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Cutting to the bone: How the economic crisis affects schools

They’re calling it “The Great Recession.” Not since the Great Depression of the 1930s has the United States gone through such an economic meltdown—huge increases in unemployment, steep drops in housing prices, and tight credit for even the most financially sound. These events have taken their toll on the country’s economic output and unemployment rate, and they have affected just about every classroom in the nation as well.  

Education is usually one of the last budget areas to be cut, but most districts today are suffering declines in both state and local funding. At the same time, many are also facing dramatic increases in costs ranging from utilities to pension funds. With decreasing revenues and rising costs, school districts are forced to make tough decisions if they are to balance their budgets and still meet the needs of their students.

Some districts are finding ways to grapple with rising costs and limit the impact on students—for the time being. But what will be the long-term impact of this economic crisis on our next generation of students? This paper will describe what districts are up against and what the long-term impact might be.

A quick look at a painful subject

Although the recession technically ended in 2009, district budgets are not expected to regain their pre-recession (2008) funding levels until late in the decade, for a number of reasons:

  • Reduced local revenues from real estate taxes. Home prices are unlikely to get back to their 2006 highs for several years.
  • Lagging state budgets. State revenues might recover to pre-recession levels by 2014, taking inflation into account, but the cost of providing the same services will have risen at a significantly higher rate, due to increased demand for
  • Medicaid and other state programs with high cost increases. Most states will also have to increase their contributions to state employees’ retirement funds, which are substantially underfunded.
  • Reduced funding from the federal stimulus program. State Fiscal Stabilization Funds (SFSF) from the American Reinvestment and Recovery Act (ARRA) have helped districts limit their budget cuts, but those funds are expected to run out by 2011. The new Education Jobs Fund will pad the blow somewhat in 2011 and 2012.  

In 2008-09 and 2009-10 school years, many school districts were able to cut their expenditures with minimal impact on students by adjusting thermostats, deferring maintenance and construction projects, laying off central office staff, and eliminating nonessential travel. But for the current school year (2010-11), most districts have had to make cuts that affect students more directly. These cuts include:

  • Laying off teachers, which in turn increases class size
  • Cutting extracurricular activities
  • Cutting courses not required for graduation
  • Eliminating summer school
  • Adopting a four-day school week
  • Eliminating field trips
  • Cutting instructional programs
  • Cutting professional development for teachers and staff.

Some districts have managed to trim personnel costs while minimizing teacher layoffs by instituting furlough days, freezing salaries, and reducing health and retirement costs. But the financial handwriting is on the wall: In upcoming years, more cuts will be necessary.

School boards that evaluate possible cuts on the basis of research and data will be more likely to minimize the impact on students, at least in the short term. As this paper will show, this will only get them so far before their ability to provide a sound public education to all students in their community is seriously threatened.

Just how bad is it now?

Nearly half of a school district’s funding comes from the state, and the cuts states have been making to their budgets are hitting school budgets hard. (See how much your state contributes.) Local funding for schools has also been hurt by the sharp decline in housing values.

Although resources are declining, requirements are not. Districts still have to comply with underfunded mandates such as the federal Individuals with Disabilities Education Act and the No Child Left Behind Act, as well as with state accountability systems, scheduled reporting dates, and other requirements. Merits aside, meeting these mandates takes time and money, giving districts limited flexibility in making needed cuts in other parts of their already lean budgets. And unfortunately, the worst appears far from over.

The federal stimulus funds states received to help local districts close budget gaps will run out by 2011 (Husch, et al. 2010). States rightly see education as an investment in their economic future, so it is usually the last area to be cut. But today, many states have slashed their own budgets to the bone and exhausted their reserve funds, which means there’ll be nothing left to shield the schools the next time states wield the budget cleaver. Finally, rising costs, coupled with no substantial increase in local and state funds, will challenge districts as never before.

How are local school district budgets being affected?

According to a survey by the American Association of School Administrators (AASA) of 453 school administrators across 45 states, budget cuts are noticeably more significant this school year than they were in either 2008-09 or 2009-10. In the March 2010 survey1 they found that 78 percent of districts planned to cut budgets in 2010-11, up from 64 percent in 2009-10. Not only were more districts cutting their budgets, they were making more dramatic cuts. For the 2010-11 school year, 30 percent of districts cut their budgets between 11 and 25 percent, which was up from 21 percent in 2009-10 (Ellerson 2010).

These growing cuts signal continued declines in revenue despite federal stimulus dollars. Four out of five districts reported that they received fewer funds from state and local revenues this school year than last (Ellerson 2010)—and two-thirds received fewer funds in 2009-10 than in 2008-09. In other words,  many districts have faced declining state and local revenues for two consecutive years, even as they were enrolling more students (NCES 2010). While ARRA dollars helped districts deal with funding shortfalls, the vast majority of superintendents (87 percent) said the stimulus dollars did not make up for the loss of local and state revenues (Ellerson 2010).

