Education Funding

States’ Budgets Reflect Rising Tax Collections

By David J. Hoff — July 12, 2005 6 min read

Many state budgets are reaping the benefits of tax revenues that are rising faster than at any time since the economic slowdown ended.

Overall tax collections by states rose by 11.7 percent in the first quarter of 2005, giving legislatures extra cash to shore up school aid, increase teacher pay, and finance new initiatives such as full-day kindergarten.

“We’re talking about increases above [the rate of] inflation in most places, and [school officials] are pretty happy about that,” Michael P. Griffith, the school finance policy analyst for the Education Commission of the States, said of the fiscal year that began this month in 46 states.

Read the June 2005 “State Revenue Report” from the Rockefeller Institute of Government.

The good times aren’t being felt everywhere, however.

Some states haven’t recovered from the revenue crunch caused by the recession earlier in the decade. In some regions, one state may have plenty of money to spread around, while a neighboring state may be struggling to keep school spending rising with the inflation rate, which was 3.7 percent during the first five months of the year, the U.S. Department of Labor reported in June.

For example, Georgia lawmakers appropriated an 8 percent increase, or $500 million, in school spending for fiscal 2006 over the previous year, but states such as Arkansas and West Virginia had enough money to raise school spending by less than 2 percent in their new budgets.

What’s more, with state spending projected to rise faster than revenues, the short-term revenue gains may not solve the long-term structural deficits most states face, some public finance experts warn.

“There are going to be some severe pressures on state budgets,” said Corina Eckl, the fiscal-affairs director for the National Conference of State Legislatures, which, like the ECS, is based in Denver.

Welcome News

Looking Up

States’ first-quarter tax revenues this year increased in every region of the nation.

BRIC ARCHIVE

Note: The chart reflects increases in tax revenue due to economic activity, not increases in tax rates.

SOURCE: Rockefeller Institute

When asked about the improved revenue situation in his state, Minnesota Gov. Tim Pawlenty, a Republican, said: “It’s about time.”

In Minnesota, tax collections rose in the first quarter of the calendar year by 10.9 percent over the same period in 2004, according to a report released last month by the Nelson A. Rockefeller Institute of Government. Nationwide, state revenues grew by 11.7 percent compared with the first quarter of 2004, the Albany, N.Y.-based research group said in its quarterly report on state revenue. The increase was the highest in any first quarter since 1991.

In a separate report, the National Governors Association and the National Association of State Budget Officers noted that states’ spending increased 6.6 percent in fiscal 2005 and is projected to rise another 3.8 percent.

The size of the increase, the report says, was boosted by dramatic increases in corporate income-tax payments in California, which offered amnesty for companies that had fallen behind on their payments. The inflation rate, which was higher during the first quarter than it is now, also eroded the buying power of that increase, the report said.

Without those factors, the overall increase would have been 3.9 percent—still much better than in 2001 through 2003, when state revenues shrank in just about every quarter.

The revenue growth has resulted in several generous increases in precollegiate funding in recent legislative sessions. For example:

· South Carolina legislators appropriated $2.8 billion for fiscal 2006. The 7.4 percent increase is the state’s largest in the past four years. The funding included a 1.7 percent teacher pay raise.

· With coffers in Alaska padded by revenue from rising gas prices, legislators there provided a 7.5 percent increase in state per-pupil spending for the 2005-06 school year. Overall, education spending will increase 5 percent, to $849 million, over the previous school year.

· Washington state lawmakers set aside $5.7 billion for schools in fiscal 2006 and $5.9 billion in fiscal 2007—an increase of 9 percent over the previous two-year budget cycle. The budget will pay for class-size reductions, cost-of-living increases for teachers, and other purposes that would have been financed under a ballot initiative that voters rejected last fall. The initiative would have raised the state’s sales tax by 15 percent.

‘A Disappointing Year’

Among the states not doing so well is Arkansas.

Its school spending increased just 2 percent from this past fiscal year to fiscal 2006, and most of the increase went toward improving facilities. The state’s per-pupil financing in the upcoming school year will stay the same as last year’s.

Although the Rockefeller Institute report says that Arkansas’ first quarter in 2005 revenues grew by 9.7 percent over the first quarter of 2004, much of that rise reflects a date change for taxes, one school advocate said.

The state moved the due date for income taxes forward from May 15 to April 15, resulting in a dramatic increase in revenues in the first quarter. But those first-quarter revenues didn’t change the “extremely conservative [revenue] growth estimates” for the current fiscal year, said James D. Gilson, the special assistant to the executive director of the Arkansas School Boards Association.

Although the Arkansas legislature set aside $104 million for school facilities, the lack of an increase in the state’s $5,400 per-pupil allocation will put districts in a bind, Mr. Gilson said. And while the legislature ordered districts to increase teacher salaries, districts must cut elsewhere to do so, he said.

“It was a disappointing year,” Mr. Gilson said.

In Michigan, more than 11,000 parents and educators rallied near the state Capitol in Lansing on June 21, pleading for increased school aid. Michigan’s revenues fell by 3.7 percent in the first quarter of the year, according to the Rockefeller report.

“Michigan is in dire straits economically,” said Margaret Trimer-Hartley, a spokeswoman for the Michigan Education Association, an affiliate of the National Education Association. “We’re not seeing the economic recovery that you’re seeing in other states.”

A coalition of parents and education groups, which includes the MEA, is lobbying for a bill that would guarantee districts annual funding increases equal to 5 percent or the inflation rate, whichever was less. The legislature is working on its budget for fiscal 2006, which in Michigan begins on Oct. 1. The state’s school aid fund is projected to increase by 3.5 percent for the 2005-06 school year, according to a May report by the state Senate Fiscal Agency.

Health-Care Costs

Even in states with an influx of new cash, money isn’t solving all problems.

Despite Minnesota’s 10.9 percent increase in first-quarter revenue, Gov. Pawlenty and legislative leaders failed to pass a budget by July 1—the first day of the fiscal year. The state government furloughed thousands of workers, including most of those at the department of education.

The partial shutdown hasn’t affected services provided by school districts because they continue to operate on local revenue, said Scott Croonquist, the executive director of the Association of Metropolitan Districts, a coalition of districts from Minneapolis, St. Paul, and the surrounding area.

But the shutdown has made it difficult to plan for the 2005-06 school year because districts don’t know exactly how much money to expect from the state, he added.

The state’s fiscal problem stems from its tax system’s inability to collect enough money for the state to maintain services at current levels. Even with the 10.9 percent surge in tax collections in the first quarter of the year, that’s not enough to keep up with the costs of health care and other services.

For example, Minnesota’s health-care costs are projected to increase at 26 percent annually well into the future, Mr. Pawlenty said at a June 22 press conference in Washington. “At that rate of growth, it will consume almost the rest of the state’s budget in 15 years,” he said. “These issues are going to come to a head.”

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