Response To Provo Daily Herald Editorial on October 29th
My response to your Provo Daily Herald Editorial on October 29th is an individual response since you called me out by name.
I appreciate that other CPAs are starting to get involved in the Orem school district issue. On July 12, 2022, I made an offer to Stronger Together’s Treasurer. The offer was to bring financial experts together, from both sides of the Orem school district issue, to come up with agreed upon numbers that Orem residents could rely upon. During my staff appointment at the Joint Committee on Taxation, United States Congress, during our last financial crisis, my role was to help bring parties together from the House and Senate, both Democrats and Republicans, to solve problems. This is what should have happened in Orem too. However, even after following up with Stronger Together multiple times, that offer was never accepted. Additionally, I even approached one of your firms for a review engagement on August 25, 2022, but that review was declined due to “being neck deep in our work this fall”. While your recent emergence is welcome, doing so only ten days before the election, and after ballots were cast was both too little and too late.
I agree with your suggestion of having a formal meeting with ASD Business Services might have been helpful, but that did not happen because ASD did not want that meeting to happen. This is the same pattern that ASD Business Services used with DEC who was hired to perform the Feasibility Study. Let me explain what I did do to engage with ASD Business Services. I attended a two-hour April meeting at the ASD District Office that Rob Smith was supposed to attend, but he failed to do so, he also failed to send a representative from his 28-person Business Services group, and he also failed to reschedule, despite requests to do so. I also attended, and spoke on financial matters, at two different ASD Board meetings in August and September, where I was greeted by numerous members of the Board and other Assistant Superintendents. Rob Smith was present at both of those Board meetings, but never asked for a meeting. I also traded numerous emails with Rob Smith about the budget and other financial matters were discussed. I also had several informal meetings with a member of the ASD Business services team where ASD’s Orem estimates were discussed. I also extensively reviewed ASD’s flawed calculations, which have been revised based on errors revealed to ASD based on my analysis. And I am still waiting for another ASD revised Orem estimate that a member of the Business Service’s team promised would be published over a month ago. Will ASD publish that revision before the election? I bet ASD does not release the revised estimate and admit they were wrong again. ASD is not transparent, nor do they wish to have accurate information available to the public. For example, see the slide from Rob Smiths January 5, 2018 presentation:
The most important question someone should ask when financial calculations are reviewed is whether the person reviewing the information is independent and exercises the professional skepticism required by codes of professional conduct. Did you, individually and collectively, have independence from ASD and exercise healthy skepticism in reaching your conclusions? While you met with or talked with ASD Business Services, did you corroborate their claims with relevant government agencies such as the Utah State Tax Commission, Utah County Assessor, Utah State Board of Education, or the legislative analysts at the Utah Legislature? Did you meet with the Utah Taxpayers Association, which noted the deficiencies in both ASD’s Orem estimates, and called Stronger Together’s tax claims patently false? Did you reach out to our CPA group to review the veracity of our claims—which have been acknowledged through ASD by revising their estimates based on mistakes we pointed out, and other independent parties? The PCAOB says professional skepticism is defined as: “Due professional care requires the auditor to exercise professional skepticism. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.” See the following articles on the need for professional skepticism:
You claim that the Orem Feasibility Study was flawed. Did you do your own analysis of this claim? Did you speak with either Dr. Paul McCarty or Michael Wankier, CPA, who performed the Feasibility Study? No, you did not. I know because I confirmed this by asking them whether you had contacted them and met them. If you contacted them for a meeting, and they rejected the meeting, that might be understandable, but you did not even go to the effort to meet with them, nor did you offer any evidence that you reviewed the Feasibility Study. That is not being professionally skeptical as required of CPAs.
I do not believe you are independent, nor did you exercise sufficient professional skepticism in the analysis used to reach your conclusions. For example, your leader has a financial relationship with ASD’s auditor, one can assume that independence might be impaired. Two of your group members made prior financial contributions to a registered Utah Political Issue Committee fighting against Proposition 2, which also suggests that you are not independent. How many of you have clients that have financial relationships with ASD that might impair independence? Do these relationships impair your independence on this issue?
