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Lean Years Ahead for K-12

The economic picture remains bleak, but there's growing confidence that—so long as nothing untoward happens with Ireland or Portugal...or Italy...or Greece (again)...and so long as the Middle East doesn't implode—the worst is past. In edu-circles, there are hopeful murmurs that "this will all be behind us" in another year. Such notions echo Secretary Duncan's comment last August, while touting Edujobs, that he was "hopeful" things would be looking up by fall 2011.

Unfortunately, such hopes are likely to be dashed. My colleague Whitney Downs and I explain why in the just-published analysis K-12 Budget Picture: Lean Years Ahead. As John Thomasian, director of the National Governors Association Center, explains, "State budgets have not yet recovered from the Great Recession. In fact, total state revenues probably will not return to pre-recession levels until sometime around 2013." Thirteen states have already drained their "rainy day" reserve accounts, and another 28 used at least some of these funds to balance their budgets in 2009 and 2010. And, while the worst of the recession may be over, Nobel Prize-winning economist Joseph Stiglitz has cautioned, "This is an anemic recovery...and is likely to remain anemic."

If to be forewarned is to be forearmed, it's essential that educators and policymakers set aside their hope chests and steel themselves for the facts. Four trends are likely to keep matters from getting much better anytime soon (sources for the factoids below are available in the larger piece).

First is the drag of property valuations. Nationally, property tax revenues account for about a third of K-12 spending. However, while residential property values peaked in 2006 or 2007, there's typically a three-year lag before valuations are incorporated into state collection systems. This means states and districts are still collecting property taxes based largely on "bubble" valuations. With residential real estate likely to bottom out this year, and commercial real estate predicted to bottom out next year, we're looking at a downward pull through 2014. Communities can try to offset this drag by boosting property tax rates, but that may prove a tough sell in this economic climate and with other taxes expected to start inching up.

Second, underfunded pensions and health care systems mean that strapped states and districts are going to have to come up with additional cash infusions in the coming decade. The Pew Center on the States reports that at the end of FY 2008, there was a $1 trillion gap between the $2.35 trillion states and local governments had set aside for employees' retirement benefits and the $3.35 trillion price tag of those promises. This estimate does not take into account the substantial decline in pension coffers during the past two years. Since 2000, the number of states with fully funded pension systems has dropped from over half to just four. These obligations will create pressures on state and district budgets, and will compete with classrooms for limited dollars.

Third, one of the key pieces of this year's health care reform plan was the decision to add tens of millions of state Medicaid rolls. This will add substantial new obligations and compete for limited funds. By 2013, once those provisions have fully kicked in, for instance, California will be on the hook for $3 billion more a year for Medicaid. One state budget officer explained there is "a prevailing state of 'cognitive fiscal dissonance,' where states are trying to meet Medicaid budget reduction targets while at the same time putting in place new staff and funding to get started on health care reform implementation."

Fourth, stimulus dollars will start running out next year. States used these dollars to plug between 30 and 40 percent of their 2009 and 2010 budget gaps. Stimulus funds propped up K-12 with a direct grant of $77 billion tabbed for 2009 and 2010. As these dollars dry up, it's going to create downward pressure—and no one is expecting the new Congress to approve further rounds of aid.

So, while state and local officials may feel like they've already been dialing back spending—turning down thermostats, delaying book purchases, limiting bus service, and bumping up class sizes a bit—tough years loom into the middle of the next decade. For schools to make strides in that environment will require both smart efforts to squeeze operations and bolder efforts to rethink the use of staff and technology. Readers seeking advice on this score may want to check out Stretching the School Dollar (edited by Eric Osberg and yours truly). The bottom line is that, in the next five years, leaders seeking to make a difference will have to find the dollars they need from existing sources—they can no longer count on fresh infusions of funding to fuel their improvement efforts.

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The opinions expressed in Rick Hess Straight Up are strictly those of the author(s) and do not reflect the opinions or endorsement of Editorial Projects in Education, or any of its publications.

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