What’s happening at the state level?

Since the average school district receives about half (47 percent) of its funding from state coffers—ranging from 31 percent in Illinois to 86 percent in Vermont—districts are directly impacted by the health of state budgets (FEBP 2010). And “states are facing a protracted budget crisis like none seen in the last 30 years and perhaps not since the Great Depression” (Thomasian 2010). The National Governors’ Association (NGA) declared that 2010 presented the most difficult challenge for state finance management since the Great Depression (Husch, et al. 2010).

The State of State Retirement Benefits

States and participating localities face a combined $1 trillion gap between the funds they have set aside ($2.35 trillion) to pay for the pension and health benefits they have promised their employees when they retire, and the price tag ($3.35 trillion) to pay for those promises, according to the Pew Charitable Trust (Feb. 2010).  The gap has expanded for various reasons, such as: 
• Failing to make annual payments to pension systems.
• Expanding benefits and offering cost-of-living increases without determining how to pay for them.
• Providing retiree health benefits without adequately funding them.

The funding gap is likely to increase by 25 percent, due to investment losses states have taken during the economic downturn. Pew also found the majority of states have set aside little to no money to pay for the increasing costs of retiree health care and other non-pension benefits.

State and local contributions to pension funding are going up. In 2000, when pension systems were fully funded, states and localities had to pay $27 billion to adequately fund promised benefits. By 2004, that increased to $42 billion and in 2008 it was $64 billion—a 135 percent increase from 2000. Add to the fact that in 2008 states and localities needed to contribute $43 billion to adequately fund retiree health benefits.  Taken together, states and districts should have paid about $108 billion in fiscal year 2008 to adequately fund their public sector retirement benefit systems. However, they only paid $72 billion, leaving the problem for future years.

Although the cost of public sector retirement benefits are partially covered by investment income and employee contributions, the cost is also covered by the same revenues that fund education and other critical needs. Therefore, education funding is directly impacted by the large retirement benefit funding gap.

See how your state’s pension funding level compares to other states here.

Source: The Pew Center for the States. The Trillion Dollar Gap. February 2010

What are states doing to narrow the gap?

• Reduced benefits to new employees
• Increases in required employee contributions
• No significant benefit increases
• Increased age and service requirements 
• Reduced benefits for early retirees 
• Prohibited use of accumulated annual and/or sick leave in calculating eligibility for retirement
• Two states—Alaska and Georgia—have moved away from a traditional pension (i.e. defined benefit plan).
o Alaska closed its pension for state and local employees and teachers in 2005 and required all employees to enroll in defined contribution plans (i.e 401(k)).
o Georgia created a hybrid defined benefit/defined contribution plan for new state employees, although the defined contribution plan is voluntary.

Source: National Conference of State Legislatures. State and Pension Legislation in 2009 and 2010. February 2010.

In 2010, every state except Montana and North Dakota faced budget shortfalls totaling $200 billion, or about 30 percent of state budgeted general expenditures—the largest gap on record (McNichol and Johnson 2010). States used various approaches to close these gaps (McNichol and Johnson 2010):

  • Withdrawals from reserves (so-called rainy-day funds)
  • Revenue increases (tax and fee increases)
  • Federal stimulus dollars
  • Spending cuts.

Borrowing from the future. States have also used other methods to balance their next year’s budgets, such as borrowing from future fiscal budgets and accelerating tax collections so the revenues can be applied to the current year’s budget. Such accounting strategies help in the short run but may make it more difficult for states to balance budgets down the road.

For over two decades, states averaged from 5 percent to 5.5 percent annual increases in tax revenues. When adjusting for inflation, however, state tax revenues are about the same in 2010 as they were 10 years ago—even though the nation’s population has grown by 10 percent (Boyd and Dadayan 2010).

Such a large drop in revenues called for dramatic spending cuts. States spent nearly $75 billion less in 2010 than in 2008—an almost 11 percent decrease. From 2009 to 2010 alone, state spending fell by nearly 7 percent (Husch, et al. 2010). This is the first time in more than 30 years that state expenditures have declined for two consecutive years (Husch, et al. 2010, Thomasian 2010).

When such drastic cuts are made, no area goes unscathed, including education. For fiscal year 2011 (which began on July 1, 2010 for many states), 33 states and the District of Columbia cut their K-12 funding to help balance their budgets (Johnson, Oliff and Williams 2010). The cuts were broad and deep, affecting even the most essential budget areas (Oliff and Johnson 2010, Thomasian 2010):

  • General funds to districts
  • Funding for books and classroom supplies
  • Programs for gifted and talented
  • Pre-K and after-school programs
  • Funds for teacher preparation and training
  • Aid for school construction
  • Allocations for administration staff
  • Aid targeted to charter schools.