I will point out ASD errors that you would have uncovered had you performed an independent analysis of ASD’s Orem estimates and exercised some professional skepticism as you reviewed the data and ASD’s claims.
First, let us agree on the problem. Orem schools and students do not receive equal treatment, and that Orem students are disproportionately attending seismically unsafe schools, more likely to be economically disadvantaged, and more likely to represent minority racial and ethnic groups than students from the rest of the Alpine School District. Here are links to two articles noting these issues:
ASD Split
ASD has been in discussions of splitting itself since at least 2002. In 2004, Lehi did a Feasibility Study that showed that a new Pioneer District wasn’t feasible without the tax base of the east side cities. In 2006, Orem City had Lewis, Young, Robertson do a feasibility study which said that an Orem district was feasible. In 2017, Rob Smith from ASD Business Services made a presentation stating that an Orem District was feasible. In 2022, Orem City had DEC perform a Feasibility Study also stating that Orem was once again feasible.
In 2021, the ASD Board held several meetings where they studied a split of ASD. These meetings were held a year before the Orem City Council brought up the current Orem issue. This data is likely to be more reliable because the current Orem issue wasn’t present. Here are two links to these discussions.
ASD Business Services performed some analysis showing a two- and three-way ASD split. The data for Orem and the South Area in the three-way split is very important. Page 2 contains the important metrics, a link follows:
https://drive.google.com/file/d/1eoTRjHR0O71xtfNxZ2BZnTv-XN_Madnh/view?usp=share_link
The most important metric of whether a school district is viable is the per student tax base of the district because as ASD notes:
Property tax, despite its regressive nature, is the primary tool a Board of Education has to meet local needs and “add resources” to the minimum school program set out in Utah Law and modified annually by the Utah Legislature…It is also the source of funding for Capital Plans, whether a School Board uses General Obligation Bonds for facilities or a pay as you go financing approach. The higher the property values in a school district, the higher dollar yield per .0001 (tax increment) is received by the district. As property values vary significantly in Utah, understanding this fact and its impact on state and local policy is important.
Orem ranks third in Assessed Value Per Student (among major cities) behind only Lindon and Alpine. Orem has 18.19% of students and provides 22.71% of the property taxes. More importantly, the far-right column in the analysis, FY21 Local + State rev per student, shows that Orem contributes $6,708 per student in State and local property tax revenues, third behind Lindon and Alpine—about 10% above average.
If one considers these metrics among the three “proposed” districts, the South Area which includes Lindon, Orem, and Vineyard provides metrics far above all other districts. While Lindon provides the highest per student calculations, Orem provides the largest economic base, and Vineyard has average metrics but provides for future growth. Orem and Lindon together provide a dream scenario, and no single city in the district is more ignored by ASD than Lindon. These metrics do not include expenses, but they show the revenue base is there to provide for a new district. The new School Board and Interim superintendent can determine what expenses are required for the new district.
ASD 2017 Presentation to the Orem City Council
In 2017, Rob Smith from ASD Business Services made a presentation about an Orem District to the Orem City Council. The up-front question was whether it was feasible for Orem City to create its own district. The answer was yes, and they cited the Utah Taxpayers Association as part of their analysis.
A link to Rob Smith’s 2017 ASD slides is here:
https://drive.google.com/drive/folders/1IsJY9v0WMktH_rMGkop3RiXDAnd-jMAM
ASD claimed that Orem schools annual general fund loss was $5.7M, before admitting they made a mistake and restating the Orem loss at $8.1M. Then ASD updated the analysis again claiming an $8.7M loss. See the three slides following:
ASD then includes almost all the relevant funds in their 2017 analysis: general, debt, capital, and nutrition funds. Together this shows an $4.7M loss. However, the analysis has some flaws which were pointed out by others and which ASD includes in their slides:
There were some important questions asked of ASD in 2017, which they note on the following slides. None of these concerns were addressed in 2017, and they were repeated in the 2022 analysis using 2021 data. ASD included “high cost” magnet schools, Polaris and Summit, in Orem’s expenses. This alone would almost shift the Orem loss to break even in the 2017 analysis. They underestimated the Federal revenues, which would have pushed the loss to break even. Orem has small SPED clusters which were not accounted for. Finally, the Capital and Debt funds were properly accounted for in the “contribution” analysis as will be shown next.
