The phony funding crisis: even in the worst of times, schools have money to spend.

The phony funding crisis: even in the worst of times, schools have money to spend. Chicken Little is alive and seemingly employed as a finance analystor reporter for an education interest group. If one relies on newspaperheadlines for education funding information, one might conclude thatAmerica's schools suffer from a perpetual fiscal crisis, every yearperched precariously on the brink of financial ruin, never knowingwhether there will be sufficient funding to continue operating.Budgetary shortfalls, school district bankruptcies, teacher andadministrator layoffs, hiring and salary freezes, pension systemdefaults, shorter school years, ever-larger classes, faculty furloughs,fewer course electives, reduced field trips, foregone or curtailedathletics, outdated textbooks, teachers having to make do with fewersupplies, cuts in school maintenance, and other tales of fiscal woeinevitably captivate the news media, particularly during the late-springand summer budget and appropriations seasons. Yet somehow, as the budget-planning cycle concludes and schoolsopen their doors in the late summer and fall, virtually all classroomshave instructors, teachers receive their paychecks and use their healthplans, athletic teams play, and textbooks are distributed. Regrettably,this story is seldom accorded the same media attention as are theprospects of budget reductions and teacher layoffs. For a variety of reasons, from one year to the next, schools almostalways have more real revenue for each of their enrolled students. Forthe past hundred years, with rare and short exceptions and aftercontrolling for inflation, public schools have had both more money andmore employees per student in each succeeding year. Teacher salarieshave increased more than 42 percent in constant dollars over the pasthalf century, while educators' working conditions, health plans,and retirement arrangements have become ever more commodious. Moreover,school-related revenues and employment levels have increased even whenthe economy (as measured by Gross Domestic Product or GDP) turned down,unlike what typically happens in sectors such as manufacturing andretail sales, where recessions trigger cut-backs in personnel andprofits. Now, local school funding is apparently more secure than everbefore. For the first time in history, the federal government hasassumed a dramatic new school-funding role, that of banker of lastresort, providing stopgap revenues to the nation's schools duringeconomic downturns. The Obama administration's unprecedentedinjection of billions in federal funding for schools likely ensures thateducation's resource cushion will continue for at least the currentdownturn and possibly for much longer. The notion that the federalgovernment should serve as a fiscal flywheel for schools would have comeas a major surprise to lawmakers even during the 1960s' high pointof federal funding for schools. A Bigger (and Brighter) Backdrop It is true that occasionally school districts become insolvent andstates have to step in and take over. California had a string of costlyand highly visible instances in the recent past, with the state havingto elbow locally elected school boards aside and install all-powerfuladministrative overseers in large districts such as Oakland andRichmond. Detroit is the poster child for similar activity in theMidwest (see sidebar). School district insolvencies are rare and mostoften the result of administrative or school board mismanagement andmalfeasance, rather than from the consequence of diminished revenues andsystematic budget cuts. [FIGURE 1 OMITTED] Nationally, America's school-district revenues have long beenon an upward trajectory (see Figure 1). Since 1929, per-pupil spendinghas declined only four times and significantly only twice, once duringthe Great Depression and once in the midst of World War II. There havebeen 11 periods during which GDP declined but mean total real per-pupilrevenues still increased. The number of employees, teachers,administrators, and others has continually increased for four decades,except for the early 1980s period of declining enrollment and recession.And pupil-teacher ratios have fallen by almost 50 percent due toinvestments in class-size reduction and an increase in the number ofteachers who are not assigned to full classrooms (see Figure 2). [FIGURE 2 OMITTED] How Is Education So Well Protected during Recessions? Public schools have long been remarkably insulated from economicdownturns. This becomes particularly clear when we compare employmenttrends in different economic sectors. Figure 3 displays historical(1972-2008) employment information in nine sectors: construction,finance, government, information, manufacturing, professional andbusiness services, retail trade, transportation, and warehousing.Employment levels reflect economic conditions and, except for government(which includes elementary and secondary education), employment levelsfluctuate with the