These painful cuts undermine reform initiatives many states are undertaking with the encouragement from the federal government (Roza and Frank 2010). At risk as a result are initiatives that support professional development, improve interventions for young children to heighten school readiness, and turn around the lowest performing schools. Even more drastic cuts would have been needed, however, were it not for ARRA funds (Ellerson 2010, Husch, et al. 2010, NCSL 2010). According to the U.S. Department of Education, the federal stimulus retained or created more than 255,000 education jobs and nearly 63,000 other related jobs through September 30, 2009, for a total of 318,000 jobs (Johnson, Oliff and Williams 2010). The Department of Education also believes the new Education Jobs Fund will help save 160,000 education jobs in 2010-11 (Rich 2010).

What are districts doing to balance their budgets?

Local schools could not escape the impact of these cuts, although districts were able to tighten budgets in 2009-10 in ways that did not directly affect student achievement (Ellerson 2010). Belt-tightening measures included reducing central office administrative staff, eliminating nonessential travel, deferring maintenance, reducing consumable supplies, and adjusting school thermostats to save on heating and cooling costs.

But such cuts have their limits. With growing budget gaps in 2010-11, districts were forced to look at areas that have a more direct impact on student achievement. According to AASA (Ellerson 2010), as of April 2010 districts reported they were:

  • Increasing class size. 62 percent said they would increase class sizes this school year, up from 26 percent in 2009-10 and just 9 percent in 2008-09.
  • Cutting extracurricular activities. 52 percent of districts cut extracurricular activities in 2010-11, up from 8 percent in 2009-10 and 8 percent in 2008-09.
  • Cutting transportation. 38 percent of districts said they would reduce their transportation programs this school year, compared to 20 percent in 2009-10 and 10 percent in 2008-09.
  • Considering eliminating summer school. 34 percent of districts said they might eliminate summer school in 2010-11, up from 14 percent in 2009-10 and 8 percent in 2008-09.
  • Considering a four-day school week. 13 percent of districts were considering shortening the school week in 2010-11, but just 2 percent did so in both 2009-10 and 2008-09.

The litany of other cuts is long: instructional improvement programs, after-school and Saturday enrichment programs, textbook purchases, elective courses not required for graduation, high-cost course offerings, technology purchases, instructional materials, field trips, and collaborative planning time within the school day. In addition, many districts also modified procurement contracts with their vendors to save costs in such areas as food services, legal services, textbook and technology purchases, and insurance brokers.

Despite these cost-saving measures, most districts still had to eliminate jobs to balance their budgets for the current school year.  

How many school jobs are being cut, and which ones?

With 60 to 80 percent of school funds dedicated to personnel (Roza 2007), budget cuts mean it’s inevitable that jobs will be lost. Nearly all districts (90 percent) said they expected to cut positions this school year, an increase from 68 percent a year earlier (Ellerson 2010)—and on top of the nearly 100,000 education jobs cut since July 2008 (Johnson, Oliff, and Williams 2010; Leachman, Williams, and Johnson 2010). Some of these personnel cuts will come through attrition, but 60 percent of districts are expected to lay off staff this year, up from 33 percent in 2009-10 and 12 percent in 2008-09 (Ellerson 2010). Taken together, the total number of education jobs has fallen for the first time in over two decades (Sepe and Roza 2010).

This year, 61 percent of districts expect to lay off teachers in core subject areas such as English, math, science, and social studies. Just a year earlier, only 37 percent of districts laid off teachers in these subjects (Ellerson 2010). (See which positions are being cut .) And not only are fewer teachers teaching more students, but they are doing it with less help. More than half of districts (59 percent) expect to lay off teacher aides in 2010-11, up from 36 percent in 2009-10.

Other school personnel are also in danger of losing their jobs. One-third of districts are considering laying off arts, music, or physical education teachers. More than four in 10 (41 percent) are considering laying off maintenance, cafeteria, and transportation workers, and 37 percent are adding central office staff and administrators to the list (Ellerson 2010). For each of these groups of workers, the percent of districts considering layoffs is significantly higher in 2010-11 than it was in 2009-10.

With the passage of the Education Jobs bill this summer, the total number of layoffs will decrease, but most districts are still likely to lay off at least some teachers to keep their budgets balanced this year and help save teacher jobs next year as well. With no significant increase in funds expected in the near future, districts are likely to spread the Education Jobs Fund over two years to avoid larger layoffs in 2011. Even though districts all over the country have cut their budgets to the bone, it is still unlikely these layoffs will be enough to fill future budget gaps without an increased investment in education.

