Financing education for today’s families and tomorrow’s employees

Can muni-bond investors help your firm by helping school districts perform better?

By R. Paul Herman, Srdana Pokrajac and Judi Brown

Where is your future workforce coming from? Will it be local to your company or will you need to “import” talent? Are your employees’ younger children and teens today in the best school districts?

If you live in McCall-Donnelly, ID, Beverly Hills, CA or Sanger TX, your school districts are performing quite well, according to the scoring of education-related outcomes. But if you live near San Diego CA, Chino Valley CA or Lebanon OR, then your employees’ children may not be in the most compelling learning environments, comparatively speaking.

As education discipline and culture—and the associated constructive competition—is established early in life, these are important questions to parents, but also to corporate citizens. Educational performance connects to the talent pipeline for your operations local facilities, and possibly headquarters. In addition, it is linked to the health, safety, and productivity of the cities, towns and counties you live in.

More than 91,000 elementary and secondary schools form 14,000 public-school districts. These are funded through federal and state disbursements to local school districts, and by the local entity’s taxing authority, typically cities and towns levying local property taxes. Total school funding for kindergarten through high school graduation (K-12) amounts to over $550 billion a year. The average school district’s annual per student spending is $10,658 (with highs of $40,000 per student in Loving, Texas).

K-12 school districts currently issue more than 25,000 municipal bonds to finance various capital projects. Because issuing a bond for a school district usually means increasing local property taxes in order to repay the bond, bond issue approval is sought through a public vote. Municipal bonds, primarily held by wealthy individual investors, offer tax benefit exemptions from federal and sometimes state income tax. Investors seeking to “do good” and “make money” at the same time can be well served by K-12 muni bonds, which typically are highly rated on impact outcomes (our firm HIP Investor is one provider of these ratings).

How that funding is used is an essential element of K-12 school performance that may also drive investors in those bonds. In a sample of 313 school districts covering 821 bonds, Tacoma WA rated highest, allocating 74 percent of its funding toward instruction and teaching, as well as student and staff support. Food and operations were 15 percent of the budget, and administrative expenses a mere 11 percent (versus some districts ranging up to 25 percent on admin alone). This K-12 performance is beneficial for Tacoma’s top employers like Boeing, the MultiCare and Franciscan Health Systems, and the Lewis-McCord joint military base.

In the classroom, allocation to teachers can help reduce the pupil-to-teacher ratio. Generally smaller class sizes correlate with higher educational test performance. Classrooms with 12 students (instead of 25) can yield test scores of 90 percent (a premium of 50 percent beyond the test performance trend line of 60 percent for some school districts). Graduation rates rise for high schools with strong K-8 school systems as well.

A responsible and well thought financing of the education system is important from multiple perspectives: whether through bonds or through the federal, state and local budgets, schools are financed through taxpayers’ money, and therefore, are (or should be) a major public concern. Schools also educate the future generations and the economic actors that will drive the economy and leadership of the nation forward. US pupils generally lag the student performance globally, especially in math and science performance, which is led by Asia’s Singapore, Taiwan, and Japanese students. This creates competitive advantage for those countries intellectual property and innovations of companies based there.

The “skills gap” is another concern that has recently prompted Americans to start questioning their education system. The skills gap is simply a mismatch in skills supplied and skills demanded on the market. Even though the official unemployment rate has improved since the Great Recession, companies are claiming to have many job openings (The Best Companies to Work For, published in Fortune magazine, has nearly 100,000 job openings from those growth-driven firms) for which they cannot find qualified enough candidates among the US population actively looking for a job.

Are the US schools keeping up and adequately preparing young adults to enter the workforce and can the lack of interest and low performance in math and science, compared to other fields, be attributed to lingering K-12 education?

The federal No Child Left Behind Act of 2001 promotes and supports standards-based education and aims to make education accessible to children affected by poverty and lacking opportunities to pursue more expensive, high quality education. NCLB prescribes standardized testing in reading and math and sciences. Schools have to report on the progress made in the past year and their aim is to improve until they reach ideal performance. Schools that are not capable of improving need to follow guidelines on achieving improvement. NCLB are often criticized to be standardized and uniform and not tailored to a specific community. As mentioned above, for example, not all schools manage to have the same budget – property tax revenue in poor communities is lower than in rich neighborhoods, therefore, poor communities are at a disadvantage and lack funds to improve the school amenities and quality of education offered. Schools can apply and compete for Title I funding offered by NCLB, but even this funding is limited and often not enough to bring everybody at the same level.

While traditional securities analysis determines the quality of a municipal bond obligor based primarily on financial management – and gives the bond issue a credit rating – HIP Investor has developed a different set of metrics that serve as indicators of the obligor’s ability to deliver outcomes and results that are pertinent to its mission and purpose of operation. In relation to municipal bonds, for example, HIP Investor scores obligors according to their ability to deliver the expected results in educating students. Therefore, metrics that analyze the performance of schools and school districts as mandated by the NCBL are appropriately weighted and included in the whole score, and so are metrics such as pupil-to-teacher ratio and the graduation rate.

Funding and expenditures per student are also included in the final HIP score, and so are board gender and ethnic diversity. Higher scores are earned by schools and school districts that have a good match between the diversity of the student body and its governance. At HIP, a school district that has high ethnical and gender diversity when it comes to students and their parents will be better governed by a similar ethnical and gender structure of its board or teachers because that the needs and perspectives of students will be better understood by someone who comes from a similar cultural background.

What does this mean for corporate leaders, especially responsible companies? Investing time, attention and possibly public-private partnership funding in your local K-12 school district can benefit your current employees’ families today, but also could lead to a stronger pipeline of your future workforce and the supporting supply chain ecosystem, benefiting your talent, your company and society.

(R. Paul Herman is President of HIP Investor Ratings LLC, as well as CEO and registered representative of investment adviser HIP Investor Inc. Srdana Pokrajac is an advisor to HIP Investor. Judi Brown MPA is an analyst at HIP. This is not an offer of securities. Disclosures can be found at www.HIPinvestor.com )

Posted December 16, 2014 in 25115