Bringing Stability to Shaky Budgets

Schools, colleges, and universities are poised to receive billions of dollars in additional federal funding from the proposed stimulus packages put forth by both Congressional chambers over the past few weeks.

But such substantial federal education investment must walk a fine line. On one hand, these funds should provide much-needed support for states, institutions of higher education, and school districts that are struggling to meet massive budget deficits. But the money should not completely supplant local funding. States must guarantee that the new federal dollars will improve education or infrastructure investment, not maintain the status quo.

To correct for this, both the House of Representatives and Senate versions of the stimulus bill contain a separate fund that let states supplant some of their local assistance with federal dollars, ensuring spending increases or new programs included elsewhere in the legislation will supplement existing budgets.

This supplanting money is the $79 billion State Fiscal Stabilization Fund. Available over two years, the fund would help states keep their kindergarten through higher education support at the fiscal year 2008 level, while also providing other money for public services. Of the stabilization money, $64 billion is available over two years, while $15 billion is set aside as incentive grants for states that make progress equitably distributing highly qualified teachers to low-income schools, improving their data systems, or enhancing their academic standards and assessments.

States that receive stabilization funds are required to allocate 61 percent of the awarded money to keeping their support for kindergarten through higher education at the fiscal year 2008 level. The other 39 percent may be used “for public safety and other government services,” though this could include educational funding.

But there’s a catch. States receiving stabilization funds will be subject to maintenance of effort (MOE) provisions that require them to maintain state elementary, secondary, and postsecondary education funding at the fiscal year 2006 level. (Early childhood education funding is noticeably absent from the MOE). Stabilization money would then fill the gap between the fiscal year 2006 and fiscal year 2008 levels.[1] Stimulus education funds beyond the Stabilization Fund would then be used to increase spending above the fiscal year 2008 level.

States can generate substantial savings by reducing education expenditures to their fiscal year 2006 level. Louisiana, for example, could save $459 million by reducing its higher education expenditures back to their fiscal year 2006 level. That’s greater than the state’s anticipated $341 million budget gap. All told, the 50 states could save up to $10.4 billion by reducing postsecondary education funding alone to the fiscal year 2006 level. This doesn’t even take into account spending on K-12 education, figures for which were not readily available.

Because the Fiscal Stabilization Fund is designed to supplant state support, both stimulus bills restrict the way the money can be used and disbursed. Governors have to apply for the funds, which will be allocated based on the size of a state’s youth and overall population. If total requests exceed $79 billion, funding will be dispersed based on the relative size of a state’s shortfall.

Assistance given to a local school district is allocated based on its percentage share of Title I funding, and can go toward any activity required under the Elementary or Secondary Education Act, the Individuals with Disabilities Education Act, or the Carl D. Perkins Career and Technical Education Act. It cannot, however, be used for capital projects.

Funds for public institutions of higher education, meanwhile, can be used for “education and general expenditures,” especially “to mitigate the need to raise tuition and fees for State students.” This money, however, cannot be used to increase an institution’s endowment or fund any capital project.

In addition to MOE requirements, the bill also requires stabilization fund recipients to comply with existing regulations concerning the creation of high-quality assessments and the distribution of qualified or experienced teachers in low-income schools. Tying stabilization funds to these two measures could help force the 11 states lacking high-quality standards and assessments to implement better tests and curricula. It could also incent states to address the fact that schools with large numbers of minorities or low-income children are more likely to have non-highly qualified teachers than more affluent schools. States that perform well on these tasks, however, can be rewarded with some of the $15 billion set aside for new incentive grants.

All told, the State Fiscal Stabilization Fund plays an important role in achieving the ultimate goals of the stimulus. Proper implementation will be crucial for ensuring that the new Congressional rescue package actually supplements existing initiatives, rather than encourages state funding decreases.

[1] The Senate version of the bill allows the Secretary to waive the MOE provision, but the House bill does not.