What can we expect in the future?

What will state budgets look like in the coming years?

“The bottom line is that states will not fully recover from this recession until very late in this decade” (Scheppach 2010). Although the recession technically ended in 2009, states are not likely to see any budgetary relief in the next few years. Typically, a recession’s greatest impact on state budgets comes one or two years after the recession ends (Scheppach 2010). If that pattern holds true, 2011 is likely to be the low point for most state budgets. But the length and depth of this recession and the projected slow recovery make it likely that states will continue to struggle well beyond 2011 (Scheppach 2010).

To be sure, according to the National Council of State Legislatures (NCSL), the steep drop in state revenues is subsiding (NCSL 2010). NCSL found that 42 states expect their revenues to improve in 2011, albeit by only razor-thin margins when compared to 2010 (NCSL 2010). Even with these projected increases, however, the National Governors Association (NGA) projects state tax revenues to be approximately $495.8 billion in 2011—still 8.4 percent less than the $541.4 billion states received in 2008 (Husch, et al. 2010). So states will still have a way to go to get revenues back to where they were before the recession.

Slow recovery. Other studies have shown that state revenues will not recover until 2013 or 2014. One such study, by Economy.com, doesn’t see state revenues reaching 2008 levels in real terms (meaning adjusted for inflation) until 2013 at the earliest (Scheppach 2010). Another study, by the Rockefeller Foundation, forecasts that per-capita real revenues will not reach pre-recession levels until 2014 (Scheppach 2010). Keep in mind, however, that during these years some costs, especially health-care costs, will have grown faster than general prices, a measure of price inflation (Boyd and Dadayan 2010). So even if revenues get back to their pre-recession levels by 2014, the rising cost of providing similar services and the need to backfill deferred investments into basic state functions—such as road maintenance—means it will take states until the end of the decade or longer to fully emerge from the current recession (Scheppach 2010).

Even when state revenues do recover to their pre-recession levels, district budgets may not catch up. A study by the Center for Reinventing Public Education (CRPE) found that 13 of the 23 states examined spent a smaller proportion of their total budgets on education once they received federal SFSF funds (Roza and Frank 2010). That is, state funds for education in these 13 states suffered deeper cuts than other major budget areas once the states received SFSF funds. The result was a tilted budget playing field, and when federal stimulus dollars dry up, districts in some states may actually receive a smaller share of funding from their state’s budget than before SFSF. So it is no surprise that the majority of superintendents did not see federal stimulus dollars as a funding increase above the loss of local and state revenues.

CRPE could not determine whether SFSF was the reason these states were applying a smaller proportion of their funds to education (Roza and Frank 2010). But the group did voice concern for the long-term impact on state education funding, saying, “For states where education’s share of the state budget shrank during SFSF, we might anticipate that restoring education’s previous share could be difficult.… The question is whether or not subsequent budgets can be passed that disproportionately move funds out of other priorities and back into K-12 education.” (Roza and Frank 2010).

Growing obligations. While states are slowly improving their revenues, their obligations continue to rise. Medicaid—which accounts for about 16 percent of state budgets—and other health-care expenses represent the fastest-growing expense for states (Thomasian 2010). With a growing number of people needing Medicaid, and with health-care costs rising more quickly than inflation, the state’s health-care price tag is rising steeply. The federal government has helped states by providing enhanced Medicaid matching funds. However, with unemployment expected to remain high for the foreseeable future, enrollment in Medicaid and other state programs is likely to grow, causing increased strain on state budgets. The new health-care law (the Patient Protection and Affordability Act) expands Medicaid to nearly everyone under the poverty level, but it’s not yet clear how this will affect state budgets. An analysis by the Kaiser Commission on Medicaid and the Uninsured forecasts that states will bear little, if any, cost increases due to the new law, but that the impact will vary from See which positions are being cut (Holahan and Headen 2010).

With slow revenue growth and accelerating obligations, 38 states are projecting budget gaps in 2011 totaling $89 billion; 24 of these states are expecting deficits of 10 percent or more of their total general fund budget (NCSL 2010).  In 2012, according to the NCSL, 31 states are already forecasting budget gaps, with six states expecting shortfalls of more than 20 percent (NCSL 2010).  For 2013, the outlook is not much better. Twenty-one states are already forecasting gaps, with five states (Hawaii, South Carolina, New York, Louisiana, and California) expecting deficits of 20 percent or more (NCSL 2010). To make balancing the budget even more difficult, most states have already exhausted such one-time stopgaps such as tapping into rainy-day funds.

Even states that don’t foresee gaps in the coming years are not necessarily in better shape. Oklahoma, for example, is not projecting budget gaps for either 2012 or 2013, but its budget could be 25 to 30 percent below what was originally budgeted for 2009 (NCSL 2010). Yet, the state is still expected to provide the same services.

