A gathering storm
State budget shortfalls spell big trouble for schools

by Mike Rose
 

Last year, Baltimore public schools were making headlines and capturing attention with some impressive gains in student achievement. Student test scores were climbing for the third straight year, with first- and second-grade students scoring above the national average and posting the greatest improvement of any district on the state's rigorous accountability exam. The results were a major victory for a high-needs urban school system that traditionally had struggled on such measures, and at least part of the credit was given to an infusion of additional resources that helped fund stronger teacher professional development, competitive salaries and additional learning opportunities for students.

Baltimore public schools are still making headlines these days--the type that make public school stakeholders shudder and education reform advocates shake their heads in dismay. Faced with a $31 million deficit, the school district is preparing a school budget that will cut deep into the system's ability to deliver a quality education to all students. Currently on the table are an across-the-board freeze on spending, bigger class sizes at the middle and high school level, systemwide furloughs of two to three days, layoffs of nonclassroom staff, tutors and temporary employees. Also under consideration are summer-school rollbacks that will cut course offerings, teacher pay and impose a $25 to $75 per month charge for each month students attend summer classes.

Baltimore Teachers Union co-president Marrietta English knows what cuts of this magnitude could mean in terms of the hard-fought gains that Baltimore and other urban districts have posted in recent years. And, with Maryland facing a $1.3 billion deficit next year, chances for a "white knight" appearing on the horizon seem remote. "We never had a lot of materials in the first place, and when you have staff  [who are] worried about other things like furloughs and layoffs, they can't focus on what they need to," the AFT leader says. "These cuts are going to have an impact on the classroom. I just hope it doesn't put the trend toward improvement at risk."
 

WELCOME TO HARD TIMES

Called the worst state budget crisis since World War II, the tidal wave of red ink that is rolling over statehouses across the country is beginning to have an impact on school systems. Cuts in state aid to school districts are threatening to produce more Baltimore scenarios in the weeks and months ahead. "Typically, the state is reluctant to cut schools and will make other hard choices first," says Ed Muir, a policy analyst in the AFT research department. "But we're in a time when the money just can't be shifted--there isn't enough money."

The headline number--a combined state budget deficit of $85 billion in the next fiscal year, according to the National Conference of State Legislatures--is only the tip of the iceberg. The shortfall comes on the heels of an estimated $50 billion budget gap for the current fiscal year. And this gap is a burden that keeps growing as states discover they've overestimated revenue. In the second quarter of 2002, for example, states took in less than 90 percent of the revenue they received in the same quarter in 2001. Big drops were suffered in state individual income tax receipts--down 22 percent, marking the fourth straight quarter of decline. And corporate income tax receipts continued to crater--down for the seventh straight quarter.

The post-Sept. 11 economic slump "is less severe but its impact on state revenue was twice as bad" as the downturn in the early 1990s, says Jewell Gould, director of the AFT research department.

What's compounding the misery for states? A sagging stock market, for one, which has crippled state receipts from capital gains taxes. Recent years also have seen corporate tax avoidance turned into a high art form. For example, 30 out of the 50 largest corporations in New Jersey paid only a token $200 minimum tax until the state moved recently to close loopholes. Pouring fuel on the fire is a combined $36 billion in tax cuts enacted by states in recent years, and an outdated sales-tax structure that ignores the ever-growing service sectors of economic life.

And while state receipts are down, demand is up. States have struggled to keep up with the soaring cost of Medicaid--up 11 percent this year alone. And they continue to be plagued by longtime unfunded mandates, such as the special education costs associated with the federal Individuals with Disabilities Education Act (IDEA), and new mandates, such as expensive testing requirements and the transportation costs associated with school choice provisions in the federal No Child Left Behind Act.

"Nearly every state is in fiscal crisis," the National Governors Association reports in its latest survey of the states. Thus far, the response by states has been to use a variety of belt-tightening measures: across-the-board cuts, targeted layoffs, program reorganizations, early retirement and tapping into rainy day funds. "Many of these budget-balancing actions are one-time only and cannot be used again," NGA's fiscal survey of states warns.

"Two years ago, we started to see the states tapping into reserves," Gould says. "Now we're starting to see the floodgates open up, and Baltimore and Oklahoma City are early warning signals."
 

