The economic impact of closing Minnesota's achievement gap: A theoretical construct

An education achievement gap by race and income has long persisted in the nation and in Minnesota. While there is a clear moral argument for closing the gap, there are some compelling economic ones as well.

Differences in high school graduation rates and achievement scores between white students and Native American, black and Hispanic students in Minnesota are some of the largest in the country. The chart below shows a substantial difference in average math scores of white and black eighth grade students since 2003.

If test scores of black and Latino students and low-income students could be raised to those of white and higher-income students, presumably graduation rates would increase, as would the overall skills of the workforce, leading to productivity gains and stronger economic growth. But by how much, and what net effect would it have for closing these gaps in Minnesota?

A 2009 McKinsey report, using a methodology developed by Eric Hanushek in a 2008 study in the Journal of Economic Literature, projects that national GDP in 2008 could have been 2 percent to 4 percent higher had the United States bridged the racial achievement gap by raising the performance of black and Latino students to that of white students by 1998 after a successful 15-year reform period. The report estimates that GDP could have been 3 percent to 5 percent higher had the United States closed the income achievement gap by raising the performance of students with household incomes below $25,000 to that of students with higher household incomes.

The same framework discussed in the McKinsey report was applied to Minnesota using National Assessment of Educational Progress (NAEP) data for the last five survey years. Closing the racial achievement gap for eighth grade students in Minnesota would improve the state’s overall average math scores by about 2 percent; closing the income achievement gap would improve average math scores by about 3 percent.

Using Hanushek’s estimate – that long-run GDP growth rate increases by 1.3 percentage points per standard deviation improvement in test scores (about 0.6 percentage points per 10 percent increase in average test scores) – closing the achievement gap in Minnesota would translate into a 0.1 to 0.3 percentage point increase in the long-run economic growth rate.

Even a small change in a growth rate over time adds up. For example, if a hypothetical 15-year reform plan could close the achievement gaps, the level of Minnesota’s GDP would diverge from trend, raising the GDP level by 1 percent or more after 30 years and by more than 3 percent to 6 percent after 50 years (see table below).

In terms of dollars, these increases translate to a few hundred million dollars per annum after 15 years from the start of the reform period to a couple of billion dollars after 30 years to more than $10 billion after 50 years. In 2011, Minnesota’s real GDP was $282 billion. However, caution should be used with these projections because it’s unclear whether Hanushek’s estimate applies at the state level.

The calculated economic impact of closing the achievement gap in Minnesota is smaller than the national estimates by McKinsey. One explanation is the lower percentage of black and Latino students in Minnesota (22 percent) relative to the national average (45 percent). Likewise, low-income students also comprise a smaller percent of population in Minnesota than in the nation.

Another explanation could be different assumptions used in McKinsey’s and Hanushek’s models. Although details are not clear, the McKinsey report seems to assume that after the 15-year reform period, the entire workforce achieves the projected gains in cognitive skills commensurate with the closing of the achievement gap in test scores. Hanushek’s paper assumes a more gradual displacement of the existing workforce with higher-quality graduates. Correspondingly, estimates for Minnesota using this assumption yield a smaller impact of bridging the gap.

Even if the economic impact of closing the gap is estimated to be smaller in Minnesota than nationally, it is by no means a trivial one. As anyone planning a retirement learns, small changes in growth rates can have a big impact on the future value of investments, more so for longer-term investments.

Furthermore, this analysis doesn’t take into account benefits to government from closing the achievement gap, such as reductions in remedial education and crime costs, and eventually higher tax revenue, nor does this analysis estimate the cost of a 15-year education reform. Both of these data points are needed to assess whether the government would achieve a positive rate of return from investing in education reform. An analysis by Henry Levin and colleagues suggests that investments in early childhood education and some reforms for school-age children do just that.

And, finally, this is not the only achievement gap whose closure would likely lead to faster economic growth. Nationally, for example, Asian students have the highest average test scores. If, hypothetically, educational reform could boost the performance of white students to the level of Asian students, overall average math scores would increase by about 2 percent, with about a 0.2 percentage point increase in economic growth. Furthermore, if test scores of all non-Asian students were raised to the average of Asian students, average math scores would increase by over 6 percent, with about a 0.6 percentage point increase in economic growth, almost 70 percent larger than the effect of closing the black-Hispanic and white achievement gap. This particular analysis, however, isn’t relevant to Minnesota, where average test scores for Asian students are lower than both Asian students nationwide and Minnesota white students.

