October 13, 2008

Economic Crisis Hits Schools

Posted by Aaron Tang at 9:14PM

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As the roller coaster ride that is the United States and global economy continues, one need look no further than to your neighborhood public school to see how the financial crisis will affect ordinary Americans. Stories are emerging across the country (New York here and California here, for instance) of states and local school districts passing emergency mid-year budget cuts which will result in delayed school construction projects, reduced classroom budgets, and squeezes on teacher salaries. An Education Week article published this week lays out in great detail many of the practical implications that will be felt in America's schools.

There are effectively three broad categories of losses that schools will incur in the coming years, each of which will have significant impacts on school children. The first category is direct losses that school districts have sustained as the result of a significant portion of their operating and capital budgets being held in stock assets that have lost tremendous value. The most obvious examples are school districts such as the 26 in California's San Mateo county which had budget resources tied up in Lehman Brothers at the time of the company's collapse. More than $60 million is now tied up in bankruptcy court proceedings from the county's 26 districts, with the schools likely to lose a significant portion of that total.

Making matters worse is that some of the affected districts will need those dollars in the near-term in order to finance school repairs, make payroll, and other day-to-day operations. Sequoia Union High School District, for example, estimates a loss of $6 million from the county's decision to invest its savings in Lehman Brothers--money that will have an impact on the district's 8,200 students this year.

But even those school districts without huge direct losses from falling asset values are getting pinched as well. The overall downturn in the economy, evidenced by reduced economic activity, falling property values, and home foreclosures will also have an impact on school district pocketbooks by reducing annual tax revenues that all schools rely on, at least in part. Since local property tax funding accounts for as much as 70% of many school districts' revenues, district leaders across America are watching with a weary eye as home foreclosures and falling property values persist. This is the second category of trouble that the financial crisis is threatening upon schools.

This effect is compounded by the fact that reduced property tax revenues may, in some cases, affect the credit scores that rating agencies give to districts who try to sell bonds to finance their school budgets -- meaning that schools will have to pay investors higher interest rates to raise money for building fixes, books, and other expenses. A half point interest rate increase on a $250 million, 6-month loan would amount to an extra $1.2 million that a school district or state has to spend on things other than teachers and school improvement efforts.

Thirdly, many schools are running into short-term problems associated with the nature of their budget receipts. School districts that receive property tax revenues in lump-sum payments once or twice during the year typically finance the early months of their budget cycles with safe, short-term loans. But as banks increasingly hoard cash reserves, the rates that schools have had to pay have increased drastically, leading to further cuts in order to make payroll and finance other school necessities.

The federal government's $700 billion rescue / bailout may help to address some of the structural issues, but as long as the economy itself is contracting, schools will have to bear some significant brunt of the nation's losses. Which means that the only sure-fire long-term investment that America can make to ensure a healthier future economy--an investment in our children--will undoubtedly take a backseat.