For years I have been predicting school districts are going to have to cut their costs by focusing on the reduction of non-classroom expenditures so they can live on a stream of lower revenue growth. I hope it is clear the bout of lower revenue growth isn’t just going away as some have hoped. Lower revenue growth is the "new normal" and we need to accept that and deal with it. That is, the school district must continue to learn to better manage its limited funds and find ways to get more education out of every dollar.
The move to a path of lower revenue growth and tighter budgets have been caused by various things.
1. Weaker National Economic Growth:
For years structural problems with the economy have been building. Instead of dealing with those problems, our government leaders have pushed them down the road.
Such structural problems include high debt levels, bad mortgages in the residential and commercial area, over promising in terms of private and public pensions at all levels of government and all over the country, too high of tax rates and a tax system that penalizes investment and hard work, costs that penalize the hiring of workers (payroll taxes, medical costs, unemployment insurance, workers compensation fees), sovereign debt problems in the European Union, underfunded programs like Social Security and Medicare, and an expansive social safety net (Social Security and Disability 58 million, Medicare 46 milion, Medicaid 63 million, Food Stamps 45 million, other welfare programs 7 million, unemployment insurance 8.5 million) that is killing the national work ethic, family leave act, illegal immigrants and what they are sucking out of the social system, the list goes on.
All these structural problems, because they were never dealt with, are now piled up in the economic road and the economy is bumping into with them as it moves down the road. As a result, this recession as well as future ones will be longer and deeper and the following economic recoveries and expansions will be weaker and shorter.
Instead of dealing with these problems, the Federal Reserve is trying to whitewash over them by printing money. In the long run, this excessive money creation will raise the inflation rate. The published inflation rate by the government is about 3%. The actual rate is more like 6%. As QE1 and QE3 move into QE3, the inflation rate will rise.
In sum, I suspect we’ll see lower GDP growth and hence lower government revenue growth. Inflation will be higher. Both will take a bite out of the school district’s budget.
2. Baby Boom:
I’ve long discussed how the Baby Boom’s preferences are changing. When baby boomers were born and when they had children, their focus was on education. As a result, a large chunk of the government revenue pie went to education. Now that the Baby Boom is nearing retirement, their focus has switched from education to their medical needs.
It is not surprising most of the major initiatives coming out of Washington and state capitals are medical programs and education funding has been pushed to the back burner. This too will slow the growth of education funding.
Go to “Write-up” and the piece of March 1, 2006, you’ll see that write-up.
3. Columbia’s Shift:
The state assembly is no longer supportive of expanding revenue for public education. Act 388 took away the ability of districts to raise money by ending the taxation of residential property. Act 388 put a millage cap on local boards’ ability to raise millage rates. Charter schools are on the verge of expanding again and taking a bigger piece of the SC education pie. Right now 44 charter schools exist. The population of students in virtual and brick and mortar charter schools has doubled the past two years. Another 20 schools have added applications. Bills like Point of Sale or school choice have steam behind them. All these things will lower the growth rate of public education funding for years to come.
By her veto of raising the base student cost for the EFA program, Governor Haley has shown that she doesn't want to just throw more money at public education. Haley and the general assembly isn't a group of bad people out to get public education. No, they are just responding to lower revenue at the state level. State revenue has fallen from $7.1 billion to $5.8 billion. They realize the decline in revenue is not a short-term thing, and the state government can no longer afford give the public education system what it has the past two decades.
4. Pickens County Tax Base:
The Pickens County tax base is on a much lower growth path now. Looking at the figures of the last reassessment, assessed values rose in only 5 of 11 categories of property. One of the categories with the largest growth was residential homes, but because of Act 388 school districts no longer tax that category.
5. Excessive Spending By School District:
The next item that is putting long-term pressure on our school district’s budget was excessive spending in good times.
