Book Review: Getting To Plan B by John Mullins and Randy Komisar


Katy Aucoin’s original plan when she founded Dearduck  in 2015 seems exciting and profitable, to my untrained eyes. Three years later, following an investment by startup accelerator RealCo and a move from the City of Houston to San Antonio’s tech hub on Houston Street, Dearduck plans to make money in a very different way than when Aucoin started.

Shifting away from an original business plan isn’t unusual. It’s the norm. Venture capitalist Randy Komisar and business professor John Mullins wrote the now-classic Getting To Plan B: Breaking Through To A Better Business Model because entrepreneurs almost never succeed based on their first business plan.

As Komisar and Mullins describe it, a startup founder sets out with the first version of her business to test her business hypothesis. As data from those tests comes back, she hopefully figures out in time the need to develop a Plan B. Customers might not respond the way you expect. Your pricing model could be off. Any number of startup assumptions could turn out to be wrong and the data will let you know.

dear_duckWith Dearduck, Aucoin began with a passionate idea, and an assumption. Gift-buying for other people – a friend, a co-worker, a lover – is an opportunity to strengthen a relationship, or not. She set out to build a better way to buy gifts for other people, using easy and fun surveys and data analytics to aid in gift curation.

Before calling Aucoin, I took some online Dearduck surveys, which walked me through series of picture-based choices: one survey regarding pets, another regarding booze. With this data, Aucoin says, Dearduck begins to identify my “consumer DNA,” unique to me. Through the first Dearduck app, she has the consumer DNA of up to 50,000 unique buyers. It indicates what things I like and allows a gift-purchaser to select something that matches my preferences.

In her original business launched in 2017, Dearduck sought to make money by sharing in “affiliate commissions.” In other words, when her data targeting drove a successful online sale, the retailer would pay Dearduck a percentage of that sale.

Katy_aucoinHer business has since pivoted to Plan B, but the core idea remains.

With Aucoin, you can hear her zest for gift-buying.

“We want to give someone that happy feeling of finding the right thing. It’s very exciting to think that people could have that feeling all the time. You just feel closer to people as you learn more about them.” By contrast, she says, “when you find yourself saying ‘Oh, if you don’t like it, there’s a gift receipt,’ that’s a problem, you’ve already failed. You already feel defeated about giving a gift.”

But while that initial core idea remains, Aucoin had to reject Plan A for how the business would make money.

Komisar and Mullins’ book may be read as a critique of the idea that startups should build an extensive “business plan,” because that plan will inevitably go wrong. Plan A – as their title implies – isn’t actually going to work. What can substitute for a fixed business plan, according to the authors, is a series of business questions and hypotheses. Then, as data on those questions comes in, a startup founder needs to respond as quickly as possible.

Aucoin’s experience mirror’s this, as the data she collected after launch began to change her business. Retailers began to make requests that she hadn’t expected. Aucoin says she conducted over 100 interviews with retailers. In addition, some of her original data on purchases was messy. She tells a funny anecdote about her boyfriend purchasing gifts for her, only to have his “consumer DNA” suggest that he now regularly wants to buy yoga pants and lipstick. Which, she says, is not quite the right signal to retailers.

As far as we know. Anyway, I’m not judging either way.

With a retooled business model, Dearduck is a few weeks away from launching Plan B, with a large San Antonio retailer. The new plan is that Dearduck’s Consumer DNA data can be used to target relationships – again, between friends, co-workers, relatives, lovers – to aid in gift-buying email campaigns, often timed around an event like a birthday or important date on the calendar. The retailer will pay based on the targeted campaign to potential customers.

Plan_BThere’s nothing easy or straightforward about doing what Komisar and Mullins say is natural – the rejection of Plan A in favor of a Plan B. Komisar and Mullins don’t really address this in their book, but it’s hard.

About downsizing from 6 team members and then moving from Houston to San Antonio, Aucoin says “It’s extremely hard. It’s emotional. You have to be willing to make the right decisions for where the company is going, not where it has been. Your customers will tell you what the product is. ‘This is how I want to use it.’ And then the retailers saying ‘We think you can solve this in a different way’”

Michael Girdley, a founder of RealCo, the accelerator that helped attract Aucoin’s business to San Antonio, finds her business shift natural. He says,

“If you’re blazing a new trail, it’s completely normal and expected. Obviously, dentists or similar established business models don’t have that challenge.”