Wisconsin public pensions: Retirees gasping, taxpayers exhaling

When the Wisconsin Retirement System released its annual annuity adjustment for pensioners earlier this month, members groaned while taxpayers breathed a sigh of relief.

The WRS is the ninth largest pension fund in the country. It is also among the country’s best funded plans in terms of long-term assets and liabilities; since 2004, its funding ratio has been near 100 percent. Yet starting May 1, certain WRS retirees will see their monthly checks fall by almost 10 percent—unheard of among the millions of public sector pensioners. In fact, it’s the fourth consecutive year of annuity cuts for some retirees. There are several sources behind this seeming financial contradiction. But the most important is that WRS retirees assume the large majority of investment return risk.

Along with worker and employer contributions, pension funds depend heavily on investment returns on their assets. Pension plans assume a certain rate of return—7.2 percent for the WRS, while many others hover around 8 percent—to project member annuities upon retirement. Most pension plans also average returns over five years to “smooth” volatility. But two of the past five years’ returns have fallen well short of the WRS benchmark, including 2008, when two WRS pension funds lost roughly 30 percent of their combined value (see charts).

When investment returns fall short of this benchmark, all other things equal, unfunded liabilities accrue. For most plans, this gap typically requires additional contributions from government employers (via taxpayers) and often existing workers; by and large, retirees are financially exempt.

In sharp contrast, WRS retirees bear the majority of investment risk and therefore reap both more benefits and more hardship. Unlike many public pension plans, the WRS plan offers no automatic cost-of-living adjustment. Instead, it uses investment returns to pad monthly pension checks on a compound basis. Such a policy worked well for retirees during the 1990s, when heady investment returns led to annual pension adjustments (called dividends) averaging almost 7 percent.

But when investment returns go south—which they did during the 2001 and (especially) 2008 recessions—those dividends can be clawed back to ensure the plan’s long-term financial solvency. But a retiree’s annuity can never go lower than the original amount established at retirement. The investment drop in 2008 was so severe—and compounded by a weak 2011—that the WRS has been forced to take back dividends from its Core Fund (which funds roughly 90 percent of annuities) for four consecutive years. (The smaller Variable Fund has no such annuity floor, and investment gains and losses are fully recognized each year.)

The amount of annuity decrease for a retiree depends on the dividends previously earned. Given three previous years of negative adjustments, the Wisconsin Department of Employee Trust Funds anticipates that close to half of all WRS retirees will see no downward adjustment this year because they have no dividends left to take and are back at their original retirement annuity. This year’s clawback also was larger on a percentage basis because of the shrinking pool of retirees with dividends remaining. After this year’s adjustments, virtually anyone who has been retired since 2000 will be back to his or her original annuity level, according to WRS's latest actuarial report.

The good news for retirees is that this is the last year that 2008 returns will be averaged into investment returns for the Core Fund. Barring another market downturn, retirees should see a little more on their monthly checks next year.

An economic development idea worth patenting?

What helps economies grow? That question vexes economists, economic development professionals, policymakers and local government officials looking for something to generate faster growth in local and state economies.

Innovation is widely believed to be important for local economies because the invention and introduction of new ideas can create long-lasting effects for business. But getting your hands around that notion and turning it into pursuable policy might be another matter.

Some equate innovation with patents. A recent Brookings Institution argued that “inventions, embodied in patents, are a major driver of long-term regional economic performance.” The study mapped patents nationwide and found that U.S. patent levels have been increasing in recent decades, and an increasing concentration of patents is coming from the top 20 metropolitan statistical areas (MSAs).

But do high patent levels lead to measurably better economies? The Brookings report did not answer that question definitively, and there are enough struggling metros in the top 20—Detroit, Philadelphia, Phoenix—to suggest that it’s not a perfect correlation. California has four of the top eight MSAs in patent production, yet all of them have high unemployment rates; San Francisco took the top patent spot, but its average unemployment rate from 1990 to 2011 ranked 161st of almost 360 MSAs analyzed.