For example, three years ago the school board voted to buy laptops and Pro-Boards for about 1,400 teachers. The total cost was $7 million. Now those laptops and Pro-Boards have to be replaced. I voted against that purchase because I realized making a $7 million investment for a 3 year assets was not a wise use of money in times when I believed revenue growth was on the decline.
For example, the size of this building program and doing it all at one time has made it unaffordable. One, the inital tax rate of 58 (it has since fallen to 50) is too high and is weighing on business as it tries to come out of the recession. This excessive tax rate will hamper local government revenue growth for years to come. Two, the addtional square footage of about 771,000 sqf is unaffordable. In the 2011-12 budget year the district has allocated $578,000 to run, maintain and repair that new square footage. It is about $1 million short given past and current estimates for what is required to run, clean and repair our school buildings.
(Elementary schools added 300,000 sqf, high schools will add 380,000, middle schools 246,000, and for the second middle school in Easley 89,000. It started at 2.1 million sqf. so that is a 36% increase.) Sooner or later the district will have to adequately maintain the new square footage and that will put more of a sequeeze on the budget.
The building plan was more than the district could afford in terms of financing. For example, next year the interest payment alone will be about $23 million, and that won’t get the district even 1 new pencil for one student. Interest payments are money down the drain. The loan has 20 years left.
All the factors slowing revenue growth and squeezing the budget create a challenge for the school district as well as all local governments. The school board is doing a few things to deal with this situation.
1. Cutting Non-Classroom Spending:
The board/ district have two choices. It can muddle along and trim the current system further, and then pray revenue growth rebounds, realizing if that doesn’t happen, this centralized/ top-down system (with all its girth) will not function well. Or the board/ district can be proactive and restructure the district or specific operations within the district and slim it down, while protecting the classroom. In some ways this is occurring. Cuts have been made to reduce non-classroom, wasteful or low priority spending, freeing up funds to help balance budgets or creating savings to protect classroom expenditures. The district cut $2.75 million in spending for the 2011-12 budget.
2. Not Raise Taxes Not Borrow:
The district needs to do is live within its means in the sense refrain from raising tax rates even more. This would put more of a burden on the business and housing sector which we need to grow in order to grow future tax revenue. The district needs to refrain from borrowing any more. The debt obligation (principle plus interest) of the district has risen from $38 to $600 million since the passage of the building program. As I mentioned above the district's interest payment is staggering.
3. Ending TIFs:
The district/ the board had entered four TIF agreements with local towns. A TIF takes school district tax revenue from a secton of that local town or TIF district and gives it back to that district. For example, the Liberty TIF gave $39,000 a year of school district revenue from Liberty, back to Liberty. The Central TIF gave $150,000 a year of school district revenue from Central, back to Central. I understand that past boards wanted to help those local towns and I know those towns appreciated that generosity, but the school district is no longer a position to be generous. I hope they understand. The Central TIF expires this year and will not be renewed. That will add nearly $150,000 in new money as that revenue starts coming back to the district.
Depending on which doc you look at, the Liberty TIF expires this year or in a couple of years. We are still tracking that one down. Clemson's TIF costs the school district $528,000 a year. It looks like that expires just after that. If I'm on the board, I'll vote not to renew that TIF, because I support recapturing that revenue for the school district. The final TIF is with downtown Easley and expires in 2018. The board has also denied TIF requests from Pickens, Easley and Central (a renewal request).
4. Selling Buildings:
While there was pressure on the district to give away its abandoned properties, the district/ the board has sold them. Properties in Dacusville, Liberty and Pickens have been sold for a total of $450,000, and the district has another four properties still on the market. Read more about that here.
Revenue growth for the district is on a lower growth path. Higher inflation is also eating up some or all of that revenue growth. The district's budget is being squeezed for other reasons. Raising tax rates more will hurt business and hence revenue growth even more in the long-run. The district needs to do the best with the revenue it has, finding ways to get more education out of every dollar. Additionally, it needs to stop the political give aways of the past like giving away buildings for free and entering costly TIF agreements to curry favor with local city councils.