The single most important ASD slide presented to the Orem City Council in 2017 didn’t include the most relevant part of the analysis. Note that ASD includes some of the relevant information but fails to point out the glaringly obvious implication of this slide. Simple analysis of this ASD data shows that prior estimates may have understated the amount of Orem’s taxes used outside of Orem. This analysis shows that ASD move $178M of Debt Fund taxes outside of Orem. Spread over 20 years, this is $8.9 million per year. Look at the previous slide that showed Orem’s debt fund contribution as $1.3M. ASD intentionally understated Orem’s debt fund “contribution” by $7.6M per year. Additionally, this does not consider the Capital Fund which Rob Smith said Orem provided a net contribution of $1.9M to in 2017 (which is likely underestimated too).
All these errors and omissions would have pushed Orem into a considerable surplus in the 2017 analysis, while ASD claimed a shortfall of $4.7M. This is simply dishonest—but worse, even when pointed out ASD made the exact same “errors” in their latest analyses.
ASD 2022 Orem Calculations using 2021 Data
Before we begin the analysis of the 2021 data, let us consider one important question. How did Orem go from a claimed (but inaccurate) $4.7M loss in 2017 to $29M loss in 2021? That would have meant that Orem’s loss was almost six times its claimed loss four years earlier. Doesn’t that seem improbable? Yes, it does!
ASD originally published its estimated 2021 Orem loss of $29M on June 1, 2022. This loss included the now “famous” error where ASD didn’t properly update the State Revenues for Orem from 2017 to 2022. See the following ASD calculation which updated the ASD revenues to the correct $3,596 per student WPU amount for 2021, while keeping the Orem calculation at the 2017 WPU amount of $3,184. Shouldn’t this be a little embarrassing for educational finance experts? Yes, but what is worse than this actual error is what ASD disclosed when they provided updated 2021 calculations which will be discussed next.
The link to the original file is here:
https://drive.google.com/drive/folders/1IsJY9v0WMktH_rMGkop3RiXDAnd-jMAM
ASD fixed the estimated Orem loss by disclosing a new file located here:
https://drive.google.com/drive/folders/1IsJY9v0WMktH_rMGkop3RiXDAnd-jMAM
The biggest problem, and an important reason to be skeptical is that ASD simply “revealed” the corrected file in the Google drive. But notice the date on the “updated” file: March 9, 2022. Alternatively, open the file and examine the properties, created by Jason Sundberg (an ASD Business Services Employee) on March 9, 2022, and last modified on March 9, 2022. This means that ASD Business Services had actually calculated the correct Orem MSP (State revenues) almost 4 months before they published the “erroneous” calculation was made public. When I asked an employee of Business Services how the error occurred and why it was not corrected the answer was “they could not say”. I followed up the question of “you do not know or you cannot say” and the reply was that they “could not say”. This is the single most concerning piece of evidence that I am aware of. Without further explanation, it appears that ASD employees knowingly and fraudulently posted inaccurate data to make an Orem district look less feasible.
The 2021 calculations perpetuate all the same problems that the 2017 calculations had. Each of these problems has been pointed out to and agreed to by the new CPA group and ASD Business Services: 1) they include the Polaris and Summit expenses, 2) they don’t property calculate Orem’s Federal revenues which are known to be larger because Orem has 31% of its students categorized as Title I, while the remaining portion of the district has on 14% Title I students. Furthermore, ASD undercounts the debt fund as do you.