Girdley continues,

“In startups, it’s the norm rather than the exception to learn things about your market and shift directions after starting.”

Entrepreneurs reading this: I’m interested in your stories. Are you on Plan B? Or Plan Z? Or were you, unusually, correct in your business assumptions right from the beginning?


A version of this ran in the San Antonio Express News and Houston Chronicle.


Please see related posts:

Entrepreneurs: Take Half the Luggage and Twice the Money

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Elements of a Tech/Startup City

closer_to_fineHere’s my thesis, which won’t make me popular in some parts: My city’s no tech startup hub. Not even close. So the question is: What’s the missing thing that would make a city a tech hub?

I asked a bunch of experts. Do you remember that Indigo Girls song “Closer to Fine?” I was an Indigo Girl last month, asking everybody my question. Maybe I can put that earworm inside your brain for the rest of the day. “I went to the doctor, I went to the mountains…” You’re welcome.

I collected six answers from as many experts, which I’ll summarize and let them expand upon: Proximity, Practice, Leadership, Unique Advantages, Real Problems, and Patience.

Those were the answers, and clearly are some of the ingredients. Combining them to make a tech city probably takes a dash of luck and a bit of magic as well.

The UT San Antonio Dean of Engineering Dr. JoAnne Browning proudly showed me the architectural plans for her department’s key ingredient to building a tech startup city: Proximity. Outside of her office window, trucks moved earth in preparation for constructing a 17,000 square foot “Maker’s Space,” intended to bring together under one roof engineers, entrepreneurs and industry experts – a tech lab to launch the next generation of startups, and startup founders.

Meanwhile, on another part of the university campus, Diego Capeletti, Coordinator at the Center for Innovation, Technology and Entrepreneurship (CITE) runs an annual startup competition to give undergraduates startup practice even before leaving university. Twenty teams typically enter the annual CITE competition, teams made up of both engineers and business students, paired with industry mentors. They are winnowed down to 10 teams that receive funds for building prototypes, and then a final group of 5 teams make a pitch to a Tech Symposium. Winners receive a $5,000 cash prize plus generous in-kind services such as legal, public relations, office space, and patent help. The big idea here is that a startup city needs to produce young people with practice in startups.

I asked Michael Girdley, who wears many hats as the founder of a software coding school CodeUp, co-founder of investment firm Geekdom Fund and startup incubator Real Co about the city’s key missing ingredient. He added the third element beyond the UTSA’s folks’ proximity and practice.

When I pushed for the tech startup city’s most important single missing piece, Girdley settled not on training undergraduates but rather on the dearth of business leadership.

“There are not enough startup founders. We need the experienced professionals, in particular, who can start companies and swing for the fences.“

cyber_securityCongressman Will Hurd (R – 23rd District) brought an intelligence agency and cybersecurity professional background to serving the district which stretches from northwest San Antonio all the way nearly to El Paso. When I asked about San Antonio’s key missing ingredient, he immediately pointed to one of the city’s natural, unique strengths – cyber security.

“It requires us to understand why San Antonio is Cyber Security City USA. Very simply, the 24th [LINK:] and 25th [LINK:] Air Force in SA, TX. This is what’s driving the talent,”

he commented, naming the two cyber warfare groups stationed at Lackland Air Force Base. The first key to building a tech startup city would be building on that unique strength, to retain people leaving those jobs who want to remain in the city, but also to build private companies to serve the Air Force groups’ needs.

And that, according to Hurd, requires the second ingredient: the need to solve specific, real problems.

“To create an ecosystem…you‘ve got to have problems to solve, and you’ve got to have people that can solve them.“

If the Air Force cyber units can identify and make specific problems available to the private sector through something called the Cyber Proving Grounds [LINK:] Hurd argues,

“then we get everybody like all these smart private sector entrepreneurs in a room, and tell them ‘Here’s our problem, give us a 30-day, 60-day, 90-day solution.’”

The big idea here is that local startups shouldn’t focus on solving Silicon Valley problems, but rather San Antonio-specific problems, as posed by the city’s unique cyber security strength.

I called Dr. Ben Jones, Professor of Entrepreneurship at Kellogg School of Management at Northwestern University in Chicago, who independently echoed Congressman Hurd’s key messages, and amplified them. It sounded to me like they’d been reading the same books on startups.

“We think in innovation that it’s easier to work back from real problems. By being close to a real problem you can pivot and innovate toward real solutions.

