The economic case for a West Bench Elementary subsidy

It sounds like the Board of Education will seriously consider the RDOS proposal for a local subsidy for West Bench Elementary.  The next question is: Will West Bench residents seriously consider it?  I have heard several residents say that they have absolutely no interest in paying a new tax.  I am certainly sympathetic to this view.  After all, my own kids are past the elementary age and the fate of the school is no longer my problem.  But I think this view misrepresents our true situation.  Our choice is not between business as usual and a new tax.  Rather, our choice is between one significant cost and another.  On March 30, 2016—the day the Board of Education voted to close West Bench Elementary—every house in the West Bench Elementary catchment lost value.  Exactly how much value is a question we return to below, but the point is:  We have all incurred a significant loss in the value of our most important asset.  This damage has been done.  The question is what to do about it?

The purpose of the proposed subsidy is to reverse SD67’s decision.  The idea is simple: we incur one type of cost (a new tax) to avoid another (a loss in property value).  As I see it, the merit of this proposal has little to do with the nurturing learning environments in small schools, a sense of community, aboriginal education, physical fitness, moonbeams and unicorns, or anything else.  Rather, the merit of the proposal rests on the hard bedrock of self-interest and pure economic rationality.  This economic rationality argument applies to every property owner, not just those with school-aged children.

We know how much the subsidy will cost: roughly $220 on average per year per household.  The critical question is how much do we avoid losing in property value if we agree to pay this tax?  The problem with “property value” arguments is that they can be used by almost anyone to justify almost any scheme.  Fortunately, the relationship between real estate and schools qualifies as a bona fide obsession in the United States and many serious empirical studies have set out to quantify the impact of schools on property values.  I took a few moments over the weekend to glance at this research and the results surprised me.

Consider the literature review provided by economist Stephen Machin1.  Such summaries are a useful starting point because they make it harder to cherry-pick this or that study to support a particular point of view.

The take-away here is not the details.  After all, we are talking in our case about school closure, not school quality.  The take-away, as I see it, is simply this: Neighborhood schools appear to impact property values.  These effects appear across a range of studies using different methodologies and across a range of geographical locations.  Many of us have already assumed this, but it is another thing to see this intuition appear in housing price data.

The literature on school closures is a bit sparser.  But I did find one recent study that has some interesting parallels to our own case.  The school was a “laboratory” school run by a university in Iowa.  The university no longer needed the laboratory school for its own research and teacher training purposes so decided to close it.  Proponents of the school had a difficult time making an educational argument in favor of keeping the school open.  The laboratory school was in a residential neighborhood already adequately served by the Cedar Falls public school system.  Moreover, although the laboratory school was seen by parents in the neighborhood as an important amenity, the school performed no better on standardized academic measures than adjacent public schools.

So what happened when the school closed?  According to the analysis by Hans Isakson et al.2:

We find that the closure of [the laboratory school] had a negative effect on house prices within the attendance zone.  Depending on model specification, the school’s closure reduced house values by 6.8% to 7.2%, or between $8,981 and $9,509 (2006$) at the mean house value.

Of course, this needs to be translated to our own case before we draw too many conclusions.  Average house values on the West Bench are higher than the $132K in Cedar Falls.  However, as noted previously, Americans appear to be more sensitive to local schools than Canadians when buying real estate (I don’t know this, but it is a conservative assumption).  So let's say this:

  • The size of the effect in housing prices will be only -2% (less than a third of the lower-bound estimate from the Cedar Falls case)
  • The market value of your property is currently $300K (it may be higher or lower)
  • The decision to close West Bench Elementary School has thus cost you about $6,000.

 

Now, let’s say we can reverse the closure decision by paying a subsidy:

  • The average per-household cost of the subsidy is $220/year
  • The subsidy will run for 10 years, at which point enrollments at West Bench Elementary will have rebounded and the subsidy phased out.
  • Ignoring the time value of money and inflation, your cost of the subsidy is $2,200.

 

A subsidy to prevent West Bench Elementary from closing thus strikes me as a fairly simple decision.  Even with some conservative assumptions, we stand to lose far less by paying to keep the school open than we do by letting in close.  Critically: losing nothing is not in the mix.  Since the Board of Education’s decision on 30 March, 2016, there is no scenario where residents of the West Bench Elementary catchment avoid both a tax and a loss in property value.

Questions and comments are welcome.

