The DeHavilland Blog

Saturday, December 29, 2007

The future of education, part 4

In an analysis of the state of public education (and more specifically, where it’s headed), we’ve looked at population trends and key movements. What about the financial outlook?

School Finances – Incomes
Property taxes make up a large percentage of the funding for public education at the local and state level. Thanks in large part to the ever-increasing value of homes and property, we’ve seen tremendous growth in per-student revenue over the past 40 years. The chart below (from USDE) shows the growth in constant dollars:

Can this continue? I believe that for several reasons, the answer is no.

The big issue here is that, unlike the federal government, states typically have requirements to balance their budgets, which means that reduced revenues cannot be offset by borrowing and deficit spending. And it is state and local funding that makes up approximately 92% of funding for public education.

The immediate concern, of course, is the subprime mortgage crisis. Home prices are dropping at a record rate; when all is said and done, some experts predict that we’ll see a total peak-to-trough decline of 15% in home value. That will have a direct impact on the revenues that local and state governments have to pay out.

California, for example, has been one of the states hardest hit by the subprime crisis, and the governor has already declared a fiscal emergency to deal with a $14 billion shortfall. And there are 19 other states that expect to go back and patch holes in their 2008 budgets.

But I believe that the subprime issue merely jump-started the financial challenges facing public education.

The much larger issue facing us is the retirement of the baby boomers. According to census data, past and projected data on people of retirement age are as follows:
  • In 1980: 25.7 million people ages 65+, or 11.3% of the US population
  • In 1990: 31.2 million people ages 65+, or 12.5% of the US population
  • In 2000: 35.1 million people ages 65+, or 12.4% of the US population
  • In 2010: 40.2 million people ages 65+, or 13.0% of the US population
  • In 2020: 54.6 million people ages 65+, or 16.3% of the US population
  • In 2030: 71.5 million people ages 65+, or 19.6% of the US population
  • In 2040: 80.0 million people ages 65+, or 20.4% of the US population
  • In 2050: 86.7 million people ages 65+, or 20.6% of the US population
First, and most obviously, these are people who have been paying income and employment taxes into the system and, by and large, will not be in the future.

And they’ll have a huge impact on state budgets as many start drawing on Medicaid, which is paid for in part by the states. According to

  • States pay for close to half (43%) of Medicaid expenses.
  • The 2006 cost of Medicaid was $320 billion for the states and the federal government combined.
  • It accounts for 22% of state spending (up from 8% in 1985), and recently surpassed elementary and secondary education as the most expensive item on state ledgers, once federal matching grants are taken into account.
  • Medicaid costs are growing at 6% annually – twice the rate of inflation.
Reduced revenues and increased expenses for the states for the foreseeable future…can the picture get worse?

Actually it can. There are indications that older citizens are less likely to support education funding, such as bond issuances. And remember that the elderly vote at much higher rates than those in other age groups, making them particularly powerful on such issues.

School Finances – Expenses
With the image of dramatically reduced state and local funding still fresh in our minds, let’s consider expenses within the school/district structure. How do things look there?

Not so good, unfortunately. Public education is a manpower-intensive enterprise: according to NCES, there were nearly 6 million full-time equivalent positions in the 2003-04 school year. More than 3 million of these were teachers, 685,000 were teacher aides, and the remainder were a mix of administrators and support staff.

Most of these employees, as state employees, receive generous benefit and retirement programs as part of their compensation. The financial implications are clear. First, consider that states have not set enough money aside to cover the retirement benefits of employees (current retirement programs are underfunded by $731 billion). And next, consider the rising cost of health insurance, coupled by the fact that many teachers receive full coverage not only for themselves, but for spouses and children as well. As one administrator said, the rising cost of health insurance “is the single most important issue facing districts nationwide.”

Finally, in terms of school/district spending, remember from a previous post that the percentage of students being placed into special education is growing steadily, then consider that it costs more to educate these students: according to the Center for Special Education Finance, in the 1999-2000 school year that cost was $5,918 per student beyond what was being spent on regular education students. Even assuming that number as a constant, the steadily increasing percentage of students being classified with learning disabilities represents a significant growing cost to schools and districts.

So, to sum up: the likelihood significantly reduced income, combined with rising costs, points to a very real possibility of financial crisis for schools and districts in the very near future.

In the next post: what it all means. Click here for Part 5.


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