You might have a company that has a real problem they are trying to improve on, and you need to bring those problems to people who can work on that.

Why do clusters of innovation happen? Because it’s a thick market on both sides. There’s a large variety of needs and a large group that can meet those needs.”


Jones’ theory echoed Hurd’s focus on San Antonio’s unique advantage – cyber security – and the identification of real problems that need solving, as the basis for startups and innovation.

For one more element, I turned to one of the original three Rackspace founders, Dirk Elmendorf, for his unique perspective as an entrepreneur who helped build the city’s only recognizably large tech company.

His pitch for the one missing piece for everyone eager for a tech and startup city: patience.

“The real challenge of being a tech city is that unlike technology itself, cities don’t change overnight. So the challenge is sustaining the ambition, to be willing to stick it out even if you’re not sure the plant is going to grow.”

He also urged a two-track approach to encourage patience.

“Our idea is to continue to build small things that may survive, because small achievable things sustain excitement, but also aim for large ambitious things that make a bigger impact.”

So proximity, practice, leadership, unique skills, real problems, and finally, patience.

There’s more than one answer to these questions, pointing us in a crooked line.


A version of this post ran in the San Antonio Express News and Houston Chronicle.


Please see related posts:


Getting started – Entrepreneurship

Entrepreneurs – Pack twice the luggage, half the money

Entrepreneurship and its Discontents


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Need Transparency Taken To Eleven

In my last post I mentioned the terrible scores Houston and San Antonio governments received for transparency in their economic development programs, according to a report by Good Jobs First.

One reason the stakes for transparency are high is because the amounts of subsidy are so big. How big? Well, we’ll soon find out. In 2017, for the first time, cities and counties nationwide will have to disclose how much in total subsidies they provide to private businesses, due to a new accounting standard known as GASB 77.

A study by the New York Times in 2012 found that governments in Texas provided the most economic subsidies to private business of any state in the nation, at $19.1 billion.

Texas Monthly writer Erica Grieder makes the point in her book Big, Hot, Cheap and Right: What America Can Learn From the Strange Genius of Texas, that “free-market capitalism” in Texas has, ironically, long relied on strong government intervention and subsidies for private business.

But with that high subsidy comes – I would argue – a heightened duty to keep the public informed of programs and results.

The current way of reporting on economic development subsidies, officials in each of the City of Houston, City of San Antonio, and Bexar County all told me, is that, once a year, the economic development department sends a spreadsheet over to someone at the newspaper, either the Houston Chronicle or San Antonio Express News. Beyond that once-a-year data dump, either an enterprising citizen or more likely a bored reporter on a fishing expedition working on deadline would need to submit a specific request to the economic development department of the city or county.

Since the information is deemed public, this request presumably would be fulfilled with little muss or fuss. All of the officials with whom I spoke reiterated that no formal “Freedom of Information Act” request (a “FOIA” for the cool kids) needs to be filed.

But you can probably see why, although that constitutes a minimum standard of public disclosure, it falls far short of what we should reasonably expect in 2017. What if the reporter or editor at the respective paper had a full plate of stories that week and didn’t really want to make use of the information? What if – as is likely every year – no particular economic development deal jumped out as worthy of newspaper coverage? What if – as shocking as this will sound to all of you reader-types – a citizen doesn’t actually read the newspaper? How would they learn about this? For each of these reasons and more, an annual newspaper data dump isn’t the right level of transparency at this point in time.

good_jobs_firstAll of the economic development officials I spoke with agreed with me in theory on this point, but obviously it will take some effort and resources in their respective departments to improve the situation.

And we can agree that improving searchable websites for ease of transparency can be difficult. Bexar County’s Executive Director of Economic Development David Marquez pointed out to me that certain (not to be named) newspaper websites can be notoriously un-searchable. That’s a fair point, my man. A fair point.

Anyway, I hope they will all take a look at Austin’s searchable database, to see what good disclosure and transparency looks like.

Beyond the amount of money involved, why else do we need a high degree of transparency with respect to economic development deals? Just this. There is nothing quite like conferring a public good – a generous tax break – to a private company that gets my spider sense tingling about potential conflicts of interest. You don’t have to be paranoid or a cynic like me (although I invite you to be) to believe that a natural symbiosis exists between public officials who need money and have the ability to award valuable subsidies and private enterprises who would happily return the favor.

going_to_elevenWe – not just writers, but also citizens – should be able bring up an online database showing, just to pick an example, political campaign contributions, and compare that database to public subsidies of private companies. Are there any connections? Does a company that contributes to a campaign show up as a beneficiary of public subsidy? That’s the very definition of conflict of interest, and we need the tools to prevent that. If there are any dots to connect, everyone should have the power and ability to connect them, from the comfort of their own laptop. If there are no dots to connect, then we all sleep better at night.