What will school district budgets look like?

On the local side of the equation, the outlook isn’t much brighter. Since over 70 percent of local tax revenues come via property taxes (Boyd 2010), which are most typically tied to the assessed value of residential and commercial real estate, it is unlikely districts will see a surge in local revenues any time in the near future. This is because home values have barely begun to rebound since the real estate bubble burst and home values declined 9.5 percent between 2007 and 2009 (Hoene 2009). However, some communities saw home values decline by substantially more.

Unfortunately, the real estate market in 2010 has not provided optimism for future property tax revenues. For example, in July 2010, sales of new and existing homes grew at the lowest rates since the 1960’s (ElBoghdady 2010). Adding fuel to the fire, more than a million homes are likely to enter foreclosure in 2010, which will likely keep housing prices down (AP 2010). Experts project housing prices will not rebound until 2013 (Morrissey 2010).

Since in many districts property assessments are set every few years, local property tax revenues are likely to be hit the hardest in the next couple of years (Hoene 2009), although it will take several years after that for assessed values to get fully back to their pre-recession levels. Taken together, the National League of Cities projects that property tax revenues will likely decline even further in 2010, 2011, and 2012 as property values are fully reflected in city property tax rolls (Hoene and Pagano 2009). Furthermore, with high unemployment and many cash-strapped citizens, it will be difficult for local policymakers to raise tax rates in order to increase property tax revenue.

Other local revenue streams are not likely to provide much relief for local education funds for several reasons (Hoene and Pagano 2009):

  • City sales and income taxes are not likely to grow for several years due to high unemployment.
  • The projected large state government budget shortfalls will likely mean cuts in aid and transfers to local governments.
  • Tightened credit markets have made it difficult for cities to maintain debt-funded projects and have resulted in higher debt costs.

What’s more, state funding for K-12 education is projected to drop 18.5 percent, or $54 billion, in 2011 compared to what was budgeted in 2009 (Roza 2009a). This reduction in state funds will result in an 8.7 percent drop in total school district spending (Roza 2009a). Districts are already feeling that pinch. For example, since the beginning of 2010, the number of California districts that may be “unable to meet future financial obligations” has increased 38 percent (Blume 2010). And the situation may get worse before it gets better.

A devastating impact

Taken together, these trends constitute a triple whammy. Federal stimulus funds are drying up. Districts are hard pressed to raise additional local funds. And states are making deep cuts in their share of K-12 education funding. The long-term impact on school district budgets will be devastating. When districts have to lay off teachers, eliminate professional development opportunities, reduce support services, and end effective programs like dropout prevention, students are bound to suffer. Teacher layoffs are a case in point. With fewer teachers, classes are larger, which can have a negative effect on student achievement in later grades—especially for disadvantaged students. Teachers with less seniority are generally the ones who are laid off, leaving future faculty made up of teachers nearing the end of their careers and those who are just beginning and have the least impact on their students. And for those teachers lucky enough to keep their jobs, curtailed professional development opportunities will mean few chances for growth and improvement.

Cut now, pay later

Tough budget decisions often amount to a policy of cut now and pay later. Consider pre-kindergarten (Pre-K) and dropout prevention programs, both of which have been shown to have long-term benefits to society. Research has found that if states implemented voluntary, universal preschool for all students, the estimated long-term payback would run between $2 and $4 for every dollar spent and total about $150 billion nationally (CPE 2008). Research has found that Pre-K programs can generate $1.62 in benefits for every $1.00 spent (CED 2006). Students in quality Pre-K programs are less likely to be retained in grade, be referred for special education, or require remedial programs—direct savings for taxpayers in those districts. Pre-K programs are also associated with a reduction of crime and criminal justice costs (O’Brien and Dervarics 2007).

Effective dropout programs can also save taxpayers a significant amount of money. According to the Alliance for Excellent Education, if high school students who dropped out in 2009 had graduated instead, the national economy would have benefited from $335 billion in additional income (AEE 2009).

Unfortunately, Pre-K and dropout programs are being cut all over the country—saving taxpayer dollars now, but running up bills for the future.

What tough decisions are districts considering now to help them make budget in the future?

School leaders recognize that short-term budget fixes are not long-term solutions. As Jeff Weiler, CFO of Clark County (Nevada) Schools, observed, “There won’t be a huge infusion of money even when the recession ends. We’ll be lucky to get back to where we were” (Kronholz 2010). The bottom line is that districts must consider changes they never entertained before.  

