Tag Archives: Pennsylvania

Comparing private-sector employment by state during Covid impacts

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Summary: Covid-19 caused deep retrenchment in the 2020 U.S. economy with effects starting to be felt in the second half of March. However, the impact on official employment data (other than unemployment claims) was not validated until April numbers were released. The surveys of households and businesses that provide monthly input for labor market measures had already been done by mid-March.

Thus, this Policy Brief reviews jobs numbers, first for April, the hardest hit single month as the effects of massive shutdowns or serious restrictions were placed on many sectors of the economy, primarily by governors at the state level. Then numbers for September will be reviewed to see to what extent jobs have recovered since the sharp decline posted in April.

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The analysis looks at private-sector payroll jobs in each state as opposed to unemployment rates. Unemployment rates can move contrary to what the underlying hiring suggests is occurring to the state of the economy because of swings in people leaving and entering or re-entering the workforce. Private-sector jobs are the focus because in many states, government employment suffered very little and federal jobs increased during the year. 

The Brief focuses on two major indicators. First, the extent of losses in April compared to the jobs count in April 2019 are calculated. Second, the number of jobs recovered through September. Namely, how did September job counts compare to the September 2019 level based on just-released data. Note that April-to-April is used rather comparing April numbers to March. March data is a flawed measure because losses were already occurring but were not captured by March surveys.  

All data used in this Brief is taken from the U.S. Bureau of Labor Statistics website.

State performances are evaluated by dividing into two groups by two criteria. States are grouped according to whether they performed better or more poorly than the national average on each measure. A further look at the very best and very worst will also be shown. 

April 2019 to April 2020

For the U.S., private-sector jobs fell 19,412,000 or 15.2 percent in April 2020 from the 12-month earlier level. There were 29 states posting smaller than 15.2 percent declines in private-sector employment. Within this group the losses ranged from 8.2 percent in Utah to 15.1 percent in Maryland. Arizona at 8.8, South Dakota at 8.4 and Nebraska at 9.4 joined Utah at having the smallest decrease—all below 10 percent. Most (20) states fell in the 10 to 14 percent-loss range with five between 14 and 15.2 percent.

Interestingly, 21 of the 29 are right-to-work (RTW) states (there are 27 RTW states). With the exception of Maryland all the states with smaller than the national April-to-April job decline—including non-RTW states—are in the South, Midwest, Mountain West and Southwest with Oregon, at 14.4 percent, the only coastal state under a 15.2 percent decline. None of the North Central, Mid-Atlantic or New England states had job losses less than the national decline.

Meanwhile, 21 states recorded losses greater than the national 15.2 percent decline from April-to-April.

These states ranged from 15.8 percent in California and Louisiana to highs of 26.1 percent in Michigan and 26 percent in Vermont. Another eight states had job declines above 19 percent, including Delaware (19.1); Hawaii (21.5); Massachusetts (19.6); Nevada (21.5), Pennsylvania (19.6); New York (22.1); New Jersey (21.1), and Rhode Island (21).  Nine ranged from 15.8 percent to 19 percent. This group of states was diverse geographically—Wisconsin; Ohio; Kentucky; New Hampshire; Connecticut; Maine; West Virginia; Alaska and Washington.

Of the 21 states having greater than the national drop percentage from April-to-April six were RTW states. And all of those except Louisiana had only recently adopted RTW. As regions, the Mid-Atlantic and New England areas suffered the biggest losses. No state in those regions have adopted RTW.

September 2019 to September 2020

The second method of evaluating state job performance looks at the decline in employment from September 2019 to September 2020. This gauge provides a picture of how well states have recovered from the huge losses posted in April. Again, the states are divided into two groups—those with declines smaller than the national year-over-year loss of 6.8 percent and those above it. 

A better-than-national performance was posted by 27 states.  That is, their job losses from September 2019 to September 2020 were lower than 6.8 percent.  Two, Wyoming and West Virginia, were at 6.8 percent. Of this better-than-national group, nine states had remarkably strong showings. Idaho’s September 2020 job count tied the year-earlier figure and thus had no net loss over the 12-month period.  Utah was close behind with a 1.3 percent drop and really good numbers were posted by Mississippi (2.2); Nebraska (2.6); South Dakota (3.3); Arizona (3.4); Georgia and Arkansas (3.7) and South Carolina at 3.8 percent.

The next lowest group includes six states in the 4 to 5 percent range of losses with the remaining 12 between 5 and 6.7 percent.

RTW states accounted for 21 of the 29 better-than-national-average performing states. The very best performers with losses at 4.5 percent or lower were all right-to-work states.  

Meanwhile, there were 21 states with losses greater than the 6.8 percent 12-month decline in private employment posted nationally in September. The four biggest September-to-September job losers include Hawaii (21.5 percent); Alaska (13.3); New York (12.4) and Vermont (11.2). Of course, the actual number of job losers in New York is enormous with over a million fewer jobs than a year before.

The smallest losses in the worse-than-national group were registered by Washington; Oregon; Rhode Island; Ohio and Illinois with all posting declines under 7.6 percent. Another 12 states were in the 7.9 to 10.4 percent-range.

Only six of the poorest performers were RTW states while 15 were non-RTW. The RTW states include Louisiana and North Dakota. Louisiana was hit hard with Covid early and has had major flooding in recent months while North Dakota has been hurt by weakened energy demand in the sector that was driving the state at a rapid pace earlier.

Conclusion

This analysis has shown, conclusively, that RTW states have fared much better on the whole under Covid than non-RTW states. RTW has long been a good proxy for how state governments view free enterprise, free markets and the importance of limited interference in markets and society in general.

Several state governors including, those in Florida; Georgia; South Dakota, and Texas among others, have been criticized heavily for opening up their states quickly or never imposing the draconian shutdown requirements that were in effect in much of the Northern and Mid-Atlantic states.  The RTW states that did fare less well were, for the most part, states that had adopted RTW fairly recently and still had influences arising out of public sector unions to deal with and were politically still less conservative in their approaches to public policy in general.

Pennsylvania’s private jobs fared worse than nationally in both measures: The April-to-April job loss was 1.05 million (19.6 percent) and there were 8.3 percent fewer jobs in September than a year ago. This notwithstanding a sizable drop in the unemployment rate from 10.4 in August to 8.1 percent in September. Many other states with high unemployment rates in August also had large unemployment declines in September but payroll job gains did not rise commensurately. As mentioned earlier, swings in labor force can create deceptive monthly changes in the unemployment rate during downturns and recoveries.

Pennsylvania’s April employment situation

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Summary: Recently released employment statistics for April provide the first opportunity to gauge in detail the impact of the mandated coronavirus closings and economic activity slowdown on statewide employment.  Anecdotal evidence, casual observations and the reports of unemployment claims have provided enough information to know the state as a whole and some areas of the state have been brutalized economically.

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Overview

Gov. Tom Wolf’s March 19 announcement of mandatory closings and the follow-up detailed list of sectors that were to close and those that could remain open or allowed employees to work from home gives a perspective on what was to come. This Brief reviews the April employment report, both household survey data and employer survey data with analysis that offers a somewhat better understanding of what had happened by the time of the April surveys. Bear in mind that the full magnitude of the economic slowdown had not been felt by mid-April as the impact of ordered closings continued into May as cases and deaths from the virus mounted, albeit at very different rates per capita across the commonwealth’s 67 counties.  These vastly different experiences have become a source of great frustration with the so-called lockdown.

