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The Housing Crisis Hits Schools

Fiscal Trouble Comes to School

By Marty Weil |

May 2008


Is your school safe?<br />
Is your school safe?

The housing market keeps falling, and it’s school districts that are taking the hit.

Superintendent Walt Rulffes has no illusions that his district will be spared the fallout of the subprime meltdown.

“Our governor has already asked us to reduce spending by $62 million,” says Rulffes, of the Clark County schools in Nevada. “Cuts of this magnitude will be difficult to implement without impacting instruction.” This is the grim reality, despite Nevada’s recent growth. “We can’t close any schools,” Rulffes continues. “In fact, we anticipate a continuing need to open additional schools.” Not all administrators face this troubling paradox, but many are confronting their own problems as the recession in the housing market deepens. As president of the Virginia School Boards Association, Laura Hall is on the front lines of the budget crisis and bears witness to the coming school district cutbacks. “Our annual budget is about $51 million. We’re facing a $500,000 shortfall between now and the end of the year,” she says. “Over the next two years, the shortfall is likely to grow.

Inflation isn’t slowing down. Our costs keep rising and funding is being decreased. As we plan our next budget, we have to decide whether or not we will fill vacancies left by those who retired this year. Next we’ll be asking: ‘Will we reduce our bus routes?’ ‘Will we charge students to ride our bus?’ Later, we may need to consider cutting things that directly impact learning, such as student-to-teacher ratio. That’s the sad part.”

Mike Perrone, budget director for Duval County (FL) Public Schools, can sympathize with Hall’s predicament. “We’ll cut administrative and clerical positions that are noninstructional before asking schools to reduce teaching positions,” Perrone says. “But before that we will look at across-the-board savings that affect all employees, such as eliminating raises and reducing work days and health benefits.”

Budget Shortfalls
School budget difficulties are ratcheting up in districts across the nation. The Center on Budget and Policy Priorities (CBPP), a Washington, D.C.-based research group, reports that about half of the states are facing projected budget shortfalls. “Schools are incredibly vulnerable to fluctuations in state budgets,” says Liz McNichol, a senior fellow at the Center. “We are finding that states are beginning to make spending cuts, or they are talking about making them. Currently, in state budget processes, governors have submitted budgets and the legislatures are considering them. We don’t have final numbers yet, but there are at least eight states where there are proposals to limit education spending in the coming school year, and the number is growing.”

Who’s Feeling it First
Some of the districts across the country facing shortfalls are looking at cutbacks that match the housing downturn on a percentage basis. Eight metro areas—seven in California and one in Florida—have seen home prices contract by more than 20 percent over the course of the market correction, according to a report by Cleveland-based National City Corporation, one of the nation’s largest financial holding companies. In total, 47 metro areas, all from California, Florida, Michigan, and Nevada, have seen double-digit declines. In California, according to a report in Education Week, thousands of layoff notices were in the queue as school districts began to brace for cuts in next year’s budget, amid the state’s worst fiscal crisis since the 2003–04 school year. The California Teachers Association estimates that more than 107,000 teachers could receive “pink slips” because of an expected deficit of more than $16 billion in the fiscal 2009 state budget. (See “Warning Tremors From the Golden State,” page 40.)Meanwhile, former Federal Reserve chief Alan Greenspan warned of a “large double-digit decline” in home prices before a bottom is reached.

House of Cards
In the past, when the majority of school district funding came from local property tax revenues, a drop in housing prices could have disastrous implications for school budgets. However, as seasoned school district administrators will recall, the damage was almost always contained within local markets where house values were in decline, and often, the housing market corrected its course in those areas before local schools felt the pinch. Today, to the dismay of some administrators, the major source of school district funding comes from state legislatures. This sets up a potentially devastating domino effect, says Michael Griffith, a school finance analyst with the Denver-based Education Commission of the States, because in an effort to level the playing field, many have mandated that schools receive funding primarily through sales and income tax revenues, rather than from local property taxes. Unlike historically more stable property taxes, revenue from income and sales receipts tend to fluctuate with the economic cycle—and right now personal spending is down. With funding primarily coming from the state treasuries, the threat of a recession casts an even darker shadow on school district budgets. “This is a new phenomenon,” says Griffith, “one we haven’t seen before.”

Switch to sales tax?
If the current economic downturn degenerates into a protracted recession, the states’ decision to switch education funding from a reliance on local property taxes to sales tax revenues may have dire consequences for many of the nation’s school districts, says Griffith.“If you have a real economic downturn that lasts for multiple years, there is no way K–12 funding can be held harmless,” says Griffith. “There will be cuts. In the best-case scenario, cuts will be made on the edges. In the worst case, cuts may force districts to lay off teacher positions. We saw that happen in the recession of the early 1990s and 1980s. In the case of the 2001 recession, state governments actually reduced per-capita spending after the recession had ended.”

