Booming U.S. Economy Translates Into Mixed Dividends for Education

By Robert C. Johnston — July 09, 1997 11 min read

James Merrill, a school administrator in Wake County, N.C., knows the conflicting pressures of a robust economy.

Full coffers made it easier for state lawmakers in North Carolina to approve funding for teacher and administrative raises and incentive bonuses this year.

But it’s been harder to get new money locally in the Research Triangle community where Mr. Merrill works. Wake County commissioners refused the 85,000-student system’s request for a 20 percent budget hike, and instead offered 7 percent, a rate that will help keep county taxes low.

“When you grow by 4,000 students a year, you can’t maintain services if your budget barely meets inflation,” said Mr. Merrill, the associate superintendent for administration for the Wake County district, which serves students in and around Raleigh. Although the 7 percent hike is more than triple the nation’s current inflation rate, it won’t make up for Wake County’s explosive growth and relatively flat spending in recent years, he said.

Around the country, as most states and districts begin a new fiscal year this month, the scene is similar. A booming economy is producing fat budget surpluses. But some state lawmakers, not sure how long the good times will roll, are hesitant about bankrolling school shopping sprees. Instead, they are using surpluses to subsidize tax breaks and build fund reserves. As a result, few schools are seeing big windfalls, except for court-mandated spending and targeted outlays in areas such as technology.

“Everything works better in an upbeat economy ... but you are not seeing huge increases in spending,” said Mary Fulton, a school finance expert with the Denver-based Education Commission of the States, a policy clearinghouse. “A lot of this is being played out in property-tax relief.”

Nonetheless, a healthy economy is helping most schools maintain services and, in some cases, expand on them against a backdrop of dramatic gains in enrollment.

Nationwide, K-12 public school enrollment rose from 39.4 million students in 1984-85 to an estimated 45.7 million in 1996-97, a jump of 16 percent, according to the National Center for Education Statistics. School enrollment in the United States set a record this school year. (See Education Week, Sept. 11, 1996.)

New estimates from the center predict that 2 million new students will enroll in public schools between the fall of 1997 and 2006. The first decrease in enrollment since 1983-84 would occur in 2007.

“There’s a [fiscal] boon,” added Richard Rothstein, a research associate with the Economic Policy Institute, a liberal think tank in Washington. “But it’s just being eaten up by growth in enrollment.”

How healthy is the U.S. economy? For starters, the nation’s so-called misery index, a combined gauge of unemployment and inflation rates, is the lowest it’s been since the 1960s.

June’s national unemployment rate of 5 percent, combined with a 12-month inflation rate of 2.2 percent, put the month’s misery index at just 7.2 points. In contrast, the index reached 21 points during the recession of the early 1980s. And, the gross domestic product grew 5.9 percent in the first quarter of the year for the highest growth in almost a decade.

Competing Priorities

State treasuries have been reaping the benefits.

Thirty-one states projected higher-than-expected tax collections this year, according to data from the National Governors’ Association and the National Association of State Budget Officers.

“It’s probably the longest time we’ve gone without a major recession since 1981,” said Diana Frurchtgott-Roth, an economist with the American Enterprise institute, a conservative Washington think tank. “We see no reason for this to stop.”

But education is just one of many areas vying for new funds. While state spending on education increased by 5 percent between fiscal 1994 and 1996, spending on corrections increased 8.6 percent in the same period.

And, as the economy picked up steam in the past few years, state and local leaders began eyeing tax cuts. At the opening of this year’s legislative season, proposed increases in state spending on education averaged 5.9 percent nationwide, almost identical to last year’s rise and below the 8.3 percent increase in fiscal 1995. Meanwhile, governors in 25 states were proposing $4.4 billion in sales-tax and income-tax relief.

When all sources of K-12 education funding are adjusted for inflation, per-pupil spending increased from $4,469 in the 1980-81 school year to $6,213 in 1995-96, in constant 1995-96 dollars. Most of that increase was seen by 1988-89.

