The AP’s Libby Quaid has an interesting story about how Education Secretary Arne Duncan has put in writing a threat we’ve heard before: that if states play shell games with the economic-stimulus money intended to help stabilize their budgets, they may be at a competitive disadvantage when it comes time to award the $5 billion in competitive stimulus grants under his control. Pennsylvania is considering cutting K-12 education, using stimulus money to fill in the resulting gap, while leaving its “rainy day” fund largely intact. Read Duncan’s letter here. And listen to him talk about the larger issue in this interview with EdWeek from March.
But Duncan’s threat to Pennsylvania policymakers may turn out to be an empty one. Here’s why:
Does Duncan—who readily admits in his stump speeches that Washington does not have all of the answers—know better than the budget experts in individual states? Sometimes, depleting a rainy day fund is a bad idea. For example, bond-rating agencies look at a state’s savings in awarding bond ratings--a healthy rainy day fund usually means a better bond rating. A higher bond rating lowers borrowing costs for states, which can save money for other things.
Second, a lot of states are talking about or doing what Pennsylvania is talking about doing. Texas is another notable example. Applications approved so far show most states are using their State Fiscal Stabilization Fund money to backfill cuts. And if you look at the latest fiscal report from the associations representing the nation’s governors and state budget officers (advance to page 52 of the PDF), you’ll see that many states are projecting that they’ll end fiscal 2010 with money still in their “budget stabilization” or rainy day funds. Many of these same states have cut K-12 education. That’s a lot of states to potentially take out of the running. Will Duncan and Team Stimulus be able to distinguish which states really, really needed to cut education versus those that didn’t?
Note in Duncan’s letter that states will be asked about (and not necessarily judged on) how they used their stabilization fund money. And, he says a state may be “negatively impacted” by such decisions. What’s more, it’s important to remember that the stimulus law, as approved by Congress, contains loopholes that allow states to move money around—and potentially away from—intended purposes.