School closings. One source of large ongoing savings is the highly controversial and politically unpopular decision to close underused schools (Kronholz 2010), Thomasian 2010). In Michigan, 12 percent of districts expect to close at least one school this year, and 22 percent expect to close at least one in 2011 (Walsh-Sarnecki 2010). The Colorado School Finance Project estimates that districts there could save $300,000 to $400,000 per year by closing an elementary school with less than 300 students and $400,000 to $600,000 per year by closing underused middle schools (Kronholz 2010). Nationwide, however, fewer than 10 percent of districts closed or consolidated schools for the 2009-10 school year (McCord and Ellerson 2009).

Closing a school is one of the most difficult decisions a school board can make. On one side of the balance sheet are cost savings to the district; on the other is painful disruption to the students and communities the schools serve. As Barb Klimek, principal of Miller Elementary School in Center Line, Mich., put it, “The school is the community” (Walsh-Sarnecki 2010). Boards have to weigh both options carefully to determine what is best for everyone within the district.

Health care. The greatest cost increase for school districts is likely to come in health care. With the Congressional Budget Office estimating that health care spending will rise to 25 percent of Gross Domestic Product (GDP) by 2025, districts will not be able to keep up without making serious changes (Dillon 2010). As of this writing, the financial impact of the new health-care law is not yet clear, but districts are already taking steps to deal with health-care costs that have grown faster than inflation (Boyd and Dadayan 2010). Nearly half of districts (46 percent) expect to reduce health-care benefits this year, up from only 5 percent of districts in 2008-09 (Ellerson 2010).

How one district saved on health-care costs

Faced with double-digit yearly increases to health-care costs, one Illinois school district realized significant savings by adjusting benefits. First, the district replaced its insurance broker with a consulting firm hired to find cost savings. Next, it took advantage of physician discounts and negotiated lower rates with local hospitals by designating them as preferred providers. The district also linked employees who required ongoing care to the best specialists and negotiated lower rates with those doctors (Dillon 2010).  

Once the teacher contract came up for renewal, the district worked with the union to modify the existing plan to encourage more cost savings, such as choosing generic drugs instead of more expensive brand-name drugs. It also negotiated cost-sharing with employees if premiums rose above a certain level. As a result of these changes, the cost of claims filed, in absolute dollars, was lower last year than it was in 2001. Savings of well over $30 million were funneled back to staff in the form of salary increases (Dillon 2010).

Nationwide, 30 states are trying to keep the cost of health benefits down by allowing teachers, professionals, and governments to create larger and more potent purchasing pools (Thomasian 2010). Other changes have been suggested, such as (Ruga 2010):

  • Shifting the cost of insurance premium increases to employees
  • Cost sharing through percentage co-pays
  • Changes in benefits, such as higher deductibles
  • Three- or four-tier prescription co-pays (that is, higher co-pays for more expensive drugs)
  • Coordinating or excluding coverage for working spouses who can get coverage through their own employers or for domestic partners.

Pensions. Although a number of states take full responsibility for pensions, it’s likely many districts will need to find more money for pension plans. In Chicago, for example, the city schools will have to contribute $587 million (out of a $6.8 billion budget) to the district’s underfunded teacher pension fund next year unless changes are made—a 91 percent increase from the year before (Ahmed 2010). And in Pennsylvania, districts are having to increase their pension contribution rates from the current 4.78 percent to 33.95 percent in 2014 (Chute 2009). As Patricia Green, superintendent of the North Allegheny (Pennsylvania) School District noted, “Unless the state enacts something, it’s all coming down on the local taxpayer, and the effect will be chilling.” (Dillon 2010).

Since 2008, many states have made changes to their pension programs to lower those costs. Some have altered future benefits. Some 20 percent of districts are reducing their pension contributions in 2010-11; before the recession, less than 1 percent (0.7 percent) reduced their contributions (Ellerson 2010). Other districts have increased employee contribution rates and adopted defined contribution plans, such as 403(b) or hybrid retirement plans (Thomasian 2010). In Michigan, some lawmakers have proposed ending teacher pension plans and enroll teachers in the less-expensive plan used by state employees (Stover 2010).

Personnel costs. These retirement and health-care obligations are potentially crippling. For example, for every dollar Milwaukee pays teachers in salary, it pays another 63 cents in benefits—about twice the typical amount in the public sector (Kronholz 2010). In the face of such high personnel costs, many districts have little choice other than layoffs after they have adopted other cost-saving measures. Instead of cutting jobs, however, some districts are cutting the number of days employees work by instituting furloughs (Oliff and Johnson 2010). On the plus side, furloughs save salary dollars; the downside is fewer school days for students.

Another way to limit the number of teacher layoffs is to change which teachers are laid off. Whether it is because of state law, collective bargaining, or just tradition, most districts lay off teachers according to the “last in, first out” rule (LIFO) (Sepe and Roza 2010). But because junior teachers are typically paid less, districts must lay off more new teachers to save as much as they would by laying off those (higher-paid) senior teachers who are less effective (Sepe and Roza 2010).