Unemployment Rate

Between mid-March and mid-April when the household employment survey was taken, 1.43 million Pennsylvanians filed unemployment clams—21.7 percent of the March count of the state’s civilian labor force and 23.1 percent of the number of people working at the beginning of March.  Somewhat surprisingly, the employment report from the state Department of Labor and Industry (data also available at the U.S. Bureau of Labor Statistics website) showed the number of unemployed rising to 976,000, up only 597,000 from the March reading, notwithstanding the 1.4 million unemployment claims filed in the 30 days since the previous employment survey.

The reported unemployment rate was 15.1 percent but would have been higher if 91,000 people had not left the labor force.  Then, too, the employment decline for April compared to March was just 688,000, still far below the 1.4 million new claims.  There are three possible explanations for the large discrepancy:  One, the survey was unable to reach many of the recently unemployed and thus undercounted the number out of work. Two, some of those who filed for unemployment payments found a job before the April survey was taken—somewhat unlikely given the inevitable massive drop in hiring during the period. Three, for whatever reason, some unemployed that were surveyed declined to admit they were out of work.  In any case, the huge gap in new claims and the reported new unemployed in April is a conundrum. And the payout to claimants is a staggering sum each week.

Note that the claims have continued to rise since mid-April, adding another half million by May 24, suggesting May’s unemployment rate will be significantly higher than the April reading.

Payroll employment

What happened to establishment payrolls—based on the employer survey—in April? By this time much of the closing orders would have had time to take effect although secondary or downstream effects of demand losses were still developing. 

In this analysis, the impact of the virus closings and related demand effects will be estimated by looking at the difference in employment by sector between April 2019’s seasonally unadjusted figures and the unadjusted April 2020 figures.  Seasonally adjusted data are not available for many of the sub-sectors of major interest for this analysis, so the year-over-year differences in unadjusted values will constitute a reasonable estimate of the coronavirus lockdown impact.  Moreover, some of the virus’ effect had begun in early March, so the change in jobs from March’s count to April’s would have missed some of the impact. 

The findings by sector are very revealing. First, note that total private-sector jobs were down by 1.024 million, almost 20 percent of the April 2019 total, thus the decline (as reported by employers surveyed ) far better mirrors the unemployment claims rise than the household survey employment number which gauges the number of people who say they are working. Meanwhile, government jobs by comparison were down only 15,800, a scant 2.2 percent of the total government employment of 718,000 in April 2019. 

Federal employment rose slightly as did the state’s job count. Local government employment was down 19,500 or 4 percent with over half of that loss in local k-12 education—presumably due to layoffs of support staff since teachers and administration are still on the job.

Second, and very interestingly, the state’s average weekly earnings for private-sector employees still on a payroll rose over the year-earlier figure climbing from $894.06 to $947.40, an increase of 6 percent. As will be shown, the largest job losses have occurred in the some of the lowest paid sectors, so the average weekly pay went up. Of course, with the huge number of job losses, total income in the state is down and the taxes being paid are also much lower.

Goods producing sectors suffered widely different percentage declines in jobs.  Total goods producing jobs dropped by 186,000 or 21.5 percent. Construction was hardest hit with the loss of 103,000 jobs, a 40 percent decline. Mining was down 17 percent but by only 4,800 jobs, and not all of the loss can be attributed to the virus as market conditions have been a negative for a while.

Manufacturing employment overall was off by 13.6 percent, 78,300 jobs. Durable goods saw a 57,000 job reduction or 16.5 percent. Non-durable fared much better with a drop of only 21,000 or 9.2 percent.  Each of the major durable sectors had losses with primary metals and fabricated metals down 18 percent. Furniture and electrical machinery were most affected with 21 percent declines. Transportation equipment along with computers and electronic equipment had losses in the 13 percent range. 

It is interesting that losses in several durable goods sectors were not larger since they were on the governor’s original March 20 close orders. Exemptions must have been granted or the close orders changed. 

Service-producing sectors have sustained the largest impact of the closing orders due to huge cuts in travel and going out for dining or entertainment.  Overall, April 2020 private service jobs fell 838,000 or 18.7 percent from the April 2019 count, but a few of the component sectors were extremely hard hit. 

While the retail sector as a whole was down 125,900 jobs, that was a comparatively low 20 percent decrease considering the 41 percent employment plunge at auto dealers (24,000 jobs) and sporting goods stores (7,800 jobs) or the 51 percent drop at furniture stores (8,100 jobs). Clothing stores took the hardest hit with jobs falling by 64.7 percent (26,900 jobs). Department stores shed 9,500 jobs or 23 percent. 

The groups with the smallest losses include general merchandise (7,600 jobs) 7.4 percent, gasoline stations (3,900) 9.5 percent and grocery stores (9,700) 8 percent. Health and personal care were in the middle range of losses at 14.5 percent (7,300 jobs).

It is in the leisure and hospitality group that the most severe job losses have occurred. The sector as a whole saw jobs fall by 345,800 or 60.2 percent.  Hardest hit in this group are the full-service restaurants where employment is down by 161,000 or 81.3 percent.  Also seeing massive declines were arts, recreation and entertainment where 60,400 jobs (63.7 percent) have disappeared. Accommodations shed 30,900 jobs or 53 percent while limited service restaurants have seen jobs fall by 66,500 (41 percent). In short, the leisure and hospitality group is being crushed by the lockdown. 

Health and education services employment, a vaunted work horse and reliable jobs growth group, has not escaped the ravages of the coronavirus impacts.  Employment in the combined group has fallen by 147,400 or 11.2 percent.  Among health sectors, ambulatory care (doctors’ offices, dental offices, home health care) has seen the biggest drop in jobs with a decline of 59,900 (17.4 percent).  Social assistance (including childcare) shed 28,700 jobs (12.3 percent), while nursing home jobs are down by 11,800 (5.8 percent). 

Education experienced a drop of 40,000 jobs or 15.5 percent.  This group includes all private schools and public post-secondary education.

Finally, there’s the group known as “other services.” This group includes repair and maintenance services, personal and laundry services and a sub-grouping that includes religious organizations, foundations, civic and professional organizations. From the April 2019 level to April 2020, employment in this category fell by 80,500, a drop of 30 percent. In the same time frame, repair and maintenance shed 8,400 jobs (15.8 percent). Personal and laundry service employment plunged by 43,800, a massive 62 percent loss. Most of this is in personal care jobs since laundry services were exempted from the closing orders.  The religious, civic, professional, etc., grouping experienced a loss of 28,300 jobs, a 21 percent decline.

Conclusion

Bear in mind that the period of plunging job counts being estimated here occurred before mid-April. And even though many states are starting to re-open their economies, Pennsylvania is moving very slowly, no doubt in part due to the very high infection and death rates in the eastern part of the state.

But even with the partial and tentative moves so far it is a virtual certainty that the May employment surveys of households and establishments with payrolls that were conducted over the middle part of the month will show further deterioration in the labor markets and, by definition, the economy as well. In Pennsylvania, state and local governments are going to face drastic reductions in tax revenue. But there seems to be no sense of urgency to cut spending or lay off workers. Why do the private sector and its employees have to bear all the burden of the coronavirus impacts?

Pennsylvania’s state school funding disparities and irrationalities

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Summary: A review of spending and academic achievement finds there is no positive correlation between the level of state funding received by districts and their academic achievement. That is to say, higher state funding per student does not translate into improved district achievement.

