Districts Pushed to Financial Brink See States as Lender of Last Resort

By William Montague — November 11, 1987 6 min read
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For school officials in Vermilion, Ohio, the financial roof fell in earlier this year when their largest taxpayer, a nearby Ford Motor Company assembly plant, was declared a “foreign trade zone.”

The designation--awarded under a federal program designed to make American firms more competitive in the world market--allowed the automobile manufacturer to exclude its sizable inventory of new cars from the school district’s tangible property tax.

The result was a $1.3-million reduction in the district’s budget, and an immediate--and unexpected--fiscal crisis.

“We had to cut in every area we could,” said Jack D. Hook, the district’s superintendent. “We’re down 51 employees from where we were a year ago.”

But even the most draconian cuts could not balance the school system’s books in time to avoid a default. So this fall, Vermilion joined a long line of Ohio districts, 23 in all, that have requested emergency loans from the state legislature in order to pay their employees and creditors.

“The majority of them are having chronic problems passing tax levies, and it’s finally caught up with them,” said James Van Keuren, director of school finance for the Ohio Department of Education.

The Ohio districts’ plight is by no means unusual. Although the vast majority of the nation’s more than 15,000 districts are in reasonably good financial health, a handful every year are forced to seek help to avoid defaulting on their obligations.

In Ohio, as in many other states, such problems eventually end up before state authorities, usually the legislature, which then act as lenders of last resort.

In general, the number of such crises seems to have declined in recent years, as state and district officials nationwide have adapted to the many tax-reduction and tax-limitation measures approved by voters in the late 1970’s and early 1980’s.

But renewed problems may be in store. The number of Ohio districts requesting emergency loans, for example, was up sharply this year after increases in state aid proved smaller than expected. And some experts say they fear a possible wave of defaults by rural districts nationwide, especially in the economically depressed farm states.

“The smaller districts are likely to be hit hardest as farms go bankrupt,” said John Augenblick, a noted school-finance expert. “They could really be pushed to the wall in some areas.”

Tougher Terms

Even if the number of districts seeking help does not increase, legislators and other state officials are becoming less willing to simply dole out dollars when a district’s problems reach the breaking point.

“I think there is less of a view in the legislatures that they just have to live with it,” said Michael Kirst, a school-finance expert who serves as a director of Policy Analysis for California Education, a university-based think tank.

“You’re seeing legislatures developing early-warning systems and tightening up repayment terms. They’re making the process more punitive,’' he said.

Over the past few years, a number of states have beefed up their district-oversight functions. Several states now require that any district seeking an emergency loan must give up a measure of its budgetary indepen4dence in return.

Ohio, for instance, assigns an outside auditor to any district that applies for a state loan two years in a row, or that runs up a total debt greater than 7 percent of its total operating budget. Until the loans are repaid, the auditor must approve all district expenditures.

States have also become much more willing to intervene in their districts’ affairs before they are forced to the brink of default, experts noted.

New Jersey education officials have taken temporary control of three districts since forming a special intervention team in 1984, and have pressured other school systems to improve wasteful management and accounting practices.

In Kentucky, the state education department has made an intensive effort to monitor district finances and help local officials correct any deficiencies on their own, said Thomas Willis, an analyst with the Legislative Research Commission.

The department, he said, uses a computer to prepare detailed printouts that analyze the state’s 178 districts on the basis of their finances and student performance. Copies of the analysis are then sent to superintendents and local school-board members. The department’s field auditors follow up with regular visits to the district.

More recently, Mr. Willis said, the state has begun ranking districts, based on those indicators. The bottom five school systems are then singled out for comprehensive management reviews.

Revenue “Shocks”

But while management deficiencies may prove expensive, they are rarely the cause of a serious financial emergency, experts said. The danger of default, they said, usually results from a sudden revenue “shock,” as in the case of the Vermilion district, or from a string of levy defeats--an increasingly common pattern in many states.

School officials may also be overly ambitious in their efforts to improve educational services and raise teacher salaries, analysts said.

In California, where the state provides the bulk of all school funds, local authorities have learned that they have little discretion in setting budget levels, noted Mr. Kirst, the pace director.

School-board members in Berkeley, for instance, authorized a number of expensive improvements in the early 1980’s, despite strict property-tax limits imposed by that state’s Pro8position 13. The district was forced to seek a state bailout in 1985.

“They were basically trying to run a Cadillac high school on regular gas,” commented William Rukeyser, a spokesman for the state education department.

Local Rebellions

Problems with district insolvency have been more common, however, in states where schools depend heavily on local revenues. While state legislators and governors may be reluctant to raise education spending, local property owners can be adamant in their opposition to local tax increases.

In Nebraska, where local revenues account for about 69 percent of all school spending, members of two school boards were faced with recall elections this year after approving sizable property-tax increases.

In Oregon, repeated levy failures have forced some schools to close virtually every year for the past decade. The state does not provide any emergency aid to bankrupt districts.

Although the Oregon legislature recently approved a “safety net” system that guarantees that every district will receive at least as much money as it did the previous year, local officials say the plan is not enough to prevent continued financial problems.

Despite a traditional reluctance to meddle in local affairs, a number of states are showing a new willingness to force local officials and taxpayers to face unpleasant fiscal realities.

Earlier this year, for instance, the Kentucky Education Department directed a school board in one rural county to raise its property tax to the legal minimum required by the state. After resisting the order for several months, board members hastily complied when the department began proceedings to remove them from office.

In Vermilion, meanwhile, local school officials were glum after the failure of their most recent tax levy, which they had hoped would add $1.7 million to their annual budget. The money would have allowed them to restore the program cuts they had had to make to balance the district’s books and pay back its emergency loan.

Unless the voters eventually change their minds and approve the levy, the cuts will remain in effect, Mr. Hook said. Worse still, the district will have no way to defend itself against any more unexpected revenue losses.

“We’ve already made about all the cuts we can in order to pay back our loan,” he said. “There’s not much more we can do without falling below the state’s minimum standards.”

A version of this article appeared in the November 11, 1987 edition of Education Week as Districts Pushed to Financial Brink See States as Lender of Last Resort


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