economy and the historical trend is modestly upward.Contrast this picture with the much steeper upward slopes in educationemployment shown in Figure 2. [FIGURE 3 OMITTED] Unlike other employment sectors, education is protected from thedirect effects of economic ups and downs by an interlocking andreciprocally reinforcing set of politically constructed conditions.Among these conditions are 1) education's privileged legal statusin most state constitutions; 2) schooling's uniquely decentralizedoperation and diffuse revenue-generation structure; 3) local politicaldynamics and institutions that foster a favorable fiscal environment forpublic schools; 4) a multitiered structure for funding schools withcomplicated intergovernmental funding incentives and reliance oninelastic tax sources, such as property taxes at the local level. Almostno other economic endeavor enjoys such a spectrum of insulatingconditions. Constitutional Privilege The United States Constitution is silentregarding education and schooling. This omission, taken in tandem withthe Tenth Amendment's reservation of unspecified powers to statesand the people, and state-level constitutional provisions, renderseducation principally a state function. Moreover, state constitutionsexplicitly assume responsibility for provision of schooling. State constitutional education clauses are generally of threekinds. They assign the legislature a responsibility for provision of aneducation system that is 1) "Thorough and Efficient," 2)"General and Uniform," or 3) the legislature's"Paramount Duty." The precise language of the state constitution is not as importantas the explicit specification of the state's responsibility forproviding education. Criminal justice, transportation, recreation,indigent care, economic development, commercial regulation, and evenpublic safety are not privileged to the same degree. A state can decideto pursue or abolish numerous areas of government responsibility, suchas support for prisons, highways, parks, and colleges, or welfarepayments. It cannot decide to abandon its K-12 school system. Indeed,several states even have constitutional provisions that prevent lessbeing spent on education in any one year than in a prior year. Many state courts have made clear that education takes prioritywhen it comes to appropriating funds. Adequacy cases decided in favor ofplaintiffs in numerous states, such as Campbell County v. Wyoming, haveemphasized that the state has a unique obligation to fund schools athigh levels, even if other parts of the budget must suffer. Decentralized Operation. No modern nation has an education systemthat is more decentralized or multitiered than the United States. Theconsequence is that American school systems are buffered structurallyand politically against resource competition with other state and localgovernmental services. Conceived in the colonial period and evolving well into the 21stcentury, public education in the United States has relied on 50 distinctstate systems that, in turn, delegate selected dimensions of operationalauthority to more than 13,000 local school districts. The majority ofthese local districts have property taxing authority; the rest rely oncounty or municipal governments to generate their share of localrevenue. Local school districts are overseen by boards of education. Most ofthese, 80 percent, are made up of elected members. The remainder of theboards are appointed by mayors, city councils, or other electedauthorities. Regardless of membership selection procedures, these boardsplace education in a privileged position relative to those publiclyprovided services that depend on general governments for resources andmust compete with other services for their share. Political Protection. General citizen apathy toward school spendingand policy can be partially explained by the costs and effort requiredfor active political participation. School policy and operationalmatters can be complicated. It takes a great deal of personal time tobecome informed regarding such issues as racial desegregation, charterschools, curriculum content, testing, graduation standards, geographicplacement of a new school, and the configuration of attendanceboundaries. These and other education-related issues affect parents andeducators more than they do other citizens, particularly those citizenswho do not have children enrolled in public school. Hence, school district politics, including those surroundingfunding issues and taxation, tend to be dominated by self-interestedcoalitions of parents and school district employees. For theseconstituents, the costs of becoming informed and actively participatingin school district decisionmaking are low relative to the benefits to begained. Employee-parent coalitions tend to dominate local school-boardelections and ballot measures regarding school funding (see "TheUnion Label on the Ballot Box," research, Summer 2006). Theirself-interest and favorable predisposition provide schools withpolitical protection against budget cuts when the