Sunday, August 31, 2014

BCTF vs. BC Liberals: How Far Apart Are They?

Sept 2 Update: As reported by the Vancouver Sun, Peter Fassbender is saying that the parties are more than $300 million apart on compensation (wage plus non-wage benefits). The analysis below shows that the gap between their publicly stated positions is about $770 million ($401 M on wages, and about $369 M on benefits assuming they start fully in 2015-2016). This implies that they were privately willing to make concessions to bridge about half of the compensation gap, and the remaining difference is small ($300 M/5 yrs = $60 M/yr = 2% of current compensation). The real issue remains class size, composition and specialists: the government is offering almost nothing, while BCTF's demand would cost about $1 billion total if it loses the court case, and $1.6 billion PER YEAR if it wins the court case.

Based the following documents by the BCTF and the government, the math works out as follows:

Current wages and wage-related benefits: The government states that BCTF's proposal, which includes a 3.5% increase and three 1.5% increases, will cost $211.1 million in Year 5. This means that the current base is 211.1M/(1.035*1.015^3-1) = $2.566 billion.

Current total compensation: The government states that an increase of $335.8 million would correspond to a 11.2% increase. This implies a current base of $2.998 billion.

BCTF Salary Demand (Total amount above current wage)
Year 1 (2013-2014): $5,000 signing bonus = $150 M
Year 2: 3.5% = $90 M
Year 3: additional 1.5% = $130 M
Year 4: additional 1.5% = $170 M
Year 5 (2017-2018): additional 1.5% = $211 M
Total: $751 million, or $150 million per year on average + 100% economic stability dividend

Government Salary Offer (Total amount above current wage)
Year 1: 0
Year 2: 1%, and additional 2% seven months into the year = $47 M
Year 3: no increase = $77 M
Year 4: additional 1% = $104 M
Year 5: additional 0.5%, and further 1% ten months into the year = $122 M
Total: $350 million, or $70 million per year on average + 50% economic stability dividend

Difference between BCTF Salary Demands and Government Salary Offer (ignoring economic stability dividend)
Total over 5 years: $401 million
Average per year: $80 million (3.1% of wage base)
Ongoing difference at June 30, 2018: $67 million (2.6% of wage base)

Non-wage compensation: BCTF demands an increase costed at $125 M in Year 5 by the government.

Grievance fund: BCTF demands a one-time $225 M fund

Class size, composition, and specialists: Government offers a $15 M increase to the Learning Improvement Fund (LIF), from $60 M to $75 M. BCTF says that this is old money, and demands:
- a further $225 M per year until the court case is resolved, to be continued if the government wins;
- the restoration of the original 2001 language if BCTF wins, costed by the government at $1.67 B in Year 5 (if this replaces the LIF and the $225 M fund, the net cost is $1.37 B).

Difference between Total BCTF Demands and Government Offer:
Total over 5 years: $1.67 billion
Average per year: $334 million (11.1% of compensation base)
Ongoing difference at June 30, 2018: $417 million (13.9% of compensation base)

These numbers assume that:
- BCTF's non-wage compensation and class size/composition/specialists demands are to be implemented in Year 3 (2015-2016). An earlier implementation, during the current school year, would increase the total and average per year cost (but would not affect the ongoing difference in 2018).
- BCTF loses its court case. If it wins, then the total ongoing difference ballons to $1.79 billion in Year 5, or almost 60% of the current compensation base.
- The economic stability dividend is nil (it is likely to be small anyway).

Given these numbers, it's no surprise that Vince Ready declared in impasse. At the end of Year 5:
- the government's proposal costs $159 million per year ($144 M in wages and $15 M for the LIF increase);
- BCTF's proposal costs $576 million per year ($211 M in wages, $125 M in other compensation, $15 M for the LIF increase, $225 M for class size/composition/specialists) if it loses in court;
- BCTF's proposal costs $1.95 B if it wins in court.

