Special Report

Stimulus Patching Budgets

Local Officials Crying Foul As Governors Grab for Aid
By Michele McNeil — March 27, 2009 8 min read
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Desperate for cash to fill growing budget deficits, state governments are starting to tangle with federal and local officials over a $39.8 billion pot of economic-stimulus money that was designed to prop up the budgets of local school districts, but is increasingly being eyed as a patch for states’ own financial woes.

Vague language and loopholes in the American Recovery and Reinvestment Act—the stimulus package signed into law in February by President Barack Obama—are sparking questions about how much discretion states have over education stimulus funding. Mayors and school boards in a number of states fear being shortchanged by revenue-hungry governors and legislatures.

U.S. Secretary of Education Arne Duncan is putting state-level officials on notice that spending the first chunk of stimulus money unwisely could jeopardize aid that his office will distribute later.

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“If states are doing things that are not in the best interests of children, they are just very simply going to disqualify themselves and take themselves out of the running for billions of dollars,” Mr. Duncan said in an interview last week.

Examples of such power struggles are piling up across the country.

In Rhode Island, Gov. Donald L. Carcieri, a Republican, wants to cut state education funding in the next budget year by about $37 million, free up that money for other purposes, and use federal stimulus money to fill in the education gaps.

Duncan on Stimulus & Schools

In Kansas, Gov. Kathleen Sebelius, a Democrat who has been tapped to become Mr. Obama’s secretary of health and human services, is objecting to the legislature’s pursuit of $26 million in K-12 cuts to help shore up the state’s $680 million budget deficit, even as Kansas is expecting about $387 million in federal education stimulus aid.

And in Ohio, under a new funding formula proposed by Democratic Gov. Ted Strickland, some districts would get little or no additional money over the next two fiscal years, even though they’re supposed to get a boost from the stimulus package through the federal Title I and special education programs.

“States have big shortfalls in their budgets, and there’s going to be the temptation to use the stimulus money for that purpose,” said Molly Hunter, the executive director of the New Jersey-based finance-advocacy group Education Justice. She noted that the practice of “supplanting,” or replacing, state funds with federal funds is generally highly restricted by federal guidelines.

“This is going to be a big concern with the stimulus,” Ms. Hunter said.

Second Round of Aid

It’s already a concern for Secretary Duncan, who said in a March 24 interview with Education Week that his office is having conversations daily with a “number of states” over issues involving how the money can be used.

Fight Over Federal Money

Officials in several states are squabbling over what to do with their share of education stimulus funding, with most of the argument centering on the $39.8 billion state stabilization fund. This pot is designed primarily to prop up education budgets and stave off cuts to school districts.


SOURCE: Education Week

And he’s dishing out a warning: “We’re putting out literally billions of dollars. We’re also holding back billions of dollars. If we see states doing things that don’t make sense and aren’t in the spirit of what this [stimulus aid] is about, they would put themselves in jeopardy of receiving the second set of money.”

At stake is a second slice of state economic-stabilization money, worth $13 billion, due to go out after the U.S. Department of Education approves states’ plans for using the money for education reform. The department is holding back that money—a third of the $39.8 billion in education aid under the state stabilization fund—to make sure states spend the first portion wisely.

Mr. Duncan also has control over which states share $4.35 billion in incentive-grant money funded in the stimulus package—money designed to reward states for progress on initiatives to improve education.

“It’s absolutely in states’ best interests, in school districts’ best interests, and children’s best interests that people do the right thing,” he said in the interview.

The American Recovery and Reinvestment Act provided some $115 billion in aid for education, most of it through the federal Education Department. (“Local Educators Prepare to Use One-Time Funds,” Feb. 25, 2009.)

Almost two-thirds of the money is flowing through state governments, either in the form of increases in Title I aid for disadvantaged students, in special education funds, or in state stabilization dollars for local school districts’ budgets. For the stabilization fund money, states—at a minimum—must keep financing their schools with state dollars at 2006 levels. The increases in Title I and special education aid, which are separate from the state stabilization fund, are supposed to flow to districts virtually untouched.

But state finances and school funding formulas are complex and vary widely. Although there are supposed to be strings attached to federal stimulus money, it’s fairly easy to move money around when state budgets are tallied in the billions of dollars.