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Pennsylvania’s school district funding data are available through school year 2016-2017. These data point to a bizarre allocation of state dollars. A key issue is that the level of state funding by district has no positive correlation with district academic achievement. Indeed, for the 49 districts receiving above $9,500 per student in state revenue (the state funding average for all districts was $6,578) and having total state and local revenue above the state average of $16,372, higher combined state and local revenue is actually associated with lower state academic ranking, although the association falls short of statistical significance. These school districts average $18,955 in total state and local revenue, ranging from $17,004 to $25,553, and average state revenue of $12,122 with a range of $9,684 to $17,741 per pupil.

In-depth statistical analysis of this group also finds that higher state funding per student is not positively related to better school achievement as indicated by district rankings that are driven by scores on PSSA and Keystone exams.

In the following discussion, all revenue figures are per student. To be precise, per average daily membership, and, for all practical purposes, per student.

State funding for the 499 districts ranges from a low of $3,018 to a high of $17,741; 287 districts received above average funding with 138 districts receiving more than $9,500. Meanwhile 212 districts received $6,500 or less with 46 under $4,000 and 12 less than $3,500. The lowest state-funded district received only 17 percent as much funding as the highest and less than half the state average.

Note that federal dollars were excluded from the revenue totals. Including them would have only made the relationship between total revenue and achievement worse. The larger amounts of these funds are typically given to districts struggling academically.

To be sure, there are districts with well above average total revenues that have good to strong academic achievement rankings but do not receive high levels of state funding. These tend to be found in fairly well-to-do suburban neighborhoods. In Allegheny County for instance, Fox Chapel, Quaker Valley, Pine-Richland, North Allegheny, Mt. Lebanon and Upper St. Clair all receive $4,500 or less from the state but have above $17,000 in total revenue. And therefore must raise the lion’s share of revenue from within their districts.

Meanwhile, for school districts that have combined state and local revenue totals of $15,000 or less and under $7,000 in state revenue, the relationship between revenue and achievement rankings confirms the revenue versus achievement results for the higher revenue districts discussed above.  This group contains 67 districts. The average total revenue for the group was $13,927 compared to $18,954 for the high revenue grouping discussed above. Revenue ranged from $12,003 to $14,999. State revenue averaged $5,475 and local revenue $8,450. Thus, these districts received, on average, less than half the amount of state funding than the high revenue group. At the same time, they locally raised $1,600 more per student.

Analysis of this group finds that while there was a very modest positive relation between district revenue and state achievement ranking it was not a statistically significant finding. There was, however, a marked difference in the two groups of districts in terms of average achievement rankings.  The 67 districts with $5,000 less than the high revenue districts and, with $6,650 lower state funding, posted an average state ranking of 225th highest out of 603 ranked districts and charter schools.  The higher revenue districts had an average ranking of 329th highest out of 603.

As expected, when data for the two groups are combined, in-depth analysis shows a very strong negative relationship between revenue and achievement. That is to say that higher revenue is associated with worse achievement. While overall significance is not comfortably high, the 95 percent confidence range for the numerical estimate of the relationship is narrow enough to confirm the straightforward evaluation using the average rankings that show the lower revenue group has better academic achievement than the high revenue group.

Some extreme examples will illustrate the oddity that is the state’s funding of school districts. Consider that Peters Township is the No. 1 academically ranked district in the state and has state and local revenue per student of $14,831 with state funds accounting for only $3,608 of that. Why the high ranking? Ninety-five percent of 8th graders were advanced or proficient in language arts, 87 percent in math and 92 percent in science. Elementary grades also performed extremely well. Keystone exam results showed 93.4 percent advanced or proficient in math, 91 percent in biology and 95 percent in literature.

Compare that to Duquesne with $20,000 per student with $17,741 of that from the state and an academic ranking of 589th of 603, or 14th from the worst. What accounted for that low rating? The district has one school, an elementary school through grade six. Only 6.9 percent of the sixth-grade class scored proficient in math with 93.1 percent scoring basic and below basic. Sadly, 72.4 percent are below basic which means they have no grasp of the material. Meanwhile, Wilkinsburg had state and local revenue of $25,553, of that $13,134 state funding. Wilkinsburg ranked 542nd in the state.  Pittsburgh had $22,603 in state and local revenue with $10,475 in state funds. Pittsburgh’s test scores that led to the low ranking of 471st are discussed in full in Policy Brief Vol. 19 No. 3. Finally, Farrell had local and state revenue of $21,162 with $15,671 from the state. Academic rank? 538th.

How can the state send so much money to some districts and get so little in return in academic achievement? Is there no mechanism for accountability?  And how do these districts get so much more money per student than the state average of $6,578 so that many districts will get much less than the state average, such as Peters with $3,608?

And consider the other side of this puzzle. The Hazelton School District had $11,779 in revenue with $6,562 from the state. Hazelton’s academic rank was a very poor 492nd with 8th graders at most middle schools scoring very poorly on all subjects, particularly math. Then there is the Wilkes-Barre district with a ranking of 505th. The district had revenue of $14,512 with $6,372 from the state.  How is it that Hazelton and Wilkes-Barre get so relatively little per student support from the state while six districts in Mercer County get over $10,000 and seven districts in Somerset County get over $10,000?

One possibility is the hold-harmless provision that for decades has kept basic education funding growing in districts with declining enrollment so that the per-student revenue rises at these schools if they maintain local support at the same level or a little higher.  If that is the case, then a dreadful injustice is being visited on the schools that have not had enrollment declines or have had enrollment increases.

That would certainly explain in large part the situation in Pittsburgh where enrollment has plummeted from over 40,000 to 24,000 over the last few decades. Duquesne and Wilkinsburg likely fit this category as well. No doubt it applies to many districts across the state that have watched enrollment fall.

But what a perverse incentive. Just lose enrollment and get more money per student from the state to pay employees more and start programs and hire all sorts of professionals. Too bad all that has done little to improve the dreadful education outcomes which have likely been a major cause of the loss of enrollment.

In simplest terms, hold-harmless funding must end. It has made matters worse, education is not improving and it is unconscionably unfair to other districts that could actually put the money to better use.

Or if they cannot put it to better use, cut the education budget. The taxpayers could use a break.

Time for Pennsylvania to Rein Municipal Regulations on Business

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Summary:  Philadelphia and Pittsburgh have enacted regulations on businesses that should not be permitted by state law. Because of Philadelphia’s exemption from the law that prohibits regulations not explicitly permitted by the state it is not being challenged in court for the regulations it passes while Pittsburgh has been sued. It is recommended that the Commonwealth amend the state’s Home Rule Charter law to remove Philadelphia’s exemption and disallow any municipalities from enacting regulations not expressly permitted by the state.

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On January 23rd, Philadelphia’s Mayor signed into law an ordinance that prohibits businesses asking applicants for employment questions about their salary history.  In 2015 the City enacted an ordinance mandating sick leave for employees of businesses in Philadelphia. The sick leave law has not been challenged in court although there are companies considering a suit against the salary inquiry prohibition law—albeit based on a very thin argument that alleges first amendment rights violation.

Bear in mind that Pittsburgh also enacted a mandated sick leave ordinance in 2015 that was challenged in court and overturned. The City quickly appealed and a final ruling has not been handed down but the law is not currently in effect.  The court’s decision was reached rapidly because the language in the Commonwealth’s Home Rule Charter and Optional Plans law of 1972 is very clear. Home rule municipalities are simply not allowed to dictate duties, responsibilities or other requirements on businesses, occupations or employers that are not expressly provided by state law or applicable in every part of the state or applicable to municipalities or to a class or classes of municipalities.

