Law & Courts

Revenue Woes in Oil, Coal States Squeeze K-12

By Daarel Burnette II — January 12, 2016 6 min read

Reeling from drastic midyear cuts after they grossly miscalculated expected revenues amid falling oil prices and troubles in the coal industry, legislators in several mineral-dependent states, including Alaska and Oklahoma, are set to debate alternative revenue sources for state school aid.

Those could include revisions to their school funding formulas or even constitutional changes to allow educators to pull more money from rainy-day funds in response to revenue shortfalls specifically tied to energy prices.

During the energy boom of the last decade, when a barrel of oil cost close to $100, school administrators in energy-producing states built football fields and gleaming new schools. They also gave teachers big bonuses as incentives to move to rural areas with surging enrollments.

But with oil now costing barely $35 a barrel, the situation has changed. The current decline has gone on much longer than economists predicted, and some projections say it could last until 2020.

“It’s not just tax revenue from oil and gas companies that’s hurting these states,” said Richard C. Auxier, a research associate at the Urban-Brookings Tax Policy Center at the Urban Institute. “It’s that oil and gas have become such a big part of their economy. The drop is affecting the state’s income and property tax, too. People aren’t making as much, and so they’re not spending as much. So much in these states is tied to that industry.”

Governors in at least eight states are expected to propose a series of cuts in the coming weeks that would more than likely alter the education debate in state capitals this legislative season. How painful those cuts will be will mostly depend on how state legislatures assembled their tax systems when oil companies first start drilling in their backyards.

“Generally speaking, when oil money was flowing well, we decided we didn’t need sales or income tax revenue, and we ended up with a sole source of revenue,” said Mike Hanley, Alaska’s education commissioner, who had to shutter the state’s pre-K program last year after the state told him to ax a third of his department’s budget. “We’re now looking at that and saying it’s not a very healthy economy when you have a one-legged stool. Legislators have done the best they can to protect our schools, but I’m not sure how much longer they’re going to be able to do that.”

Elsewhere, the dip in oil prices is expected to offer a boon—putting money in consumers’ pockets and bringing increased sales tax revenue at a time when home prices are starting to stabilize and the unemployment rate is at an all-time low.

This year’s proposed state budgets, including for K-12, will reflect that other dynamic, said Bryan Sigritz, the director of state fiscal studies for the National Association of State Budget Officers.

But the picture is expected to be very different in some energy-industry states when it comes to education funding.

Coal and Oil Woes

West Virginia and Wyoming for years have filled their education coffers with tax revenue from coal mining. But the coal industry in the last several years has largely collapsed, with layoffs and revenue shortfalls accelerating in 2015.

As a result of flagging revenue due mainly to the coal industry’s woes, West Virginia imposed midyear, 1 percent cuts to state school funding late last year. The results have included teacher layoffs, closed schools, and consolidation of some districts with waning student populations.

Wyoming in the past used revenue from its coal-mining industry to build new schools. In 2013, the state received $736 million for school construction from that source. In 2019, it is projected to receive just $26 million. In a recent sketch of next year’s budget, legislators didn’t include $6 million they spent on teacher bonuses last year, meaning teachers may have to go back to their 2013-14 salaries this fall.

Some oil-producing states are facing the same kind of squeeze.

“There is no perfect system,” said Greg Albrecht, Louisiana’s chief economist. The state predicted oil would cost $48 a barrel by this time. With prices at $35 a barrel, the state experienced a $500 million shortfall.

Boom To Bust

School districts are caught up in the fiscal turmoil in a number of states that have seen their revenues squeezed or threatened by setbacks in the oil, gas, and coal industries.

ALASKA: The state generates 89 percent of its revenue from oil. After oil prices plunged, though, Gov. Bill Walker proposed instituting a statewide income tax, the first in 35 years. The state earlier this year told its education department to cut a third of its budget, which axed, among other things, its preschool services and a professional development program for administrators. Some rural districts, which have just a handful of students left, are considering closing.

LOUISIANA: Republican Gov. Bobby Jindal recommended in November cutting $1.2 million from the state’s education department. Local officials say they’re seeing a decrease in sales tax after the oil industry laid off 10,000 workers in the last six months alone. Legislators predict a $1 billion shortfall next fiscal year.

NEW MEXICO: A recent proposal by Gov. Susana Martinez would result in $101 million more for the state’s schools and include a bonus for new teachers, a new reading program and academic coaches at low-performing schools. Funding for other state agencies would be kept flat, however, because of the state’s revenue squeeze.

NORTH DAKOTA: The state is in the middle of a two-year budget cycle. The state’s school system, which is still benefiting from a recent oil boom and a new funding formula approved in 2013, has largely remained unscathed from recent slump in oil production. The governor and legislators agreed to make cuts in other agencies and pull money from the state’s $3.3 billion in savings to protect its schools. Legislators predict, though, that they’ll have to make more cuts in 2017.

