Education Funding

Fiscal Forecast for States Begins to Darken

By Michele McNeil — August 14, 2007 4 min read

The fat years for state budgets are over for this decade, a new nationwide analysis says—and that could spell trouble for future funding of K-12 education.

Although state fiscal conditions remain solid, the latest survey by the Denver-based National Conference of State Legislatures, released at the group’s annual meeting here Aug. 5-9, suggests that states’ revenues already have peaked, and that officials are destined for some financial belt-tightening.

That’s likely to put education leaders on guard, since K-12 aid makes up about 50 percent of states’ budgets, and a number of states have relied on the favorable fiscal climate of recent years to increase public school funding.

“Evidence indicates that [fiscal] 2006 was the peak for state fiscal health this decade,” according to the report, written by Corina Eckl and Ron Snell of the NCSL Fiscal Affairs Program. The annual report covers fiscal 2007, which ended on June 30 in most states, and the 2008 budget year. “The trend is downward,” it says.

The survey includes budget data from 45 states; California, Illinois, Michigan, North Carolina, and Wisconsin had not completed their budgets in time for the report. Since those states are mostly large, with big budgets, and three are in the struggling Great Lakes region, NCSL fiscal experts expect the national outlook to grow a bit dimmer when the five are included.

States’ year-end balances—or how much financial cushion they’re carrying forward to the next budget year—are dropping. Aggregate year-end balances fell 7 percent from fiscal 2006 to the end of fiscal 2007. Those balances are expected to fall again by 24 percent from fiscal 2007 to fiscal 2008.

Housing Slump a Factor

The explanation for the fall, according to the report, is that states are enacting tax cuts and seeing weaker revenue projections, while their spending is growing. Contributing to the situation is the slump in the housing market.

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Education has been one of the beneficiaries, meanwhile, of spending growth. In fact, 20 states during their 2007 legislative sessions used unexpected funds—either leftover money from previous years or higher-than-projected revenue—to increase spending on schools. Total state spending on K-12 education is expected to grow nearly 10 percent this fiscal year, compared with the 8.1 percent in growth budgeted for state spending on Medicaid—the fast-growing health-care program for the elderly, the poor, and people with disabilities.

But much of the growth in education spending, especially among states that saw significant jumps in K-12 aid, is due to changes in how schools are funded, and not necessarily a result of new programs or reform measures. Texas, for example, increased school spending by 32 percent, in part to further decrease school district property-tax rates, according to the report. Connecticut boosted spending by nearly 15 percent to help offset the K-12 spending burden shouldered by towns. Alaska’s nearly 26 percent increase is largely attributed to rising teacher-retirement costs.

‘On Autopilot’

In Arizona, most of the additional $335 million in school funding legislators set aside in the newly enacted budget covers student growth in that fast-growing state, said Sen. Robert Burns, a Republican and the chairman of the Senate appropriations committee.

“A lot of our budget is on autopilot,” he said.

David Wyss, the chief economist for the New York City-based Standard & Poor’s, who addressed legislators in an NCSL session last week, predicts that the decisions on education will only get tougher. States will face increasing financial pressures, he said, as the housing market continues its slump, energy prices stay high, and baby boomers retire and start collecting on promised state-funded pensions and health-care benefits.

“I can see this clash between education funding and health-care funding,” Mr. Wyss said, adding, “I would rather invest in the future”—meaning in education.

Budget troubles are forcing Florida lawmakers to return to work next month for a special session to close a $1.5 billion spending gap in a $71 billion state budget—the result of still-dropping home sales and a decline in sales-tax revenue, according to a report unveiled earlier this month by state economists.

Preliminary estimates by the Florida Department of Education show that $700 million could be cut from K-12 spending to help reduce the deficit.

Maryland also is facing tough choices. The state will have a $1.4 billion budget deficit by fiscal 2009, Sheila E. Hixson, the Democratic chairwoman of the Maryland House of Delegates’ ways and means committee, told fellow legislators. And that’s only the amount needed to maintain stable funding for services, without giving increases to important state priorities such as education.

Maryland’s K-12 budget for fiscal 2008 is $6 billion, up by about $1.5 billion since fiscal 2002—the biggest driver of increased spending in Maryland, Delegate Hixson said. Now, she said, legislators will have to find more money to sustain the higher school funding—by raising taxes; creating new sources of revenue, such as gambling; cutting other programs; or some combination of those strategies.

“There’s no question … [increasing school aid] will greatly benefit schools,” she said. “We still have a big obstacle to overcome: We have to find a way to pay for it.”

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A version of this article appeared in the August 15, 2007 edition of Education Week as NCSL survey suggests revenues have peaked; risks for education seen

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