The Center for Reinventing Public Education (CRPE) argues that high-minority and high-poverty schools tend to bear the brunt of LIFO layoffs (Sepe and Roza 2010). Because these schools have greater concentrations of new teachers, CRPE says, they will have more than their share of teacher turnover, which further destabilizes the schools (Sepe and Roza 2010). With such concerns in mind, some districts are making, or advocating, changes to LIFO policies. However, research has not identified clear alternatives that are better for students.

However, there are costs involved in laying off teachers, such as reimbursements to state unemployment insurance (TWC 2010) or paying out unused sick leave. These costs would likely be greater for laid-off senior teachers, who would be more likely to have accrued a greater amount of sick leave districts would have to pay out, as well as other possible benefits. Such costs will likely differ significantly from state to state and even district to district, but should also enter the discussion when evaluating the fiscal impact of LIFO policies.

Salary cuts or freezes are other options. In a simulation to determine ways to reduce personnel costs by 5 percent, CRPE found that if teacher raises included a 3 percent2 step increase and a 2 percent3 Cost of Living Adjustment (COLA), then 14 percent of the district’s teachers would need to be laid off, increasing class size by 17 percent (Roza 2009b). If districts froze teacher salaries at their current levels, however, the simulation also found that only 7.5 percent of their teachers would need to be laid off, increasing class size by 8 percent. Districts could avoid layoffs altogether, of course, but to realize a 5 percent savings they would have to cut the entire teacher salary schedule by 8 percent (Roza 2009b).

The trouble is, by dramatically rolling back salaries, districts risk losing their most effective teachers and being unable to attract good teachers. Conversely, districts face significant layoffs and increases in class size if teachers receive regular salary increases. The answer lies somewhere in between, which means each district must weigh the consequences of larger classes versus reduced teacher salaries. Cutting or even freezing teacher salaries may not be possible or beneficial for all districts, but some, such as Virginia’s Fairfax County, have avoided substantial layoffs by freezing teacher salaries (Mollenbeck 2010). Districts can use the District Resource Allocation Modeler (DREAM) tool to see the impact of cutting different resources on student performance.

Utility costs. Between 2002 and 2008, energy prices increased at a higher rate than the Consumer Price Index (CPI) (Cymrot, Martinez, and Jones 2010). In particular, the price of gasoline and electricity, utilities districts use a lot of, grew at even higher rates than the CPI (Cymrot, Martinez, and Jones 2010). School districts in Tennessee, for example, saw their energy costs rise from $164 million to $246 million during these years (Cymrot, Martinez and Jones 2010). (Keep in mind that Tennessee’s energy prices are below the national average.) Some Tennessee districts combated this increase by becoming more energy efficient. In 2007-08, the most energy-efficient districts spent $173 per student on energy, while the least energy-efficient districts spent $295—a difference of more than 70 percent (Cymrot, Martinez, and Jones 2010).

What can school boards do?

Nothing makes cutting budgets easy, especially when there’s little, if any, fat left to cut. The dilemma, then, is to find substantial cuts that will balance the district budget while still meeting students’ needs. As school boards monitor this year’s budget and plan for next year’s, research can point the way toward which cuts will have the least negative impact.

Layoffs and class size. Faced with the difficult decision of teacher layoffs and larger class sizes, a school board should ask:

  • What will the impact of larger classes be on students?
  • Is the impact the same in all grades?
  • Is the impact the same on all types of students?
  • How many students should be in a classroom?
  • Does your state have a law about class size?

Research shows that smaller classes do have a positive impact on student achievement—especially in the lower grades with low-income students. Before making decisions that may increase class sizes, districts should examine their student demographic and achievement data to pinpoint which classes need to remain small and which may be able to absorb more students without undermining achievement. Professional development that helps teachers be more effective in larger classes can minimize the impact of these changes.

Class size research also shows that smaller classes, by themselves, will not provide much impact without effective teachers. Therefore, a school board should also be asking:

  • Do all students have equal access to effective teachers?
  • How will layoffs affect that access?
  • How do we currently determine teacher effectiveness?

Again, these are questions that research can answer. For example, studies have shown which characteristics (such as subject-matter certification) are associated with effective teachers and which (such as graduate degrees in unrelated subjects) are not. District data can also show the board which students have the most access to effective teachers. Before making layoff decisions, districts can look to this research to identify effective teachers and then examine district data to see what effect layoffs will have.

Student achievement. Research can provide guidance in other areas as well. School boards looking to cut costs while improving student achievement can start by asking such questions?

