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In Recession-Battered Farm States, School Funding Imperiled

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Still reeling from the crisis in agriculture, the worldwide energy glut, and a recession in the mining and timber industries, a growing number of states across the Midwest and the Southwest are cutting their budgets, throwing into doubt their ability to finance school improvements or even to maintain current services.

If economic problems in these states persist--and experts predict that they will--lawmakers will probably make more cuts in state budgets next year, catching school districts in a "pincer movement" of declining state and local support.

In some states, the fiscal crisis is so severe that officials say it could lead to dramatic changes in the way those states raise taxes and deliver services, including education. One possibility is a new round of school consolidations.

Hemmed in by reductions in federal aid and shortfalls in state revenues, and fearful of local taxpayer revolts, a half-dozen states--including Arkansas, Colorado, Idaho, Iowa, Nebraska, and Oklahoma--have already made or are moving toward across-the-board spending cuts.

Others, such as Minnesota--which reportedly faces a shortfall of as much as $915million over the next two years--will probably raise taxes, cut spending, or both, when their legislatures convene early next year.

"You'll always have a couple of states cutting back each year, for one reason or another, but here we're seeing a trend," said Karen Benker of the National Association of State Budget Officers. As many as 10 states may cut their budgets this year or next, Ms. Benker said.

"It's going to be hard," she added. "It's a retrenchment."

Even in Illinois, which has a $400-million surplus and a strong manufacturing
sector, Gov. James R. Thompson has imposed a statewide hiring freeze and has asked for new taxes, seeking to ensure that the state meets its commitment to education reform, said Robert L. Mandeville, the state's budget director.

States that have already moved to cut their budgets include:

Arkansas. Gov. Bill Clinton last month cut spending by 1 percent across the board, including a $6-million cut in state aid to local school districts, according to Tommy Venters, the state's education commissioner. The education department has covered the $6-million cut with reserve funds, so that districts will not lose any funds, Mr. Venters noted.

He said the state's reform programs are not in jeopardy, but added: ''If we have further cuts, we'll have to adjust at that point."

Colorado. Last month, Gov. Richard D. Lamm asked for a 2 percent across-the-board cut, which would eliminate $16 million from the state's equalized payments to school districts, said Donald Saul, a senior consultant with the school-finance division of the education department.

Rather than cut aid payments by the full 2 percent, Mr. Saul said, the department has asked all districts to cut their programs by 1 percent.

As a result, "in most districts, salary agreements with teachers are all up in the air," said Gerald Difford, executive director of the Colorado Association of School Executives. "It puts us in a real holding pattern, a surviving pattern," he added.

Idaho. Gov. John V. Evans has recommended a 2.5 percent across-the-board "holdback," which amounts to a $14.7-million spending cut. Slightly more than half--$7.6 million--will be absorbed by the public schools, "because they get about half the state budget," said John Andreason, director of the state's legislative budget office.

But the holdback "probably will not be adequate" to solve Idaho's fiscal problems, Mr. Andreason added, because the state faces a deficit of up to $25 million.

Iowa. Gov. Terry Branstad has issued an executive order cutting appropriations by 3.85 percent across the board. "We had a $90-million to $95-million problem," said Timothy Faller, deputy director of the state's legislative fiscal bureau. Of that amount, "$80 million to $85 million was covered with the across-the-board cut," Mr. Faller noted.

For precollegiate education, the cut amounts to more than $20 million, all but wiping out this year's $35-million increase in education spending, he said.

Nebraska. The legislature--called into special session to trim a $41-million deficit from the state's $829-million budget--has given initial approval to a 3 percent across-the-board cut, said Deb Thomas, counsel to the legislature's revenue committee.

The cut will save about $20 million, she said, including about $4- million from the state's $134-million K-12 education budget. At the same time, she noted, a legislative consensus is "beginning to jell" in favor of a tax increase that would raise the other $20 million.

"A tax increase is needed to avoid a 6 percent cut instead of a 3 percent cut," she added.

Oklahoma. Despite a tax increase of more than $250 million this year, Oklahoma faces a $150- million deficit in the next fiscal year, according to Michael Terry, a Senate appropriations-committee staff member. Gov. George Nigh has asked state agencies to cut spending by 3.5 percent this year and by the same percentage next year.

Mr. Terry said the legislature-- which has called for a 6 percent budget cut in fiscal 1987--will "try to protect" increases given this year to fund raises for teachers. But, he added, "whether we can come up with cuts without jeopardizing the gains, I don't know."

Threats of Shortfalls

In addition to those states where cutbacks are already in the works, a number of other states are threatened with budget shortfalls.

