Funding Concerns Greet Legislatures As Sessions Begin

With the opening of the 2004 state legislative season at hand, school lobbyists will struggle once again for funding that keeps up with the growing costs of public education.

Despite rosy economic news, highlighted by the 8.2 percent surge in the nation’s economy in the third quarter of 2003, state coffers aren’t growing at a pace to meet the needs of schools and other high-priority programs such as Medicaid and prisons, budget experts say.

“Revenue is no longer plummeting, but it remains weak,” said Donald J. Boyd, the director of fiscal studies for the Nelson A. Rockefeller Institute of Government in Albany, N.Y., who tracks total state spending. “We’ve stopped falling, but the problem is we’re way below where we were” before state budgets started feeling the impact of the recession in 2001.

The potential for tight funding comes after schools have already scaled back under recession-driven budgets, the experts say. Meanwhile, states face new costs as they try to comply with the federal No Child Left Behind Act.

“What’s scary about the numbers for [fiscal 2005] is they’re coming after three bad years for most states,” said Andrew Reschovsky, a professor of applied economics and public affairs at the University of Wisconsin-Madison.

In the past month, many states have started issuing estimates of how the money they’ll have to spend in the 2005 fiscal year, which starts July 1 in most states.

In California, the legislative analyst’s office predicts that the state will face a $10.7 billion deficit if it doesn’t make cuts or find new revenues. New York Gov. George E. Pataki’s budget office estimates the 2005 budget shortfall will exceed $5 billion if tax receipts don’t improve or if spending cuts aren’t made.

Overall, 21 states are forecasting shortfalls, totaling $40 billion, which amounts to about 11 percent of their operating budgets, according to the Center on Budget and Policy Priorities.

“It’s hard to imagine that there will be dollars available for investments in education,” warned Nicholas A.P. Johnson, the director of the state fiscal project for the Washington-based research center, which analyzes the impact of policy decisions on low- and middle-income families.

Not Keeping Up

For the past two years, states have kept general operating budgets essentially flat. (See accompanying chart.)

They have been the leanest consecutive budget years in two decades, according to the National Governors Association and the National Association of State Budget Officers.

From fiscal 2002 to fiscal 2004, Mr. Reschovsky estimates, 35 states have failed to give schools increases that kept up with enrollment increases and inflation. Schools in 11 states received increases that outpaced those demands by less than 5 percent, according to Mr. Reschovsky’s research. Only three states gave schools increases of greater than 5 percent. (Mr. Reschovsky excluded Pennsylvania because the state hadn’t passed a fiscal 2004 budget in time for his analysis.)

While state budget officials say they are collecting enough revenues to pay their bills in the current fiscal year, legislators may soon face the daunting prospect that they may again have to rein in or even cut spending to meet budget revenues.

“We’re in a tight fix,” said Georgia Sen. George Hooks, a Democrat, who is a member of the legislature’s joint House-Senate budget responsibility and oversight committee. “Our economy is improving, but not anything we’d like it to be.”

“It’s not worse” than last year, said Loretta A. Lepore, the press secretary for Gov. Sonny Purdue, a Republican. But, she said, “the hope was we would have a lot more wiggle room in it.”

That puts any effort to increase Georgia’s K-12 spending at risk when legislators convene this month.

This year, 30 states are scheduled to enact annual budgets, and three others plan to write biennial budgets. The remainder will be in the second year of two-year budgets.

Even states that are seeing a rebound in revenues are preparing for difficult decisions over what to fund.

In Maryland, the state comptroller estimates that revenues will increase 4.5 percent in fiscal 2005. But that won’t be enough to keep up with the growth in Medicaid and other mandates passed by the legislature.

“Things are getting better,” William Donald Schaefer, the Maryland comptroller, said in a statement when he released fiscal 2005 revenue estimates Dec. 17. “Nearly every indicator has been positive so far, and the revenue outlook looks good. But the state still faces a large budget problem.”

Given the budget climate, one Maryland lawmaker said, the legislature will struggle to find the money to meet the $382 million payment on its six-year schedule to increase K-12 school funding by $1.6 billion over fiscal 2003 levels.

Maryland will be especially hard pressed to find the money because last year lawmakers took short-term measures to balance the budget, according to Sen. Patrick J. Horgan, the vice chairman of the Senate budget and tax committee. For example, they borrowed $300 million from transportation accounts, which they need to start paying back this year.

The plan to increase school aid “is in jeopardy,” said Mr. Horgan, a Democrat. “To stretch it out or cut it back just delays ... the moral responsibility to produce an educated workforce.”

Adequacy Pressures

In New York state, where school funding dropped slightly in fiscal 2004 from the previous year, the legislature faces legal pressures to significantly increase the amount it spends on schools.

Last month, education funding advocates said the state would need to add $2 billion to its school spending in fiscal 2005 to comply with a 2003 court decision saying that the state inadequately finances the New York City schools.

Meanwhile, the state board of regents has proposed a $500 million increase in 2000 as a down payment on an overall $6 billion increase.

Either amount may be hard to produce in the current budget climate, according to Robert N. Lowry, the associate director of governmental relations for the New York State Council of School Superintendents.

Like lawmakers in Maryland and other states, New York legislators balanced the current fiscal year’s budgets by taking actions they’re unlikely to repeat. In addition to reallocating money from other accounts, the legislature overrode the Republican governor’s veto of increases to sales- and income-tax rates.

In the current election year, the Democratic-controlled Assembly—the lower house—and the Republican-led Senate will be shy about doing that again, Mr. Lowry said. “They’ve done all of the easy things and some of the hard things” to balance the budget, Mr. Lowry said.

Just about every state facing a revenue shortfall has already exhausted such quick fixes, according to Mr. Boyd of the Rockefeller Institute.

“We’ve turned over the cushions on the couch,” Mr. Boyd said. “We’re not going to have the one-time solutions” anymore.

Why the Shortfalls?

While the tax collections tend to be increasing in the current fiscal year and are projected to rise again in most states in fiscal 2005, the increases aren’t always compensating for state losses that began in the recession.

The three major types of taxes collected by states—income, sales, corporate—fell by an average of 9.1 percent in fiscal 2002 and then by another 4.7 percent the next year, Mr. Boyd said at a presentation last month in Washington to the National Conference of State Legislatures.

The modest gains in revenues seen at the start of the economic recovery haven’t yet made up for those losses.

Other factors suggest that cautious optimism is in order, according to fiscal experts. For example, the capital gains from a booming stock market that helped boost state revenue during the 1990s are unlikely to return.

Others point out that some of the sectors fueling the recovery do not produce taxable revenue for the states.

At the same time, states’ Medicaid spending is eating up a larger share of their budgets—growing 10 percent annually in recent years, Mr. Boyd said. The pace is expected to continue as enrollment in the program and the cost of health care rise, he added.

This year, the cost pressures and lagging revenues will be difficult to deal with because state legislators have eliminated the fat from their budgets, deferred expenses, and borrowed from trust funds that are usually off limits. Balancing budgets will be hard in fiscal 2005, Mr. Boyd said, with few of those quick fixes to turn to.

Such factors appear to leave little room for negotiating increases in K-12 education aid.

But some educators see reasons to be optimistic. In New York, recent reports that income-tax receipts are up by 10 percent in New York City have school leaders optimistic that the revenue news might not be as bad as projected.

“It’s encouraging news,” Mr. Lowry said. “Perhaps the gap will be less than $5 billion.”