A research resource

School boards facing difficult financial decisions can be guided by proven research findings, as well as district data, in assessing the likely outcome of various options. One place to turn is the Center for Public Education. The Center is a national resource for up-to-date research, data, and analysis on current education issues and information on ways to improve student achievement and engage public support for public schools. Center reports on issues discussed in this paper include:

  • What is the most efficient way to organize schools?
  • What is the most efficient way to schedule classes?
  • What are the most effective methods of instruction in specific subjects, such as reading?
  • What classes are crucial for all graduates? What about college-going students?
  • What is the value of such programs as pre-kindergarten, dropout prevention, or supporting late graduates?

Every district has distinct problems and priorities, of course, and what works in one may not work in another. But being able to point to actual data to support a decision adds facts in an otherwise political discussion, increasing board members’ confidence that they are making the best decisions they can. Boards can also use research and district data to engage their communities to support local education funding. During these challenging economic times, it is more important than ever for school boards to show their constituents they are getting the most out of their tax dollars.

Communication. In addition to working with the superintendent to map out the most cost-effective and educationally sound budget strategies, school boards have other governance functions to perform to secure the future financial and educational well-being of their districts. One key point is to engage the community and the local media to build understanding of the situation and support for future efforts to pass budgets and tax levies so districts have the resources they need to meet their students’ needs. Similarly, boards should communicate with their state and federal officials to provide them with a clear long-range picture of their local conditions and solutions needed.

Looking to the future

The worst is not yet behind us. For the past few years, school districts have benefited from federal stimulus funds and been somewhat shielded from state budget cuts. But stimulus funds will be running out by 2011, and more states will be slashing K-12 funding. Real estate values remain low, and costs continue to rise, especially the cost of medical and retirement benefits. Education funding cannot be expected to return to pre-recession levels until later in this decade, yet schools are being asked not only to sustain student achievement but to increase it.

What will be the long-term impact of this unprecedented budget crunch? Just think: Today’s primary school children may graduate from high school before their districts can afford to reinvest in quality teachers, small classes, and proven educational programs. Unprepared for top colleges or a demanding workforce, many of these young people will earn low wages (and pay low taxes) at best; at worst, some will become a drag on society. That’s a tragedy for individual children and a serious long-term problem for the nation.

Questions for school board members

What impact will cuts have on student outcomes in the long-run?

What research is available to help inform my decision?

What have other districts done to be more efficient?

What will need to be changed about the way we fund education in the future?

How can we work with our superintendent to map out the most cost effective and educationally sound approaches for addressing the short-term and long-term budget?

What other governance functions must we perform to secure the future financial and educational well being of their school district?

How can we inform the community and the local media of the circumstances to avoid loss of support because of unpopular cuts?

How can we build support for future efforts to pass budgets and tax levies in hard economic times?

How can we communicate with state and federal officials to provide them with a clear long range picture of local conditions?

Worst-case scenario? Yes, but there’s little room for optimism. Cuts to health care and pension benefits will make it difficult to attract and retain good teachers. Layoffs will lead to larger classes. Cuts in early education programs will mean fewer students enter school ready to learn. Fewer professional development programs will make it harder for teachers to stay abreast of the most effective new teaching strategies. And if the school week or school year is curtailed, students will spend less time in school and have less access to quality instruction.

None of these cuts are good for the nation’s children now, and none will be good for the nation as a whole in the years to come.

Clearly, the current system of school funding isn’t working. For schools to succeed in the long run, school boards, policymakers, and the public need to reexamine how public education is funded at the local, state, and federal levels. Federal ARRA and Education Jobs Fund are simply tourniquets for hemorrhaging local and state education budgets. We need a new system that will stop the bleeding permanently by providing reliable and sustainable funding for public education. What that new funding system looks like should be the subject of a serious national conversation—and the subject of in-depth research.

Districts need to communicate how severe the long-term outlook is and work to ensure that students who are just starting school now will be able to compete with their international peers when they graduate from high school. Asking schools to do more with less does not make sense. How much less can schools have before they are unable to do more? How much erosion in the quality of public education can the nation sustain?

1. Since the survey was taken before the passage of the Education Jobs bill, it is unknown how much of the $10 billion districts will receive from the federal government would have impacted the survey results.

2. Teachers average a 3.16 percent annual salary increase via ‘step’ increase on their salary schedule and average a 2.87 percent increase via Cost of Living Adjustment (COLA) annually. Taken together, the national average teacher salary increases 6.03 percent each year.

3. After already accounting for saving from hiring freeze and regular attrition. It also assumes salary schedule rewards the average continuing teacher 3.16 percent step change (the national average), and a previously agreed upon 2 percent across-the-board COLA increase to the schedule.

Published October 7, 2010.  © 2010 Center for Public Education.

This study was written and researched by Jim Hull, Center for Public Education's Senior Policy Analyst.

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