Among 24 MSAs in Ninth District states (including 10 in Wisconsin that are located outside Ninth District boundaries), there was a wide range of patents per thousand workers (see Chart 1). Rochester, Minn., lapped much of the competition several times over—it ranked third best nationwide in patents on a population basis, thanks mostly to being home to an IBM campus. Wisconsin MSAs, many of them manufacturing hubs, also tended to rank high. But patent levels at a majority of MSAs in district states were less than one per thousand workers; only one in three regional MSAs was above the national average of 0.6 patents per thousand workers.

Not surprisingly, the top ranking MSAs tended to have a larger share of technology jobs as a share of all employment, as well as a higher proportion of workers with degrees in science, technology, engineering and math (so-called “STEM” degrees; see Charts 2 and 3. In the four scatter graphs, the MSAs from Chart 1 are rank-ordered, so low-ranking Great Falls = 1, high-ranking Rochester = 24).

However, patents themselves are not a particularly good predictor of economic growth over time. As Charts 4 and 5 demonstrate, there is virtually no relationship between recent patent trends and either growth rates per worker or unemployment rates.

None of this means that patents and other innovations are not valuable to local economies. It only means that local economic activity is a complex recipe, and patents are likely only one ingredient for faster growth.

Some oil for the kids, too

Oil has meant many things to North Dakota over the past decade. Along with reversing the state’s population decline, it has pumped new life—students, workers and revenue—into many of the state’s K-12 schools.

The state’s K-12 population has risen from 94,000 in 2007-08 to 99,000 in the current school year, according to the state Department of Public Instruction. Some of the strongest growth has occurred in the 17 western counties in or near the Bakken oil patch. The school district of Williston, the heart of the Bakken, has seen its enrollment rise from 2,100 to 2,800 students over this period.

As a result, school districts are hiring more teachers and other staff. A fedgazette survey of North Dakota school district administrators (with 65 respondents out of about 180 districts statewide) found that more than half added staff last year (see left chart). Employment gains were realized in every quadrant of the state, but were more prevalent in the west. Among 18 respondents in the northwest part of the state, 15 reported employment gains and three reported no change.

School officials have more modest employment expectations for this year—about one-quarter believed they will add school workers (see right chart).

But regardless of location, the large majority are expecting higher revenues. That comes, in part, from higher enrollments, which are part of the education funding formula. But it’s also due to a state education trust that, thanks to fast-growing taxes on oil activity, has grown from $1 billion to $2 billion over the past three years. This after it took more than 100 years to earn the first billion dollars, according to a state source.

The so-called Common Schools Trust Fund distributed about $92 million to school districts in the 2011-13 biennium—about 5 percent of statewide education expenditures—and trust fund officials have said they expect that figure to go up considerably in the next biennium.

A rough road for townships

When springtime comes around this year, the harsh winter effects on roads will become obvious. So too will the effects of lagging state aid for roads to local governments.

The matter is particularly problematic for township governments. Roads make up the single largest expenditure for most of the thousands of township governments that provide public service to the rural expanses spanning the Ninth District. So when budgets get tight, rural roads are heavily affected.

In November, the fedgazette surveyed township officials on the subject of tight budgets and their consequences for public services (see January fedgazette). Among almost 150 respondents (about 85 percent from Minnesota, and the remainder from the Upper Peninsula of Michigan), more than two-thirds identified roads and transportation as the service most affected by tight local budgets (see chart).

Below are comments that respondents gave the fedgazette permission to share with readers.

“Road work suffers the most, dirt roads don’t get as much attention as they should. … (Residents) are not happy; they want the roads smooth but don’t realize the money isn’t there.” Cheryl Lincoln, clerk, Richardson Township, Minn.

“We blade the roads less often and also remove snow less often. We also cannot afford to apply as much gravel to our roads.” Jo Ann Kolbaske, clerk, Bismarck Township, Minn.

“With the retirement of a full-time employee, the position was eliminated in our road department. Our former four-person department continues with three people to operate and maintain 63 miles of roads in addition to 90,000 linear feet of sanitary sewer line.” Rhonda Peleski, clerk/treasurer, Thomson Township, Minn.

“Our largest expense is roads. There have been no improvements or upgrades. (We’re) trying to hang on to the status quo. The public would like to see road upgrades and improvements, such as paved roads, improve drainage issues and dust control. The number one issue would be more gravel for roads. We also have one bridge in jeopardy, (but) no money for repair.” Dave Tangen, clerk, Hawley Township, Minn.