So, why has Philadelphia not had a lawsuit filed to overturn the mandated sick leave ordinance or the salary inquiry prohibition? (As mentioned earlier, a suit might be forthcoming on the salary issue.) In short, because the Home Rule Charter and Optional Plans law explicitly excludes Philadelphia from the provisions of the statutes.  The absence of an existing state law preventing Philadelphia from imposing requirements that dictate duties and responsibility prompted the Pennsylvania Senate to pass legislation in April 2015 that would have negated Philadelphia’s sick leave mandate. It would have also prohibited other municipalities from passing mandated sick leave laws as well.

The bill never passed out of the House because of opposition and the threat of a highly probable veto.  However, an updated version of the bill (SB 128) is being reintroduced. Whether it will be signed into law remains to be seen. A veto seems to be the likely outcome and an override in the House is improbable.

Despite the poor prospects of the bill being signed into law, Pittsburgh and other home rule municipalities will still face the constraint imposed by the Home Rule Charter law. But if history is a guide Pittsburgh will undoubtedly keep enacting ordinances that run afoul of the law. Then too, Philadelphia will continue to have a lot of leeway in its ability to impose burdens on businesses within that city. This stems from the fact that Philadelphia was granted home rule status back in the 1950s well before the 1972 Home Rule law. Apparently the authors of that legislation deliberately chose to allow Philadelphia to retain all the powers and authority either explicitly or implicitly bestowed by the Commonwealth at the time of the City acquiring home rule status.

The irony is that despite exempting Philadelphia, the authors of the 1972 law saw very clearly the dangers that could occur if home rule municipalities were to interpret home rule as providing the opportunity to impose regulations on businesses. Regulations that are putatively designed to achieve political or social objectives are inconsistent with the freedom businesses need to operate profitably and competitively. As a result of anticipating such overreach, the authors of the home rule law included the language that precludes home rule municipalities from trying to impose regulations not explicitly permitted by Commonwealth statutes.

And while SB 128 is a good start toward addressing the regulatory situation in Philadelphia, there is a simpler and more far reaching way to deal with Philadelphia as well all other municipalities that might be considering enacting business regulations. The General Assembly should write a new short law or amend the Home Rule Charter and Optional Plans Law to: (1) remove the exemption of Philadelphia from the requirements of the law and (2) mandate that all municipalities, whether home rule or not, are to be bound by the language in 53 Pa CS section 2962, paragraph F.

The language would be rewritten with the amendment shown in bold as follows: Commonwealth municipalities shall not determine duties, responsibilities or requirements placed upon businesses, occupations and employers, including the duty to withhold, remit or report taxes or penalties levied or imposed upon them or upon persons in their employment, except as expressly provided by statutes which are applicable in every part of this Commonwealth or which are applicable to all municipalities or to a class or classes of municipalities. This subsection shall not be construed as a limitation in fixing rates of taxation on permissible subjects of taxation.

Moreover, the amendment to the Home Rule Law or the new law should contain language making the law retroactive until January 1st 2015.

The end result would be that no municipality, especially Philadelphia, could take upon itself the power to impose political or social desiderata on businesses unless allowed by the Commonwealth.

Another School Strike in Pennsylvania

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With the just initiated Highlands School District strike, Pennsylvania continues to cling tenaciously to its title of teacher strike capital of the United States. For many years the Commonwealth accounted for half of all teacher strikes in the country.  A strike creates disruptions in students’ lives, pressure on working parents to find child supervision, and delays in completing the school year with all that entails for students looking for summer jobs and family travel plans. Eventually, it will mean higher taxes to pay for the compensation increases the union will receive in a new contract.

 

And what does it cost teachers?  Nothing. They will work the required number of school days to complete the mandatory school year and get paid their entire annual salary. What a great deal. They risk nothing other than a little public anger that history tells them will dissipate quickly. In New York, teachers who go on strike lose two days’ pay for every day off the job. Thus, they will suffer income loss even though they finish the mandatory number of days in the school year. Not many strikes occur in New York.  On the other hand, teachers in the Highlands district have struck twice before, during the period 1997 to 2013.

 

The Education Commission of the States pointed out in a 2011 report that 35 states permit collective bargaining for school employees, but only eight of these states permit strikes.   Most states have long since decided that prolonged shutdowns of the schools during the school year are not good for the education of children and it is certainly not reputation enhancing for the state to be known as a place where school kids can be left in the lurch for weeks because teachers are allowed to walk out.

 

Consider the absurdity of this Commonwealth with its mandatory attendance laws for children of school age wherein parents are legally obligated to make sure their children are in class, unless properly excused for good reason such as illness, but teachers can unilaterally and peremptorily decide to take a two week vacation during the school year. And that includes taking it toward the very end of the year thereby inflicting the greatest possible hardship on students and parents.  It certainly calls into question the mantra teachers continually spout about how much they care for their students.  Union loyalty and show of power are obviously more important.   Clearly all those states without teacher strikes with good academic records must be doing something right.

 

The state granted permission to strike is a reflection of the power public sector unions—especially teachers—have had in rigging and sustaining the laws to create maximum benefits for themselves. The threat of strikes produces a heavy bargaining advantage. Occasionally, an actual strike is needed to remind other districts of that bargaining advantage.

 

This power is not constitutionally required and it is not ordained from on high. It derives from pure, raw political will and an electorate that cannot, or will not, find the strength to get legislation passed that eliminates the right of teachers—and while they are at it transit workers—to strike.

 

Beyond the right to strike, other Pennsylvania laws are written to protect teacher jobs. To wit; consider the requirement that to terminate teacher positions the district has to eliminate an entire program or have suffered large enrollment losses. Of course eliminating programs elicits maximum public outcry as parents whose children are involved squawk loudest. Commonwealth statutes also require that no district will have its basic education allocation cut from year to year even if the district has seen substantial enrollment reductions.  Isn’t that great if you are a school employee?

 

And so it goes. Pennsylvania continues to lag economically with its outdated pro union biased laws; it is not a right to work state, it has costly prevailing wage laws, and is one of a handful of states allowing teachers and transit worker strikes.

 

This will not change unless or until voters decide enough is enough, but in light of the fact that the situation has been going on for so long with no successful effort to do anything about it, one has to surmise that not a sufficient number of voters are upset about it. Therefore, it seems the uphill battle to address these problems will be with us for a long time.

Is Internet Gaming a Good Bet for Pennsylvania?

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Pennsylvania’s budget for fiscal 2015-2016 is now more than four months overdue. The stalemate is focused on the Governor’s desire to raise taxes on income, and Marcellus Shale drillers to generate revenue to pay for a huge boost in spending while the Legislature desires to avoid some, if not all, of the proposed tax hikes. However, one possible new revenue source that has received considerable attention from both sides is to tax internet gaming, which, of course has yet to be enacted. Both sides in the budget clash seem to agree it might be a possible answer. But would it offer substantial help for the Commonwealth’s fiscal problems?

 

The short answer is no. An internet gaming tax is unlikely to generate enough money to make a meaningful contribution to state government revenue.

 

Internet gaming is legal in only three states:  Delaware, Nevada, and New Jersey.  To gauge the impact of internet gaming in Pennsylvania, we will look at the experience in New Jersey as a likely indicator of what the revenue potential might be in the Commonwealth.

