Education Funding

States Reeling From Revenue Roller Coaster

By Alan Richard — March 12, 2003 10 min read
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In 1999, the state of Michigan began planning for the state’s first three-year education budget. State officials reckoned it would give school districts a head start on improving their financial situations, starting teacher-contract talks, and dedicating money where it was needed most.

That was then. This is now.

The economy has soured, and Michigan is left with little more than a year-by-year budget plan that resembles those of many other states. Districts, in fact, have been hit with budget cuts that sliced into education funding increases that were approved in better times.

“We’re going back to where we used to be,” lamented Bruce Van Eyck, the superintendent of Michigan’s 1,600-student East Jackson Community Schools.

As most states deal with their largest revenue shortfalls in decades, state leaders and educators are looking at ways to insulate their budgets from sudden and dramatic shifts in the economy. They’re looking at long-term planning, revising their tax systems, and searching for ways to make government and school districts run more efficiently.

But, if anyone knew a surefire method of avoiding budget crunches in the future, he or she would be hollering from a mountaintop for all to hear. For now, lawmakers around the country are wading through wrenching budget choices and adjusting their tax systems.

Everyone wants to know how to budget better. School finance experts warn against easy answers, but they do offer some clues that might help states shield themselves from future downturns and survive the current one.

“It’s certainly a difficult time to be a public servant, because regardless of what the final decision is, none of these choices are easy to make,” said Steve Smith, who runs the National Center on School Finance for the National Conference of State Legislatures, which is based in Denver. “The problems are significant, to say the least.”

Taxing Questions

One of the problems, some suggest, is that the fiscal systems in many states have not evolved with their economies. As the importance of service-oriented jobs and the Internet have expanded, for example, many states have not adjusted their tax systems accordingly.

“We have a 1950s level of taxation in the 21st century,” said Scott Pattison, the executive director of the National Association of State Budget Officers, located in Washington. “We’re not always taxing economic activity.”

Sales-tax policies often don’t have any rhyme or reason, Mr. Pattison continued. Whether transactions are subject to taxation often is influenced by the most powerful lobbies in each state. In some states, for instance, consumers “pay sales tax on a candy bar, but maybe not on dry cleaning or a haircut,” Mr. Pattison said.

Governing magazine, a Washington-based monthly that covers state and local government, and the Washington-based Pew Center on the States recently found that many states have inadequate tax systems that have complicated the current budget crisis. The magazine’s annual report detailed how some states were adopting better ways to deal with the problem by broadening and modifying their sales tax es, and charging taxes on Internet purchases for the first time.

But that could be nothing more than a start, says one budget expert.

States may need to look deeper to keep their revenue sources more stable and sensible, argues Brooking Institution scholar Alice M. Rivlin in a recent paper prepared for policymakers. She recommends that states accumulate more reserve funds, and make sure their tax systems include a balance of property and sales taxes.

Just as courts have ordered several states to do with their school finance systems, Ms. Rivlin suggests that states evaluate the services they provide, then rework tax systems to raise the appropriate amount of money to pay for those needs.

“It is time to re-examine where the states have the resources to deliver what is expected of them,” she writes.

Ms. Rivlin, who served as the director of the White House Office of Management and Budget during the Clinton administration, also recommends that the federal government provide “significant temporary relief to state governments” in the coming budget year, then enact a program of revenue sharing that would aid states during hard times and keep state cuts from exacerbating downturns in the economy.

In the meantime, states are considering imposing new taxes, charging slightly higher tax rates, and closing corporate-tax loopholes. They also may be fostering a new reliance on cigarette taxes and other excise taxes that may be easier to pass than new sales or income taxes, but are not as reliable, some experts warn.

“There are long-term problems wrapped into this,” said Nick Johnson, the state fiscal project director for the Center for Budget and Policy Priorities, a Washington think tank. “It’s going to take attention to structural issues.”

Immediate Issues

Having experienced a total revenue decline that has lasted now for 16 months, Mr. Johnson said, states are dealing with the immediate issue of generating funds and cutting costs.

Maryland raised cigarette taxes last year to pay for a new funding package for public schools. Pennsylvania and other states may follow suit. Cigarette taxes represent more than one-third of the new taxes passed in the last year, according to data from the National Conference of State Legislatures.

Others are looking at closing what are seen as corporate loopholes.

Texas legislators are debating a revision to that state’s corporate-tax structure that could raise some taxes on businesses while offering property-tax relief to many homeowners. President Bush had recommended a similar plan while he was governor. (“Texas Bills WouldScrap Finance System,” Feb. 12, 2003.) Elsewhere, Virginia Gov. Mark Warner is battling with his state’s Republican- controlled legislature over changes to the state tax system. The Democrat has offered few specific plans, but last month called on lawmakers to review tax rules so that education funding, which he called “our most compelling need,” could be bolstered.