overall economy turnsdown. Several other political elements favor school funding. Districtemployees, those with the most direct interests in sustaining orelevating school spending, are frequently well organized politically.Employee groups can offer sympathetic candidates greater campaignresources than other school-related constituencies. Union members areprobably the voters most predisposed to turn out at an election and tovote. These dynamics provide schools and school spending with localadvocates who are politically sophisticated and well resourced forcampaign purposes. Opponents of increased school spending or higher taxes for schoolscan be mobilized and on occasion dominate an election. This wasdramatized in the 1978 enactment of California's famoustax-limitation provision, Proposition 13. Usually, however, incrementalincreases in proposed school budgets represent only a fractionaladdition to local property-tax rates. When property owners anticipatepaying only a hundred or so additional dollars in the forthcoming year,they may be unwilling to make the effort needed to oppose the increase. There is an additional political dynamic contributing to thepreservation of local school-funding levels. A frequent metric, howevermisguided, for measuring school quality is the amount of money adistrict spends per pupil annually. Many posh suburbs actively competeon this dimension, proudly proclaiming their per-pupil-spending statusranking relative to competitor districts. Citizens, parents, and otherswho have purchased homes in such districts perceive the value of theirproperty to be linked to high spending levels and accordingly acquiesceto advocates' entreaties for more money. Finally, in most states, education employee unions have the rightto bargain with school boards and to embed collectively derivedagreements regarding salaries and working conditions into legallyenforceable multiyear contracts. These extended contracts, oftenbridging or outlasting economic recessions, act to buffer threatenedrevenue reductions. Multiple Revenue Sources. Schools are highly resource dependent,but they are not dependent on a single source. The distribution ofrevenue-raising responsibility over federal, state, and localgovernments contributes to education revenue stability (see Figure 4). [FIGURE 4 OMITTED] Three trends of note can be discerned in this graphic. First, onecan see that initially, local funds were the dominant source of districtrevenues, with states and the federal government being only minorpartners. In most places, local district and municipal revenue has beengenerated through property taxation, and this arrangement has assistedin insulating schools from economic ups and downs. Property taxes arerelatively inelastic when the economy swings up. It takes assessors twoto three years to capture escalating property values and, thus, to giveschool districts the full measure of benefit from economic growth andhousing inflation. However, this same inelasticity protects schoolsduring economic downturns when property owners continue to pay thosesame taxes, even if their income is reduced, as assessors do not reduceproperty values in a timely manner. The second trend began in the post--World War II era, as statefunding supplanted and matched or slightly exceeded local revenues. Thispattern resulted, at least partially, horn the "equalprotection" litigation movement launched in the 1970s, in whichstate courts determined that rectifying once-gaping spendinginequalities between districts was the states' responsibility.While remedies might have left local funding as the principal revenuesource for schools, state legislatures chose instead to provide fundingcentrally from state coffers and to reduce the relative contribution oflocalities. Even in the face of the current recession, state governments areraising taxes to cover deficits. This may actually reflect an additionalexplanation for how well schools have done in the past: States arerequired to have balanced budgets, so they raise taxes when times arctight and then keep the new rates when the money flows again. Localgovernments and school districts do not have the luxury of deficitspending. Reliance on state funds is a double-edged sword, however. Staterevenues dampen interdistrict inequalities but, since they typicallyderive from sales and income taxes, these revenues are also more closelylinked to economic fluctuation and more volatile than property taxreceipts. Dependence on state funding also places education in a morecompetitive resource arena. Local school boards concern themselves, andfocus their taxing authority, only on education issues. Statelegislatures, education's privileged constitutional positionnotwithstanding, have to consider a far wider range of services andresponsibilities in deciding who gets what. The third trend pertains to the federal contribution. In 1965, thefederal government launched its most significant education endeavor whenthe Johnson administration initiated the Elementary and SecondaryEducation Act (ESEA). Appropriations from this legislation pumpedfederal spending all the way up to 8 percent of total school revenues.The No Child Left Behind Act (NCLB) is the 2001 version of the ESEA.This statute did not dramatically increase federal funding foreducation, at least as a percentage of total revenue. It did, however,usher in a completely new era of accountability in education. Prior to 2009, the highest historical rate of federal contributionto education had been 10 percent. The Obama administration'seconomic stimulus plan ($44 billion for schools now flowing under theAmerican Recovery and Reinvestment Act [ARRA] of 2009) dramaticallyalters this trajectory and contributes to a more evenly balanced revenueportfolio for schools. The federal government is becoming less and lessa junior partner, and more and more an equal partner, in the tripartiteAmerican method of funding schools. Why the Ever-Present Fiscal Doom? If school revenues have enjoyed such remarkable stability, why thepersistent appearance of fiscal calamity? One reason is thatschool-district budget cycles are imperfectly synchronized with stateand federal legislative appropriations processes. The fiscal year forstate and local governments routinely begins on July 1. It isincreasingly rare for legislative bodies to enact spending bills much inadvance of this date. School districts are legally obligated to havebalanced budgets and cannot balance anticipated expenditures throughdeficit financing. As local school boards begin their winter and springbudget planning, they and their administrative officers perceive stateand federal fiscal uncertainty and publicly discuss, as state"sunshine" statutes mandate, their contingencies for budgetcutting. Since some 80 percent of school-district budgets are absorbed inpersonnel costs, local school boards, when pressed fiscally, quitenaturally give consideration to personnel cutbacks and salary freezes.State statutes make it necessary to inform school employees, usually inApril or May, if there are to he layoffs. Sensing financialvulnerability and needing to comply with personnel notificationdeadlines, school districts issue layoff notices and hold mandatorypublic hearings, even if the probability of actual personnel layoffs isslender. Such public threats trigger a media frenzy, alarm employees andparent advocates, and exacerbate, yet again, the prevailing publicperception that schools are headed for fiscally stringent times. The likelihood of resource reductions is remote. However, it is arare education reporter, teacher who receives a layoff notice (howeverunlikely to be acted upon), or parent who was expecting to have thehighly regarded but layoff-vulnerable Ms. Jones for her 3rd-grade childin the fall, who sees the matter in historical perspective or withobjectivity. What Has All This Money Produced? The ever-increasing cost of public education would engender lesscontroversy if the product had improved apace. The United States expectsmuch of its schools. Preparation for career, college, and citizenship;personal health and hygiene knowledge; racial and gender equity; leisureand aesthetic appreciation; social mobility; scientific sophistication;safe driving practice; and sex, alcohol, drug, reproductive, andenvironmental awareness are all part of the booming, buzzing, andsometimes antithetical public discourse that assigns purposes to thenation's schools. Still, there are two fundamental dimensions onwhich schools must maximize performance in order to make progress towardall other desired education outcomes: 1) children learning to read and2) students completing high school. Viewed longitudinally,America's schools have not done well on these dimensions. Reading scores on the National Assessment of Educational Progress(NAEP) have been level for four decades. Graduation rates, as recentlycalculated by economist and Nobel laureate James Heckman, display thesame regrettable pattern as reading scores. For a half century, nearlyone-third of the nation's high-school students have failed tograduate with their class each year. That average masks much lowerhistorical rates for black and Hispanic students than for whitestudents. Many who do not graduate from high school subsequently obtainhigh-school equivalency credentials, such as the General EquivalencyDiploma (GEO). Still, more than 1 million adolescents each year havesomehow not been retained by the nation's schools. Will the Schools' Fiscal Privilege Persist? If one were to place bets based on past evidence, the odds favorAmerica's public schools to operate next year with at least as muchand probably with somewhat more money and a larger and (modestly)better-paid labor force than they had in 2009. The dramatic escalationof the federal government's revenue contribution, to close to 15percent of education's national total, almost guarantees that meanper-pupil revenues will not decline in 2010. There is no effort here to dispute the reality of the currentrecession. State and local tax receipts, heavily dependent