 

By way of background, New Jersey legalized internet gaming early in 2013 and by November of that year, casinos were taking their first online wagers.  According to the New Jersey Casino Control Act, “a casino’s primary Internet gaming operation, including facilities, equipment and personnel who are directly engaged in the conduct of Internet gaming activity, shall be located within the territorial limits of Atlantic City, New Jersey.”[1]  All internet gaming takes place on servers and computer equipment (hardware, software, and equipment) physically located within Atlantic City’s casinos.  All gaming activity takes place on the servers at the facility and the information is transmitted to players along common carriage lines outside of the casino premises.  Thus, technically, all games and wagering are taking place inside the casino.  In 2013, there were twelve casinos operating in Atlantic City, six of which were involved in internet gaming with a combined 13 gaming websites—Caesars Casino had the most websites with four.  By 2015 the number of casinos involved in internet gaming fell to five and the number of websites increased to 14—Borgata joining Caesars with four.

 

Only New Jersey residents, physically located within the state at the time of wagering, are allowed to play.  Their presence is to be verified through an IP address, local wireless connections mapping, and cellular data.  The player must set up an account using a legal name, valid address, phone, and e-mail, a date of birth, and proof of identity.  Once the account has been created, the player deposit funds into the account from which wagers are placed.

 

New Jersey imposes a tax on internet gross revenues, the amount wagered on games through an approved website less the payout of winnings, at rate of 15 percent.  In 2014, the first full year of internet gaming, the state collected roughly $18.5 million in tax revenue—implying $123.1 million in gross revenues.  Through three quarters of 2015, New Jersey was on annualized pace to collect $21.8 million in taxes on $145.1 million in gross revenues.  Given New Jersey’s 2014 total gross revenue figure of $123.1 million and population of 8.9 million people, estimated per capita gross revenue is placed at $13.80. For 2015’s estimated gross revenue of $145.1 million, the amount per capita has increased to $16.24.

 

Using New Jersey’s revenue performance as a template, and taking Pennsylvania’s population of 12.8 million and assuming $14-$16 per capita in internet gross revenue, the casinos in the state should expect total gross revenue of anywhere from $179 million to $205 million.  Of course, how the number of internet sites in Pennsylvania and other legally determined restrictions compared to New Jersey could make a difference, up or down. One gaming expert predicts Pennsylvania could top $300 million in online gaming revenues in the first year, but as we have seen with gaming predictions in the past, they are often grossly overstated (see Policy Brief Volume 10, Number 43).

 

The amount of revenue generated for the state will of course depend upon the tax rate chosen.  Using 15 percent as a starter, the tax would provide anywhere from $27 million to $31 million in annual revenue based on the gross revenues estimated above.  Using the current slot machine rate of 34 percent (also the rate on fully automated table games) would place that range at $61 million to $70 million.

 

The license fees would provide a separate and upfront revenue payment to the Commonwealth.  News reports are suggesting the upfront fee would be $5 million.  Assuming all twelve casinos jump on the online bandwagon, that gives the state another $60 million.  But this would be a one-time payment.  New Jersey collected an issuance fee, which, according to their Gaming Act, is to be no less than $400,000.  Thereafter they collect an annual renewal fee which shall not be less than $250,000.  These amounts go to the state coffers, but they also add $250,000 for compulsive gaming treatment fee to each license and renewal.  With a $400,000 first time initial fee, not counting the $250,000 dedicated for gaming treatment programs, New Jersey collected $2.4 million in 2013.  They have collected another $1.5 million in annual renewal fees each year since.  As long as the number of casinos offering internet gaming remains constant, they will continue to do so.

 

Thus Pennsylvania’s choice of fees will determine how much is collected. Bear in mind that the state will incur management and administration costs in levying and collecting the new tax along with substantial expenses in setting up the systems and regulatory mechanisms. These costs will presumably come out of license fees and annual tax collections.

 

Keep in mind that internet gaming complied with Federal and state laws in New Jersey because it only applies to intrastate gaming, not interstate gaming—that is,  only New Jersey residents are allowed to play and only when they are physically located within that State’s borders.  Similar constraints would apply to Pennsylvania—only Pennsylvania residents would be allowed to play.  Thus in order for the casinos to see $200 million per year in online gaming play, to give the State coffers tax money of up to $70 million, Pennsylvania residents have to lose $200 million annually.  Unlike the casinos where residents from other states can play (and lose), thereby filling gaming tax coffers, this tax would fall solely on residents of the Keystone State.

 

Big question: How will internet gaming affect visits by locals to the casino and resident play at casinos? That might be a much more important question in Pennsylvania than it is in New Jersey because internet gaming is set up in Atlantic City where a high percentage of the business is non-residents.  Then too, is the profitability of internet gaming sufficient for an operation to be sustainable if the tax rate is above 15 percent?

 

Some thought should be given to these questions before the Commonwealth ventures too far down this road.

[1] New Jersey Casino Control Act of 1977 (amended), Article 6C Internet Gaming.

Common Core Tests Have Created Challenging Results

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The results of the 2015 Pennsylvania System of School Assessment (PSSA) exams have been released and they are causing quite a commotion.  The exams, given to students in grades three through eight, contained the new Common Core standards as recommended by the Federal Department of Education. 11th graders are not examined by Common Core based PSSA exams because the state replaced the PSSA with the Keystone exams for high school students.

 

The statewide average for the math test for all tested students, grades three through eight, shows a sharp drop from 73.3 percent proficient or advanced in 2014 to 39.7 percent proficient or advanced in 2015. For the language arts exam the number scoring proficient or advanced fell from 69.2 percent in 2014 to 60 percent in 2015. Clearly, the Common Core based math test is more demanding than the old PSSA while the language arts test is more difficult and was expanded to include writing as well as reading. Similar results have been reported by other states after they adopted Common Core. Not only were the tests made more demanding but higher percentages of correct responses are now required to rank proficient or advanced.

 

What else can we learn from these dramatic scoring changes in Pennsylvania?

 

First of all, we can determine if there are major variations in how the different grades were affected by the new tests. Second, we can explore how math testing was changed compared to the language arts exam. Third we can ascertain how poorly performing schools were affected compared to how strongly performing schools were affected by the more rigorous testing. To carry out this analysis, nine school districts from Allegheny County and one from Washington County were selected.  The sample contains five districts that are considered academically weak performers:  Clairton, Pittsburgh, Sto-Rox, Wilkinsburg, and Woodland Hills.  Five districts are considered to be strong performers: Hampton, Mt. Lebanon, North Allegheny, Peters (Washington County), and Pine-Richland.  Test results for fifth and eighth grades were used in the analysis.

 

As it happens, the results on the new language arts test for the fifth grade students appear to have little impact. For the districts that are considered low performing there were no really worrisome changes from 2014 to 2015.  Indeed, while the five district average for those scoring advanced declined by less than two percentage points (7.1 to 5.3), the average scoring proficient rose two percentage points (26.9 to 28.9). A somewhat encouraging change was the decline in the percentage scoring below basic (40 to 31) with most apparently moving into the basic group which climbed from 26 percent to 34 percent in 2015.

 

For the poor performing districts the language arts test was either not made much more difficult –perhaps even easier with the addition of the writing component—or the students were somewhat better prepared in 2015 than 2014.

 

For the five strong performance school districts, the effect of the shift to Common Core on language arts test results for fifth grades was generally positive in terms of the students scoring higher than in 2014.  Their district averages for the percentages reaching advanced and proficient actually rose: advanced (44.7 to 46) and proficient (41.6 to 44.5). At the same time the already low percentages of basic and below basic percentages dropped a couple of points: basic (9.2 to 7.4) and below basic (4.5 to 2). Although on average the gains were modest, Hampton had a nice jump with the combined percentage of advanced or proficient up significantly from 84 in 2014 to 94 percent in 2015.