This is in no way a Republican or Democratic Party issue. But if you want to see it that way, just consider the importance of making sure officials from that other party (the one you most distrust) can’t get away with it. We need you on that wall, people, guarding against that other party’s nefarious conflicts of interest!

I believe the right volume of transparency for economic development tax breaks for private companies is a “SHOUT IT FROM THE ROOFTOPS, CONSTANTLY” level of transparency. On a scale of one to ten, I want transparency that goes to eleven. Because you see, it’s that one bit louder, isn’t it?

The next best thing to a transparency volume turned up to eleven is an online searchable database. Properly understood, that’s strongly in the interest of public officials and private corporate recipients as well. They also want and deserve the legitimacy that goes with transparent economic development plans, free from charges of influence peddling or conflicts of interest.
Please see related posts:

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Need for Transparency in Economic Development Part 1

Economic Development Subsidies: Turtles All The Way Down

Book Review: Big Hot Cheap and Right, by Erica Greider

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Book Review: The Lean Startup

What’s the most important thing to do when starting a company?

How about this: Don’t try to build the company. Instead, try an experiment.

A confluence of events and conversations have me re-asking that question, and landing on that answer.

The first event is that my city celebrated “Startup Week” in the beginning of March. I attended gather ideas on the central mystery of startups. The mystery is – how do you manage that initial transfiguration from a mere idea stuck inside a lunatic entrepreneur’s head to a real-live business providing a service, satisfying customers, collecting revenue, and employing people?

The second event is that a few weeks ago I started asking people in my own network for advice about a financial technology startup idea of mine. It’s a genius idea, obviously. Just ask me. A few minor stumbling blocks exist for me, however, like for example I’m not a technology guy and I don’t have direct experience in the relevant financial industry. That is not going to stop me. With a small dash of humility, however, I reached out to friends for advice.

One of my best friends works in the Bay Area as a software development manager. “You should read The Lean Startup,” by Eric Ries, he mentioned casually in the course of our phone call.

Next I called my cousin in Boston, currently in year five of his tech startup, for advice. “BTW, have you read The Lean Startup?” he texted after our call ended.

The next day I asked advice from a friend in my neighborhood who had successfully launched a technology company while still in college. As he laid out some suggestions, he added, “of course, you know the ideas from The Lean Startup?”

Ok, ok, guys, fine! I’ll read it. One does not simply start a company anymore. Apparently, one does a lean startup first.

Lean_startupBut what does that even mean?

The point, as I’ve now learned by reading Ries’ book, is not to build a finished product or company and then deliver that to a customer. The point is to design a series of business experiments to learn what customers want most.

Do customers respond to certain type of marketing pitch? Do they even use a proposed product in the way you expect? Or maybe they have a different preference for features than you expected?

Ries argues that cheap testing – followed by fast innovation in response to customer data – will succeed more often than a fully-built solution.

Ries makes the interesting point that big companies too can employ lean startup techniques. Instead of investing huge dollars and months or years in research and development, he argues, small teams within a larger organization should be encouraged to attempt small-scale experiments, all the more easily trashed, or expanded, as they gain feedback from customers.

So that’s what Ries means by “Lean Startup.” Seemingly every entrepreneur in my acquaintance has bought into this idea.

Ries goes on to redefine, for entrepreneurs, what their “burn rate” is.

In a typical startup, we might think the burn rate is determined by comparing the money in the bank and the speed at which the startup incurs costs. With $700,000 in the bank, and $100,000 costs per month, we can say that the company has roughly seven months before it runs out of money. A seven-month opportunity to achieve sustainability is an important measure of survivability

Ries seeks to re-define a different kind of survivability-pace for startups. Specifically, how much time and money does it take to test a business hypothesis? If a startup can legitimately prove or disprove a business idea in four months, that’s fine. If, however, the next startup experiment only takes two months to disprove or prove an important idea, then the startup is in effect improving its chances of survival. The shorter the time the company takes to test innovations, the better its chances of survival. The more ideas it can test, before it runs out of money, the greater the chance of sustainability. Ries says this is a better measurement of survivability.

