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Education Funding

How Fallout From the Debt Debate Could Affect Education

By Michele McNeil — July 20, 2011 3 min read
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Congress and President Barack Obama are still struggling to reach a deal to end a fiscal showdown over the $14.3 trillion federal debt ceiling, and K-12 education will likely be affected one way or another, no matter how it’s resolved.

Any deal to raise the debt ceiling—and avoid a U.S. default —will likely mean sharp cuts in federal government spending that will affect most agencies, including the U.S. Department of Education. Even though Obama has said he will not support draconian cuts to federal education spending, some cuts seem likely.

If Congress can’t reach a deal by the Aug. 2 deadline, then all bets are off. Schools, districts, and states could encounter several consequences.

First, if the federal government is forced to choose which bills to pay and which to put off, education programs could be directly affected. For example, says John Musso, of the Association of School Business Officials International, federal dollars that flow to districts—such as Title I money to help disadvantaged students, or Carl Perkins vocational funds—could be delayed.

Separately, he said, states could end up rejiggering their own spending on K-12 and other areas to make up for delays in federal aid for programs such as Medicaid.

“This is all happening so quickly, I don’t think many school people have thought about it,” Musso told me. “The domino effect could go in so many directions, it is hard to speculate all the combinations.”

NCSL’s Crystal Ball

In a recent memo made available to state lawmakers across the country, the National Conference of State Legislatures said if there’s no deal, it’s unclear how the federal government would set priorities for which programs that provide money to states—such as Medicaid, and spending on energy, child welfare and nutrition, and education—would receive money first.

In the event that the debt ceiling is not raised by Aug. 2, and the federal government has to rely only on incoming revenues to cover its bills, states would most likely have to tap their own revenues to maintain some or all of their committed spending for various state and federal programs, NCSL’s memo explained. States could also be forced to decide which programs would be halted temporarily.

“At this point, you have no idea” how states would be forced to respond, Jeff Hurley, an NCSL policy specialist, told my colleague Sean Cavanagh in an interview. All of the scenarios for states are “vague and not very specific,” he said. “Everyone’s playing it by ear.”

On the borrowing front, school districts could feel some pain if interest rates go up because of the uncertainty or in the event of a default, which would make borrowing more expensive. “States and school districts borrow a good amount of money,” said Mike Griffith, a fiscal analyst for the Education Commission of the States.

Long-term borrowing for construction projects and major maintenance could get more expensive, but so could short-term borrowing. Many districts, because of up-front costs of buying things like new textbooks, do a lot of short-term borrowing to increase cash flow until state aid payments catch up to expenses.

Shutdown Analogy

Scott D. Pattison, the executive director of the National Association of State Budget Officers, said a short delay would have a relatively modest effect on state budgets, comparable to a relatively brief government shutdown. But he said it’s difficult to predict the extent to which federally funded programs in education or in other areas would be affected, partly because the federal money flows on different schedules.

At the school-district level, there would probably not be any immediate consequences unless an impasse dragged out for an extended period of time, Pattison said. And while a failure to raise the debt ceiling could cause upheaval in the financial markets, the turmoil would have to last a long while for it to have an impact on state and local tax revenues, Pattison added.

And Pattison said he was confident that Congress would not allow a default on U.S. debt, given the economic consequences of failing to act. Even if deal to raise the debt ceiling is not in place by the Aug. 2 deadline, Pattison predicted it would be a short time before federal lawmakers took that step.

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