A growing number of states are filling in their budget gaps with stimulus money or, in another strategy, cutting the state share of education funding—thereby freeing up state dollars for other expenses—and filling in education budgets with stimulus aid.

Some education advocates fear states may try to count the increased Title I and special education dollars as part of their own commitment under state school funding formulas, freeing up more state money for other purposes.

School districts in many states, such as California and Florida, won’t end up getting any increased funding over current-year levels despite the economic-stimulus funding.

Deficit Sinkhole

States are facing a combined $84.3 billion in budget deficits in the 2010 fiscal year alone, according to a January report from the Denver-based National Conference of State Legislatures. And governors, who generally are bound by state constitutional restrictions barring them from taking on debt, must balance those budgets.

That’s made for some creative thinking when it comes to use of the education stimulus aid.

In Hawaii, Gov. Linda Lingle, a Republican, found out in mid-March that the state had a $90 million shortfall that had to be closed by June 30. Last week, she proposed using $90 million in state stabilization education funds to close that gap. Otherwise, she said, education or other state agencies would have to be cut.

To comply with the letter of the stimulus law, the state is, in effect, slashing education by $90 million and using federal funds to fill the gap.

“The only ability we have with stimulus funds is to use it to put into education,” Gov. Lingle said at a March 25 press conference. “So this makes ... education whole.”

In Idaho, Gov. Butch Otter has drawn criticism for proposing to cut school funding by 5 percent next fiscal year and hang on to the stabilization funding from the federal government until 2011—the deadline by which states must spend stabilization funds.

“We simply do not know how much worse this economic downturn will get or how long it will last,” Gov. Otter, a Republican, said in a statement. “It is far better, wiser, and more fiscally responsible in my judgment to continue planning for the worst.”

Talk of a similar strategy has been heard in Connecticut, Illinois, Texas, Michigan, and California.

But local officials are pushing back.

The San Diego Unified School District was so worried that the state would try to hold back some of the stimulus money to plug the budget deficit that it asked the state’s congressional delegation for clarification, said Bernie Rhinerson, a district spokesman.

California’s dire budget situation forced $42 million in midyear cuts to the 132,000-student district’s $1.2 billion general-fund budget, and San Diego Unified faces another $50 million in cuts this year without help from the stimulus package, Mr. Rhinerson said.

The result of the district’s lobbying was a stern letter on March 17 from 26 of the state’s U.S. House members to Gov. Arnold Schwarzenegger, a Republican, and other top officials. It read, in part: “It has been suggested that the state has some ability to intercept stabilization funds. ... It does not.” The letter’s endorsers included House Education and Labor Committee Chairman George Miller, D-Calif.

Local Officials Protest

It’s not just school districts keeping an eye on stimulus funding.

In Rhode Island, David N. Cicilline, the Democratic mayor of Providence, wrote to Secretary Duncan urging him to intervene in a plan by Gov. Carcieri to cut the state contribution to education funding by $37 million and fill the gap with federal stimulus money.

“The net result is that most districts would see a small increase, and in Providence, there’s actually a reduction in the education investment,” Mayor Cicilline said. “To take [the money] away from the children and use it to plug a budget gap is absolutely wrong.”

In defending his budget proposal, however, Gov. Carcieri said: “My budget uses the federal stimulus money as it was intended—to preserve and create jobs.”

In Ohio, Gov. Strickland has developed a complex new school funding formula, in part because the current one has been declared unconstitutional several times by the state’s high court. He’d use federal education stimulus dollars, in part, to fund the new formula.

The result would be that even though some Ohio districts, by federal estimates, are supposed to get additional money for Title I and special education under the stimulus package, many would get little or no increase over the next couple of years. That has sparked complaints from legislators.

But not everyone is complaining. David Varda, the executive director of the Ohio Association of School Business Officials, acknowledges the governor’s funding plan may seem to conflict with rules that say federal Title I and special education money must “supplement” state funds and not “supplant” them.

“But we are not in normal times,” Mr. Varda said. “The state’s broke. They’re pulling all of the ends together to get to a goal of getting all districts to have as much money as [in fiscal year 2009].

“What’s the alternative?” he said. “To lay off a bunch of teachers, and then kids don’t get the services they need?”

A version of this article appeared in the April 01, 2009 edition of Education Week as Stimulus Patching Budgets

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