From your Op-Ed, your Orem Revenues were $113.7M, and your breakdown of revenues are as follows: property tax (22% of total), Federal (14% of total), and MSP (64% of total). Tabulating your results looks like the following—I have included ASD’s revised revenues and your proposed changes or differences to their work as follows:
| Total Operational Revenues: | Your Estimate | ASD Estimate | Difference | ||
| Property Tax | 22% | $25,014,000 | $28,379,204 | ($3,365,204) | |
| Federal | 14% | $15,918,000 | $9,507,053 | $6,410,947 | |
| Other Local | 0% | $0 | $1,831,565 | ($1,831,565) | |
| State | 64% | $72,768,000 | $71,142,036 | $1,625,964 | |
| $113,700,000 | $110,859,858 |
State Revenues
State revenues are exogenous to the school district. Your claim that State revenues phase out as property taxes increase is only absolutely true for the Basic Levy, the phase out works differently for the Voted Local and Voted Board levies. The calculation of the Basic levy depends on the Adjusted Assessed Valuation. ASD’s calculation has the FY2021 Orem valuation at $8.024B.
The FY2021 Orem valuation is based on the 2020 valuation. The Utah State Tax Commission Certified Tax Rate website is used to calculate taxable values for property tax purposes. The 2020 Orem City Proposed Taxable Value is $6.124B, and the Total Adjusted Value is $6.538B. Even the 2021 Orem City Proposed Taxable Value is $7.082B, and the Total Adjusted Value is $7.539B. This means that ASD’s Orem valuation is wrong and phases out MSP revenues of $2.6M. Meeting with the Utah County Assessor would have led you to uncover that ASD has used the wrong tax base for their Orem calculations, as pointed out by our group and the Utah Taxpayers Association. Using the correct Orem tax base would have led to a material increase in Orem’s MSP calculations which could have been verified by a call to the Utah State Board of Education as well. Your failure to follow basic accounting protocol and corroborate evidence led to a significant error in your analyses.
Additionally, using ASD’s demographic and tax revenue split calculation the per student taxable valuation is $461,434 multiplied by 14,663 students is only $6.76B, so anyway you calculate the Orem base used by ASD is wrong and overstated, which phases out several million dollars of state revenues.
Your MSP projection is $1.6M above ASD’s projection, but still should be increased by $1M for the taxable value correction discussed above.
Federal Revenues
Your Federal revenue projections are $6.4M above ASD’s projection. Your scenario is likely because Title I and Medicaid funds are directed more towards students on the free and reduced lunch plans, where 31% of Orem students qualify. Your funding is also approximately equal to Provo School District on a per student basis, and Orem and Provo have similar percentages of economically disadvantaged students.
Property Tax Revenues
Your property tax revenues are $3.4M below ASD’s calculation of $28.4M. Using the Utah State Tax Commission Certified Tax Rate calculation Orem’s share would be $30.1M to the general fund less tax increment financing. Let’s assume that ASD’s calculation is correct, your revenues should be adjusted upward by $3.4M.
Other Local Revenue
You didn’t include other local revenues of $1.6M, after excluding the non-K-12 revenues. ASD and I agree on this amount. So, your revenues should be increased by $1.6M.
In total, your revenues are $8M above ASD after correcting for State MSP and Federal revenues.
Fund Accounting
You were right to note the importance of fund accounting, but then you do not actually follow fund accounting in your analysis and discussion. For example, you failed to exclude the non-major Fund 23 issue inclusion. All prior Feasibility Studies done in Utah, including the one done by Rob Smith of ASD, include all three major funds, the General, Capital, and Debt funds in the analysis. However, you made only a partial adjustment for the Debt fund and passed on adjusting for the Capital fund. Additionally, the fund analysis should either include, or exclude, all the non-major funds. You failed to excluded the Fund-23, non-K-12 fund, that ASD included in the analysis, but didn’t include any of the other non-major funds. In 2017, ASD included all the non-major funds. For a complete analysis, you must either include only the major funds, or exclude all the funds, neither of which was done in your review of ASD’s analysis.
2017, ASD admitted that an Orem school district if feasible, and cited the Utah Taxpayers Association, as part of ASD’s analysis.
Your Capital fund analysis is also wrong. Orem currently contributes significantly more to the capita levy than the $3.85M you state. Additionally, if you look at ASD’s MSP calculation, or financial statements, you will note that there are significant State and Federal contributions to this fund. So, while you pass on adjusting for a Capital Fund adjustment you are likely understating Orem’s contributions by $3-4M per year.