Another way to took at this is through the rate of increase of ongoing costs:
- government: 1.0% per year
- BCTF: 3.6% per year if lose court case, 10.5% per year if win court case.

The government's proposal is obviously stingy: it is likely to come in below inflation, which implies a real cut, following two years of wage freezes. On the other hand, other public sector unions have settled for similar increases.

BCTF's demand that if it wins the court case, the 2001 language be restored, is obviously unrealistic, and is probably a bargaining tactic to obtain the $225 million/year fund. A 3.6% annualized increase is normally not out-of-line, but in the context of agreements signed by other unions, it is quite high.

I believe that a reasonable settlement would be along the lines of:
- 1.5% increase per year in total compensation, with no signing bonus. The parties can decide how to divide this into wage and non-wage benefits. The price tag would be $688 M over 5 years, which is slightly above below the middle of the government salary offer worth $350 M and the BCTF compensation demand worth $876 M $1.12 B (assuming that the non-wage demands are enacted in Year 3). The total increase would be 7.7%, about zero after adjusting for inflation. This is more than what other public-sector unions got, but likely less than private-sector wage increases. The final ongoing cost would be $232 M per year.
- $200 million one-time grievance fund, but only if BCTF wins in the Supreme Court.
- Increase the LIF to $150 million. This is double the government's proposal of $75 million, and half BCTF's demand of $300 million ($75 M LIF plus $225 M fund).
- Replace the LIF with $225 million annual fund if BCTF wins in the Supreme Court.

Total ongoing cost of my proposal at June 30, 2018:
- If BCTF loses: $322 million per year (compared to $159 M and $576 M)
- If BCTF wins: $397 million per year (compared to $159 M and an unrealistic $1.94 B)

The annualized increase in ongoing funding would be 2.1-2.5%, which I think is a fair outcome for our education system, and right in the middle of the 1.0-3.6% cost of current proposals. It slightly outpaces inflation, and along with a decrease in enrollment, should allow for a modest improvement in services. At the same time, it is less than provincial GDP growth, so this is definitely an affordable plan, even if BCTF wins the court case. The total risk of the court case to the taxpayer, $75 million per year plus a one-time payment of $200 million, is manageable considering that it concerns more than a decade of education funding - keep in mind that the BC government spends over $5 billion per year on K-12 education, and over $44 billion per year overall.

Wednesday, August 27, 2014

BCTF vs. BC Liberals: Whose Proposal is Best for B.C.?

The school year is supposed to start next week in BC, but the labour dispute between teachers and the government has not yet been resolved. Here are my two cents on the issue.

The parties are not too far on salaries: the government offers 6.5% over six years, while the teachers demand 8% over five years. Given that, in its latest budget, the government is forecasting inflation of 9.4% over five years (9.8% compounded), and that wages generally increase faster than inflation due to productivity gains, the teachers' salary demand is very reasonable.

However, the real difference between the parties is on the issue of class size. The BCTF points out that the Liberals have unfairly increased class size in the past by illegally removing it from the bargaining procedure. It also points out that there is evidence that a class size reduction would improve student performance, and that BC has large class sizes compared to the rest of Canada. The Liberals reply that despite the class size increase, BC students' academic performance remain among the best in Canada. Moreover, the current fiscal situation is tight.

None of these arguments, from either side, get at the real issue: is reducing class size a good investment?
- Perhaps the class size increase was achieved illegally. But if it is the right policy, it should stand, and BCTF should be compensated for past wrongs through more direct and less costly means.
- Even if class size reduction does improve student outcome, if the improvement is small, it may be cost-ineffective.
- BC's classes being larger than other provinces' does not imply that they are too large: it could well be that other provinces are wasting money because smaller classes sound good to voters.
- Even if BC students' academic performance held up (and this is disputed), this is not proof that the class size increase did not have an adverse effect: perhaps if class sizes had remained low, our students would be doing even better.
- The surplus being small and revenues growing very slowly does not mean that we can't invest in education. If the return is high enough, then borrowing is the right thing to do for BC's long-run prosperity.