“Gravel used for our township roads is becoming scarce, (and) the price per cubic yard is rising dramatically. The price for chloride that we use for dust control is going out of sight.” Daniel New, supervisor, Hudson Township, Minn.

“There is not enough money to keep up our roads and bridges the way we need to. There are no pluses when you have to cut services in the townships. Road ditches will fill up with brush and less money for rock on the roads. Soon it will need to be addressed, but what can we do? Still no money. … (T)he budget has to increase to keep up with some of the services, but we can’t keep up with them all.” Dave Tart, supervisor, Forestville Township, Minn.

“We do not blade our roads as often and only spot-gravel our roads. Snow plowing is important in our township. … The roads have more washboards and are slippery when it rains. If we get a lot of snow, that could be an issue to get the snow plowed off.” Lori Handyside, clerk, Clover Township, Minn.

“The cost of road maintenance is always on the rise. Our roads are being hammered by ever increasing size of farm machinery. They were not built to withstand the weights being put on them now.” Dale Kulberg, supervisor/chairman, Brookfield Township, Minn.

Tax me for this, but not for that

Local governments have been facing tough budgets since the recession, or even longer in states like Minnesota and Wisconsin, where state budget deficits have been semiregular occurrences since the 2001 recession. One of the difficulties posed by tight budgets is deciding what services residents value most and which ones they’d prefer to scale back rather than see taxes go up.

The Michigan Public Policy Survey provides one perspective on that dilemma. A biannual (spring, fall) survey started a few years ago at the University of Michigan, it polls each of Michigan’s 1,856 units of general purpose local government, including several hundred in the Upper Peninsula (the only part of Michigan in the Ninth District, and the focus of this post).

Last year’s survey showed that 35 percent of U.P. respondents (who are local government officials) said their community was less able to meet its financial needs this year compared with last year. Almost 30 percent said there had been a decrease in federal aid (compared with just 7 percent that saw an increase), and more than half had their state aid cut (12 percent saw an increase). At the same time, almost half of U.P. respondents said infrastructure needs have increased, and 31 percent said similar for human services; virtually no local officials reported decreases in these public services.

So what to cut? Not fire services. Almost 60 percent of local U.P. officials believed residents would prefer higher taxes, while just 11 percent believed residents preferred a service cut over tax increases (see chart; the gap in responses for individual categories—why responses don’t add up to 100 percent—represents both “don’t know” and “doesn’t apply” answers). No other service had close to the same support. General government operations, economic development and public transit, as well as parks, recreation and libraries were conspicuous in the lack of support for higher taxes to avoid cutbacks for these services.

For more discussion on tight local government budgets, see the January issue of the fedgazette.

Government workers feeling brunt of job loss

Government jobs have long been known for their comparatively high job security. During and shortly after the recession, government employment actually rose slightly while private employment plunged (see previous blog post), thanks in large part to the federal stimulus plan that funneled billions of dollars to local and state government budgets to stave off further unemployment in the economy.

But with that stimulus gone, government employment has fallen by about 2 percent, or roughly 18,000 jobs, across Ninth District states from the first quarter of 2010 to the first quarter of 2012, according to data from the Bureau of Labor Statistics.

But there was considerable volatility in government employment even before the recession. An analysis of total government employment (federal, state and local) shows that almost half of the counties in district states saw a net decrease in government workers from 2001 to 2007 (see Chart 1). Some (unknown) portion of the decrease is likely due to the wind down of the 2000 decennial census; the number of federal workers dropped by almost 1,300 during this period while overall government employment rose by 12,300. About 85 percent of the job gains occurred in state government, where jobs are not as geographically widespread.

 

The federal stimulus temporarily pumped up government payrolls in the district, adding 18,000 net public workers from 2007 to 2010, half of them at the local level. But once the stimulus funds ran dry, the pink slips came out. By the first quarter of 2012, district states had shed almost 19,000 government jobs, about two-thirds of which were local government workers; another one-quarter of losses were federal workers, likely the result of another census winding down. Job losses were seen in 62 percent of district counties analyzed (see note at end).

