Sunday, June 1, 2014

The Problem with Schools and Housing Supply

In an earlier post, I discussed how the population of young adults and young children is rapidly declining in the wealthy suburbs of New York City, a trend previously noted by the New York Times.  Although I alluded to high housing costs being an important factor in these changing trends, I failed to mention an absolutely crucial element that is driving much of the opposition to increasing housing supply: school funding. This factor is so important that is helps explain not only regional patterns in the New York area, but the NIMBY attitudes prevalent throughout much of the United States that have been so heavily covered in recent books and articles.

While it's often pointed out that the American system for education funding creates great disparities both between states and among school districts within states, what's less often noted is that the same locally-slanted funding system greatly contributes to and reinforces opposition to increasing housing supply. A glance at the particulars of the funding system makes it immediately obvious why this should be the case. Crunching the numbers for the city of Rye, in Westchester County, the Zoning Plan blog estimates that:
"While it’s true, higher assessments on large new homes provide more school tax revenue, there’s reason to believe high assessments may also increase turnover and that this, in turn, creates a larger school tax deficit. ... [A] large home assessed at $50,000 has more than double the cumulative school tax deficit of a smaller home assessed at $25,000."
I can't vouch for the accuracy of these particular figures, but there's no doubt that the typical state's funding system, which places around 44% of the cost of funding local schools directly onto homeowners through local property taxes, punishes those jurisdictions that choose to increase their residential housing supply, and in particular the type of housing supply that is aimed at families with children.* The town that adds additional homes of this type has two basic options: either increase the tax burden on existing residents, with no improvement in the quality of education, or keep taxes constant while letting school quality decline.

The quoted blog is particularly interesting in how it illustrates how opposition to demolition of smaller homes, and their replacement with so-called McMansions, is linked to concerns about school-related property taxes. The site puts its bluntly: "We don’t want to be told we can’t replace a three bedroom, senior-friendly ranch, with a five bedroom, family-friendly colonial, but then, why should neighbors pay more school taxes and endure class-overcrowding when [school] enrollment increases?"

The blog suggests the common-sense solution of increasing the proportion of child-free households by constructing much smaller single-family homes to retain empty-nesters, something I've advocated previously.  In most American towns, however, and certainly in the elite suburbs of Westchester and Fairfield County, such a recommendation is likely to be met with intense hostility. Multifamily residential is even less welcome, and non-residential uses are feared as nuisances and traffic generators. Faced with the threat of larger homes bringing increased taxes and smaller homes portending decreased property values, the shrill NIMBY voice is raised against any project, large or small.* 

The typical American system of local school funding appears to be unique in the world, or nearly so. As psychologist Robert Slavin wrote in 1999:
"To my knowledge, the U.S. is the only nation to fund elementary and secondary education based on local wealth. Other developed countries either equalize funding or provide extra funding for individuals or groups felt to need it. In the Netherlands, for example, national funding is provided to all schools based on the number of pupils enrolled ... ."
Canada's provinces maintained a roughly analogous funding system in the not-too-distant past, but educational reforms in several provinces in the 1990s — notably in Ontario, British Columbia and Alberta — brought about a transition from joint local-provincial school funding systems to provincial-level systems. These changes also seem to have involved a shift in funding sources away from local property taxes and toward general tax revenue. In the case of Alberta, these reforms are reported to have enabled a reduction in residential education property taxes of 65%.

The heavily localized school system in the United States long predated Brown v. Board of Education and school desegregation, but incentives for localization were greatly increased with the Milliken v. Bradley decision from 1974, which endorsed political balkanization of urban areas as a means of evading desegregation mandates. In combination with exclusionary zoning codes, which the court had approved nearly 50 years earlier, self-governing municipalities were given almost every imaginable enticement and ability to restrict increases in housing supply. Since good schools, no matter what their enrollment, are associated with higher property values, the incentive is to create the best possible schools for the fewest possible students.

At worst, the result is an urban area composed of petty, squabbling fiefdoms, each groaning under the weight of local property taxes and thus resistant to the arrival of any new families, but equally resistant to conceding any revenue or authority to higher-level governments. Is it any surprise that young families are deserting these areas in large numbers, as I showed was the case in Fairfield and Westchester Counties?

Not every state has so localized a school system, however. In Fairfax County, Virginia (a state that doesn't lack for its own school funding problems and controversies), where schools are run at the county level, property taxes are half the level of Westchester, achievement is comparable or higher, and the under-5 demographic, which is in freefall in Fairfield and Westchester despite overall population increase, is growing rapidly. Similarly, in Davidson County, TN, which merged with the city of Nashville 50 years ago, the 25-35 and under-5 populations have surged.

Westchester County school administrators object that the high cost of housing in the county requires higher teacher and staff salaries, but this too is partly a consequence of restricted residential supply. The attempt to exclude families in an effort to limit property taxes increase ends up inflating housing costs, and these increased costs are shifted back onto property taxes in the form of the increased employee salaries needed to account for the cost of living. Lately, cities have attempted to shift even this consequence onto the private sector by mandating inclusionary zoning for new development to provide for city employees (typically, law enforcement, firefighters and educators) unable to afford market prices, and doing so for purportedly altruistic reasons. However, when Darien, CT, attempted to limit its own inclusionary zoning program to so-called priority populations, including town employees, it drew attention from the Department of Justice.

