Budget & Finance

Interest Rates Are Going Up to Fight Inflation. Schools May Feel the Pain Either Way

By Mark Lieberman — July 05, 2022 4 min read
Illustration of a man holding oversized money.
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School district leaders hope the Federal Reserve’s recent interest rate hikes will provide fiscal relief as they strain to keep up with persistent inflation—but some also will find that the interest rate hikes only deepen their problems.

The Federal Reserve, the nation’s central banking system, has raised interest rates three times this year, in March, May, and June. The most recent increase of 0.75 percentage points was the largest since 1994. Another hike at that level could be coming next month, officials have signaled.

The interest rate increases are meant to help slow the pace of inflation, which is currently at a 40-year high of 8.6 percent year over year. School districts, like everyday consumers, are seeing increased prices of construction materials, fuel, energy, and classroom supplies.

Anything to bring rising prices to a halt would be welcome, but some districts worry about the trade-offs.

“We know that the hikes are supposed to slow inflation, and we hope that happens, but combining increasing the cost of borrowing with all the other cost hikes will make life difficult for us all,” said Betsy Ginsburg, executive director of the Garden State Coalition of Schools in New Jersey.

Here are a few ways inflation and interest rates are placing fiscal pressure on school districts—and one bright spot amid the challenges.

Construction costs caught in the turmoil

Without a dedicated federal funding source for school infrastructure, most districts pay interest on private bonds they sell to finance long-term capital projects like improving their buildings.

The nation’s schools in 2020 collectively spent $21.4 billion on interest for capital projects, according to federal data from the National Center for Education Statistics. That’s roughly 3 percent of America’s overall spending on K-12 education, and more than $400 per student.

The massive spending on interest appears likely to skyrocket as districts spend three rounds of federal COVID relief funds, known colloquially as “ESSER,” on projects including efforts to improve ventilation, heating and cooling, and water filtration. A recent analysis by the nonprofit FutureEd of 5,000 districts’ ESSER plans collected by the tracking firm Burbio found that nearly half are using some of their funds for HVAC projects.

Interest rates might further squeeze districts that are already sweating elevated costs for projects they’ve long hoped to accomplish. Some districts worry that the widespread economic pain will make voters less likely to support ballot initiatives for funding capital projects.

“Just like what you’re seeing in the housing market right now, people just get to the point where they can’t afford it,” said Sue Young, executive director of the New Jersey Association for School Business Officials.

Others are delaying or shrinking construction projects to keep them within budget. Two school districts in Butler County, Pa., recently rejected all bids for construction projects because they came in more than $8 million above budget.

Costs of salaries and benefits rise

When the cost of goods and services goes up, so too does the demand for higher wages. Many teachers unions are calling for substantial wage increases for their members, citing the particularly challenging working conditions of the past two years. But districts don’t always have the capacity to meet those demands, even when they want to.

In New Jersey, for instance, districts can only increase local tax levies by 2 percent per year, according to state law. When workers expect raises of 3 percent or higher, something has to give.

The Parkrose district in Oregon is currently in the process of selling a pension bond. Sharie Lewis, the district’s director of business services and operations, had hoped to keep the interest rate for the bond between 2.5 percent and 3 percent. Instead, she’s counting her blessings that it only ended up being 4.5 percent.

Because state aid is tied to enrollment, “Your only revenue is a child that’s sitting in a seat, and property taxes,” Lewis said. “And with inflation and interest rates going up, property taxes are sometimes not one of the things that people think about paying on a frequent, ‘let me pay that ahead of everything else’ basis.”

Transportation gets more expensive

Fuel costs have skyrocketed since the start of the year. Districts have to adjust rates for school bus contractors, trim routes or extracurricular offerings to maintain steady bus service, and rework budget plans they assembled before the economic situation evolved.

Interest rate hikes may compound those challenges, Lewis said. Many districts lease buses and other equipment, and leases require interest payments that will now be higher than anticipated.

Meanwhile, transportation costs appear likely to remain at all-time peaks for a while. During a recent Senate hearing, Federal Reserve Chair Jerome Powell said he doesn’t expect fuel prices to come down as a result of interest rate hikes.

Silver lining: reserves could grow in value

Some districts invest portions of their excess reserve funds, like individuals do with savings accounts. Those reserves could grow if high interest rates persist.

Districts’ capacity for reserves varies greatly depending on where they’re located and how they’re managing their money. Some states require districts to keep a certain amount of reserves on hand, while others place restrictions on how districts can use those savings. The likely gains from the savings districts have invested are hard to predict, and could fall back even as they currently appear to be on the upswing.

In 2020, Education Week profiled several districts that have run out of excess funds and are feeling the pinch as a result.

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