Minnesota faces a shortfall for the 1986-87 fiscal biennium of from $159-million to $915 million, according to Daniel Salomone, director of research for the department of revenue.

Although the state has a $450-million "rainy day" account, Mr. Salomone said the likely deficit--$736-million--"would cause a bit of a problem." He said the state will probably suspend income-tax indexing, "and the rest of the deficit would have to be recouped with budget cuts."

"That will definitely happen before a tax increase," he said. He predicted that the state would "probably cut payments to local governments, maybe education aid."

In Louisiana, no action has yet been taken to deal with what is described as a severe revenue crunch, state officials report. But "the chances are very great that we'll have to make a budget cut prior to the end of the fiscal year," said John Dupre, assistant budget commissioner.

The outlook appears better in Kansas, where revenues are running only slightly behind projections and officials are hoping to avoid spending cuts. But Dana Ferrell, a financial economist with the budget division, cautioned that his state is "in a less optimal position than we'd prefer to be."

Other states were so conservative in their revenue projections that they have not experienced shortfalls, officials said. Texas, for example, which committed itself to huge spending increases for K-12 education this year, anticipated the decline in the growth of state revenues and cut other programs.

"At least as it stands, we're quite comfortable with our revenue estimates," said Homer Scace, assistant director of the Texas legislative budget office.

'Added Blow'

For many rural school districts, the budget-cutting by states could not have come at a worse time, experts said.

Many districts have already been squeezed this year by shortfalls in local revenues due to higher-than-average property-tax default rates. They are also seeing their tax bases erode, as farmland continues to decline in value and insolvent farmers move off the land.

In some Iowa counties, for example, officials report that default rates this year are running twice as high as last year. In neighboring Nebraska, meanwhile, farmland valuations are scheduled to fall by 20 percent next year, Ms. Thomas said.

And with farmers moving off the land, declining enrollments may cost districts an additional part of their state aid, which is typically based on per-pupil formulas.

"They're truly caught in a pincer movement" of declining state and local support, Nebraska's Ms. Thomas said. "It's a rock-and-a-hard-place situation," said Idaho's Mr. Andreason.

"It's definitely an added blow to small schools and their financial situation," said Joseph Newlin, executive director of the Rural Education Association. "When you have enrollment declines and falling valuations, you have a real difficulty in raising money. Then, when you get a 2 percent cut from the governor added on top, that's an added blow."

Some districts may try to raise property-tax rates to compensate for the decline in local land valuations, and others may be able to cover their losses by drawing on reserves. But farmers in some areas are so strapped that opposition to any tax increase would probably be stiff, experts said.

"When someone sees his property valuation go down, he expects the tax he pays to go down; when it does not, he wants to know why," said Neil E. Harl, professor of agriculture and economics at Iowa State University. Tax-revolt groups have already sprung up in rural counties across Iowa, he added.

Never Recovered

The states that have cut their budgets have been forced to do so because revenue collections have not kept pace with projections. In energy-producing states, revenues are down because of the decline in oil prices, which has reduced oil severance-tax proceeds. Such taxes are based on a percentage of the wellhead price, and thus decline along with the price.

"We lose $11 million in revenue for each $1 drop in the price of oil," said Mr. Terry of the Oklahoma Senate's appropriations committee. Oil prices have dropped by more than $6 a barrel since January of 1983, according to Elgie Holstein, senior staff director for natural resources and the environment with the National Conference of State Legislatures.

In states that depend on agriculture, timber, and mining, state sales and income taxes have produced less revenue than lawmakers had anticipated.

"I think they were expecting some real improvements in their economies and it's not occurring," Ms. Benker of nasbo said.

"I don't think there's any doubt that what's happening in the farm sector is having a more dramatic impact on the overall economy than we had expected," added Iowa's Mr. Faller.

According to nasbo's annual fiscal survey of the states, many of the states that have cut spending did so despite budgeting conservatively this year; in fact, most raised taxes and cut their rate of spending growth.

But because of the nature of their economies, these states have never completely recovered from the 1981 recession, and they will face even greater fiscal pressures as the federal government continues efforts to reduce its deficit, experts predicted.

"If you look at other areas of the country--New England, the Great Lakes states--they're doing quite well, because there has been more of a rebound in the manufacturing region," Ms. Benker said.

As bad as things are now, officials predict that the cuts this year portend another round of budget cuts next year.

