New Federal Money Eases, But Does Not Eliminate, Impact of State Budget Cuts

The Education Jobs Fund signed into law by the President on August 10, 2010 may not lead to the retention or recall of the number of teachers that many of its supporters had anticipated. Nevertheless, the $10 billion in additional, immediate stimulus support for public schools that the bill provides will help to stabilize educational services in many states where budget deficits are severely undermining the provision of core educational services to children.

The new stimulus funding, to be divided according to state population, is an extension of the American Recovery and Reinvestment Act of 2009; besides the $10 billion for education, it includes another $16 billion for Medicaid. The funds must be distributed among local educational agencies either in accordance with the state’s “primary elementary and secondary educational formulae” or through the local agencies’ relative share of Title I funding for disadvantaged students. Both of these distribution methods tend to funnel more money to high needs areas.

With the exception of two percent that may be used for administrative costs, all of these funds must be used “for compensation and benefits and other expenses, such as support services, necessary to retain existing employees, to recall or rehire former employees, and to hire new employees, in order to provide early childhood, elementary, or secondary educational and related services.” The legislation specifically prohibits the use of stimulus “for rainy-day funds or debt retirement,” (H.R. 1586), which it is hoped will avoid a practice that had been adopted by some states, contrary to Congress’ intention, with the original 2009-2010 education stimulus funding. Texas provided an egregious example of this practice, utilizing billions of dollars in stimulus funds to replenish its rainy day accounts; the jobs bill singles out Texas for this practice and specifically requires the state to maintain funding levels not only for fiscal year 2011, but also for 2012, and 2013. Texas Governor Rick Perry says that this provision is unconstitutional, and the state is threatening to sue the federal government to eliminate the restriction.

Although the $10 billion Congress appropriated is substantially less that the $23 billion proposed in the original version of the bill, the infusion of even this lesser amount of funding (which the Secretary of Education must distribute within 45 days) will provide substantial relief to school districts that have been hard pressed to maintain critical services in the face of substantial cuts in state aid. For example, Colorado has cut public school spending across the board by nearly five percent from 2010 levels, amounting to more than $400 per student, Georgia has reduced funding by 5.5 percent, leading the state board of education to exempt districts from class size requirements, and Mississippi has cut 7.2 percent funding for the Mississippi Adequate Education Program, a program aimed at bringing per-pupil K-12 spending to adequate levels in every district. In New Jersey, funding has dropped by 7.4 percent overall; the specific impact of cuts of this magnitude is indicated by the fact that afterschool programs for some of its neediest children have been cut by amounts that will likely cause more than 11,000 students to lose access to the program.

In an effort to avoid the use of these funds to supplant state funds that otherwise would have been used for education, a wide-spread practice with the original stimulus funds, the bill is explicit on maintenance of effort requirements (a discussion of the maintenance of effort issues that arose with the original stimulus funding is contained in the Campaign for Educational Equity's February, 2010 report, "Stimulating Equity?"). In order to receive their share of the $10 billion federal education funds, the Governor of the State must certify that 1) “for State fiscal year 2011, the State will maintain State support for elementary and secondary education (in the aggregate or on the basis of expenditures per pupil) and for public institutions of higher education (not including support for capital projects or for research and development or tuition and fees paid by students) at not less than the level of such support for each of the two categories, respectively, for State fiscal year 2009;” or 2) maintain support for K-12 and higher education ( as defined above) at the same proportion of the budget as was allocated for these two categories in fiscal year 2010; or 3) , if the state’s tax collections for calendar year 2009 were less than they were for calendar year 2006, for fiscal year 2011, the state must maintain support for elementary and secondary education and for higher education (as defined above) at not less than the level of support or at the percentage of total revenues that were available to the state for fiscal year 2006.

Some states are considering whether these maintenance of effort requirements may be too great to warrant even applying for funding. According to an article from the Associated Press, South Dakota may not take their allocated $26 million in education aid, “because acceptance of the money could trigger an increase in local school districts’ property taxes under the language of South Dakota’s school funding law.” Jason Dilges, the governor’s budget director, notes that the education dollars could require a $20 million increase in local property taxes. This year South Dakota did not decrease K-12 education aid, but did cut higher education funds, which would need to return to fiscal year 2010 spending levels in order to receive the federal funds.

South Carolina, unwilling to raise education spending, may forgo the federal funds altogether. The state does not currently qualify for its $143 million share of funding because their current budget is $110.8 million short of the required amount for higher education spending. Governor Mark Sanford and some South Carolina legislators say they will not re-adjust their already-approved budget, arguing they would have to either move money from other government agencies or raise taxes. The state is reportedly meeting with federal officials to “work out a solution” that would allow the state to receive federal funds without raising state spending on education.

In Mississippi, Governor Haley Barbour claims that the state will have to redirect $50 to $100 million from other state agencies to education funding for the current fiscal year. A statement released by the governor reads, “There is no justification for the federal government hijacking state budgets, but that is exactly what Congress has done.” This year Mississippi cut the state education budget by $214 million from fiscal year 2010, a decrease of 10 percent in total public education spending.

These allegations of unwarranted federal interference with state budgetary prerogatives appear to ignore the fact that most state constitutions contain substantive clauses that guarantee students a basic adequate education, and in many cases, this affirmative constitutional support for education establishes education as a priority responsibility for state governments. In such cases, the federal maintenance of effort requirements would be bolstering, and not undermining, state law. In any event, the federal stimulus funds are distributed under the spending clause of the federal constitution, which means that states are not obligated to accept these funds, but if they do, they must adhere to the federal requirements that accompany them.

Some states approved fiscal year 2011 budgets while anticipating fresh federal stimulus funding, including both the education stimulus money and additional support for state Medicaid programs. The new jobs bill provides an additional $16 billion for state Medicaid support. According to a report by the Center on Budget and Policy Priorities, as of June 2010 twenty-three states had approved fiscal year 2011 budgets relying explicitly on the extension in Medicaid stimulus funding that is also included in this jobs bill. Additionally, seven states that had not yet passed budgets assume Medicaid extension in their current budget proposals. The CBPP report states that, without the new federal aid, “States’ aggregate budget shortfall for 2011 is likely to reach $140 billion…a gap equal to nearly one percent of GDP.”

The fact that Congress has not appropriated the full amount of additional Medicaid funding that many states had anticipated has caused problems that will impact education funding in some states. For example, the Pennsylvania legislature passed a budget that included the expectation of $850 million in Medicaid funding. Under the Education Jobs Fund, the state is budgeted to receive $668 million for Medicaid. This leaves the state with a $182 million budget hole to fill. The New York Legislature had adopted a contingency provision in its budget that would have covered an anticipated $1 billion reduction in federal Medicaid funding with across the board cuts in all areas of the budget, meaning that education would have taken a $300+ million hit, in addition to the $1.4 billion that had already been cut from the fiscal year 2011 education foundation budget. The jobs bill will provide approximately $600 million in education aid and approximately $800 billion in additional Medicaid support, meaning that the final reduction in core education spending should be reduced to about $800 million plus approximately an additional $100 billion to cover education's "share" of the remaining shortfall in Medicaid funding.