Details on the Maintenance of Effort Provision of the SFSF

As states have been submitting their State Fiscal Stabilization Fund (SFSF) applications, questions have arisen regarding Maintenance of Effort (MOE) provisions. In order to receive SFSF monies, states must maintain fiscal year 2006 spending levels in 2009, 2010, and 2011 for both K-12 and public institutions of higher education, or apply for a waiver. Recent guidance from the Department of Education (ED) provides insight into what the MOE provision actually means for state spending and how states can apply for waivers if necessary.

According to the American Recovery and Reinvestment Act (ARRA) legislation, states must satisfy the MOE for state spending on K-12 and higher education separately. This means that states cannot combine all state education spending into one lump sum that must be maintained in each year. Instead, they must ensure that K-12 and higher education receive at least a minimum level of funding individually.

For K-12 education, the guidance clarifies that the MOE requirement pertains primarily to the “principal funding mechanisms” that provide funding to K-12 education. This means that states must spend in 2009, 2010, and 2011 the same amount they spent via these mechanisms in 2006. This must include funds distributed through the state’s primary education funding formula but can also include any categorical or block funding provided via other channels. This type of funding could include money distributed to qualifying schools and districts like those that meet a certain student-teach ratio, or money distributed for other services that do not depend on size of student population. Allowing states to exclude categorical funding outside the primary funding formula from the MOE calculation, however, is problematic in states like California that provide significant amounts of K-12 funding through grants and other programs.

The guidance also states that the K-12 MOE calculation can be determined on either an aggregate basis or on a per pupil basis. For example, a state that spending $500 million total and $8,500 per student on K-12 education each year can choose to use either the $500 million amount or the $8,500 per student amount for their MOE calculation. This flexibility can benefit states with rapidly growing student populations like Arizona because they are able to demonstrate maintenance of an aggregate spending level even though spending per pupil is decreasing over time. Similarly, this can benefit states with declining student populations like Maine and North Dakota that can demonstrate a consistent per pupil spending level even though aggregate state spending is decreasing over time.

The guidance concerning the MOE for public institutions of higher education specifies that minimum spending levels must include 2006 state appropriations for higher education under principal funding mechanisms. However, the MOE calculation must exclude any expenditures for capital projects, research, and tuition paid by students. If states distribute unrestricted funds to institutions of higher education that is used for such purposes, states must estimate that amount and exclude it from the MOE calculation. Additionally, spending on state administered financial aid programs cannot be included in the MOE test but money distributed to institutions that is then used for financial assistance through a school-run program is included.

Finally, and perhaps most significantly, the guidance states that for both the K-12 and higher education MOE calculations, states are only required to maintain total spending, not spending levels for individual programs. As a result, states are free to adjust spending on individual programs (like community colleges or special education) to favor certain services over others. This flexibility is a concern in states like California where community colleges are guaranteed a certain spending level under law but four year universities are not. As a result, funding for four year universities may face larger budget cuts in order to maintain required funding for community colleges.

If a state is unable to maintain the required MOE spending levels for K-12 or higher education or both, they can apply for a waiver for spending in 2009, 2010, and/or 2011. To qualify for the waiver a state must demonstrate that the percent of total state revenues for all education spending in the year for which they are applying for a waiver is at least as great as the percent of those revenues used for education in the previous year. For example, if 37 percent of all state revenues went towards education spending in 2008, a state must show that 2009 education spending will also make up at least 37 percent of total state revenues.

Thus far, no states have applied for MOE waivers. But recent revelations regarding the dire fiscal straits many states are facing suggest that they may be forced to request them soon. Ed Money Watch will cover such instances as they arise.