proposal, over the next 20 years Holladay City, Salt Lake County and the Granite School District would give nearly $100 million—$70 million from the Granite School District alone—to General Growth Properties (GGP), the company who currently owns the Cottonwood Mall. In exchange, GGP will upgrade the current site with more than 1 million square feet of high-end retail and residential space.

If all goes as planned, Holladay and GGP claim the city, Salt Lake County and the Granite School District will receive significantly more in property tax revenues when the project is finished, and a smaller increase in property tax revenues while the project is being completed. They’ll be taking those revenues from another city or another school district, but at least Holladay will be getting more property tax dollars. If all goes as planned.

If, if, if. That darn “if” is a real pain. Every developer, every businessman has a different pain threshold. Some are willing to assume a greater risk for the potential of a bigger pay off; others are content to let lucrative deals pass by, because the potential loss would be too painful.

When it comes to assessing those risks, elected officials aren’t quite as careful, at least when they aren’t using their own money. It’s not because they don’t care, or because they want to be cavalier with taxpayer dollars. But just as most people go bankrupt when playing Monopoly, elected officials’ pain thresholds are much higher when they’re using taxpayer dollars.

The Cottonwood Mall redevelopment project is a perfect illustration. Located on major freeways, the Fashion Place and South Towne malls have replaced the Cottonwood Mall as preferred locations for national department stores like Dillards and Nordstrom. Unsurprisingly, this mall has lost all but one tenant; its parking lot is a shamble; and some of the most prized land in the Salt Lake valley has been almost vacant for some time.

Before any upgrades can be done, GGP estimates $100 million of infrastructure work will be necessary to meet various flood plain, fill and other regulations created since the Cottonwood Mall was first built in 1962. GGP is willing to invest some $550 million into this project over the next 20 years; $650 million takes them past their pain threshold. That’s why they want Holladay, Salt Lake County and the Granite School District to put the last $100 million into the project. And if all goes as planned, what is now the Cottonwood Mall probably will be a residential community people aspire to live in. If all goes as planned.

The question is, why should these taxpayer dollars be placed at risk? Why should education taxes from the Cottonwood redevelopment, which would have been used to pay teachers’ salaries on the west side of the Granite School District, be risked to build condos on the east side?

And we can’t ignore the further risks inherent in the political world. Holladay was among several cities who considered splitting the Granite School District in half. They opted not to move forward this year, but it would be foolish to believe that the impetus for separation has disappeared. More likely, those who wanted to split Granite School District are just biding their time, waiting to see how the Jordan split goes. Can the Granite School District in good conscience let education taxes be placed at risk, with such a serious threat to their very existence looming?

Public education advocates readily proclaim that Utah schools are woefully underfunded. If that’s so, how can they afford to risk these education tax dollars? Mayor Webb and GGP say the dollars aren’t at risk, that the increases in tax revenues are guaranteed. If there really isn’t a risk, why is GGP asking taxpayers to cough up $100 million in the first place? Why don’t they just put the last $100 million in themselves?

Even if all does go as planned, this RDA would be a bad idea. That GGP sees a distinct possibility that it won’t go as planned makes this bad idea even worse. But that’s a topic for our next post.

Monday, November 26, 2007


Rep. Urquhart and Jesse Harris have recently been discussing questions regarding the financial position of UTOPIA on their respective blogs, and Jesse Harris has focused on what he perceives as the dearth of public information on UTOPIA’s financial position. Fortunately, UTOPIA has published much of the data Rep. Urquhart is asking for. Given the dismal story the data tells, however, it’s not surprising UTOPIA doesn’t like to talk about it.

UTOPIA’s original feasibility study projected that they would receive an average revenue per user (ARPU) of $58 (page 16). Page 29 of the same feasibility study anticipates that a take rate of less than 20% would jeopardize the $10.1 million annual sales tax pledges from member cities. Over the 20 years of the UTOPIA bonds, that means UTOPIA pledging members would have to pay $202 million.

During their June 2007 board meeting, UTOPIA’s representatives shared the current state of their finances. Page 2 of their 2007 financials show them with 6,493 customers, and $2.25 million in revenue. (Curiously, UTOPIA still hasn’t published that data online, though they did email these financials when Utah Taxpayers Association asked for it.) That means for 2007 their ARPU was just $29, or half of what they were projecting.

In a recent presentation to the Cottonwood Heights City Council, UTOPIA described their current take rate, both on a system-wide basis, and city by city. On slide 16, UTOPIA indicates that their current system-wide take rate is 16.4%. With their take rate below the break even threshold, and their ARPU just half of what their feasibility study projected, UTOPIA’s financial position seems precarious at best.

Their 2007 financial summary raises other serious questions. While they anticipated receiving $5.25 million in fees from subscribing members, their amended budget shows them only receiving 1/3 that amount, or $1.75 million. Similarly, they projected that they would spend $9.0 million in network operations, but their amended budget shows them spending just half that amount, $4.3 million.

The combination of much lower-than-projected subscriber revenue and much lower-than-projected expenses for network operations suggests that UTOPIA didn’t attract anywhere near the number of retail customers as they anticipated. In all of these cases, UTOPIA made much rosier projections than actual experience justifies. In testimony before the Legislature’s Government Competition and Privatization Subcommittee, UTOPIA general counsel David Shaw explained the dissonance between their projections and reality as the product of “externalities.” Perhaps a better word would be “competition.” Given this dissonance, the Legislature can and should ask whether UTOPIA is a going concern. If they aren’t, it’s hard to see why they should be allowed to expand.

Monday, September 17, 2007

State employee retirement: 30% or 100% taxpayer funded?

Utah state and local government employees, including school district employees, receive generous retirement benefits. Utah taxpayers cover 100% of the cost of state/local government employee retirement benefits (some employees on the older system chip in some of their own funding).

However, the Utah Public Employees' Association claims differently. In their August/September 2007 newsletter, the UPEA states

Contributions into the retirement system are only funding 30% of the cost; 70% of the cost of the retirement system is funded by investment earnings. Put another way, for every $1 of benefit paid out by [Utah Retirement System], only 30 cents is being funded by the employer (taxpayer).

Obviously, we disagree. The other 70% should also be considered taxpayer funded as well since investment earnings are derived from taxpayer contributions in the first place. This is no different than the investment earnings that individuals and households earn in their own retirement accounts. The earnings are attributed to the investor's account.

Thursday, September 06, 2007

Charter Schools Still Receive Less Funding Per Student than District Schools

In its September 2007 newsletter, the Utah Taxpayers Association has released an analysis of per student spending for district schools and charter schools for FY2006.

After excluding lunch service and non K-12 programs and deducting transportation costs and federal start-up funding, charter schools received $5,329 per student in FY2006 while district schools received $6,001.

While some of the per student funding difference between charter schools and district schools is attributable to different enrollment demographics, more than half of the difference is attributable to charter schools being short-changed on local replacement funding.

Click here to see the report.