Whenever the topic of the city’s financial problems are discussed, inevitably someone will suggest that our problems have occurred because our largest employer — Kent State University — doesn’t pay property taxes as a public institution and yet it brings students into Kent that end up being large consumers of city services. As attractive as that hypothesis may sound, the data proves otherwise. As a matter of fact, when we ran the numbers it turns out that the economic benefits derived from just the income taxes paid by the 3,000+ faculty and the administrators exceed the value of city services used by over $1 million dollars.
In the course of studying the City’s financial situation, one of the areas of particular interest was understanding where our revenues came from and where they were being spent. One of our goals was to cluster revenues and expenses according to categories of customers, e.g., households, apartment buildings, retail, manufacturing, etc. Kent State University is so large that it is in a category all by itself.
The idea behind this effort was to better understand our cash flow as a city by overlaying the diversification of our revenue base with service consumption patterns. That’s a fancy way of saying that we wanted to be able to compare how much was being contributed by whom, with how much services were being used by whom.
Side Comment on Revenue Diversification
Ideally, just like in our personal investments, we want to have as much diversification in the city’s revenue base as possible so that we can avoid the volatility that comes from being overly dependent on any one category. People have a high expectation for the availability and continuity of city police, fire and safety services so government needs to have enough diversification to be able to compensate for unexpected economic downturns in any one particular sector.
With that in mind, it turns out that the City is very heavily dependent upon Kent State revenues. Over 70% of the income tax revenues received by the City come directly from Kent State. That’s dangerously high and would normally be considered too high a risk but the good news for the City is that universities tend to be fairly recessionary-proof and they don’t tend to be outsourced, relocated , merged or shut down — so the typical risks of this high a dependency is less relevant.
Kent State University revenues may not grow at a fast rate but they have also not declined and as a result they have provided a stabilizing influence on our cash flow. And that’s exactly what has happened as Kent based manufacturing jobs have declined over the last decade — the steady revenues from Kent State have been there to help us bridge over the tax loss with neglible impact on service levels.
Tax structures will largely determine who pays what and in Ohio the income tax is far and away the single most important revenue source for local government so that means that jobs — business activity — contributes the greatest revenue. That holds true in Kent with 90% of our tax revenue coming from income tax. Don’t get me wrong — every penny of property tax counts too — but for all practical purposes it is a very small revenue source for the City.
That’s why a minimum wage job actually contributes more revenue to the City than many single family homes in Kent. And if you think about it most of those minimum wage jobs are probably filled by and were created to serve Kent State students. In a more thorough study we would factor in all the secondary business activity that is in Kent because of the University such as these fast food jobs. Studies in other university cities indicate that for every dollar the university spends it generates anywhere from 1.5 to 4 times more in secondary economic benefits, e.g., gas stations, food marts, car repair, etc. For simplification purposes we decided to not even count those multiplier effect benefits — that’s another study for another day — but they are real.
Getting back to just direct tax revenues — 90% of our City tax revenues come from income tax and 70% of our income tax comes from Kent State University. What that means is that the business sector — which in our case is dominated by Kent State — subsidizes city services provided to residential property owners in Kent. So while it is true that Kent State doesn’t pay property tax, the loss of that revenue has neglible impact on city revenues compared to the significant impact of Kent State income tax receipts.
Here’s a summary of the actual numbers calculated using 2005 dollars:
Income Tax Revenues Received from Kent State University = $3,450,000
Cost of Kent State/Student Related Fire Calls = ( 350,000)
Cost of Kent State/Student Police Related Calls = ( 1,300,000)
Miscellaneous Other Costs Related to University = ( 100,000)
Net Kent State Impact on City Revenues = $1,700,000
We also examined what our revenues would look like if Kent State University wasn’t here and the land was developed with a combination of commercial/industrial and residential property. Again, the numbers came back with the City receiving about $1 million less in revenues if the university land was developed in the same proportions of business to residential units as the rest of the City.
In the business world companies perform similar exercises under the title of “Customer Profitability Analyses.” In building these customer profiles companies calculate who contributes how much and who consumes how much. Historically the rule of thumb followed the 80/20 rule – 80% of your profits come from 20% of your customers.
A new book (called Angels and Demons) took this analysis even further and found some excellent case studies that showed how 150% of your profits come from 20% of your customers – they are the Angels. The Demons are those 20% of your customers who actually lose you money equal to 150% of your profit.
From a purely financial perspective, Kent State University is clearly one of our Angels.