Education Funding

States Enjoy Steady Rise in Revenue

By David J. Hoff & Linda Jacobson — May 12, 2006 9 min read
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With his state flush with cash, Gov. Michael F. Easley of North Carolina can have the best of both worlds.

Sitting on a $1 billion surplus in an operating budget of $17.4 billion, the second-term Democrat last week proposed a politically popular 13 percent spending increase for K-12 education, while also asking the legislature to block scheduled tax hikes.

Such surpluses are giving policymakers around the country the chance to do the same in their own states. According to a recent report, fiscal 2006 revenue estimates are exceeding original targets in 44 states. But while schools will share in the spoils in North Carolina and many other states, some lawmakers are instead spending unexpected revenue elsewhere or are saving it for a rainy day.

“He’s mostly been dealing with very lean times,” said Seth Effron, a spokesman for Mr. Easley. “Now, with significant growth in the economy, he’s able to propose significant investments. It’s allowed him … to make some very significant upgrades in education.”

In the Black

Six states project their revenue will be 10 percent or more above their original fiscal 2006 projections.

State Above Target
Millions Percentage
Alaska $1,300.0 50.0%
Arizona 488.0 10.5
New Mexico 650.0 14.0
North Dakota 109.3 18.4
Texas 2,526.5 14.1
Wyoming 47.8 11.2

SOURCE: National Conference of State Legislatures

Education will benefit from the overflowing state coffers in different ways.

Maryland lawmakers increased aid to schools in the fiscal 2007 budget by 12 percent over current levels, and added $262 million to shore up the teacher-pension fund and improve its benefits in the future.

In Hawaii, the legislature appropriated $235 million to renovate 95 school buildings across the islands.

And in California late last week, Gov. Arnold Schwarzenegger settled a high-profile lawsuit that contended the state had failed to provide enough money for public schools. In the settlement, the governor agreed to spend $2 billion in the 2006-07 school year and phase in an additional $3 billion over the next seven years to compensate for underfinancing schools for the past three years.

But schools in some other states aren’t as lucky.

In Michigan, state revenues are still anemic. Tax receipts are projected to increase by just 1.7 percent in the current fiscal year, which ends Sept. 30, and lawmakers are expected to get only a 2.7 percent increase in all tax proceeds for fiscal 2007, leaving little room for K-12 increases next year.

Recovery Mode

Forty-four states report they are collecting more money than they had expected for fiscal 2006, according to a March report from the National Conference of State Legislatures. The NCSL report estimates that states have amassed surpluses totaling $28.9 billion—about 5 percent of general-fund budgets—because collections of all forms of taxes have improved with the growing U.S. economy and a rising stock market.

The surpluses are a stark contrast to the financial crises states faced starting in 2001, when a slumping national economy drove collections of sales, income, and corporate taxes—states’ main sources of revenue.

Corina Eckl, the director of the fiscal-affairs program at the Denver-based NCSL, said many states are squirreling away extra cash to replenish the emergency funds they raided during tight times.

“There is concern about not digging into holes again,” she said.

Leaders in several states, she added, are aiming to use their surplus money for one-time expenditures or to catch up on transportation, capital-improvement, and maintenance projects.

The North Carolina windfall is allowing Gov. Easley to underwrite some new K-12 initiatives and expand others.

In his plan to spend $18.9 billion in general-fund money for fiscal 2007, unveiled last week, Mr. Easley proposed spending $7.4 billion on K-12 education in the 2006-07 school year—a 7.6 percent increase over current levels.

Much of that money would pay for initiatives that Mr. Easley launched in the first five years of his administration or go to start new ones. The governor’s budget would allot $9.8 million for his Learn and Earn program, in which students can earn high school diplomas and complete courses equivalent to two years of college in five years. Mr. Easley would also allocate $4.8 million to place literacy coaches in 100 middle schools across the state.

He also wants to give teachers an 8 percent salary increase, following the lead of colleagues in other states who have identified teacher raises as a priority. (Politics Pulls Teacher Pay to Forefront, Jan. 25, 2006.)

In addition, the new state lottery the legislature created at Gov. Easley’s behest will provide $425 million to expand early-childhood programs, lower class sizes in the primary grades, and offer new college scholarships.

But he would also hold the line on taxes, canceling increases in the sales and gasoline taxes that are scheduled to go into effect this year. By doing so, the state would forgo $220 million in fiscal 2007.

Golden State

In California, a healthier economy has helped end a lawsuit brought against Gov. Schwarzenegger, a Republican, by state Superintendent of Public Instruction Jack O’Connell and the California Teachers Association.

The lawsuit, filed last year, sought repayment of Proposition 98 funds the governor used in 2004 to help balance the state budget as part of an agreement with school groups. Proposition 98, passed by voters in 1988, sets minimum school funding levels.

The union and the state superintendent contended that in addition to $2 billion used to cover state expenses, the state owed schools extra money to make up for using a finance formula that lowered state-aid levels.

