The Elephant in the Room

Monday, January 14th, 2013 at 1:14 pm by

There was an elephant in the room when Governor Andrew Cuomo talked about education in his State of the State address last week.  In this case, we’re not referring to the symbol of the Republican Party.

Like most education groups, we issued a statement welcoming the positive vision the Governor outlined.

We agreed,

We should provide better beginnings for more children through prekindergarten, offer more learning time, connect schools with other services families need, and give all students the best teachers and school leaders we can.

But we added,

There are challenges the Governor did not talk about that still need to be addressed.

In so many communities, the financial prospects for schools are dire.  Local leaders and families are asking how their schools can preserve basic services and give their children the learning opportunities they will need to thrive in life after school.

That tension was evident in reporting on reactions from local education leaders in the Southern Tier, the Catskills, the Lower Hudson Valley, the Mohawk Valley, the Mid-Hudson Valley, the North Country, Western New York, Orange County, and Long Island, and in wire service stories by Gannett and the Associated Press carried in multiple newspapers.

An Albany Times Union editorial graded the State of the State “incomplete,” and asked,

What about the fact that, particularly under the state aid cuts and property tax cap the state has enacted in recent years, many school districts and local governments are draining surpluses and soon won’t be able to afford to do even what they’re doing now?

and,

What happened to reforming or paying for the unfunded mandates the state imposes on governments? What about aid some may need just to stay afloat?

And not a word about the financial straits school districts are in? What about the state’s now-forgotten promise to provide enough funds so that every child receives the sound, basic education required under its constitution?

Similarly, the Poughkeepsie Journal noted,

The governor has been criticized — and appropriately so — for failing to identify where mandate relief should come from, considering local governments and school districts already have dipped into their reserves and need help to stay under the 2 percent property-tax cap going forward.

In November, we issued a report on our survey of superintendents on financial matters.  We found widespread concerns about potential insolvency – financial and educational, with the latter defined as inability to fund state and federal mandates.

We identified five reasons for the pervasive alarm over financial prospects.

First, schools have already been through a prolonged stretch of difficult budgeting.  The “low-hanging fruit” – easier budget balancing options – have already been implemented. 

Most state aid was capped in 2009-10, then cut in both 2010-11 and 2011-12.  To a far smaller degree than in past periods of state austerity, districts did not turn to local property tax increases to offset losses in state aid. Tax increases requested during the recent three-year span averaged 2.9 percent – more than five points below the 8.2 percent average increases sought in 2003, the last time aid was cut.

Second, schools have been drawing from reserves to spare students and local taxpayers from actions that would have had more drastic negative effects.  But barring a reversal in other financial trends, that option will be exhausted.

This year, without use of “appropriated fund balance” in their budgets, districts would have needed to raise taxes by 7 percent more than they actually proposed (by 9.2 percent, instead of 2.2 percent), or make cuts of corresponding scale.

Among the poorest 10 percent of districts, tax increases averaging 21 percent would be needed to replace these temporary resources.

But the State Education Department has reported that school district “rainy day” reserves are shrinking fast – from $2.76 billion in 2009-10, to $1.21 billion in 2012-13.

Third, pension contributions and health care premiums — two hard to control costs — have been surging.

Anecdotally, superintendents regularly cite pension and health insurance costs as the primary threats to their districts’ solvency.  These costs are hard to control:  schools cannot reduce pension obligations except by cutting jobs and, like all employers, they struggle to keep up with health insurance premiums.

We estimated that pension and health insurance costs alone would have driven up total school spending an average of 2.5 percent in both 2010-11 and 2011-12, even if all other costs could have been frozen.  Actual overall school spending increases proposed by districts averaged under 1.4 percent both years, indicating that districts cut other expenses to absorb those costs.

Growth in pension costs slowed some for the budget year schools are in right now.  But the State Teachers Retirement System advised districts that employer contribution rates will need to increase from 11.84 percent to between 15.5 and 16.5 percent in 2013-14.

The contribution rate is applied against the payroll for employees in TRS, so the rate increase is equivalent to mandating districts to absorb a cost equal to giving all those employees 3.6 to 4.6 percent raises, whether or not districts provide any actual raises.

There are other costs to absorb.  A rule of thumb is that “step” increases in collective bargaining agreements – additional pay for an additional year of service – are commonly around 2 percent.  With payroll typically accounting for half of school spending, a 2 percent increase in salaries alone would translate into a 1 percent increase in overall spending.

The state’s Triborough law guarantees payment of step increases even after a collective bargaining agreement expires.

Fourth, at least from a district-level perspective, state government’s appetite for mandates on schools has not been satisfied.

The Board of Regents and State Legislature have approved limited changes in special education man-dates.  District sharing opportunities through Boards of Cooperative Educational Services and joint purchasing have been expanded.  But these are small steps.

Governor Cuomo’s “Tier VI” pension reform proposal was enacted and will significantly shift the balance of costs from districts toward employees, but its near-term savings impact is limited.

At the same time, the Council’s surveys find schools straining under new mandates arising from the Regents Reform Agenda and the state’s commitments under its federal Race to the Top grant.

In our 2011 survey, 77 percent of superintendents said the cost of implementing Race to the Top items would significantly exceed their funding from that grant.  This year, 70 percent said that new teacher and principal evaluation requirements will require significantly greater expenditures than past practices.

Fifth, the two major revenue sources for schools – local taxes and School Aid – are now subject to state-imposed growth limits. The largest remaining revenue item – federal aid – is now increased at-risk under deficit reduction efforts in Washington.

The property tax levy cap makes it harder for school districts to gain voter approval for local tax increases, and imposes drastic consequences if voter approval is not obtained – districts are foreclosed from any increase in tax levy.

Less known is that the other major school revenue source – state aid – is also subject to a cap now.  Tied to yearly changes in the total personal income of state taxpayers, the cap provided for a 4.1 percent ($805 million) increase in School Aid this year and is expected to allow for a lesser increase in 2013-14.

Just the mandated increase in TRS contributions described above would absorb all the revenue most districts would receive from either a 2 percent local tax increase or a 3.5 percent state aid increase.

Albany Times Union editorials have emphasized the constraints of the tax cap in arguing the state has an obligation to step forward to help schools and local governments with aid, mandate relief or both.

But our surveys suggest that, for the most stressed districts, state aid levels are the greatest worry.

Among superintendents who foresee financial insolvency for their districts within two years, 71 percent picked state aid as the greatest revenue concern and 29 percent said state aid levels and the tax cap were of equal concern.  None said the tax cap was the primary revenue concern for their district.

Over 20 percent of the state’s school districts raise less than $50,000 through a 1 percent local tax increase.  They were capped by circumstances before they were capped by law.

— — — — —

Along with local leaders and voters, as well as legislators and Regents, Governor Cuomo owns the financial problems threatening public schools.

Not because he created those problems – most of the pressures described above have been building for a long time.

Surging pension costs are chiefly the result of the 2008-09 worldwide financial collapse.

The School Aid reductions the Governor proposed in his first budget were necessitated by the $10 billion deficit he inherited.  Two prior lean state aid years occurred under his predecessor.

But along with local leaders and voters, and colleagues in state government, the Governor owns the financial problems facing schools because he is the Governor and voters expect their Governors eventually to solve major problems confronting their state.

This entry was posted on Monday, January 14th, 2013 at 1:14 pm and is filed under Finance, Leadership, Legislation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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