The Week in Public Finance: School Funding's Lost Decade, Teacher Pension Pressures and More

A roundup of money (and other) news governments can use.
by | October 21, 2016

Want to read this regularly? Subscribe to "The Week in Public Finance" newsletter for free.

A Lost Decade for Public School Kids

New data this week shows that nearly half of all states are providing less in per-pupil funding today than they were before the recession in 2008. Taking inflation into account, eight of the 23 states have cut funding per student by about 10 percent or more, according to a report by the Center on Budget and Policy Priorities (CBPP).

What's more, five of those eight -- Arizona, Kansas, North Carolina, Oklahoma, and Wisconsin -- have cut education funding while also cutting income taxes, resulting in tens or hundreds of millions of dollars in lost revenue each year.

Localities, battered by lower property tax revenues, have generally been unable to make up the funding difference. Instead, they have resorted to service cuts. Nearly one-third of Oklahoma’s more than 500 school districts have opted for a four-day school week. Many Arizona schools eliminated full-day kindergarten after the state stopped funding the program.

On the flip side, some states have actually increased funding. Thanks to booms in oil revenue over most of the past eight years, two oil states lead the nation in funding increases since 2008 -- North Dakota increased funding by more than one-quarter and Alaska boosted funding by one-fifth. California, Connecticut, Delaware, New York, South Dakota and Washington have all increased funding by more than 10 percent. Of those eight states, Alaska, Connecticut, Delaware, New York and North Dakota have per-pupil funding higher than the national average.

The Takeaway: These funding cuts have already shaped at least one generation of public school students. Put another way, an Alabama child entering kindergarten in 2007 is now a freshman in high school and the state is paying just 86 cents on the dollar compared to what it paid a decade ago for that child.

Combined with the reduced services in many places, these cuts harm the nation’s long-term competitiveness, said Michael Leachman, CBPP's director of state fiscal research. “Education is key to kids’ aspirations and our country’s economic growth,” he said Wednesday in a conference call with reporters. “As such, the cuts some states have made to their local schools should concern all of us.”

Of course, more money alone isn’t a panacea for education performance. The conservative Heritage Foundation has pointed out that high school graduation rates between 1991 and 2005 increase by just one percentage point to 73.7 during a time of consistent education funding growth. Conversely, that rate has actually improved during this era of contracted resources. This week, President Obama announced graduation rates have reached an all-time high of 83.2 percent.

Teachers Haven’t Fared That Well, Either

It hasn’t been easy being a public school teacher over the past decade or so. Not only have many teachers gone without raises since states started cutting education funding in 2008, but new teachers are actually getting worse overall benefits than their predecessors.

That’s largely because nearly every state increased benefits for teachers in the booming 1990s, but few set aside the money to pay for it. Since then, states have scaled back on teacher benefits as their unfunded pension liabilities have mounted. But a new analysis by the Manhattan Institute’s Josh McGee shows just how much pressure the legacy costs are placing on today’s strained budgets.

For example, since the 1990s, the growth of pension debt per pupil was more than nine times larger than the increase in total annual education expenditures per pupil. Taxpayer contributions for teacher retirement benefits have risen from about 12 percent of total education payroll in 2004 to 20 percent today.

The Takeaway: While pensions payments and education funding fall under two different buckets in the state budgeting process, there’s certainly an argument to be made that legacy costs for retired educators are straining resources for teachers today. “Taxpayer contributions into teachers’ pension plans are now used to pay down pension debt owed for past service,” wrote McGee, “rather than to pay for new benefits earned by today’s teachers.”

Meanwhile, teachers have experienced stagnant salaries, reduced retirement benefits, and watched spending decline on classroom supplies, equipment and building upkeep. “Without reform,” McGee said, “this trend will continue.”

Presidential Politics a Boon to the Muni Market?

This year has seen a boost in bonds sold by states and localities in the municipal market. Experts are predicting 2016 will be the busiest year in a half-decade. RBC Capital Markets’ Chris Mauro said this week that October will likely represent the third consecutive month of record bond issuance volume. In fact, he predicts that total issuance this year “will likely exceed the $433 billion record set in 2010 -- a particularly impressive accomplishment, given that Build America Bond issuance greatly inflated 2010 volume.”

The Takeaway: A big driver of all this activity on the governments’ end is uncertainty. The biggest question mark has been over who will win the presidential election, followed closely by whether or not the Federal Reserve will raise short-term interest rates by the end of the year. Given the vastly different positions of the candidates, governments are unwilling to gamble on the tax and spending policies of a new administration. As such, Mauro predicts bond issuance could creep up to $450 billion by the end of the year.

Want to read this regularly? Subscribe to "The Week in Public Finance" newsletter for free.