A Challenge To K-12 Education

What lies ahead for our economy and for Georgia’s K-12 education? This quarter and the first quarter of 2009 will be dreadful. We are going through some sharp pullbacks in spending by both consumers and businesses. People and companies have lost assets. The wealth that has been lost will not be easily rebuilt. So, even though the economy may bottom out fairly soon, it will be slow to recover.

In the current fiscal year, any good news with respect to state revenue collections will be severely back loaded. Monthly percentage declines in revenue collections were at their worst in the first half of the current fiscal year. I say that, even though Georgia’s economy will not be at its absolute worst until about March or April of 2009. What killed us in the first half of the fiscal year is that the comps from the prior fiscal year were very tough to beat. We were lapping months during which Georgia’s economy was expanding solidly. The value of your house was appreciating. Now things are different.

Nonetheless, the year-over-year revenue comparisons soon will get easier to beat. But decisions regarding additional budget cuts must be made before any good reports come in.

Gov. Perdue spared K-12 education from the worst of the initial budget cuts. QBE formula funding was cut by only 2 percent, with most other Department of Education programs cut by 6 percent. That’s not too bad given what’s happening to revenues. Unfortunately, those are not the only cuts that K-12 education will have to absorb. Many local governments are, or soon will be, wielding the budget ax. A flattening of property tax digests plus reduced collections from local option sales taxes are two culprits.

Growth of local property tax digests hinges on real estate market performance. Depressed levels of new construction, plus flat or depreciating home prices, means no growth in property tax digests. Beyond housing, a deepening recession in nonresidential construction will limit the growth of tax digests as the pipeline of projects in development empties and as the number of new projects shrinks to almost nothing.

Another problem is that automobile sales have tanked; the cars that do sell are smaller and less expensive than those selling previously. Combine that with rapid depreciation, and you get declining contributions to tax digests.

More constraints on the property tax digest: Even though home prices are not falling much in Georgia, the publicity regarding nose-dives in Florida and elsewhere means that property owners will get aggressive when it comes to challenging their assessed property values. This erodes the tax base and may cause cashflow problems. The rising proportion of properties on the edge of foreclosure or in bankruptcy delays the normal timing of revenue collections, creating additional cashflow problems.

Let’s step back from the current recession for a moment and ask: What was the impact of the last recession on government funding of K-12 education? Three scholars at Georgia State co-authored a paper titled: “Fiscal Problems and Education Finance.” They found that the 2001 recession resulted in a substantial slowing of spending on K-12 education. In Georgia, inflation-adjusted spending by state government on a per student basis was 9.1 percent lower in 2004 than in 2001. Using similar metrics, spending by local government was 1.5 percent higher. In combination, spending was down by 4.2 percent. So, in the wake of the last recession, higher spending by local government partially offset cutbacks in state spending.

Unfortunately, I doubt that a similar offset will occur this time. One reason local governments were able to ramp up spending after the last recession is that housing sailed through that recession, soared through the recovery and then boomed. In many school districts, rising property digests make it easy to boost spending on public K-12 education without upping millage rates. Because much of the growth was due to an increased number of properties rather than substantially higher existing home prices, the burden on long-term residents did not rise too much.

But prospects for housing in the wake of the current recession aren’t promising. Without increases in millage rates, local governments won’t be able to offset the cutbacks in state spending to any great extent.

I’d like to close on a positive note, even though the current economic situation makes that difficult. The bottom line: We will get through this.