April 20, 2009: The Stimulus and Poverty: Will the Federal Stimulus Bill Protect Public Education from Spending Cuts? By Andrew Reschovsky, Professor of Public Affairs and Applied Economics at the University of Wisconsin-Madison
This commentary is the third in a special series that examines how the American Recovery and Reinvestment Act affects low-income Americans.
Economist Timothy Smeeding opened the series with the piece “First Steps toward a Strong Antipoverty Policy: New Attention to a Growing Problem;” Professor Daniel R. Meyer of the University of WisconsinMadison continued the series with his commentary “Tax and Transfer Programs in the Stimulus Bill: A New Direction?” In the following piece, Professor Andrew Reschovsky examines how the stimulus bill will affect public education funding from the perspective of the State of Wisconsin.
The current recession is having a devastating impact on the finances of state and local governments. In most states, revenue from income taxes, sales taxes, and business taxes has fallen dramatically. At the same time, the recession has spurred demand for state-funded health and social services programs as more people lose their jobs and see their incomes fall.
The result is growing state budget gaps. The Center on Budget and Policy Priorities estimates that from now through fiscal year 2011, the collective budget gaps of state governments will equal about $350 billion.
Meanwhile, many local governments may face the double whammy of reduced fiscal assistance from their state governments and declining revenue from the property tax. Declining house prices will begin to be reflected in lower property value assessments. Local governments and school districts will have to enact large increases in property tax rates or face a reduction in property tax revenue. In areas where foreclosures are common, property tax revenue will certainly plummet.
As over 90 percent of funding for elementary and secondary education in the U.S. comes from state and local governments, public schools throughout the country are at risk of sharp cuts in funding, leading inevitably to teacher layoffs, larger class sizes, and reduced efforts at shrinking the achievement gap.
Motivated by a desire to prevent large cuts in education, the Obama administration and Congress specified that about $60 billion of the money appropriated through the American Recovery and Reinvestment Act (ARRA) will be used for elementary and secondary education, with most of it designated to go directly to state governments and local school districts.
Although the story will be different in every state, Wisconsin provides a good example of how states plan to use stimulus dollars to prevent cuts in education spending. According to current estimates, Wisconsin faces a budget deficit of nearly $3 billion in each of the next two years, an amount that is equal to over a fifth of the state۪s annual general fund budget.
In Wisconsin as is the case in many states the largest single share of state spending is in the form of grants to elementary and secondary school districts. This year, state aid to education totals $5.5 billion and makes up nearly 40 percent of all state general fund spending. The simple arithmetic of the state budget means that it would be impossible to balance the state۪s budget without making substantial cuts in aid to education or precipitously raising taxes.
The stimulus package includes several large pots of money dedicated to elementary and secondary education. The largest amount of money comes from the State Fiscal Stabilization Fund, which includes about $40 billion that states can use to fund education. States are given great latitude in how they use those funds; however, states are not allowed to cut their own support for education below 2006 levels. The stimulus package also includes about $13 billion of additional funding that goes directly to school districts in support of programs for students from economically disadvantaged families (through Title I) and approximately $12 billion in additional funding for special education programs.
As do many other states, Wisconsin has a complex school funding system. State aid currently accounts for about 52 percent of school district revenue, with 42 percent coming from local school districts, primarily from the property tax, and 6 percent from the federal government. Nearly 90 percent of the state government۪s contribution is distributed using an equalization formula designed to provide more aid to property-poor school districts.
The rest of state aid is allocated to local districts using about 35 separate categorical aid programs. Nearly 60 percent of categorical aid goes to help finance “special education” programs for students with mental and physical disabilities. The largest of the other categorical aid programs is Student Achievement Guarantee in Education (SAGE), a program that funds small class sizes in kindergarten through third grade in schools with high proportions of students from poor families.
Although the state provides substantial education funding to local school districts, it also restricts local districts۪ ability to increase spending by raising local property taxes. Since 1993, annual increases in the sum of equalization aid and property tax revenue have been capped, generally at levels that are below the rate of inflation for many districts. This year the revenue cap equals $275 per student.
In releasing his budget for the next two fiscal years, Wisconsin Governor Jim Doyle proposed devoting $789 million of the state۪s allocation from the federal Stabilization Fund to finance equalization aid. The federal funding, however, would result in no increase in equalization aid flowing to local school districts in FY 2010, and an increase of less than one-half of one percent for FY 2011, because he would reduce state funding for equalization aid and replace it with federal stabilization funds.
Total categorical aid to school districts would increase by a minuscule amount in each of the next two years. State spending on special education would remain unchanged between FY 2009 and FY 2011. The only increases would occur in three poverty-related programs, SAGE, age 4 kindergarten start-up grants, and a small-grant program that targets state aid to districts with very high concentrations of children from poor families. State funding for all other categorical aid programs would be reduced by one percent.
The fact that most school districts will receive little in the way of additional state aid will make it particularly challenging for local school districts to maintain education quality and to continue efforts to improve the relatively low levels of academic achievement among students from poor families. Over the past decade, annual increases in state equalization aid allowed most districts to increase spending to meet rising costs, without having to enact large increases in school property taxes. This year will be different.
With equalization aid frozen, increased spending allowed under the revenue caps will have to be funded entirely from the property tax. There seems little question that many school districts will find it politically difficult, if not impossible, to increase property taxes when local residents are coping with falling home values. Although exact predictions are not possible, it is likely that the strongest resistance to increases in school property taxes will occur in low-income communities, where many homeowners are already struggling to meet mortgage payments and to avoid foreclosure.
One positive note is that Wisconsin school districts will receive approximately $400 million over the next two years in increased federal funding for special education and for Title I, thanks to the ARRA. The formulas used to distribute these federal funds are designed to target them to school districts with large numbers of students from poor families. These funds will be particularly beneficial to Milwaukee, where over three-fourths of public school students live in poverty, providing about $600 per student of additional federal aid over the next two years.
There is no question that without federal stimulus aid, most states would have been forced to enact large cuts in state aid to education. The federal stimulus will allow most states to at least maintain existing levels of aid. The large increase in Title I aid will play a particularly important role in allowing school districts that educate large numbers of students from poor families to maintain and perhaps expand educational programs. Nevertheless, in Wisconsin, as elsewhere, many school districts will have to operate over the next few years with few additional resources even as costs rise. They will face significant challenges in maintaining education quality.
One lesson from the mild recession in 2001 is that improvements in state government finances often lag behind improvements in the general economy. Thus, even though the overall economy was growing by 2003, state government revenues continued to fall, and in some states the largest cuts in state education aid occurred in that year.
This time around the recession is much more severe. There is every reason to believe that even after the economy starts to grow again, state revenue growth will continue to stagnate. The real crisis in the funding of public education may well occur in 2012, when states۪ weak fiscal situations prevent them from expanding education aid, and a weak housing market makes it politically difficult for local school districts to compensate for reduced state aid with higher property taxes. Whether Congress would be willing to provide states with a new round of fiscal assistance, designed to protect public education, remains to be seen.
Andrew Reschovsky is Professor of Public Affairs and Applied Economics, Affiliate of the Institute for Research on Poverty, and Affiliate of the Wisconsin Center for Advancement of Postsecondary Education at the University of Wisconsin-Madison.