SA Startup Week

At Startup Week, I arrived ready to test whether that’s indeed what successful entrepreneurs do in my city.

By happenstance, I picked a particularly “lean startup-ey” event venue, organized by entrepreneur George Haskell, founder of cheap-airfare service Whiskr.

Haskell had organized this meet-and-greet for startups and interested people in what he described as “science fair for startups.” At the event, entrepreneurs set up a quick and easy booth to show off and describe their wares or services. It was an experimental venue with a knowing nod to high school-level experimentation.

whiskrDid Haskell endorse the lean startup model for his own business?

Oh yes. Haskell described to me an extremely cheap form of experimentation, on his way to business creation.

“My company started in 2012 as a simple mailing list. We pitched it at travel conventions, with just a t-shirt and stickers, simply talking to people. I got their feedback, what they wanted, what they didn’t want.”

With a mailing list of interested customers, Haskell would personally spend hours online searching for what he called “mistake listings,” of cheap fares – like flights cross-country for less than $175, or to Europe for less than $300, or to Asia under $400. Having first built his customer base experimentally, and a manual process for finding what they wanted, he launched this past week an automated process of delivering deals fast to his customers. It all sounded quite lean startup-ey to me.

wildway_granolaAfter chatting with Haskell, I wandered over to a different booth at the science fair for startups. Probably because I’m a coffee addict, I grabbed the Vanilla Bean Espresso granola sampler on my way past the Wildway Granola table.

As it turns out, Kelli Koehler and her husband Kyle began Wildway with a series of experiments as well.
“We started at farmer’s markets. We tested a lot of different flavors,” says Koehler.

In the beginning they would make just 20 to 40 bags of granola for one farmer’s market.

“We would get feedback right then and there from consumers, over and over again, from hundreds of people in one four-hour farmer’s market. We tested a lot of flavors that we don’t have today because they didn’t hit a wide enough audience or they fell flat.”

I asked about their packaging.

“We started with ‘the sad brown bag’ as we like to call it. Just a brown bag with a sticker, and the sticker evolved every single week. We would add stuff to it, take it off, change the shape. We were still trying to figure out our voice, our branding, what we stood for, what we wanted that to feel like. We went through lots of iterations.”

“Our motto has always been to get it out there to market, and to see what happens. You can always improve and make changes along the way, but nothing is going to happen if you don’t at least put it out there.”

19th Century Lean Startup Guy

Koehler proudly reported to me that Wildway Granola is sold in over 700 stores nationwide, including Whole Foods and HEB. Koehler totally endorses the lean startup approach.

“This is a quote that I have on my whiteboard above my desk, and it’s from Mark Twain, and he says ‘Continuous improvement is better than delayed perfection.’

So I learned that Mark Twain, nineteenth century wit, was also a lean startup guy.

Entrepreneurs: Don’t build the whole company. Build an experiment and improve from there.


A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts on entrepreneurship:

Entrepreneurs – The difficulty of funding

Entrepreneurs – The difficulty of getting started

Entrepreneurs – Bring half the luggage, twice the money

Entrepreneurship – The air, the taxes, the retirement

Please see other book reviews – especially All Bankers Anonymous Book Reviews In One Place!



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Organic Waste – My Kind of Green

Inigo_MontoyaWhen I think about environmental action, my mind goes to the words we commonly use – particularly “sustainable” and “green.” And like the Princess Bride’s Inigo Montoya, I do not think these words mean what traditional environmentalists think they mean.

Because of my particular definitions, I am oddly excited about my city’s organic compost plan. I’ll explain why in a moment, but first, those words.

To me, an environmental plan is “green” when we make money or save money – cool, paper, greenbacks. A “sustainable” environmental plan is one that continues because everyone sees it as in his or her own personal financial self-interest. A “sustainable” environmental action, therefore, is one not easy stopped by a political change or a slight shift in market prices. If people want to do the right thing environmentally and it’s also in their interest financially, then that action will sustainably continue.

Ok, so why do I get all tingly about my city’s green organic composting barrel that showed up at the end of my driveway a few months ago?

After a little bit of research I found out that a business managing organic waste can make money – in a green, sustainable way. As it turns out, my city, and indirectly taxpayers, can save money from organic composting. The final piece – the specific financial benefit for households – is only weakly established, in my opinion. San Antonio is working on this as well, but that’s probably the part that needs the most strengthening in the years to come.

