Unveiling the Financial Impact of Indexing Preschool for All: A Comprehensive Analysis
The Preschool for All program is at a critical juncture, with new data shedding light on the potential financial implications of indexing its tax. As Multnomah County officials grapple with this decision, a fresh analysis from top economists offers valuable insights, but it also raises questions that could shape the future of this initiative.
In the aftermath of inconclusive meetings in August, the idea of indexing the Preschool for All tax to inflation has resurfaced. The new analysis suggests that the program can navigate the challenges of adjusting tax brackets without a scheduled rate increase, ensuring its financial stability. However, this optimism is built upon assumptions about program costs that have sparked debate.
County commissioners, recognizing the need for long-term financial clarity, initially hesitated to index the tax on high earners. This decision aligned with the recommendations of the Technical Advisory Group (TAG), a panel of economists, demographers, and business leaders. The TAG's stance was influenced by the understanding that more modeling was required to strengthen their advice.
Since then, the modeling process has yielded significant findings. It revealed that the county's initial forecasts for Preschool for All's participation were overly optimistic, leading to a December analysis by ECOnorthwest. This analysis highlighted a potential windfall for the program's fund balance, which could surpass $2 billion if commissioners proceeded with the scheduled tax increase. However, subsequent modeling has slightly adjusted this figure, projecting a balance of approximately $1.99 billion.
At a recent meeting, ECOnorthwest presented policy proposals, including indexing and delaying the tax increase, and their potential impact on the program's financial trajectory. The firm's analysis also addressed the sustainability of these proposals under the TAG's criteria, which define a sustainable scenario as one where the fund balance in year 10 is above zero, and cumulative revenues exceed expenses between years 11 and 20.
The analysis on indexing revealed a notable outcome: the fund balance would not experience a substantial growth spurt if the tax were indexed. Instead, it would remain in the tens of millions during its lowest years, with a recovery starting in 2038. This modeling assumes an increase in income thresholds over time to determine tax eligibility.
The other financial lever being considered is the delay in the Preschool for All tax increase of 0.8%. ECOnorthwest's modeling suggests that while the fund balance would temporarily dip into the red through 2033, it would rebound by 2040 and return to the hundreds of millions shortly after. This optimistic outlook may initially appeal to supporters of indexing and high earners seeking a delay.
However, a catch emerges from the shadows. Concerns are brewing within the Program Advisory Group, which questions ECOnorthwest's model for underestimating the growth of seat costs and fixed costs. Currently, these costs are projected to increase by 4% and 3% annually, respectively, but the advisory group advocates for a 5.2% baseline increase, citing national firms and even the 6% growth rate of Portland Public Schools.
The crux of the matter lies in the impact on preschool programs. Under a baseline scenario with 5% growth in seat and fixed costs, both indexing and indefinite tax increase delays would fail the TAG's sustainability test. This realization has prompted county officials to seek a more comprehensive analysis from the TAG, incorporating multiple factors and assumptions.
As the deadline looms, with recommendations due in mid-April and decisions on tax changes by August, the county commissioners are tasked with navigating a complex financial landscape. The outcome of this analysis will significantly influence the future of Preschool for All, impacting laws, civic leaders' actions, and the careers of politicians. Will the program's financial trajectory align with the TAG's sustainability criteria? The answer lies in the hands of those tasked with shaping its future.