 

In brief, the Common Core based fifth grade language arts test has not presented any significant difficulties beyond those already posed by the old PSSA exam.

 

Meanwhile, the performance on the Common Core test for fifth grade math was a much different story with scoring decidedly weaker than in 2014.  All ten districts in the sample experienced decreases in the percentage scoring advanced/proficient.  For the weaker five districts the average percentage scoring at the advanced level fell sharply from 24 to four percent, the average for proficient scorers dropped from 21 to 16 percent. At the same time, the average percentage posting scores at the basic level jumped from 24 to 38 while the below basic percentage climbed from 31 to 42 percent.

 

For the stronger districts, the fifth grade math results also showed major problems with the Common Core test compared to the old PSSA. The five district average percentage of students scoring at the advanced level plunged from 67 to 36 percent. Much of that decline showed up in the percentage scoring proficient which rose from 21 to 37 percent. However, that was the only non-negative news for the test results as the percentage scoring at both the basic level (up from eight to 20) and the below basic level (up from 4.5 to 10) rose significantly. Numbers like these for basic and below basic have not troubled the strongly performing districts for a long time.

 

Clearly, the new PSSA math test for fifth grades was much more difficult for both the poorly performing and stronger academic districts than the old PSSA test.

 

What’s more, the eighth grade scores depict a very dramatic challenge being posed by the Common Core based PSSA exams.

 

On the language arts test the five poorly performing districts saw their eighth graders average percentage reaching the advanced level slide from 20.7 in 2014 to 3.4 in 2015, nearly eliminating all the high scores. Indeed, none reached the advanced ranking in Wilkinsburg.  At the same time the average percentage of eighth graders scoring proficient slipped from 28.1 to 22.8 and those were undoubtedly the result of students who would have been at the advanced level on the old test moving even further down the achievement scale on the new test. This is a reasonable conclusion because of the fact that the number of students at the basic level jumped from 20.8 percent to 45.7 percent on the new test, almost certainly due to students slipping who would have been advanced or proficient on the old exam. Below basic scorers held fairly steady declining from 30.6 to 28.1 percent.

 

Meanwhile, the stronger five districts suffered a major shock in terms of the massive drop in the number of students scoring at the advanced level on the new language arts test. The five district average percentage advanced tumbled from 81.3 in 2014 to 35.3 in 2015. Evidently most of the expected advanced students fell into the proficient category as the average percentage in that grouping shot up from 14.5 percent to 52.8 percent on the Common Core test in 2015. The number of basic level scorers also moved up rising from 2.8 percent to 10.9 percent meaning that many expected proficient scorers slipped into the basic group. In something of an anomaly the below basic scorers held fairly steady falling slightly from 1.5 to 1.0 percent.

 

Clearly, the eighth grade Common Core language arts test difficulty was ratcheted up substantially in difficulty from the old PSSA.

 

If the eighth grade language arts results were bad news, the math results must be considered truly dreadful. For the five poorly performing districts the average percentage of students reaching the advanced level fell from 22 in 2014 to 1.9 in 2015 on the Common Core based test.  Wilkinsburg and Sto-Rox had no one at the advanced level on the new test. Furthermore, the average percentage reaching proficient also fell sharply from 24.7 in 2014 to 8.4 percent in 2015. At the same time, the averages for these five districts showed the percentage at the basic level held steady in moving from 19 to 20.1 in 2015. The largest change was in the below basic category where the percentage climbed abruptly from 34.2 to 69.6 on the new test. Thus, the percentage basic and below basic jumped from 53 before Common Core to 90 percent after, with proficient and advanced combined dipping to just 10 percent.

 

And the story is not all that different for the historically strong performing district results. The average percentage scoring at the advanced level plunged from 80.1 in 2014 to 20.7 in 2015 on the new test.  Some of that was captured by a rise in percentage proficient from 12.7 in 2014 to 37.5 on the Common Core based test.  The gap in the drop in advanced and the rise in proficient is captured by the big increase in the percentage scoring basic which rose from 4.2 to 31.2 percent and a smaller but still significant rise in the below basic from 3.1 to 10.6 percent. Thus, from 93 percent advanced/ proficient and 7 percent basic/below basic, these traditionally strong schools are now at 58 percent advanced/proficient and 42 percent basic/below basic in math.  Those scoring results a year ago would have been comparable to some of the poor performers used in our sample.

 

To put it mildly, the new math test is far harder than the test used through 2014 and has brought even the best schools down several notches on the scoring scale.

 

This new exam is causing a lot of hand-wringing among administrators, teachers, school boards, and state education officials.  Indeed, what useful information has been learned from this experiment? That top ranked schools that were believed to be sterling academic performers, have been brought down a few pegs? Or that poorly performing schools are truly terrible?  One must ask how much more the traditionally strong districts can do to raise average scores. Their SATs are very good; the students are above state levels by a wide margin and ahead of national levels as well.  And for the poorly performing schools will the new tests that make them look even worse than before do anything to motivate educators to improve beyond what they are already doing? Could the impact be just the opposite of what was hoped for by the Common Core proponents by destroying any hope that most students will reach proficiency under the new standards?

 

On the other hand, will these results be used to argue that education funding in Pennsylvania must be boosted by 30 or 40 percent to a state average of $20,000 per pupil and districts such as Pittsburgh and Wilkinsburg to $30,000 per pupil?

 

Not a good outcome either way.

Education Funding Commission is a Distraction from Real Issues: Part I-Equity

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What is the most pressing problem with public education in Pennsylvania?  According to the teachers’ unions, the Governor, the education establishment, and their allies in the Legislature, it is inadequate and unfair funding of schools.  The same argument that has been made for decades.  And recently arrived is yet another commission report offering more schemes to solve the purported funding issues.

 

This comes against the backdrop of National Association of Educational Progress (NAEP) 2013 statistics that show Pennsylvania’s overall academic achievement record through 8th grade stacks up well nationally—beating the national averages handily and certainly far from the disaster some portray it to be in order to justify large increases in funding. The record is somewhat better for white students (ranked 7th highest among the 50 states in 8th grade reading and math) than black students (ranked 14th in 8th grade math and 15th in fourth grade reading).  Unfortunately, the NAEP reports 12th grade results for only a handful of states so it is not possible to do a similar comparison of Pennsylvania with other states for high school seniors. This could be an area of concern given the tendency in many districts for achievement scores to drop in the higher grades relative to those in elementary schools.

 

But returning to the original question posed above, the correct answer to “what is the most pressing problem with public education,” is simple. To wit, it is the ongoing miserable failure of many school districts to educate children to anything approaching an acceptable level of competence despite expenditures per student far above the state average. And we know this because there are school districts in Pennsylvania that spend at or below the state average per pupil ($15,019) and yet have high schools that rank among the top schools in the state on academic achievement (Peters, Hampton, and Pine-Richland are prime examples). Thus, spending levels alone cannot be the answer.

 

And what else do we know to be true?  Top ranked academic performance districts compared to very poor performing districts with well above average per student outlays  receive a relative pittance in state funding compared to the amounts received by those poorly performing districts. Data to illustrate this truth are shown below.