Ms. Fulton said that the heavy spending in the 1980s was due in large part to renewed national concerns about the quality of public education.

‘Breathing Room’ in Calif.

One of the states to benefit most from the vigorous economy is California. After several years of financial decline, the Golden State is on the mend. The state anticipates having an extra $3.4 billion in available overall revenue in fiscal 1998, thanks to higher personal-income-tax receipts and reduced welfare rolls.

And, because of previous miscalculations of state school aid, coupled with funding guarantees, most of those new revenues would go to K-14 education. About $1.3 billion is designated in discretionary aid to be shared by districts. The money would be targeted to individual districts based on a formula that sets an across-the-board increase while also funneling extra money to districts that spend below the state average on their schools.

Of course, with budget talks still in progress, some observers worry that the $1.3 billion might not make it into school budgets.

“The [discretionary money] is potentially in jeopardy because of legislators who have ideas of their own about how to spend it,” said Kevin R. Gordon, the associate executive director of government relations for the California School Boards Association.

Republican Gov. Pete Wilson has aid he wants to u e remaining, nondiscretionary funds to fully pay for the state’s reduced-class-size effort in grades K-3, purchase off-the-shelf standardized tests, and boost classroom technology.

Even as the 1998 spending plan continue to take shape this summer, school officials in California are dusting off unmet-needs lists.

“This gives us some breathing room that we haven’t had for a few years,” said Jacquie Canfield, the budget director for the 78,000-student Fresno school district. The district would use some of its anticipated $6 million in new state discretionary money on musical instruments, training, and art supplies. It would also move to 20-to-1 pupil-teacher ratios in 3rd grade classes, as it already has in grades K-2.

Sacramento school officials, meanwhile, are eyeing a portion of an expected $9 million in new state money and a rare district surplus for middle and high school reading. The school board also approved a 5 percent raise for district employees. Before the 1995-96 school year, district staff members went five years without cost-of-living increases.

“Until the economy improved, we were unable to look at increases,” said Laura Bruno, Sacramento’s deputy superintendent for finance and personnel.

California is not alone in raising state funding for schools. Beginning in the 1998-99 school year, Nebraska will boost state aid by $110 million a year, increasing the state share of school costs from 40 percent to about half.

But as with many states, the spending increase mostly makes up for a property-tax cut. In Nebraska, that took the form of a $1.10 cap per $100 of assessed value that kicks in next July.

Battle in Wake County

But even great economic news doesn’t mean schools can count on all the aid they believe they’re entitled to, as district leaders in North Carolina’s Wake County are discovering.

This year, Democratic Gov. James B. Hunt Jr.'s proposed $500 million increase in state education spending seemed like a dream. But it became reality when state tax revenue surpassed projection early in the year.

Eventually, most of Mr. Hunt’s initiative passed.

“When the budget came in better than expected, [state leaders really delivered,” said Bob Berlam, the director of government relations for the North Carolina School Boards Association.

Rep. Gene Arnold, the Republican chairman of the education committee, said legislators suddenly had the ability to meet call for better education and school accountability. “You’re seeing a demand by the public to see student performance increase,” he said. “For too long, we’ve allowed ourselves to be at lower levels than we should be.”

At the same time, one of the top-performing districts in North Carolina is in a legal battle with its county commissioners over school spending.

This spring, Wake County school officials, whose students boast some of the state’s top SAT scores, asked for a 20 percent budget increase in the county’s school appropriation, from $108.5 million to $129.8 million. The school system’s operating budget, including state and federal aid, was $429.6 million last year.

School officials defend the big request, saying that local spending has not kept up with technology needs and a roughly 5 percent annual growth rate for the past several years. Between 1991 and the end of the 1997 school year, a booming economy fueled by the area’s high-tech and research industry has brought more people than ever to Wake County and boo ted local enrollment from 66,000 students to just under 85,400. And 4,000 more students are expected to enroll by this fall.