The past two years have been particularly rough on counties with large employment bases, with all of them seeing at least a nominal decline in the most recent period (see Chart 2, right-most panel). But many saw earlier cutbacks, and some even declined in spite of stimulus funds (see other two panels). Many of these larger counties are in Minnesota and Wisconsin, where state and local budgets have been see-sawing since the 2001 recession. Larger counties in the Dakotas and Montana generally fared better in terms of government employment, in part because they are seeing strong population growth, which tends to induce more government services and subsequent employment.

Much more on local government budgets and employment will follow in the forthcoming January fedgazette.

 

 (One methodological note: County-level data can be hit or miss for a given quarter, particularly among smaller counties. Almost one-third were missing valid counts in one or more of the dates analyzed. As a result, the scatter-plot analysis above includes 244 out of a possible 355 counties in the Upper Peninsula of Michigan, Minnesota, Montana, North Dakota, South Dakota and all of Wisconsin, only the northwestern one-third of which is part of the Ninth District.)

Smarty pants: College attainment, bachelor's degrees conferred mostly growing in Ninth District

It’s widely accepted that a college education is a prerequisite to a better (financial) life. But that sentiment is embraced differently across the country.

In Ninth District states, the percent of population with a bachelor’s degree continues to increase overall. But individual states are performing differently against the national average. For example, Minnesota ranks 11th in the nation for the percent of population age 25 and older with a bachelor’s degree at 34 percent in 2011 (see Chart 1). But its college attainment levels have stagnated a bit in recent years, and its advantage over the national average has shrunk slightly (see Chart 2). 

 

In contrast, Montana, North Dakota and Wisconsin have historically been below the national average, but that gap has been closing for all three states of late. Each also ranks in the top half of states in college attainment (partially a function of high-population, well-educated coastal states pulling up the national average). South Dakota is the outlier; college attainment has been below the national average. It ranks in the bottom half of states and its achievement gap has widened slightly.

In concert with this trend, the number of bachelor’s degrees conferred also has been rising. But the rate of increase at district colleges and universities in recent years has lagged the U.S. benchmark by a considerable amount (see Chart 3), according to the National Center for Education Statistics. During the 1990s, growth in the production of bachelor’s degrees in Montana and South Dakota surpassed the United States, while other district states posted slower growth. During the past decade, growth slowed in Montana and South Dakota, but picked up in Minnesota. Some of the recent gains in Minnesota’s college degree production are likely due to growth in Minnesota’s private online universities, such as Cappella University and Walden University.

In 2010, Wisconsin colleges and universities conferred 34,110 college degrees, ranking 17th in the nation (see Chart 4). Meanwhile, Minnesota colleges and universities produced 31,952 bachelor’s degrees, ranking 18th. North Dakota, Montana and South Dakota, ranked 44th, 47th and 48th, respectively.

Among district states, North Dakota has the highest number of degrees conferred by colleges and universities relative to the 20-year-old state population (see Chart 4). This suggests that North Dakota has a relatively large capacity to produce college graduates relative to the primary college-age population in the state. All district states have a higher ratio of bachelor’s degrees conferred relative to the 20-year-old population than the nation, demonstrating a relatively strong presence of higher education in the region.

 

Minnesota’s lakes: More impaired, but don't be afraid to jump in

In the land of 10,000 lakes, the Minnesota economy has a unique relationship to water that is widely used for fishing, general recreation and even moving goods to market. So it raised some eyebrows when the state announced that more than 600 bodies of water were added this year to its list of impaired lakes and rivers.

But before the “ick” factor makes you put away that canoe, or pull the kids from their favorite swimming hole, it helps to get the background story. Turns out that the measure is more building block than condemnation—a work-in-progress assessment for preserving one of the state’s most valuable natural resources.

Since the mid-1990s, the federal government has required states to assess their water quality. Since then, the number of impaired bodies of water—those that don’t meet various federal water quality standards—has risen steadily and now stands at more than 3,600 (see chart). A map shows that these impaired water bodies are widespread (see map).

 

While this might not be “good” news for boaters and anglers, neither is it necessarily cause for great concern, according to officials with the Minnesota Pollution Control Agency, which puts the list together. The state has an incredibly large amount of water—92,000 miles of streams alone—and the growing impairment numbers “are indicative of our growing monitoring efforts,” said David Christopherson, who does environmental reporting and special studies for the agency’s water division.

