Much Ado About State Education Spending and the SFSF

In late September the Department of Education's (ED) Office of Inspector General released a report warning ED officials that many states may be using certain provisions of the State Fiscal Stabilization Fund (SFSF) in a manner that could prevent the realization of many of the education reform ideals Congress outlined in the SFSF. Specifically, the report warns that states could use the maintenance of effort provision (MOE) in the SFSF to significantly lower state education spending as a percentage of total spending. While education reform is an important outcome under the American Recovery and Reinvestment Act (ARRA), the legislation was primarily intended to address economic, not reform, needs. ED and the Obama Administration will eventually have to decide which is more important - keeping states from bankruptcy or supporting education reform.

The SFSF is a $48.6 billion dollar fund created by the ARRA to help states fill education budget gaps in fiscal years 2009, 2010, and 2011. The MOE allows states to lower their state spending to fiscal year 2006 levels and use the SFSF dollars to fill in their budgets up to the higher of fiscal 2008 or 2009 levels. Additionally a MOE waiver allows states to spend less than fiscal year 2006 levels as long as education spending makes up the same percentage of total state spending as in the preceding fiscal year.

The Inspector General's report cites three examples of states that are using the MOE and the waiver option to reduce education spending while maintaining high levels of total state spending. In other words, the states are using funds which would normally go to education for other purposes and using SFSF dollars to make up the difference.

In Connecticut the Governor has used the MOE to lower state spending on education in 2010 to $1.6 billion (the 2006 level), 14.3 percent lower than before the passage of the ARRA. At the same time, total state spending has dropped by only 0.3 percent, indicating that education spending now accounts for a far smaller share of total state spending than previously indicated (from 10.0 percent to 8.6 percent).

Although Pennsylvania has not yet finalized its 2010 budget, talks between the legislature and the Governor suggest that the state may also opt to lower its contribution to education relative to its overall budget. Specifically, the legislature supports a plan that would decrease education funding by $418 million in 2010 and use SFSF to bring up the balance, disproportionately lowering state spending. In contrast, the Governor's plan would use both SFSF funds and the state's rainy day fund to bolster education spending above 2009 levels, a plan favored by ED.

In Massachusetts, the state has chosen to take advantage of the MOE for both K-12 and higher education funding. As a result, the state has lowered its K-12 funding to 2006 levels, a $412 million decrease from previously planned fiscal year 2009 funding.

At the same time, the state has declared that it is unable to fund higher education at 2006 levels in 2010 and has instead opted to utilize the waiver provision and demonstrate that it is maintaining education spending at the same proportion of total spending in 2010. This is possible because the state has already lowered 2009 spending by $412 using the MOE as described above.

All three of these examples cited by the report outline ways states can use the MOE and waiver to manipulate state education spending in their favor and produce greater savings, and there are likely others. This trend will surely undermine any reform efforts currently afoot at the state and local level and work in opposition to the SFSF's reform ideals. But the report may be focusing on the wrong goal of the SFSF. At its essence, the SFSF is about economic stabilization - reform appears to be secondary in both the legislative language and the actual implementation.

As we've discussed before, the tension between economic stimulus and education reform is not specific to the SFSF. It is present in all aspects of ARRA education funding including Title I and IDEA. But in the end the ARRA was a stimulus bill, not a reform bill. Even though many programs funded through the legislation involved some aspect of important and long-overdue reform, the primary goal of the ARRA was to stimulate the economy and prevent states from cutting services in the absence of revenue. This report emphasizes that it's difficult to both reform and stimulate in difficult economic times.

ED and the Obama Administration will likely continue to struggle with reconciling those two goals until they better distill their priorities.