"This is the time of year when governors and legislators are preparing their budgets, and they're doing it in the context of revenue shortfalls. We should expect some budgets to have cuts in them," said William Harrison, an education specialist with the ncsl

Lawmakers "feel very constrained not to raise taxes but to maintain services," Mr. Harl noted. As a result, he said, "they're left holding the bag."

And given the nature of the farm crisis--with as many as one-third of all farmers expected to face insolvency in the next few years--the fiscal condition of states dependent on agriculture will most likely get worse before it gets better, experts said.

"We're saying the crunch will be occurring in financial terms in 1987--that's two years down the road. And it's not going to stop there," predicted Robert Young of the Center for National Food and Agricultural Policy at the University of Missouri.

"I don't think there's any doubt that it's going to get worse," Mr. Harl added.

The farm bill now being developed in the U.S. Congress will probably not provide farm states with much relief, said Deborah Louison, the ncsl's staff director for energy and agriculture, because the Congress and the Reagan Administration are "not inclined to increase price supports or increase prices"--the rationale being that "a balanced budget will do more for farmers in long run than a budget-busting farm bill."

"Exchange rates, the worldwide recession, and interest rates all come to bear on agriculture, and you just don't address them in a farm bill," Mr. Young added.

Education May Be 'Cushioned'

Because education accounts for such a large part of state budgets, anything that limits states' ability to raise revenues threatens education spending.

"I think education will get cuffed around and buffeted as much as it ever has," Mr. Harl said, noting that state officials are "reluctant to cut other programs."

"The irony is that when you're under economic stress, the need for education is that much greater," he added.

Others maintained, however, that despite the gloomy outlook, precollegiate education remains a top priority for many states and will likely be cushioned from the brunt of a new round of spending cuts.

"I don't think the states will cut back education," nasbo's Ms. Benker said, although "they may not fund it as generously as they have in the past."

"Even in those states experiencing shortfalls, they'll at least hold the line or come close to holding the line," Mr. Harrison predicted.

But in states where lawmakers do protect education, they will have to cut other services by even greater amounts, placing an added burden on communities dependent on those services, officials said.

"Someone else will be taking some pretty hard cuts to take care of" education, said Mr. Faller of Iowa's legislative fiscal bureau.

In several states, officials said,4economic conditions are so poor that lawmakers will probably be forced to consider fundamental policy changes that would stand little chance of approval in better times.

"We're faced with a monumental problem," said Idaho's Mr. Andreason. "I think they're going to consider everything you can possibly imagine--the tax structure itself, for one thing, and cutting back programs."

Unless the legislature raises taxes or cuts spending in other areas, Idaho school districts that cannot absorb the cut in state aid will have no choice but to seek higher local levies in the next election, Mr. Andreason said.

"Either the legislature will do what's necessary to correct the shortfall or next September the districts will be required by law to levy increased amounts," he said. "There will be a war in the legislature in January on that very thing."

Lawmakers "don't have many options," Mr. Andreason added. Whatever they do, "it's going to affect the very people that are hurting--either it adds to the tax burden or takes away from current services," he said.

Ms. Louison of the ncsl said declining rural populations and the erosion of rural tax bases will eventually force farm states to change their tax structures. They will also have to "look hard at the number of governmental units," with a view toward consolidation, she predicted.

"The crunch may be great enough that the question will be posed like never before," Mr. Harl added. "We've got to look much more diligently at how to cut costs."

Forced To Innovate

In Nebraska and Iowa--two of the states that have been hit hardest in the current downturn--lawmakers appear braced for major changes in tax and spending policies in an effort to deal with their faltering economies, officials said.

"We've got some big problems," said Nebraska's Ms. Thomas. "The only part of the state above water is Omaha, because it has a diversified economic base."

"There's a real feeling among state senators that this is going to force them to be innovative," she added. "They're going to be forced by economic conditions to be innovative and to consolidate."

Earlier this year, the Nebraska legislature approved a historic consolidation measure that would have forced all districts that operate only elementary schools to merge with larger districts. But the bill was put on hold when opposition forces gathered enough signatures to place the measure on the 1986 ballot.

The plan includes a provision that would limit property-tax revenues to no more than 45 percent of a district's budget. Herb Schimeck, a lobbyist with the Nebraska State Education Association, said the proposal is now likely to pass, "because of the economic situation."

In Iowa, a new school-finance system--which a special legislative committee has been studying--could be included in a general reorganization of the state government, Mr. Faller said.

When asked about the chances for school-finance reform, Mr. Faller replied: "If the state was in a reasonably stable economic climate, I'd say no." But because of current conditions, he said, "I think they'll look at that a little harder, given that people are saying we're in a real bind and have to do something."

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