Usually this column is devoted to how we invest our personal savings to meet long-term goals such as retirement and college education. This week we’re going to take a brief look at how we invest our public dollars in North Carolina. My attention was distracted from mutual funds and portfolio managers by two recent developments.
As the new school year begins, it is evident that most school districts in North Carolina are being forced to use “permanent” substitutes to fill vacant positions and are suffering the ill effects of losing too many veteran teachers. At the same time, there are growing calls from economic development officials across the state for the governor to call a special session of the General Assembly. These officials aren’t worried about the state of our educational system. They’re upset that the General Assembly failed to pass legislation extending a variety of economic development programs.
Although the General Assembly managed to push through a salary increase for teachers, it did little to stop the high level of turnover among our education professionals. While starting salaries got a big boost, the salaries of experienced teachers failed to keep pace with inflation. Meanwhile funding for textbooks continued to plummet. Five years ago, North Carolina was spending more than $111 million, or about $76 per student. Today we’re spending $23.3 million or $15 per student.
As a result, some teachers in Brunswick County are headed across the border to Horry County, S.C., where they can make $10,000-$12,000 more per year. Chapel Hill High School reported a 20 percent vacancy rate at the beginning of the school year. And Houston reported that 10 percent of its new teachers came from North Carolina. It would take a new teacher in North Carolina roughly 20 years to earn the starting salary in Houston.
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As investors, we’re rightfully concerned when we see a lot of turnover among the portfolio managers and analysts at a mutual fund. In the world of investing, there’s tremendous value in retaining investment professionals and in mentoring newly minted MBAs. In fact, savvy investors tend to shun money managers who can’t retain their investment teams. Similarly, portfolio managers tend to steer away from investing in companies that churn through key personnel. Some hedge funds make a practice of shorting the stocks of companies with personnel woes.
When it comes to public education, similar principles apply. The quality of education is sure to suffer when we’re losing experienced teachers year after year and having to rely on a disproportionate number of new teachers and substitutes. Frankly, the raging debate over curriculum and testing is rather beside the point if we haven’t developed a stable workforce. Many of you may think that teacher turnover and the funding of our schools isn’t your concern because you don’t have children in public schools. However, public education is a key factor in the long-term health of our state’s economy. Obviously, it’s not the only ingredient, but public schools, higher education, infrastructure and sound environmental policies are all part of creating suitable conditions for businesses to operate and expand. Unfortunately, we’re not doing to well on many of these ingredients either.
Regrettably, many of our politicians have the short-term mentality of Wall Street traders. Perhaps that’s why Wall Street gets along so well with politicians of both parties. While traders angle for quick profits that will generate huge bonuses, our politicians yearn for favorable press releases that will translate into votes. Thus, the unfinished business of properly funding our schools or repairing our roads can wait for another session of the General Assembly. However, the maintenance of economic incentives (tax credits, grants, matching funds) may well deserve a special session. Of course, much of this dysfunction was created because the General Assembly slashed revenues by cutting the top marginal tax rates without properly anticipating the consequences. Despite the state’s recent growth, our fiscal house is in disarray, which has led to a piecemeal approach to public education.
Economic development officials will swear that their incentive programs are critical to competing with other states for new jobs. Like shrewd stockbrokers, these folks are adept at touting their winners and ignoring their losers. Of course, there’s no shortage of businesses extolling the virtues of special tax credits, abatements and grants, because the competition among states helps to pad their bottom lines. While some of these programs can make a difference in a particular case, especially in distressed areas, the decision to expand or relocate seldom hinges on these special programs. Instead, the business case depends on myriad factors, including the quality and stability of our schools.
In the first part of my career, I worked with the business community and economic development officials in New York state to fashion the same types of economic incentives that have been used in North Carolina over the years. These programs afforded the governor and the secretary of commerce ample opportunities to attend ribbon-cutting events for new plants or office buildings. Politicians got good copy for 30-second campaign advertisements in the next election, and taxpayers were left with the long-term bill for the special incentives. Just as today, we created careful tallies of the number of jobs saved and created by our programs. And just like many successful money managers, we conflated correlation with causation. Clearly, the jobs saved and created were correlated with our credits and tax exemptions. However, there was little real cause and effect. Other factors, such as schools, were more critical to the business decisions to expand or relocate.
As a portfolio manager, investment strategist and business executive, I spent most of my career analyzing and making decisions about business expansion and relocation. Long before state or local economic incentives ever entered the picture, a host of far more substantive questions had been answered. In essence, we had already baked the cake and were simply looking around to see if any state or locality was willing to offer us the icing.
Sound investing requires a balanced long-term approach, whether you are investing in your future or the future of your state. While North Carolina’s many current advantages continue to attract businesses, our unwillingness to properly fund our schools will, in due course, send jobs and economic opportunity elsewhere. When the tax bill comes due, you and I will bear the burden. By that time, most of our politicians who authorized those subsidies will have become lobbyists, joined the money management industry or sent their children to private school.
Andrew Silton’s Meditations on Money columns can be found twice a month in The N&O’s Work&Money section. He is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog http://meditationonmoneymanagement.blogspot.com/