The following is a back-of-the-envelope analysis on whether class size reduction is desirable in BC, given its costs. The starting point is this review of the evidence on class size reduction, by the Brookings Institute, a highly esteemed non-partisan think tank (think, not Fraser Institute or CCPA) in the US.

- The largest effect of class size reduction found in a well-designed, credible study is as follows: reducing average class size from 22 to 15 for four years (K-3) resulted in an improvement of academic performance equivalent to 3 months of extra schooling. This "STAR" study was done in Tennessee, across schools in different socio-economic settings.

- Other studies have found smaller effects, or no effects at all. Generally, class size reduction is most effective when applied in early grades (like in STAR) and in low-income settings.

So let's assume that the real effect is as measured in STAR. What would be the costs and benefits of such a policy for BC? (Note: Obviously, the class size reduction contemplated in BC is different, but in principle, both the costs and the benefits would scale.)

Cost of 4 years of class size reduction from 22 to 15 students
- Government expense: Reducing class size from 22 to 15 students requires 46.7% more teachers. According to a Statistics Canada report, the average spending per pupil in BC in 2010/2011 was $11,832, 40.5% of which was spent on educator remuneration. Assuming that this class size reduction increases educator remuneration by 46.7% (it might be a little less since educators include some non-teachers), and that no other costs change (obviously in reality, some other costs, like classrooms, would go up), the increased cost per student is $2,236. Over four years, this adds up to $8,945 per student.
- Of course, spending an extra $8,945 per student requires extra taxes (now or later), which would cause an economic loss. It is difficult to quantify such a loss, but fortunately, the Québec government has estimated it for various forms of taxation. In the long run, the most efficient way to raise taxes is via a value added tax, and the economic cost is estimated at $0.54 per dollar of revenue in Québec. The cost in BC could be lower because we start from a lower level of taxation, but it could be higher because we have an inefficient sales tax as opposed to a value added tax. Taking the $0.54 estimate as such, the additional economic cost would be $4,830 per student.
TOTAL COST: $13,775 per student

Benefit of 3 additional months of schooling
This is obviously difficult to measure, but one way to look at it is that this should equal the cost of 0.3 years of postsecondary education.
- Direct cost of education: It is not easy to disentangle teaching from research costs in our postsecondary institutions, so this can only be very approximate. A reasonable estimate is that a year of postsecondary education costs about $15,000 per student. 0.3 years = $4,500 per student.
- Opportunity cost of forgone work: Having to spend 3 extra months in school will result in foregone wages. Assuming that the average starting wage is $20/hour (it's less for high school grads, but more for university grads), this works out to 12 weeks*40 hours/week*$20/hour = $9,600 per student.
TOTAL BENEFIT: $14,100 per student

Obviously, these are very rough calculations, so the conclusion to draw is only that the costs and benefits of reducing class size in K-3 are comparable. There is no strong case for either side. Given that most studies show smaller benefits at high grade levels, it is likely that the costs of reducing class size exceed the benefits in secondary school.

Teachers may argue that reducing class size carries not only academic benefits, but also behavioural benefits. This argument certainly has merit, so the above benefits may be understated. On the other hand, these estimates of benefits are based on the most favourable credible study (at least according to Brookings). So on balance, it is not clear in which way the above numbers are biased.

Moreover, the Brookings summary referenced above mentions evidence that other forms of investment in education tend to yield higher returns than class size reductions.

Based on this evidence, my opinion is:
- I support a targeted class size reduction for elementary schools in disadvantaged areas.
- I am neutral toward a general class size reduction for K-3. Perhaps this should be given as a concession to make up for the government's past illegal actions.
- I mildly oppose a general class size reduction for grades 4-7.
- I oppose class size reductions for secondary schools.

On balance, if the choice is between BCTF's proposal and the government, I would choose the government's, as I believe that current class sizes are fine in most settings. But ideally, the two sides can come together and do the right thing, which is to focus resources on those that would benefit the most: the youngest and most disadvantaged students.