For those districts that still receive a large percentage of their funding directly from property taxes, the effect of the housing bust might not be felt for years, if at all. “To the extent that house prices go down and property values go down, tax revenue will decline,” says CBPP’s McNichol. “However, there is a lag—sometimes a year or 18 months—before property taxes readjust. It will take time for that decline to adversely affect a school district’s revenue stream.”

Even if property values don’t rebound as they’ve done in the past, municipalities that rely on property taxes to support K–12 education have options available for keeping school budgets intact. “At some point, local governments can simply increase their property tax levy calculations to make up for the reduction in property valuation,” says Griffith.

According to Griffith, school districts are “becoming an island” as property tax revenues take a backseat to state funding of K–12 education in many local school districts. “Districts that were used to seeing increased amounts of funding—when funding was done through property taxes—are suddenly seeing cutbacks now that their funding is controlled by the state,” he says.

Preparing for the Crunch
In Minnesota, Jackie Magnuson, president of the Minnesota School Boards Association, is preparing to weather looming state funding cuts. “People are scared,” she says. “They hear rumors that there will be no funding coming from the state. In light of this, we are being very frugal with the money in our bank account.We are also trying to maintain our commitment to the families in the community, but the state isn’t helping us keep those promises. They say they’ll provide a one percent increase to education, for instance, but what they don’t tell people is that they’ve cut something else that isn’t immediately apparent.”

While Magnuson looks for ways to maximize her existing dollars, administrators in districts hit hard by the housing recession and other economic troubles are making difficult decisions. “We’ve put a freeze on hiring,” says Virginia School Boards Association’s Hall. “We will not hire anyone until after we know exactly how much our budget will be cut.” In years past, Hall attended college job fairs to hire replacements for retiring teachers, but she’ll stay home this year. If the situation deteriorates, Virginia School Boards Association may start discussions about eliminating staff positions when school starts. “If we have fewer teachers, we have to increase the number of students in each classroom. We have to follow certain guidelines to make that approach work. There is also the possibility that we could lose federal dollars if we’re unable to meet government mandates,” Hall says. “We want to accomplish the goals of the federal government, but if we don’t have adequate staff, we might not be able to do what’s required.”

According to CBPP’s McNichol, all the states combined face an overall budget gap of $38 billion to $40 billion—about the same amount as was missing during the first year of the 2001 recession, which led to a fiscal crisis that went on for five years (with gaps to $75 billion in the second two years). Are we at the beginning of a financial crisis like 2001, or something much worse?

Overall, I suspect that this time around, the weak economy will have a milder effect on school budgets than in 2001,” says Tom Gais, codirector of the Rockefeller Institute of Government. According to Gais, the usual drop or reduction in state aid to K–12 education takes several years at least before districts feel the crunch. This was true in the last recession: The bigger cuts came in 2004, not during the actual recession years of 2001–02 or 2002–03. Gais says that this is partly because most of the state aid is issued through appropriations. Therefore, the amount of money transferred from the state to the local school districts is automatic—until the legislature gets around to making cuts. “This coming recession, if we do have a recession, does seem to be a very different one,” Gais says. “It is clearly a recession that is hitting the housing market. So school budget problems are more likely to arise in parts of the country where we have seen a big run-up in housing prices, such as in Florida, California, and Arizona.”

“During the last recession, states reduced school spending,” McNichol notes. “In 2008, if we go into a recession, and it’s a prolonged fiscal crisis, I’m concerned that we will see even greater spending cuts in education.” McNichol tries to remain hopeful, however, that if state budgets are squeezed, legislatures will decide to use reserves put away specifically for times like these. “For district administrators, it makes sense to encourage the state to use money from their ‘rainy day’ fund rather than cut education spending,” she says.

Rainy-day accounts and federal bailouts aside, Virginia School Boards Association’s Hall is prepared for the worst. “Before we cut classroom services, we will cut external options, something that most districts will do,” she says. “We will examine how we service our debt. We will make minimum payments—just like people are doing with their own mortgages.” Hall says they will also consider grants and other alternative funding sources more carefully. “We need to begin thinking outside the box,” she says. “In extraordinary times, you do extraordinary things.”

Glass Half Full
Even as economic conditions continue to deteriorate in the first quarter of 2008, extraordinary measures, like those suggested by Hall, might not be needed. Many economists still believe that a U.S. recession can be avoided. In fact, in some areas—where the housing prices never reached a fever pitch and the local job market remains viable—school district budgets have been left untouched. For example, in the Lewisville (TX) Independent School District, the good times continue to roll. “Unlike Florida and other places, we have not seen a negative impact from the housing market,” says school board president Fred Placke. “We are not experiencing as steep a downturn in our community. Yes, we have more foreclosures than we’ve had in a while, but our district’s enrollment is still growing by 1,000 kids per year. We are still in growth mode. Recessions come and go.”

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