OKLAHOMA: Republican Gov. Mary Fallin declared a “revenue failure” after tax revenue fell $50.1 million in November. Overall projections fell $444 million last year. The state’s education department made $47 million in cuts (a 1.4 percent funding cut) to local districts. The state’s legislators also made a series of untimely tax cuts that have worsened budget cuts. Fallin’s office predicts the state will have $900 million less to spend in 2017.

TEXAS: The state is in the middle of a two-year budget. Legislators protected the state’s education department using money saved up from the oil boom. The state’s comptroller made 3 percent across-the-board budget cuts to townships in December.

WEST VIRGINIA: Due to continued aftershocks from the coal industry’s collapse, Gov. Earl Ray Tomblin in October directed all of the state’s agencies to cut 4 percent out of their budgets, except for the education department, which was directed to cut 1 percent. With coal mines shutting, several districts are losing hundreds of students, forcing districts to consider consolidating or closing schools.

WYOMING: The state for decades has used money from its coal-mining industry to pay for school construction. In 2013, it received $736 million from that source for school construction. In 2019, it is projected to receive just $26 million. Lawmakers will have to cut $500 million from the state’s $3.5 billion budget this legislative session. The two-year budget cycle ends in June.

Source: Education Week

Louisiana’s school board is being pressured to modify the state’s school aid formula, which legislators are obligated to fully fund, Albrecht said. “When money is falling out of the sky, the pressure is on to cut taxes elsewhere,” Albrecht said. “But it’s not the wisest thing to do in the long haul.”

School districts in oil states may directly benefit from oil royalties that are written into school funding formulas or placed directly into states’ general funds.

When oil prices are high, property tax values in Odessa, a town in the Permian Basin fields of West Texas, skyrocket, bringing in millions more to Ector County Schools, said the district’s superintendent Tom Crowe. The state’s funding formula requires the district to return much of that to the state, though, and educators and the community know the good times won’t last.

“This community is so tied to the oil industry that they don’t panic,” said Crowe, who anticipates a potential shortfall in revenue next school year. “They understand that this happens. They understand that it’s going to come back. ... They plan for it. They build savings accounts.”

For states that saved large portions of their tax revenue, the oil boom that lasted through the most-recent recession poured billions of dollars into trust funds and savings accounts.

New Mexico’s Land Grant Permanent Fund, reserved mostly for education purposes, has $15 billion in it. Texas’ Permanent Schools Fund ballooned to more than $36.3 billion. North Dakota has saved more than $3.3 billion. For years, Alaska paid dividends from its trust fund to residents worth up to $2,000 per person.

Tapping the Reserves

When times were good, legislatures wrote strict constitutional laws that restrict when they can tap into those funds.

Now, there’s a growing movement in New Mexico and North Dakota to appeal those laws.

During the most recent oil boom, Oklahoma’s Republican Gov. Mary Fallin led the state’s Republican-dominated legislature through a series of income and corporate tax breaks. The state now collects in taxes just half what it did in 2007.

In December, Fallin declared a “revenue failure” after tax collections fell $50 million, or 12 percent short of projections in November.

School districts had to make $47 million in cuts or 1.5 percent of their total budgets last year. Fallin predicts the legislature will face a $900 million shortfall next year.

David K. Pennington, the superintendent of the Ponca City school district in Oklahoma, said he’s laid off dozens of elementary school teachers and increased class sizes to an average of 27 students per class. Pennington is supporting an initiative to place a measure on this year’s ballot that would add a penny sales tax, with the money to be used, among other things, to provide teachers in the state with a $5,000 pay raise.

The initiative is being held up at the state’s Supreme Court after an anti-tax group sued.

In Alaska, Independent Gov. Bill Walker is proposing the state’s first income tax in 35 years after analysts predicted the state will fail to collect two-thirds of the revenue needed to fill the state’s $5 billion operating budget.

Among several cuts, legislatures are debating whether to close schools with fewer than 25 students, a centuries-long mainstay in the mostly rural state.

“When you start closing those schools, you start to eliminate communities,” said Bobby Bolen, the superintendent of the Bering Strait school district, an 80,000-square-mile district with 1,800 students in the northwest corner of the state.

And as East Coast states consider allowing oil drilling in the Atlantic and as Pennsylvania debates ways to tie revenue from the shale gas industry to its general revenue fund, legislators in some oil states warn them to think long-term.

“Education is not a one-time expense,” said North Dakota state Rep. Jeff Delzer, who is chairman of that state’s finance committee. “If you use oil revenue for ongoing expenses and then that money goes away, you’ve got big problems.”

A version of this article appeared in the January 13, 2016 edition of Education Week as School Revenue Squeezed in Oil, Coal States


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