Under the settlement, K-12 education will receive $2 billion, and an additional $3 billion will be paid in installments through fiscal 2014, or until the debt is fully paid.

“I’m pleased we have been able to resolve this disagreement through negotiation, rather than litigation.” Mr. O’Connell said in a May 10 statement.

Barbara Kerr, the president of the CTA, an affiliate of the National Education Association, said the state’s revenue surplus certainly helped settle the case, but she gave the most credit to last year’s vote against the governor’s ballot initiative that would have given the governor and the legislature more control over Proposition 98 funds. “He knew he owed the money, and he finally paid it back,” she said.

The brighter outlook in California stands in contrast to a deficit that reached $35 billion over the 2003 and 2004 fiscal years.

Bricks and Pensions

Hawaii’s department of education, which operates the state’s schools as a single district, will spend a portion of the appropriated facilities money for “whole school renovations” in 95 schools. In that process, crews take an inventory of everything that needs repairing or replacing—such as chalkboards, floors, and windows—and complete the work.

The schools “are like new” when they’re finished, said Greg Knudsen, a spokesman for the department. “This is the kind of thing that normally, if we didn’t have the money, wouldn’t get done,” he said.

In Maryland, the state teachers’ union persuaded lawmakers to upgrade teacher pensions after several years of trying.

Maryland teachers had received a pension equal to 38 percent of the average final three years of their salaries—one of the lowest rates in the nation. The legislature agreed to add $120 million to the pension fund in the first of annual payments to increase the payout to 54 percent for teachers hired after 1998. Lawmakers also added $142 million to shore up the financial viability of the teacher-pension fund.

The Maryland State Teachers Association has lobbied for the changes for four years. This year, the legislature delivered in part because the state has a $114 million surplus in fiscal 2006 and projects a $590 million surplus in fiscal 2007, according to a March estimate by the state comptroller’s office. For fiscal 2007, the state will collect $1.3 billion to finance its operating budget.

The Maryland legislature also raised state aid to schools by $425 million, a 12 percent increase, for fiscal 2007. That amount represents the third annual payment in the four-year plan to increase the state’s K-12 financing by $1.3 billion over the fiscal 2002 amount.

Big Oil, Big Dollars

While dozens of states have benefited from rising tax collections, those that are major energy producers are especially prosperous right now, given sharp rises in oil and natural-gas prices. In Wyoming, schools are scheduled to receive a 24 percent increase in state spending for the 2006-07 school year.

Because revenue from oil sources could dry up if the market takes a dive, Alaska lawmakers have decided to set aside portions of the state’s surplus to finance schools in future years. In March, the state estimated that its revenues would be $1.3 billion—or 50 percent—higher than expected. That figure could eventually reach $2 billion. The fiscal 2006 general-fund budget is $3 billion.

Officials said they would use $565 million of the surplus to help pay for education in fiscal 2007, and $300 million in surplus money in fiscal 2008. The state budgeted $849 million for K-12 education in fiscal 2006.

“The thing about Alaska is, we’re so reliant on oil that every year we can have drastically different situations,” said Eric Fry, a spokesman for the state education department.

Texas lawmakers are debating how much of the state’s $8.2 billion surplus—out of a biennial budget of $72 billion—will go to fix their school finance dilemma.

The state is under orders from the Texas Supreme Court to rewrite its tax code to eliminate a state cap on property taxes. The court declared the cap unconstitutional last year. In bills proposed by Gov. Rick Perry, a Republican, the legislature would create a new franchise tax on businesses and raise cigarette taxes to replace a large portion of the revenue lost by reducing property taxes.

His plan also would tap $1.8 billion of the fiscal 2006 surplus to pay for fiscal 2007 education costs, according to state Comptroller Carole Keeton Strayhorn, who is running against Mr. Perry as an Independent in this year’s gubernatorial election. Ms. Strayhorn said using the surplus would leave a “gaping hole” in the state budget for future years.

By not creating a revenue stream to finance education now, “it pretty much ties the hands of legislators in the future to do anything significant for education funding” in later years, said Rob D’Amico, a spokesman for the Texas Federation of Teachers, a 27,000-member affiliate of the American Federation of Teachers.

But some of Mr. Perry’s fellow Republicans in the legislature say the governor’s plan doesn’t use enough of the surplus—in particular, by failing to return the windfall to taxpayers.

“Surpluses ought to mean we owe something to the taxpayers who have overpaid,” said Rep. Bill Keffer.

Even as legislators nationwide have been debating what to do with rising revenues, a few states are still feeling the fiscal pinch.

Michigan’s financial picture remains bleak as the domestic auto industry continues to struggle.

The Michigan Senate is proposing a per-pupil funding increase of $225 for the 2006-07 school year, a 3 percent increase from the current level of $6,875.

“That is nowhere near what other states are doing,” said William H. Mays, the executive director of the Michigan Association of School Administrators. “Most [Michigan] districts will tell you they no longer have fat to cut. Now, they’re making cuts to the bone.”


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