When Does It Cost Too Much?

An Analysis from Dick Vosburg

A key question (maybe the question) to the establishment of aGermantownMunicipalSchool District is the effect on property taxes.  I will try to give some perspective to the issue.

Historical precedent has been that when Memphis annexes property, any schools therein are transferred from Shelby County Schools to Memphis City Schools at no cost.  That means free.  The eight schools within GermantownCity limits are owned by Shelby County Schools, paid for by all the taxpayers of ShelbyCounty.  That means we paid for them and will continue to pay for them (to the extent of approximately $6.4 million per year paid byGermantown taxpayers to service school debt).  So the precedent is free.

If you have been listening to Martavious Jones, president of the Memphis City School Board, he is sayingGermantown should pay replacement cost for the schools.  Why? Because he thinks he can get it from us.  Is this fair?  No one from MCS is talking about fair. Germantown city staff has estimated replacement cost as $130 million based upon insured values.  The old Shelby County School Board (who has title to the schools) missed the opportunity to follow the precedent of transferring the title toGermantown.  So, Germantown will be negotiating with the new 23-member Memphis Metro School Board where we will be outvoted 16 to 7.  A transaction requires a willing buyer and a willing seller—we doubt we will have that.

So what is our alternative?  Next to every school is a park.  We can tear down the park and build a school.  When the schools have been abandoned, we can take over the schools, tear them down and build parks.  Hopefully that is humor and it will never come to that.  But what do we have in the schools inGermantown?  Average building age 24 years.  All with great amounts of deferred maintenance needs.  Most do not have fire sprinklers or adequate technology.  While updating the buildings would probably cost less than building new, maybe not that much less.  Hopefully Southern Education Strategies will give us an indication of what the deferred maintenance costs might be so that the Mayor can use that in negotiations with the Memphis Metro School Board.

If we are serving the 4,600 students who areGermantown residents, we need probably six schools.  I will assume we configure them as 5 elementary-middle schools and one high school (a separate middle school and four elementary schools do not change the calculations).  The primary schools will cost approximately $15 million each.  Seven acres of land (even if buying up some homes) should not cost more than $3.5M per school.   Southwind High School cost $45 million, including land.  So capital cost of the six school buildings should not be more than $137.5 million.  For that we would get six bright, shiny new schools; not the worn buildings that Mr. Jones wants to sell us for about the same amount.

Germantown just issued debt at 2.55% for 20 years.  But our AAA debt rating will not survive another $137.5 million—we would probably pay more like 3.1%.  This would cost Germantown $9.325 million in annual debt service over 20 years.  With current Germantown valuations, that means 71.7 cents per $100 assessed value.

Operating costs are really unknown—that is one of the primary responsibilities of the recently-hired consultant, Southern Educational Strategies, to assess.  Germantown Schools will get both state and county funding.  The State requires we contribute at least 15 cents per $100 of assessed valuation so we are financially invested in the municipal schools.  Let’s assume that the 15 cents will be sufficient.

Can we afford this?  The median home sale in Germantown this year was almost exactly $300,000.  With assessment at 25%, that means an average assessed value of $75,000.  An increased tax of 86.7 cents per $100 means $650 per year in increased property taxes for the median Germantown home.  This will cover the cost of buying land, building new schools and operating them.  This is the worst case scenario and our city leadership will likely find a less costly path.  $650 is expensive for those with limited resources; a bargain for those paying private school tuition.  How many new families will be attracted to Germantown?  When a house sells will there be more young families looking?  Will home values go up?

If home values go up by as little as 2%, that will be enough to break even. One way to look at the financial aspects of a municipal school district is cash flows.  If you invested $650 a year into a savings account paying 4% interest, at the end of ten years you would have $7,804.  If you invested $650 a year in a municipal school district AND the presence of a school district added 10% to the value of your home, you would have an extra $22,000 when you sold your home, even if the value did not appreciate further.  A municipal school district is a fabulous investment when viewed in terms of property values. This might be the best $650 you invest to maintain your home value—and think of what we can provide for the children of Germantown!