Department Releases Guidance Specifics on Stabilization Fund

The Department of Education released long awaited guidance documents for the major programs funded in the American Recovery and Reinvestment Act today. Each document specifies how funds for each program will be distributed, how each governor must disperse the funds, and how states and local education agencies (LEAs) or institutions of higher education (IHEs) may use them. Because each document is 40 pages or longer, we will summarize the guidance in three separate posts. Below, we take you through the details of the guidance for the Education Stabilization Fund section of the State Fiscal Stabilization Fund (SFSF).

The guidance divides the SFSF into two parts – the Education Stabilization Fund (81.8 percent which must be used for pre-K through higher ed purposes), and the Government Services Fund (18.2 percent which can be used for government services, education purposes, or school modernization, renovation, or repair). Within the Education Stabilization Fund section, the guidance provides separate instructions for the use of funds by LEAs (including charter schools) and the use of funds by IHEs.

In the Education Stabilization Fund section, the guidance outlines some very specific prohibitions on the use of funds by Governors. Most importantly, Governors cannot use SFSF money to pay off preexisting debt. Similarly, Governors cannot retain any funds for state purposes – all Education Stabilization Funds must be given directly to LEAs and IHEs. In that vein, Governors cannot distribute funds directly to students for financial assistance, or to State Higher Education Boards. Funds cannot be used to provide financial assistance for private elementary and secondary students.

As reported earlier, SFSF funds must be used to fill any education budget gaps between 2006 state funding levels and either 2008 or 2009 (whichever is higher) state funding levels. The guidance, however, now specifies that a state cannot choose to dedicate funds to either preK-12 or IHE purposes. Instead, a state must use SFSF funds for both purposes according to their share of the budget shortfall. Thus, if preK-12 spending makes up 60 percent of the budget gap and IHE spending makes up 40 percent, then a state must spend 60 percent of the Stabilization Funds on preK-12 and 40 percent on IHEs.

The guidance specifies a four step process when determining how much Education Stabilization funding will be needed to restore levels of state support. Any calculations of state support for LEAs are done using a state’s primary education funding formula, not additional spending outside the formula (such as categorical grants). State support for IHEs is calculated by excluding tuition and fees paid by students. All money must be obligated by September 30^th, 2011, but can be distributed at any point before then.

• Step One: Calculate the amount needed to restore preK-16 support to the higher of 2008 or 2009 levels in fiscal year 2009.
• If funds remain, Step Two: Calculate how much money will be needed to restore levels in 2010.
• If funds remain, Step Three: Calculate how much money will be needed to restore funds in 2011.
• If funds remain, Step Four: Distribute any remaining funds to LEAs based on Title I formulas.

In contrast, calculations of state effort for the Maintenance of Effort (MOE) provision (which requires states to maintain 2006 spending levels) must include spending distributed to LEAs through the primary education funding formula as well as support provided through other channels such as grants. State support for IHEs, however can be calculated by excluding both tuition and fees and support for capital projects and research and development. Thus, the MOE requirement for LEA spending will capture more spending than what the Stabilization fund will provide, while the MOE requirement for IHE spending will actually capture less.

The outline below provides details on how LEAs and IHEs can receive and use Education Stabilization Funds.

• LEAs (including charter schools)
  • Distribution of Funds
    • LEAs must submit applications to their governors in order to be eligible to receive funds. This application must specify that the LEA will follow the statutes regulating the funds and use proper reporting methods. Governors may require LEAs to provide additional information within reason. However, the governor cannot control how LEAs use funds.
    • Funds must be distributed to all LEAs that receive funds through the primary education funding formula used by the state.

  • Usage
    • Any activities authorized under NCLB, IDEA, Adult Education and Family Literacy Act (AEFLA), and the Perkins Vocational Act.
    • Modernization, renovation, and repair of public school facilities.
    • Construction of new school facilities as long as it is in keeping with state law.

  • Prohibitions
    • Maintenance, vehicle upgrades, construction that is inconsistent with state law.
    • Construction of athletic buildings or buildings not explicitly for education purposes.
    • Supplementing Rainy Day funds.

• Public IHEs
  • Distribution of Funds
    • The federal government does not require IHEs to submit applications for funds. A governor may choose to require one.
    • Governors can choose to provide funds only to specific schools including community colleges. Governors can restrict usage of funds to spending that would prevent tuition increases for in-state residents.

  • Usage (including charter schools)
    • Education and general expenditures that prevent tuition increases.
    • Modernization, renovation, and repair of facilities that are used for instruction, housing, and research.

  • Prohibitions
    • Maintenance costs, new construction, modernization of athletic facilities, modernization of religious facilities.
    • Increases to endowments.
    • Supplementing Rainy Day funds.

This guidance clears up several of the mysteries states and LEAs have been discussing for the past month. Now that states cannot use SFSF money to backfill debt, many governors will have to rethink their strategies for distributing funds. At the same time, it looks like districts will have significant autonomy in deciding where they want to invest their funds for the greatest impact. We hope that this guidance helps them with this weighty decision.