States Can’t Resist Education Trust Accounts

By John Gehring — May 07, 2003 5 min read
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Think of the economic reality most states face as a desert of dried-up fiscal resources, and you’ll get a sense why education trust funds represent an oasis of much-needed revenue for a growing number of legislatures.

For some lawmakers, though, the vaunted security of such reserves is becoming a mirage.

Though they come in many forms and bear various names, such funds essentially are pots of money, often set up years ago, that use principal from sources like public land or money earned on natural resources to generate interest. The interest, in turn, pays for various state needs.

Thirty-eight states have revenue sources specifically earmarked for education, according to Steve Smith, a senior policy analyst with the Denver-based National Conference of State Legislatures. Nationally, about 15 percent of total state aid for K- 12 schools comes from those sources. A handful of states, including Alabama, Michigan, and Utah, provide all or nearly all their education funding through specific education reserve funds.

With at least 20 states having cut precollegiate spending this year, many states are looking to tap in to the funds as a way to protect education from more severe cuts or to shore up other holes in state budgets.

Others simply want to start them. Just last month, Gov. Gary Locke of Washington state proposed a new education trust fund that would provide funding to stabilize and strengthen public schools and universities.

“It’s something that seems to be growing in interest in state capitals and legislatures,” Mr. Smith said. “People are very averse to taxes, but it’s an easier sell if they know it’s going to be earmarked for education.”

Such funds, he said, “will continue to be popular as the states face a budget crisis that hasn’t been seen in generations.”

Reliable Sources?

For decades, the funds have been trusted sources of state school aid.

In Louisiana, an Education Quality Trust Fund, established in 1986 after the state won a settlement from the federal government over oil and gas revenues, has distributed $842 million for an array of secondary and postsecondary programs since its inception.

Spending for K-12 and higher education in Alabama comes entirely from a $4 billion education trust fund established in the 1930s and which relies on sales and income taxes. The fund helps pay for teacher salaries, textbooks, and a variety of state education programs.

Money earned from a public-land trust in Arizona has meant about $1 billion for the state’s permanent school fund since the early 1990s. Three years ago, voters approved a new fund that helps pay for teacher salaries, class-size reduction, and dropout-prevention programs.

And in Montana, 5 million acres of state-managed land has generated income for education and other state programs since the 1880s. The state’s common school trust fund earned some $45 million last year, about 10 percent of the total funding allocated to K-12 education.

But periodically, and especially in recent years, raids on the trust funds have left them close to dry.

And while the dedicated revenue sources can offer short-term cushions against school aid cuts, the temptation to rely on them for immediate help can allow policymakers to avoid making tougher decisions about fundamental problems in funding systems.

Oregon set up an education endowment fund in 1997, which served as a depository for a share of lottery proceeds that helped finance education programs. But when Oregon’s economy took a nosedive, the fund became an easy source of revenue for lawmakers who didn’t want to raise taxes.

“They were looking under every mattress and tin can they could find,” said John Marshall, the director of legislative services for the Oregon School Boards Association.

Amid a series of special legislative sessions last spring, Oregon legislators gave voters the chance to change the education endowment fund into an “education stability” fund, or “rainy day” fund, that could be tapped during economic downturns. Voters rejected that proposal.

Determined to get at the endowment money, the state’s lawmakers in another special legislative session reworked the proposal so that they would initially withdraw $50 million from the fund rather than the $120 million first proposed. The new measure would also contribute a greater share of lottery proceeds to the fund. Voters approved that plan in November.

But when the Oregon legislature convened in January, the budget for the 2001-03 biennium was still out of balance. Lawmakers withdrew $50 million to avoid deep cuts to K-12 programs. While the fund continues to collect lottery proceeds and has about $130 million in it now, it also lacks principal, as a result of the withdrawals.

“The idea with the education endowment fund originally was to create a pot of money with principal that would grow over time, but the situation changed because the economy took a downturn,” Mr. Marshall said.

An education trust fund in Colorado is also running dry.

The fund was created in 2000 as part of the voter-approved Amendment 23, which amended the state constitution to require annual school aid increases. It also directed a share of income-tax revenue to the state education fund.

That fund, however, could be bankrupt by 2005 or 2006, according to a legislative report, because a drop in income-tax revenues has meant millions less going into the education fund than expected.

“Our budget crunch has left us no choice but to take money from the fund,” added Sen. David Owen, the Republican chairman of the legislature’s joint budget panel.

Washington State Plan

But even with some of the uncertainties of education trust funds, Gov. Locke of Washington hopes an education fund there will provide a way to preserve the state’s commitment to education.

His proposal would direct state revenues to help pay for everything from prekindergarden programs to financial aid for college students. Lawmakers are now debating the details of how money would be raised for the fund. Options include “sin taxes” on tobacco products and the elimination of tax loopholes.

“Education is the key to the future of our state, and this trust fund would provide a down payment on stable, consistent investments in education,” Mr. Locke said in a statement this spring announcing his plan.

Lisa Macfarlane, the executive director of the state’s League of Education Voters, said an education fund could help spark a broader conversation about the state’s commitment to education funding. “I’m intrigued with this not only as a way to get more money, but as a way to make some strategic and systemic changes,” she said. “That’s exciting.


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