To deal with growth, officials took the controversial step this summer of capping enrollment at four of the county’s schools, and will bus overflow students to other nearby schools. To trim utility bills, summer schools are running on four-day schedules, and administrative buildings will close for four Fridays this summer.

But Wake County commissioners said that the district’s 20 percent request was too high. A 7 percent funding boost, they argued, was the best they could do while also meeting other municipal needs and maintaining a 2-year-old property-tax cut.

In the 1995-96 school year, Wake County appropriated $1,217 per pupil, 14th among 119 districts statewide. Including all funding sources, the school system’s $4,521 per-pupil expenditure in the same period ranked 78th; the state average was $4,614.

“We didn’t leap a tall building in a single bound, but we took a large step toward a reasonable budget,” said Vernon Malone, a Democrat on the County Commission. “We’re under pressure to maintain a certain tax rate.”

In an extreme measure, the Wake County district became the third in state history to take advantage of a state law that allows a school system to declare its local funding insufficient and call in a mediator. The first session with the mediator was scheduled for this week.

Big-City Outlook

Some of the nation’s largest districts have seen mixed dividends from the strong economy.

In New York City, school officials expect spending in the nation’s largest school system to rise by 4.6 percent in the coming year--well above the less than 1 percent increase in the fiscal year that ended last month. They estimate enrollment growth to hold steady at 1.7 percent. Whether that increase fully materializes, however, depends on ongoing state budget talks, which have dragged on past their spring deadline in part because of disagreements over how to spend an estimated $2 billion surplus.

The Dade County, Fla., district, which includes Miami, will see state funding rise about 3 percent in the 1997-98 school year, while enrollment is projected to climb by about 2 percent, from 341,000 students to 347,500.

Though Florida lawmakers spent about 25 percent of a roughly $2 billion budget surplus on schools in their fiscal 1998 budget, Richard H. Hinds, the chief financial officer for the Dade County district, said that share could have been better.

“Public schools did all right, but we were not one of the priorities this year,” Mr. Hinds said. He added that $10 million will be trimmed from the school system’s $2.3 billion budget for fiscal 1998 to absorb a decrease in state special education entitlement funds.

An official with the 409,500-student Chicago public schools said that a 14 percent increase in the state’s income tax revenue last year amounted to a wash because school revenue from that source was capped.

It is no surprise to some observers that urban areas might not share in the new wealth. State revenue is not well targeted on city and high-poverty schools, they argue.

And a lot of the property in cities is exempted from school taxes, or fails to generate much revenue because the local property wealth has not improved significantly, said Michael Casserly, the executive director of the Washington-based Council of the Great City Schools, which represents the nation’s large urban districts.

“What looks like something that could be a windfall for city schools is anything but,” he said. “A good economy is helpful, but not as beneficial to city schools as you might think.”

Meanwhile in the small town of Franklin, N.H., state officials have approved record state school aid for a new kindergarten program, but the local City Council has yet to ease local budget pressure. Since 1979, the Franklin council has enforced a cap on local taxes that limits local tax increases to no more than the growth of the national consumer price index, or about 3 percent each year.

And unless the council raises that cap, at least for school costs, the 1,400-student Franklin and Hill school district will have to cut field trips, sports budgets, and staff positions to make up the $900,000 budget shortfall.

School officials say that they have no choice but to seek a budget hike from $7.5 million to $8.4 million because of a 24 percent increase in special education costs and salary increases slated to go into effect in the new school year.

And the city’s per-pupil spending last year of $4,012 was $2,099 below the state average. While there are some new building going up in town, Franklin also saw its projected revenue drop $6 million because of reduced property-value assessments.

“People here say that they want the tax cap raised for schools,” said Kathy Bateson, the business administrator for the district. “But I don’t think they have the two-thirds votes needed to override it.”

A version of this article appeared in the July 09, 1997 edition of Education Week