Other Adjustments
While we agree on most of the revenues and expenses, and that Orem schools are aging and have been neglected by ASD failing to perform $82.5M of deferred maintenance between 2016 and 2021 (see Lehi Free Press article). While there is judgment in accounting estimates, we note that you didn’t correct for the following mistakes, errors, or omissions that were pointed out including: the inclusion of the non-major fund (non-K-12 expenses), miscalculation of Orem’s property tax base which affects MSP revenues, and miscalculations of the Capital and Debt fund taxes and Orem’s share of these amounts, as well as State and Federal contributions to the capital fund.
Your analysis also ignores several other important adjustments: 1) the cost savings from closure of Geneva, which is calculated at $1.4M per year, 2) the cash proceeds of $5.2M for the sale of Hillcrest and $9M for the sale of the Polaris, 3) busing overhead costs allocated to Orem well beyond what Orem consumes.
AAA Bond Rating
ASD likes to tout its AAA Bond rating, which is a nice accomplishment. However, this ignores the Utah State School Bond Guarantee Program which “provides the qualifying school district bonds with the state’s top, AAA credit rating.” That means every school district in the state gets funding at the AAA bond rating level.
Additionally, why does ASD keep issuing Lease Revenue Bonds at substantially higher rates than general obligation bonds? Could it be because ASD hasn’t controlled costs of the 2016 Bond and had to resort to Lease Revenue Bonds ($82M of them since 2018) to complete the promises it made to the public? See the 2021 Comprehensive Financial Statement for the projects built with these bonds—including the West Transportation hub.
$595M 2022 Bond
Your analysis also ignores the elephant in the room. ASD’s $595M bond is the
largest school bond proposal in Utah history. This bond will cost Orem $116M of principal and likely $200M with interest. Orem has named projects in the bond that would return a paltry $15M to Orem. This bond is the primary reason that this decision should be made now, before Orem accepts responsibility for the loss of another $100M to other cities.
When ASD forecast the bond in August, they used a 4% interest rate, which was appropriate and perhaps even conservative at the time. However, the Fed has raised interest rates at “six straight meetings, something it hasn’t done since 2005.”
Do you think they will even issue the first tranche at 4%, it is highly unlikely. Look at rates today (3.9%) and expect one or two Fed meetings before the bonds will be issued.
https://www.fmsbonds.com/market-yields/
Did you consider Orem’s return on the 2022 bond? Orem has two disclosed projects as part of the 2022 bond—two multi-purpose rooms (gyms) that are at Orem and Timpanogos High Schools in phases 3 and 4 of the bond. Given that ASD went 31% over budget on the 2016 bond during more stable economic times, what is the likelihood of any money being left for these superfluous projects at the end of the proposed bond? An even better question is whether any rational Orem taxpayer would choose to build third gyms at these schools over fixing the seismic issues at Sharon and Windsor elementary schools (Title I schools). Has ASD answered why they replaced Cascade Elementary (non-Title I school) that sits in a more affluent neighborhood while two Title I schools with more significant seismic issues sit un-remediated. I have not seen an appropriate response since this issue was addressed by DEC during July—because there is no appropriate response for this awful decision making that favors the rich over the poor.
Proposition 2 would avoid Orem taxpayers for being liable for another massive wealth transfer. This would add to the $174M that has already left in Orem in the last 20 years.
Orem Enrollments
Orem has enrollments that are declining slightly, but this is largely due to the fact that one in six school age children within Orem are pursuing educational opportunities outside of Alpine School District schools. See today’s KSL article as a reference:
https://www.ksl.com/article/50509479/why-is-enrollment-declining-in-many-utah-school-districts
This is corroborated by ASD’s showing that 13% of Orem students do not attend ASD schools. However, if you look at Lindon and Vineyard charter schools that have 29% and 40% of students in Charter Schools, it is not hard to believe that many of these students are Orem students.
https://drive.google.com/drive/folders/1jEnKJ3qZ_id03zeq1XsThwh4fYigtaPz
You claim that Orem has declining enrollments which prevents funding our schools. However, you fail to understand basic economics. If the number of Orem’s students are going down, and Orem’s taxable property base is going up (which it is), that means there is more money per student—which is why the Utah Taxpayers Association and the academic literature focus on the property tax base per student. It is just basic economics and common sense.