onconsumption and income, were down 4.6 percent for the first quarter of2009 over the prior year. Still, per-pupil revenues will likely continuetheir historical upward trajectory. The unprecedented ARRA stimulusrecovery allocation for education only strengthens this prediction. Although the current economic crisis has several dimensionspreviously unseen--the pace at which employment and housing sectorscrumbled, the speed at which credit disappeared, the intensifiedeconomic interdependence of global markets, and the stunning magnitudeof plummeting personal and institutional wealth--the federalgovernment's monetary and fiscal recovery plans were enacted intopolicy with remarkable speed. Congressional willingness to subsidize theeconomy was never higher. And the international community coordinatedstimulus spending as never before. Also, during early April 2009, the U.S., European, and Asian stockmarkets seem to have bottomed out and turned up. Job losses, whilecontinuing, are slowing. Nationwide unemployment, at 9.3 percent as ofthis writing, is still lower than at its post-World War II peak of 10percent in the 1982 recession, and gives no indication of coming closeto catastrophic Great Depression rates. In April 2009, prices of goodsand services were down and consumer confidence unexpectedly climbed,modestly, upward. Balancing all these factors leads to the projections in Figure 5,which provide a bounded estimate of national total operating revenuesper pupil through 2020. These high and low projections, based on 2006-07dollar spending, are the result of calculating historical rates of leastand greatest growth and applying those rates to create low and highprojections until 2020. Specifically, the low projection, which wouldproduce $9,519 in per-pupil spending in 2020, is based on an averagegrowth rate of 0.1 percent, similar to the period from 1991 to 1996. Thehigh projection, which would produce $13,208 in per-pupil spending in2020, is based on an average growth rate of 2.45 percent, similar to theperiod from 1997 to 2004. (Readers should keep in mind that thesefigures are in 2006 dollars and the actual per-pupil dollar amounts in2020 would be higher.) [FIGURE 5 OMITTED] The major assumption here is that the federal government'sstimulus contribution to K-12 schooling will approximate $90 billion.The $37 billion in the stimulus package that is intended to offsetreduced state and local education revenue in 2009 will cushion whatwould otherwise likely have been the first significant per-pupilspending reduction in 60 years. A New Fiscal Stability Whether measured on a per-pupil basis or as a percentage of GrossDomestic Product, support for public schools is stronger in the UnitedStates than in most other nations. Moreover, this condition haspersisted for many decades. A unique set of constitutional, structural,financial, and political arrangements ensures that school systems andprofessional educators are buffered from revenue losses when the economydeclines. State rules surrounding local school-district budgetingprocedures contribute to the opposite impression, making it appear thatschools are in a perpetual financial crisis. The 2009 ARRA stimulus package may portend an entirely new sourceof fiscal stability for America's schools. When the economy turnsdown, the federal government may serve as the major fiscal backstop forpublic education. RELATED ARTICLE: Another Detroit Deficit A century ago the Detroit Public Schools were among thenation's leading educational institutions; they now teeter on theedge of oblivion. Enrollments have dwindled to 93,000, roughly half oftheir 2001 level, as parents have moved or enrolled their children incharter schools. Only 58 percent of enrollees graduate from high school;only 25 percent of 9th graders graduate four years later. Studentstandardized test scores are among the lowest in Michigan. A Council ofGreat City Schools report found deficiencies in instruction, data,accounting-the list goes on. The district has 100 vacant schools on its property rolls. The FBIhas targeted a school district payroll manager for allegedly embezzling$400,000. When Detroit school employees were asked to pick up paychecksin person, 257 checks were never claimed, presumably made out to ghostemployees. A recent audit found staggering waste, from unused vehiclesand electronic equipment to health coverage costs for ineligibledependents. In 2002, the Detroit Public Schools had a $103.6 millionsurplus. Now the district faces a deficit of $259 million and iscontemplating filing for bankruptcy protection, a rare occurrence in thehistory of American public education. More than 2,000 layoffs and 29school closures have done little to narrow the gap. The district isscheduled to receive $149 million in federal stimulus funds, but only$11 million of this can go toward reducing the deficit. James W. Guthrie is professor of public policy and education atVanderbilt University and director of the Peabody Center for EducationPolicy, where Arthur Peng is research associate.