Water bodies make the list if they exceed any number of water quality standards, like turbidity (excessive sediment), eutrophication (too much nutrient, often phosphorous from farm run-off), presence of fecal coliform or a host of other standards. In putting together its biennial impairment report, the agency “uses all available data” from internal and external sources with information about any of the state’s water bodies. As a result, the data are neither comprehensive nor systematic; given that the list comes from a partial assessment, it’s not even a random sample that could be considered scientifically representative.

The list also is highly sensitive to evolving standards for water quality. For example, a huge spike in listings in 1998 was the result of a first-time federal advisory on mercury and fish consumption, and mercury impairment is by far the biggest source of listings. Christopherson added that the state will be applying additional nutrient standards in the near future, “and I would expect to see a big jump (in impairments) then too.”

As a result, he said, “I don’t think (the impairment list) gives us much indication of overall water quality” in the state. Instead, Christopherson said the impairment list is more like a slow-growing benchmark that will give policymakers and others the data necessary to develop a more comprehensive approach to improving and maintaining water quality. “This is a primary driver in terms of what we’re doing” to improve water quality. “Once they get on the list, we have to deal with them.”

He acknowledged that “there are a lot of water quality issues out there. It’s a big issue and will take a long time to address … (but) I don’t think anyone here is particularly surprised” by the growing list of impaired lakes and rivers. The agency generally believes that about 40 percent of water bodies could stand some improvement, and the list “matches what we’ve been finding for years and kind of expected. A lot of other (states) are worse.”

The efficiency of energy efficiency programs

Everyone knows a penny saved is a penny earned. The environmental adaptation: A penny not spent on power is a penny earned and a carbon unit saved. More utilities (and their government regulators) are using that mantra to encourage investments in energy efficiency so that households and businesses will be convinced to sip rather than guzzle power to save money on monthly bills and lessen their carbon footprint.

A recent report on Minnesota’s utility-based Conservation Improvement Program shows that much more is being spent on energy efficiency projects. The amount of electricity saved by CIP more than doubled to 900,000 megawatt hours (MWh) between 2006 and 2010. But efficiency expenditures—paid for by all ratepayers—went up in roughly equal proportion (see Chart 1), which suggests that there have not been any returns to scale in terms of efficiency gains. In fact, on a per MWh basis, electricity savings have come at slightly higher cost in 2010 ($207) compared with 2006 ($200). (Carbon emission reductions mirror energy savings over time because they are estimated by formula. One MWh of electricity savings equals 0.9 tons of CO2 savings on average.)

 

The increase in CIP costs stems from a change in state policy, which shifted from an expenditure requirement to an energy-savings requirement that is equivalent to 1.5 percent of a utility’s annual retail sales, according to the Minnesota Department of Commerce, in response to questions from the fedgazette. This change also offers one explanation why efficiency programs, in aggregate, have not become more cost effective over time in a nominal sense.

To meet higher levels of energy savings, the agency pointed out, utilities have had to create new programs and eliminate others that were not cost effective. They’ve also had to increase some incentives and invest in outreach activities and program measurement, all of which costs money. New efficiency programs are typically less cost effective than legacy programs (like residential lighting), but the agency expects these to become more cost effective over time.

Also notable, individual utilities vary widely on the average cost of their efficiency investments in a given year (see Chart 2). Size has little to with the variation, with the exception that small utilities had both the highest and lowest average CIP costs on a per MWh basis.

The Commerce Department said there were several likely reasons for the disparity. For example, utilities have different customer and consumption bases (what the industry calls “load profile”). Efficiency projects at commercial and industrial users—who typically consume much more energy—are usually more cost effective than residential projects (whose users are small and dispersed). “So utilities with high residential loads may have to spend more to achieve the same savings,” the agency said.

Utilities also charge different power rates, and those with low electricity costs might have to offer higher incentives to convince users to pursue efficiency projects. Utilities can similarly vary in their experience and ability to promote and execute efficiency programs. Those with a “high level of engagement with its CIP programs” are typically more cost effective, according to Commerce.

But back to those pennies: While costs for energy efficiency projects are borne on an annual basis, energy savings accrue over a number of years. Agency guidelines suggest a weighted average payback period of 15 years or less for individual efficiency projects to be worthwhile. With average electricity costs at roughly $85 per MWh, none of the 2010 projects (in aggregate, at the utility level) faces more than a 10-year payback, and most have payback schedules of about one to five years.