 

The question then arises: what educational metric, other than achievement test scores, is most different between high schools with excellent performance in the low spending districts and high schools with abject performance failure in high spending districts?   The answer: absenteeism, especially in high schools. Not teacher qualifications, not the absence of free breakfasts or free lunches, not the absence of remedial programs, not the lack of access to resources, not lack of special programs. Absenteeism is a huge difference. There might be other corollary measures but absenteeism is a place to start because it serves as a proxy for a lack of interest in, and commitment to, becoming educated.

 

Part II of this Brief, to be released shortly, will provide an empirical demonstration of the correlation of high absenteeism and extremely poor academic achievement.

 

Back to the questions of funding adequacy and fairness.  Consider the following data. The ten lowest  ranked school systems based on academic achievement in the 2013-2014 school year include in order, Duquesne, Wilkinsburg, Sto-Rox, Chester-Upland, Steelton Highspire, Aliquippa, Clairton, Greater Johnstown, Farrell, and Reading.

 

Using PA Department of Education data we find that in the 2013-2014 these ten failing districts had average (non-weighted) revenue per student of $16,684 of which $10,562 came from state funding, $4,545 was raised locally and $1,186 came from Federal sources. Other sources such as debt issues and private gifts make up the small remaining amount of funding. Bear in mind that average total spending per student in Pennsylvania was $15,019.

 

Within this group of poorest performing districts, Duquesne led with $25,603 in total revenue per student; $20,310 came from the state and $1,534 from Federal sources. And yet Duquesne, despite this enormous revenue, was the lowest ranked district academically. Chester-Upland, Farrell, and Clairton each received more than $10,000 per pupil from the state. None of the ten received less than $7,000 per student from the state with six of the remaining districts getting $8,000 to $9,400.

 

By contrast, the top ten ranked districts (Unionville–Chadds Ford, South Fayette, Rose Tree, Lower Merion, Radnor, Tredyffrin East Town, Garnet Valley, Lower Moreland, Mars, and Mt. Lebanon) had average revenue of $17,767 per student—excluding Lower Merion where local funding is so high that it distorts the total revenue of the group. Interestingly, the nine districts received an average of only $2,935 per student from the state, raised $14,603 from local taxpayers, and got $169 from Federal sources and $62 from other.  Lower Merion raised $24,019 per student from local taxpayers and stands as the premier example of funding inequity for those who push the inequitable school funding issue. They might want to ask the teachers in Lower Merion if they would like to see that $24,000 number cut sharply and along with it teacher compensation.

 

In short, the weakest performing districts received 3.6 times ($10,562/$2,935) more per student funding from state aid than the highest ranked districts.  Meanwhile, the lowest ranked districts received nine times more in Federal money per student than the top ranked districts.  Someone needs to explain how districts like Wilkinsburg, with its $23,437 per pupil revenue, can have the second worst academic performance in the state—and more generally why so many districts with huge amounts of revenue, with much of it from the state, are unable to deliver something approximating even a bare minimum level of academic proficiency. The key question we ought to be asking is: how likely is it that even more state dollars will turn the situation around in the high spending districts in the bottom tier of performers in light of the countless programs that have been tried and found to be ineffective over the decades?  Maybe something new and dramatic such as vouchers would be a better plan. But that is unlikely as long as funding can be kept in the forefront of needed policy changes by education lobbyists as being the critical issue.

 

Here is another problem for the funding reformers to deal with. The ability of well-off districts such as Lower Merion and others to raise easily vast amounts of money for education creates a distortion in the school funding picture compared to the funding levels in most districts. Does the Legislature plan to tell these rich districts that they will not be permitted to raise so much money for education? Unless that happens the argument that Pennsylvania is not providing enough state funding will never go away.

 

What we know from the facts as opposed to rhetoric is that the state’s taxpayers are spending enormous sums of money on failing schools that are not getting better, while very good schools are raising the lion’s share of their funds locally.

 

Tinkering with the funding formula will not solve what ails Pennsylvania education.

Wilkinsburg: Poster Child for Failures of the PA Education System

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Last November the superintendent of the Wilkinsburg School District was complaining that poor education performance was closely tied to a lack of resources (see Policy Brief, Volume 14, Number 56). This argument has been made by so many defenders of poorly performing school districts that it has become a mantra despite the fact that in the case of Wilkinsburg, as well as other underperforming districts, it is simply not true.

 

In a recent news report concerning the Wilkinsburg superintendent’s effort to get another school district to take his 7-12th grade students, it was revealed that the Wilkinsburg District spends $27 million per year. Of that, $5.3 million goes to cover the 343 students who are attending charter schools and the rest to cover the 835 students in the District run schools. That means the charter students cost the district $15,450 per pupil while the students in the District managed schools cost $26,000 per pupil. Yet some still argue the charters are crippling the District financially. In either case, the cost per pupil should be more than enough to educate the children.

 

However, the School Performance Profile data reveal an unmitigated disaster is occurring as far as educational achievement is concerned.   The latest scores for Wilkinsburg high school students show only 8.6 percent to be proficient in math, 13.3 percent proficient in reading and none proficient in science. Notwithstanding these deplorable figures, 62 percent of the cohort who started 9th grade together will graduate.

 

Is the dreadful academic performance due to having poor quality teachers?  Not according to the PA Education Department’s evaluation procedure that shows 93.5 percent of classes are being taught by highly qualified teachers. Of course, this is the same Education Department that says 56 percent of the 11th grade students were making progress in science (in the Department’s terminology, “meeting annual growth expectations”).

 

In the Education Department’s academic scoring scheme, the “meeting expectations” metric accounts for the bulk of the school’s academic score points. Sadly, this is just one example of how the education establishment has tried to mislead the public about how bad things really are and, in so doing, has made itself an accomplice in the ongoing education debacle that characterizes far too many school districts across the state.

 

In the middle school achievement test scores were slightly above the high school results but with just 24 percent proficient in math, 34 percent proficient in reading and 15 percent in science, the middle school must also be considered a horrendous failure. This despite all the money that is being spent and having just under 99 percent of classes taught by highly qualified teachers—according to the standards used by the PA Education Department to measure qualifications.   The two elementary schools fared somewhat better but fewer than 40 percent were proficient in reading in the third grade at either school. Regrettably, this disappointing statistic means the prospects for improved educational achievement in later grades are doubtful at best.  This unpleasant truth is borne out quite clearly by what should be totally unacceptable middle and high school scores. The longer the kids are in these public schools the farther they fall behind academically.

 

The most recently published official data (2012-2013 school year) shows that 58 percent of Wilkinsburg funding came from other than local taxpayers. That means non-local tax base sources were providing $15,073 per pupil enrolled in Wilkinsburg public schools, while municipal taxpayers were providing almost $11,000.   For those levels of funding, taxpayers ought to be able to expect a far better academic performance than they are getting.

 

Trying to get other school districts to take students who are so poorly prepared is not the answer. These other districts have enough problems of their own already. What the State and the District should be doing is offering all the students who truly want to get a good education and their parents a voucher worth up to  $15,000 per year to attend the school of their choice, whether it be private or parochial. The number of school options will expand to meet the demand, especially when the student can bring $15,000 a year.

 

Interestingly, at the school meeting where the farming out of the students was being discussed, a young woman stood up and complained of having to pay for her son to attend a non-public school so he could receive a decent education.  This is the exactly the person the State and the School District should be listening to when trying to figure out what to do to improve education.  Parents with that much dedication to their children’s future should be rewarded with real help in getting their child into a decent school where learning is actually taking place on a consistent and disciplined basis. Many such parents want a lot more from schools than experience tells them they can expect from the failing public schools. Unfortunately, they are not in a position to afford the better alternatives.