Gov. Mike Huckabee of Arkansas, a Republican, has broken from his normally conservative views on taxation to propose a small increase in sales taxes to answer a state supreme court ruling that ordered more education spending in his state. (“Compromise Emerges to Fix Ark. Schooling,” this issue.) Interestingly, fewer states are raising taxes to deal with the current budget crisis than they did in past crises, said Mr. Smith of the NCSL. He recommended a mix of taxes that spreads the burden around as equitably and as painlessly as possible. “You do not want a one-legged stool,” he said.

State leaders are considering other structural adjustments as they face the economic crunch.

In Montana, Gov. Judy Martz is backing a plan to stabilize school funding for rural districts where enrollment is falling. Under the plan, average enrollment numbers over a period of three years would be used so that districts would not face dire cutbacks in services when students depart.

Enrollment in Montana’s K-12 public schools has dropped by about 16,000 in the past seven years, to about 150,000, said Kris Goss, the education adviser to Gov. Martz, a Republican.

California lawmakers, who are looking for ways to help close a budget shortfall of more than $30 billion over the next year and a half, plan to ease class-size caps under their state’s initiative for smaller classes in grades K-3.

In Maryland, first-term Gov. Robert L. Ehrlich Jr., a Republican, is pushing the Democratic-controlled legislature to allow the state’s first-ever slot machines to generate tax revenue to help pay for schools and other needs.

Federal Fix

Then there is the impact of federal education policy on states, which state leaders are still trying to calculate.

Even before Congress passed the “No Child Left Behind” Act of 2001, many states had embarked on costly school improvement efforts, such as trying to raise teacher quality, broaden leadership capacity, and improve school facilities.

But, the new federal requirements may be the toughest of all—and the most expensive. Unless some states completely overhaul their tax systems or find new sources of money, many schools may not be able to pay for the new requirements, some leaders fear.

“Schools will try to make a good-faith effort to try to do some of this,” said Mr. Pattison of the state budget officers’ group. “But there are going to be limits. ... That’s going to be the problem over the next two to three years ... localities saying, ‘We’re trying.’ ”

Mr. Smith of the conference of legislatures noted that even a large increase in federal education aid would not alleviate the shortfalls many states are seeing. Federal money accounts only for about 8 percent of K-12 education spending nationally.

“What perhaps is a little bit more troubling to our constituents,” Mr. Smith said, is that while the federal government may provide only a small portion of funding for schools, “the feds sure are calling a lot of the shots” on school accountability.

Jerry McClure, Minnesota’s income-tax director, said, “I don’t know how you can throw enough money at this thing,” he said, referring to compliance with the No Child Left Behind Act, which reauthorized the Elementary and Secondary Education Act. Considering how expensive vast improvements in some schools might be, he said, “I don’t think the schools can be all things to all people.”

Mr. McClure said state politicians should realize the seriousness of Minnesota’s budget crisis, and make fewer financial decisions based on politics. The state is facing a projected revenue shortfall of $4.2 billion over the next two fiscal years, and Gov. Tim Pawlenty had to tap such one-time revenue sources as the state’s rainy day fund and tobacco-settlement money to balance his proposed $46 billion biennial budget.

“We gave out almost $3 billion in the last five or six years” in tax cuts, he said. The rebates were called “Jesse checks” by some, after then-Gov. Jesse Ventura, who pushed the plan.

“Many of us look back at that and think, man, that probably wasn’t good planning,” Mr. McClure said.

Michigan’s Retreat

When it comes to new ideas to help stabilize school funding, Michigan’s three-year plan seemed to be a step in the right direction when it was approved in 2000. That was before the terrorist attacks of Sept. 11, 2001, and downward shifts in the national economy presented some unexpected turns.

“We spent so much time talking about budgets that we rarely got into discussing policy,” Sen. Wayne Kuipers recalled, giving one reason why he helped pass the three-year budget plan.

When then-Gov. John Engler, a Republican, and the legislature introduced the three-year education budget, they combined it with extra money for schools. But, halfway into the budget cycle, as the economy started to soften, lawmakers were forced to rescind some of the extra funding.

Now that he has seen how drastically the economy can change, Mr. Kuipers said he believes a two-year budget cycle may be more manageable.

“I have mixed feelings about a three-year budget,” said Mr. Kuipers, a Republican from Holland, Mich., west of Grand Rapids. “It’s very difficult to project what the economy’s going to look like.”

Michigan’s new, Democratic chief executive, Gov. Jennifer Granholm, has released a one-year plan, in part because of the economic crunch, though she promises to protect education above all else.

Mr. Van Eyck, the superintendent in East Jackson, about 30 minutes west of Ann Arbor, Mich., said he appreciated the efforts to bolster education funding and come up with a long-term plan. But schools that sank most of their extra money into smaller classes and teacher training are finding it painful to cut back funding in those areas, he said.

Some state leaders have suggested cutting from district-level administration, but Mr. Van Eyck said: “Where? I’m the superintendent and the business manager and the personnel director. When someone says cut your fluff, we don’t have any.”

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