Figuring out how a private business makes money is why I visited the headquarters of New Earth, the company that has the contract with the City of San Antonio to collect organic household waste.

New_EarthIn theory, I’m enamored of their business model. They get paid to take in raw waste, and they get paid to sell compost. Getting paid both coming and going!

Organic waste dumpers – like landscapers, tree-clearing developers, and now the City of San Antonio – pay New Earth for the privilege of dropping off organic trash, the first source of the company’s revenue. New Earth then applies its processes – the art and science of industrial-scale composting – to that waste over 1 to 3 months. At the end, they produce ground cover, mulch, and compost bags for sale to landscapers, developers, and gardeners.

Of course, I’ve simplified the attractiveness of New Earth’s business model.

Like any real business, profit is not as easy as it at first seems. New Earth takes considerable financial risks.

Here’s just a sample of why it’s risky: Handling trees and brush cleared from a new construction site is relatively easy – you run the trees through a chipper and you have a relatively uniform product at the end. However, properly filtering household organic waste – produced from hundreds of thousands of sometimes careless trash-tossers like you and me – is a far more risky and manual-labor intensive process. Clayton Leonard – until recently the President of New Earth – explained to me that New Earth had to double their workforce to handle the city contract. They also had to invest in a multi-million dollar piece of equipment to sort through the waste. Leonard climbed up with me onto one of their giant sorting machines.

compostWe watched the household waste pass through a conveyer belt while guys with rakes – some of their new hires – separated the non organic waste from the pile. Pro-tip: Neither your old iPhone case nor your plastic bags should go into organic waste. Not all households, I saw from the conveyer belt process, have gotten that memo.

I mention all this to say that it takes significant capital and labor costs to try to make money on a citywide organic waste contract. The key point for me, however, is that New Earth is being run in my version of a green, sustainable way – to make a profit.

At the same time, the City of San Antonio has their own green, sustainable, reasons – saving money. Here’s how.

When the city hauls and dumps regular trash, it pays an average of $24 per ton to local landfills for that privilege.

When the city hauls and dumps organic waste over to New Earth it pays $16.50 per ton. The city is incentivized therefore to redirect as much volume of trash as it can to organic waste. As New Earth’s Leonard told me, “In order for us to survive, we have to be cheaper than a landfill.”

going_greenAs the city fully rolls out the green barrel program – scheduled for completion in April 2017 – it hopes to get a lot of residents dumping their compostable waste into those barrels. The goal for the household organic waste program is 60,000 tons per year, according to Nick Galus, Assistant Director for the Solid Waste Management Department. At current prices, that would save an estimated $450,000 per year.

As a public entity, Galus notes, their goals are a combination of financial gains and sustainability, traditionally understood.

“Our goal is to capture the greatest amount of the waste. The cost isn’t the driving force. We’re trying to get to our goal in the most cost-conscious way,” he said.

Interestingly, San Antonio is the first major Texas city to roll out an organic recycling program city-wide. The fact that other Texas cities haven’t done the same – despite some financial incentive to do so – indicates that there are risks for a city as well. Any city, including San Antonio, has costs for rollout and household education. Other Texas cities have pursued strategies focused on yard waste, according to Galus, making it costly to switch over to a plan that also accommodates food waste.

The San Antonio goal is to have 60 percent of all waste hauled by the city be recycled, composted, or repurposed in some way by 2025. They’re at 33 percent as of 2016.

If San Antonio can show cost savings, the case becomes more compelling for other cities. If they can even figure out the household financial incentives, the whole process becomes my kind of green and sustainable.


A version of this post ran in the San Antonio Express News and Houston Chronicle.



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School Finance And My Tax Bill

school_taxI got my real estate tax bill in the mail recently, and noted with horror that more than half of my annual chunk of flesh goes to my local school district. That chunk for schools got 16 percent bigger this year compared to last year, and on November 8th we’re being asked to vote yes for a bond and a “TRE” to make that wound permanent. As I finance guy, I like to understand why.

The immediate “why” dates back to a May 2016 ruling by the Texas Supreme Court that variously described the state public school finance system as Daedalean, Byzantine, Augean, and an “ossified regime ill-suited for 21st Century Texas.”

Clever classical references notwithstanding, the court also declined to intervene, found the system met “minimum constitutional requirements,” and referred future financing changes back to the state legislature. Immediately following that decision, school districts like my home district of San Antonio ISD began scrambling to find sources for much needed funding. Hence, my increased tax bill, and the ballot question to ratify that increased bill.