BITTER CHOICES

Tight state budgets have sparked major cuts in state assistance to Oklahoma City public schools. Last spring, the effects of the slumping economy hit the state hard, and tax receipts began to plummet month by month. As a result, the district lost $16 million in state aid this year and is now looking at budget cuts of up to $22 million--more than 10 percent of the overall budget.

"It really has wreaked havoc," says Ted Metscher, president of the Oklahoma City Federation of Teachers. "The mood is frantic, and people are shell-shocked."

The district responded to the shortfall by moving to fire nearly 400 noncontinuing contracted teachers--a move blocked in large part by aggressive union action. Ultimately, the district cut more than 75 teachers' positions through attrition, trimmed administrative staff and continues to look for more cost savings. An additional 166 teachers could lose their jobs under cuts anticipated for the next school year, Metscher says. "At this point the union has two major objectives. First, no teacher should lose contractually agreed-upon pay. Second, no teacher shall be laid off."

The union is working with the district to develop retirement incentives to save money. The AFT local also has cooperated on a voluntary wage-deferral program that has attracted 800 teachers and administrators, resulting in a short-term savings of roughly $500,000.

But more cuts are likely in the future, and the district might be forced to take steps that are ultimately damaging and counterproductive. For example, the school board is currently looking for ways to shift the 2003-04 academic year back by two weeks in order to keep schools closed during some of the hotter weeks in the summer. The move would save on energy, proponents argue. But Metscher believes it will ultimately cost a lot more than it saves. "Over 80 percent of our students qualify for free and reduced-price lunch. This move means we just let those kids sit on the couch another two weeks while we delay instruction. You'll see its effects when scores go down in the next round of testing."
 

BEYOND GUM AND BAILING WIRE

The economic downturn following the Sept. 11 attacks undoubtedly contributed to the problems that states now face. But the problem runs deeper than just a single event. Perhaps a more accurate view is that Sept. 11 exposed some longstanding structural weaknesses in states' jerry-rigged budgeting mechanisms--systems that increasingly place the biggest burden on those who can least afford it.

Consider: The average state and local tax rate on the most affluent 1 percent of families is 5.2 percent, after accounting for tax savings from federal itemized deductions. The average state and local tax rate on the poorest 20 percent of families is 11.4 percent--more than double the effective rate on the very wealthy, the Institute on Taxation and Economic Policy reports. "Overall, changes in state and local taxes over the past decade have made state tax systems even more regressive," ITEP reports in its recent study Who Pays? A Distributional Analysis of the Tax Systems of All 50 States.

This decade-long "tax holiday" by the wealthiest Americans was easier to stomach a couple of years ago, Muir notes. "Prior to Sept. 11, you had seven fat years, with a stock boom, rising consumer confidence and lots of tax cutting. Now that the stock market is churning, you're just not getting those revenues."

AFT leaders across the nation are encouraging policymakers to reexamine some of their most basic budgeting assumptions (see sidebar). One of the biggest fights is now under way in Connecticut, where Gov. John Rowland has responded to a $650 million budget shortfall with demands for state employee contract concessions totaling $450 million. Either that or face layoffs, the governor has warned.

Public employee unions stand ready to help the state deal with the budget crisis and already have proposed a package of wage deferrals, combined with retirement and reduced workload incentives, that would save the state $990 million over four years.

But the state must take a look at key contributing factors to the crisis--particularly taxes, says Leo Canty, president of the AFT's Connecticut state affiliate.

"We want to have a responsible budget in place that taxes more of the wealth and more of the revenue drivers," Canty explains. "Businesses have received $2 billion in tax breaks over the past 10 years... and Connecticut's income tax is basically a flat rate where someone who makes $100 million pays the same rate as someone who makes $40,000 a year.... The key is to make sure the tax structure is supported by a more stable revenue base."

AFT affiliates have joined with other AFL-CIO unions, big city mayors and community groups to spearhead a grassroots effort to persuade lawmakers to take hard but necessary steps to get the state on solid economic footing. It's a tough-but-necessary campaign.

"About 85 percent of legislators have never had to vote on a serious tax increase--1991 was the last one," Canty explains. "It's a hard thing for them to start to get into, this combination of concessions, program cuts and taxes.

"But there is grassroots action, and a lot of people are getting out there and saying, 'Do the right thing.' That's what we're working on," Canty says.

See sidebar: Once and for all

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