 


1. Stephen Machin, Houses and schools: Valuation of school quality through the housing market, Labour Economics, Volume 18, Issue 6, December 2011, Pages 723-729, ISSN 0927-5371, http://dx.doi.org/10.1016/j.labeco.2011.05.005. (http://www.sciencedirect.com/science/article/pii/S0927537111000601)

2. Available online here: http://www.huichawaii.org/assets/isakson,-hans---et-al---2015-ahse-huic.pdf

Comments

Hi Mike,
While I am in agreement with the concept of the tax if it will keep WBE open, I think there is an aspect of the argument that needs to be thought through as I think it will come up amongst the opponents to this. The tax cost is real but the property value loss is only real if you are selling your property. It could also be argued that the decreased property value has a benefit in lower property taxes.

Other thoughts:
- Having a timeline for when enrollment declines will turn around, and a clear explanation of how that would trigger a cessation of the tax would be important in getting votes off the fence.
- If the motion to close is rescinded while we go through the process and it ends up in a no vote, it could possibly delay the closure process to the point where we have bought ourselves another year.
- Are we proposing this on a the economics or on the point of process, i.e, the fact that other schools with a grant were excluded?

Thanks for the meaty comments Brian, here are some responses off the top of my head:

The tax cost is real but the property value loss is only real if you are selling your property.

Many people assume that older West Bench residents are the mostly likely to be opposed to a new tax.  Ironically, the property value issue impacts older residents most because they are more likely to be selling en masse in the coming decade.  By doing so they convert a theoretical paper loss into a realized loss.

The research shows a more or less instantaneous drop in property values after a school closure. It is reasonable to expect the drop to disappear over time as people forget there was ever a school there.  The question is whether baby boomers (the oldest of whom are 71 years old) want to wait that long to to sell.  My parents got out of their too-big West Bench house last summer.  Just in time.

It could also be argued that the decreased property value has a benefit in lower property taxes.

Lower assessments do not necessarily mean lower property taxes.  By way of background: The RDOS calculates the cost of running Area F services and divides that cost among participating properties. For most services the share a property pays is determined by its assessed value.  So if everyone's assessment goes up or down, the shares remain roughly unchanged (and thus the tax burden remains unchanged).  Having said this, a drop in assessed values on the West Bench would mean a tax savings for regional services (our assessments would drop relative to Naramata and Kaleden, for example, so their shares would climb relative to ours). But these regional expenses don't actually cost that much (see more on taxes here).

Having a timeline for when enrollment declines will turn around, and a clear explanation of how that would trigger a cessation of the tax would be important in getting votes off the fence.

I am not sure anyone can provide a credible timeline.  In my initial proposal I suggested a five year renewable term with exit conditions for both parties.  We take a look in five years and determine whether (a) things are turning around for our school or (b) the situation is increasingly futile.  No one can predict that now.  The inescapable fact is that we have gone through an unprecedented period of demographic stagnation in the Penticton area.  I am not sure whether this is just a blip caused by several massive economic shocks or is the new normal. The fact that other Okanagan municipalities such as Lake Country and West Kelowna have grown aggressively suggests that policy can play a role.

If the motion to close is rescinded while we go through the process and it ends up in a no vote, it could possibly delay the closure process to the point where we have bought ourselves another year.

Yes, it will take until next year no matter what because the RDOS did not budget for this subsidy in 2016.  We can only spend what we said we would spend (and have permission to spend).  SD67 may, of course, request back payment of the 2016 subsidy.  This would hurt a little bit.

Are we proposing this on a the economics or on the point of process, i.e, the fact that other schools with a grant were excluded?

Both. the primary argument in favor of the Board of Education accepting the proposal is that SD67 did not consider other rural schools for closure because of ~$150K grants.  We would expect the same treatment obviously.  Such grants helps the Board of Education solve a fairness issue on their end (specifically: why should the school district be subsidizing rural schools out of its operating funds).

The primary argument in favor of West Bench residents accepting the proposal is, I think, primarily economic.

Both the Board of Education and West Bench residents have to buy into this plan before it goes anywhere.  In the absence of such support the grant proposal will simply go away.

That is very valuable info and discussion for our community. Is there any plan to email out a letter about it to everyone?

The Board of Education has not yet said that it would keep West Bench Elementary open if we could match the Naramata and Kaleden grants.  Until they do there is little point in in formal public consultation with West Bench residents.  If SD67 accepts the proposal then we will switch gears. There will be the normal public consultation process (including media coverage) around assent for the new tax.

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