Administrative Costs
Stronger Together keeps mentioning economies of scale in school administrative costs. Most school districts are well established and have significant legacy costs. School districts, like other governmental entities, have less incentives than private, for-profit entities to contain and control costs. I have had numerous conversations with Provo and other school district administrators about creating a new district. The Feasibility Study also identifies many places where cost savings at the administrative level can be achieved. Yes, city school districts in Utah have higher administrative costs than Alpine. But there is nothing special about a single, versus multi-, city districts. A new School Board and Interim Superintendent would be wise to look to Cache County schools. While not a new district, it has experienced significant growth in the last decade or two and they know how to contain administration costs. Cache schools have a per student spend of $650 annually, while ASD has a per student spend of $831. Cache schools have 19,554 students, and administrative costs of $13M. The Feasibility Study includes $21M of administrative costs for an Orem District, which is less than Provo, but substantially more than Cache schools. Perhaps we need to take a fresh look at what it actually takes to run a district. Compare the number of, and salaries of, ASD’s top administrators to Provo and Cache and then let us have another conversation. For example, the ASD Business Services director, Rob Smith, made $232,104 in 2021 ($328,924 including benefits) before a 4 percent raise. In comparison, the Provo District Business Services director made $136,754 in 2021 ($188,503 including benefits). Executives at larger districts have outsized compensation packages.
Link: https://utahtaxpayers.org/school-spending-report/
Start-Up Costs
We keep hearing about the Jordan/Canyons split costs. Yes, they were $59M (see copy below). But let us break these costs down to see which were split costs versus capital costs. Also, remember that the legal costs should be substantially lower because the Utah State Legislature overhauled UCA 53G in response to the tactics used by Jordan during the split. Canyon split costs were $6.1M, this was for a district twice as large as Orem, and without the protections offered under UCA 53G.
Jordan also stuffed these costs with capital expenditures to make it look destitute. The Salt Lake County Commissioners then created an equalization program to help poor destitute Jordan School District. Capital expenditures include (see list below): District office improvements ($3.8M), District office rent ($1.5M—an operating cost), District office purchase ($9.2M), ASB office improvements ($13.5M), ASB Office Rent ($1.7M), ASB office purchase ($15.3M), and Transportation improvements ($2M). That is $46.7M of capital improvements and rents which are not split costs. Contrary to the narrative, the Feasibility Study provided sufficient expenditures to cover actual split costs that are necessary.
Net Contribution
My calculation is a net contribution calculation rather than a net income calculation. ASD and Stronger Together claim that Orem schools are being subsidized by ASD. This requires a net contribution analysis, rather than net income calculation. While you are correct that Orem would be responsible for paying off old debts when it leaves ASD (which is just more contributions by Orem taxpayers to ASD), you didn’t answer the correct question which ASD addressed to the Orem City Council clear back in 2017:
Feasibility Study
Feasibility Study looks forward, not backwards. You, like ASD, uses FY2021 numbers, while the Feasibility Study looks forward to project what an Orem District would look like. So their tax forecasts are based on future revenues and expenses and the current tax base, while Stronger Together used the 2020 tax base “for consistency”. In fact, Stronger Together’s Treasurer questioned why the tax base was even relevant in correspondence—which demonstrates a lack of awareness and competence.
I believe we all want the same things, what is best for Orem’s school children. What will help us get there is if we get correct information for all to consider—not biased, missing, and wrong information. With good data, we are more likely to make better decisions. I have offered numerous times to work with ASD, Stronger Together, and others to get the data right. I extend the same invitation to do so again, because the current information you and others are discussing is wrong and continuing to push these false data narratives is dishonest and unethical. Sometimes we must take a risk, trading something that is good for something that is better.
John Barrick, PhD and CPA