SAISDResidents in the San Antonio ISD residential area – like me – are asked to vote November 8th for two increased funding items. The first is a run-of-the-mill $450 million bond vote, the proceeds of which are limited by law to capital improvements like renovations of school buildings.

The second vote, for a Tax Ratification Election – or TRE – is a bit more unusual and offered me a window into the weird world of public school financing. Since bond money proceeds can only be spent on buildings – the “hardware” of education – TRE money pays for for improvements in the “software” of education, such as educational programs.

The need for this particular TRE vote arises from the peculiar funding rules and history that govern public school finance in Texas.

History of funding

Both nationally and in Texas, we initially fund schools at the municipal and county tax level rather than at the state or national tax level. This results, naturally, in huge inequalities in school funding based on property tax and property value differences across cities and towns.

Next, at least in Texas, we sue the legislature over unequal funding levels, as happened in 1989 when Edgewood ISD along with others won a state Supreme Court case based on this inequality.

The state then created mechanisms for roughly equalizing the distribution of money, primarily through a state fund called the Foundation School Program (FSP.) Money for the FSP come from a combination of state allocations and funds recaptured from property-wealthy districts, such as I described in Houston ISD last week.

Even though the burden of funding still sits with locals, in 2006, the state legislature ratcheted downward the amount of tax that local districts could raise, from $1.50 to $1.00 per $100 in property tax value. For example, a $200,000 house taxed at $1.00 per $100 in tax value would generate $2,000 in school taxes, rather than the previous $3,000 in taxes at the $1.50 rate.

That would normally be great because – “Hey look! Lower taxes!” – but the state legislature realized subsequently that if local districts don’t tax enough, the state would have to make up the difference with the FSP (state money). So that had to be undone, or else we’d have to raise more state taxes. Also, in the case of Texas in particular, a statewide income tax or “Ad Valorum Tax” is unconstitutional, so taxing decisions have to be – or at least appear to be – made at the local rather than the state level.

Between the 2009 and 2013 legislatures, a system emerged to incentivize more local taxation, presumably to relieve the legislature from providing more funds at the state level. As local districts raise more revenue locally, approaching $1.17 per $100 of property value ($1.17 is the new state cap on local taxation) the state will match some of that money through the FSP.

And that increase in property tax to capture matching state funds for your local school district are what’s at stake on the ballot in San Antonio ISD, and where many other school districts in Texas will look to raise money in the future. The $0.13 bump on my ballot of $1.04 to $1.17 per $100 property value will increase taxes on a $200,000 home by $260 per year.

My school district hopes to ratify the tax raise to the tune of about $15.6 million from local taxpayers, with the promise of about $16.5 million in matching state funds from the FSP.

Is that clear? Or clear as mud? This kills me with how confusing it is.

Look, I’m pretty good at bond math, cash flows, and spreadsheets. I have watched live presentations on the bond and TRE question; I’ve watched multiple video presentations online; I’ve read the entire 100-page Supreme Court ruling from May 2016; and I’ve sat down for long one-on-one conversations with SAISD officials – and I still find this ballot question incredibly confusing.

By state law, I understand this has to be a ballot question for voters, but honestly, there is no way for informed citizens to actually understand and vote on this other than an unsophisticated choice between: “Public Schools (Good!)” or “Taxes (Bad!)”

And that’s upsetting to me. When an issue is as confusing as public school finance is in Texas, you should always ask yourself – who benefits from the complexity and who loses?

I complained about this complexity to Seth Rau, SAISD’s Legislative Coordinator, who assured me, depressingly, that Texas is right in the middle of the pack nationwide when it comes to school finance complexity. Rau joined SAISD in 2015 from Nevada – as did Superintendent Pedro Martinez – where school finance is just as confusing. According to Rau, 45 of 50 states have tried to settle school finance problems through lawsuits. So I guess we don’t have a monopoly on “Daedalean,” “Augean,” and “Byzantine” systems here in the Lone Star state.

Full disclosure: public school finance feels very personal for me, with two kids in San Antonio ISD. As a parent of a first grader and sixth grader, I pinball between frustration with and empathy towards my school district, which at times appears intent on undermining positive student outcomes and at other times seems like it’s doing God’s Work Here On Earth under near-wartime conditions.


A version of this post ran in the San Antonio Express News and Houston Chronicle.


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