Policymakers haven't been blind to the perverse incentives created by localized school funding. Massachusetts' Chapter 40R, which creates incentives for towns to upzone residential land, has companion legislation providing for additional funds for cities and towns that establish such upzoned districts to cover the costs of educating children who move into those same areas. Not that it has been successful in this end, at least as of a few years ago: according to a 2009 study, "[v]ery few districts approved to date allow construction of the type of housing (modest single family "starter" homes) that would be expected to trigger payments under [the law]."  In addition, the charter school phenomenon, although far too complex a topic to delve into in any detail here, frequently involves direct state-level funding of charter schools.

Even in Connecticut, the problem has long been known and obvious solutions proposed: a report from back in 2003 observed that the state was "badly in need of regional and statewide revenue raising and land-use planning for long-term development." In Connecticut's case, as is the case for many states, this is a solution that is easier said than implemented.

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*It's an easy task to find quotes from city and state officials raising concerns with affordable housing programs on the basis that they attract young families with children, typically prefaced with the caveat that the legislator in question doesn't disapprove of children per se. A state representative from the town of Trumbull, in Connecticut:, reacting to the effects of the state's affordable housing law (the notorious Section 8-30g): "The [affordable] developments tend to have children, and children are great. But the fiscal reality is that our schools have grown considerably. We've had to build a new school in part because of our increasing population. We would have had to have built it eventually, but that [affordable housing] sped that along."

*This paranoid mindset, especially when paired with other latent biases and prejudices, can result in what I would term "NIMBY derangement syndrome," where otherwise reasonable and mild-mannered homeowners make shocking, hysterical and/or outrageous claims and allegations, usually against so-called "greedy" developers.

5 comments:

  1. "Each square foot of residential expansion generates thirty-two dollars of city tax revenue but may cost the Rye schools more than three hundred dollars."

    I don't see how that even passes the smell test. A thousand-square-foot, two bedroom apartment costs the Rye schools $300,000?! Are these lifetime costs, or something?

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    1. Alai -- the blog author shows his work here: http://zoningplan.org/2013/04/20/case-study-32000-assessed-value-2-children/

      So the ratio is more like 2-1 than 10-1. I've changed the quote to reflect that.

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  2. This is good information because it puts a numerical certainty to current building patterns in residential America.

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  3. Maybe the solution is to control school costs. Eliminate half the administrators, for a start. Then the other half. Allow more charter schools; they do a good job of cutting costs while improving education.

    Of course, Democrat politicians need unionized teachers like a vampire needs blood, so this can never happen. Our cities will go bankrupt before politicans stop getting their taxpayer-funded union campaign contributions.

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  4. Multifamily Transit Oriented Development can alleviate a tremendous amount of this burden and here are the facts (check Rutgers and UCal Berkeley): {we are not talking Affordable or Subsidized Housing}

    A) Construction Costs are high that you are forced to build premium market rate product and obtain Class "A" rents
    B) TOD's average 5% School Children per unit so imagine a 150 unit building by the train station would be 7.5 kids; however local studies have found 50% of these folks send their children to private school so the impact might be only 3.25 kids grades K-12
    C) a strange phenomenon is occurring demographically where new household formation is substantially lower than in years past; people are having less children
    D) 25-40 don't have money for down payments especially in Westchester; also make the connection on age and likelihood of kids
    E) Single family homes 54% have kids
    F) TODs residents have 50% less amount of cars

    Here is why this is really interesting: Taxes too offset the burdens on everyone else.

    150 units with 7.5 kids paying roughly $7,500 per unit (usually greater than 3x gross rent) in local property taxes (150 x $7500) = $1.125 Million in Local Property Taxes. Take that figure and divide it by the number of kids 7.5 = $150,000 in taxes per kid.

    The median home value in Rye is $1,308,200. Average taxes are $19,731 and average home size is 2,349 square feet.

    54% of single family households have kids. Taking the same number of homes and units (150), the 150 homes would pay $2.9 Million in taxes or $54,808 per kid.

    Here is where it is really interesting: $150,000 divided by $54,808 = 2.74 times greater contribution by multifamily to the taxes than single family, thereby making the greatest return on investment for the local jurisdiction.

    Although the nominal figure is higher in single family (really due to an exaggerated home price in Rye; other less affluent areas the multifamily multiple would be significantly higher)

    Nationally, data make clear that apartments put much less of a burden on local school systems than single-family homes. In addition, apartments are taxed at higher rates than single-family houses. The average property tax rate for the median-value house in urban areas across the country is 1.41 percent; for apartments, the rate is 1.83 percent. As such, apartments contribute more to the local government revenue base than single-family houses.

    For some reason when people think of multifamily as old ugly nasty brick 1940s built (right after the war because they had too) buildings, but you have great local developers who design very attractive buildings where their architects and deliver really nice Class "A" type apartments. They are not eyesores, quite the contrary, most of them fit within their local architectural context.

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