 

It is far past the time for the education establishment and the pro-public school lobby that defends even the most abject failures to recognize the damage that is being done to society and the lives of thousands of children who are being denied a respectable K-12 education.  Granted, there are societal and cultural problems at play in the poor educational performance at many public schools. But that cannot be used as an excuse to deny children and parents, who value a good education as the best chance for success in life as well as personal accomplishment and self-worth, a real opportunity for an education.

 

It should be absolutely clear by now that the downward spiral of educational attainment, with its accompanying lack of skills and lowered self-esteem and motivation, are closely bound together with the other social pathologies that are truly crippling communities. It is not, as the apologists always cry, due to a lack of funding.  If money was the answer, the problems would have been solved long ago.

 

How long will Pennsylvania taxpayers tolerate this inexcusable money wasting and life ruining education- in- name- only system that continues to become worse and more intractable before they demand legislative action? Sadly, the political dynamics do not favor any significant or meaningful reform. The education establishment, including the teachers unions (with all the retirees), the principals, the superintendents, many school boards and all the lobbyists who work for them have an enormous vested interest in perpetuating the status quo. And they also have sufficient clout and political influence with enough elected officials to forestall any of the real reforms so desperately needed.  So the horror stories never get fixed, they just get worse and the taxpayers keep getting handed the bill for an intolerably poor product at the failing schools.

Another Punitive Wrinkle to Severance Tax

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In his first budget address the newly inaugurated Governor carried through with his promise to go for a severance tax on Marcellus Shale gas production.  He has proposed a five percent severance tax on the value of natural gas being pumped from the Marcellus Shale formation in Pennsylvania plus a 4.7 cent tax per thousand cubic feet (Mcf) fee.  As we outlined in previous Policy Briefs (Volume 15, Numbers 10 and 14) there are questions as to whether a net of one billion dollars in revenue will be forthcoming from the tax scheme and, just as important, whether using Marcellus tax revenue to fund huge increases in education spending without first proving the additional funds will improve education quality should be a non-starter in the General Assembly.

 

As we demonstrated in the earlier Briefs the problem is quite simple: the price of natural gas has been on a downward trend since late 2014 and does not seem to be coming back up anytime soon, with the Henry Hub price closing at $2.72 on March 23rd—38 percent lower than its trading price one year ago.  In one Brief (Volume 15, Number 10), using 2014’s unconventional well production of just under 4 billion Mcf, and the average Henry Hub price for 2014 ($4.13) and factoring the per cubic foot fee, the estimated amount generated will be about $1 billion.  However, in mid-February, that price had fallen to $2.75 and the amount realized would be around $735.5 million.  With the most recently recorded trading price at about the same level, our revenue estimate would be essentially unchanged.

 

Here it is important to note that the price used in the above calculations is the Henry Hub price as mentioned in Act 13 which is used to set the price for the impact fee schedule.  Henry Hub is a natural gas pipeline hub in Louisiana that is the national benchmark, as traded on the New York Mercantile Exchange, but it is not necessarily the price at which natural gas is sold in Pennsylvania.  Pennsylvania has its own hubs where drillers bring gas to the market. Hubs in the southwest, near Pittsburgh, such as the Dominion South, are a little closer to Henry Hub.  But for the Transco-Leidy Hub in Potter County, the selling price is much lower due to the oversupply being brought to the market and the inadequate pipeline infrastructure in moving it out to other regions.  News reports note that at the Dominion South hub, the selling price as of March 20th was $2 per Mcf, while at Transco-Leidy, the price was $1.49.

 

Of course the problem the severance tax proposal faces is that prices do in fact fluctuate.  The original announcement said the tax would be five percent of the value of gas produced. And then we learned that an updated proposal included a 4.7 cent per thousand cubic feet add on fee. And now that prices have continued to stay low and revenue forecasts are not moving higher, we are learning through the media that an updated severance tax proposal will set an arbitrary minimum gas price for tax calculation purposes at $2.97 per Mcf.  This is obviously an attempt to get more money when prices are low and add stability to revenue. But this would create a serious problem when prices are as low, or lower, than they are now.

 

Setting a minimum price near $3 per Mcf means that for producers who are getting half that price the severance tax rate would be much higher than five percent. And the flat 4.7 cents per Mcf adds to the total tax rate.  Consider a producer with a monthly volume of one million Mcf selling at a price of $1.50 per Mcf. The value of the produced gas is $1.5 million. At five percent, this producer would pay a tax of $75,000 and another $47,000 from the 4.7 cent per Mcf add-on for a total of $122,000 per month—an 8 percent tax rate.  However, with the artificial price floor of $2.97, the severance tax will be based on $2.97 million in value and this producer would pay $148,500. On top of that the company would still pay $47,000 in the per Mcf fee for a total of $195,500 in taxes that month.  That is a total tax rate of 13 percent of actual market value.  At that level, the tax becomes extremely punitive.

 

Of course, the tax paid will reduce the profit by that amount and will lower the corporate income tax somewhat but it will also lower the amount available for royalty payments and reduce the rate of return on investment.  In effect, the tax is an added cost on production.  When costs go up and cannot be passed on in prices, it hurts investment and production. The ramifications for the future of this industry in Pennsylvania need to be weighed carefully before this tax grab is even considered seriously by the Legislature.  And where is the proposal to apply the severance tax to shallow wells? Note that conventional vertical wells tapping into the Marcellus formation are also subject to the tax, but they represent a very small fraction of total production.

 

Finally, the Governor’s stated purpose for levying this tax is to use it for education. As we have shown in an earlier Brief (Volume 15, Number 14) adding dollars to education spending without demonstrating how they will improve education is folly. For the most part, advocacy for more money is special interest pleading by the education establishment that cares little or not at all about cost management.  There is never a willingness to entertain significant reforms such as ending teacher strikes or creating a voucher system that would let children get out of failing public schools. Any discussion of meaningful pension reform, a main driver of higher education costs, is met with derision.  The General Assembly should demand some concessions on these points before it considers increasing spending for education. It should also ask why some districts can achieve sterling academic results while spending well below the state average per pupil and some districts spend far more than the state average and have dreadful academic results. And it would be useful to critically review spending in other areas as well.

 

A “left leaning” think tank spokesman advocating the severance tax said that Pennsylvania is the only gas producing state with no severance tax and it is high time we had one.  Perhaps the spokesman might consider that several states do not have a personal income tax, does that mean Pennsylvania should get rid of its personal income tax? Twenty-five states have a right to work law, including important recent additions in Michigan, Indiana and Wisconsin. Should Pennsylvania not have a right to work law as well?

 

Only three states have significant numbers of teacher strikes and only eleven even allow teacher strikes. Pennsylvania for years has led the nation in teacher strikes.  Should we not outlaw teacher strikes as well? Moreover, only two states, one of which is Pennsylvania, have state owned liquor stores. Should the Commonwealth not join the 20th century and 48 other states and privatize its stores?

 

If Pennsylvania is out of  touch with  better economically performing states, it is because of its outdated laws regarding public unions, pension crises, prevailing wages, liquor stores, antiquated property assessment laws and so much more. The severance tax arguments are a red herring to take people’s minds off the real fundamental structural problems the state is beset with and cannot bring itself to deal with.  And it is also an effort to make people believe there are easy and quick fixes to the state’s financial woes that can be dumped on the backs of the Shale industry.