Economic Perspectives on State and Local Taxes

1. Economic Perspectives on State and Local Taxes January 21st Lincoln Institute Michael Griffith Senior Policy Analyst Education Commission of the States

2. Education Commission of the States • The only nationwide education interstate compact • Founded in 1965 to enlighten, equip and engage education policy makers • 53 member states, territories and the District of Columbia • Web Site: www.ecs.org

3. Overview • Education spending – A national picture • The increased federal role • National Funding Problems • Solutions

4. Spend Per PupilFY 2009-2010

5. Education Fund by Source

6. State Education BudgetsThree bad years that could have been worse In the past three years all states have made some cuts in education spending. Number of States that made cuts to their K-12 primary funding formula: • FY 2008-09: 20 states • FY 2009-10: 30 states • FY 2010-11: 38 states

7. K-12 Education SpendingSome Traditional Patterns Are Holding True • During the last four economic downturns • State funding tended to decrease as a percentage of total K-12 education funding • Local funding tended to increase as a percentage of the total, and • Federal funding remained flat or slightly increased • A greater reliance on local funding creates greater inequity between the “haves” and the “have-nots”

8. Education Revenue SourcesSource: NCES

9. Coming to the Rescue?Additional Federal Funding • American Reinvestment & Recovery Act ($100 billion) • Funding: Early Learning ($2 bill) • K-12 ($70 bill) • Higher Ed. ($28 bill) • Education Jobs Fund (Edu-Jobs) ($10 billion) • States must distribute the funding in FY 2010-11 but districts have until FY 2011-12 to spend it.

10. Funding Sources for K-12 Education Fiscal Year Fiscal Year 2007-082010-11* State 47.9% 40.3% Local 43.3% 44.0% Federal 8.8% 15.7% Each 1% swing in funding represents $5.7 billion *Estimated

11. Percent of Education Funding From Federal Sources ARRA & Edu - Jobs NCLB

12. Two Funding Issues Every State Is Facing Pensions Health Care

13. Pensions • Teacher Pensions: Pew estimates that there is a $500 billion shortfall nationwide. • State Liabilities (2008) • Connecticut $15.8 billion • Maine $ 2.7 billion • Massachusetts $21.8 billion • New Hampshire $ 2.5 billion • Rhode Island $ 4.3 billion • Vermont $ 0.5 billion Funded below 80% level

14. National ProblemsHealth Care • Health Care Costs: • Account for 6% to 8% of all K-12 spending • These costs are increasing by 10% to 15% each year

15. We Already Know How Bad It Is What We Need are Solutions!

16. Pensions Other than cutting benefits what can states do? • Move new employees to defined contribution plans – like 401k plans • Create hybrid systems • Increase vesting time for new employees • Close loopholes in the system

17. Health Care Costs • What can state’s do other than cutting services or increasing employee contributions? • Move to joint purchasing: • Michigan: All school districts must now participate in the state’s health care pool

18. Make Sure You Have The Information You Need • Salaries & benefits drive education costs: • 65% goes to educator salaries & benefits • 15% go to other staff salaries & benefits • Benefits alone account for 20% of education spending • Total administrative costs account for 7.5% • Transportation costs account for 4.2% • Instructional supplies (including textbooks) 3.3%

19. Make Sure You Have The Information You Need

20. What are States Doing?School District Policies • Promote school district purchasing co-ops • A study in Delaware found that if school districts pooled their purchasing power, they could reduce their costs from 8% to 14%. • Encourage districts to work together to educate high-need special education students. • Studies have found that this can result in both improved quality of education and reduce costs.

21. What are States Doing?School District Policies • Texas: Combining services • The state is providing financial incentives to districts that are willing to combine services • School district consolidation • Maine has been working on this over the past 3 years • Kansas, Michigan and other states are currently reviewing this option • Iowa provides financial incentives to districts to consolidate

22. What Are States Doing?Class Time • Some districts are moving to a four-day school week • ECS has found that 120 districts (less than 1% of total) make use of a four-day week • Districts who move to a four-day week tend to save less than 3% • In 2009-10 Hawaii shortened it’s school year by 15 days • Teachers are donating 6 days in order to eliminate 15 furlough days • Banks provided funding to schools to help them bridge the gap

23. What Are Other States Doing?Funding Systems • Adopting New Funding Systems • Ohio and Rhode Island in 2010 • Pennsylvania in 2009 • All three states took the opportunity to streamline their systems • New York has recently allowed districts greater flexibility in spending

24. Sometimes Savings Can Be Found in Odd Places • California: Changing Kindergarten Start Date • California is pushing date from Dec 2nd to Sep 1st • This will reduce Kindergarten enrollment by 100,000 • State grants will be made available for Early K programs • This change will produce $700 million in savings

25. This Too Shall Pass • Traditionally it takes 18 to 24 months for state budgets to recover after a recovery begins • Most economist agree that a recovery started in 3rd or 4th quarter of last year • If this recovery holds education budgets will begin to see improvement in mid to late 2011

26. Michael GriffithSenior Policy AnalystEducation Commission of the States 303-299-3619 mgriffith@ecs.org www.ecs.org