The DeHavilland Blog

Wednesday, December 14, 2011

The hidden danger to the K-12 system (funding)

Yesterday, an article in the Chicago Tribune highlighted problems with Illinois’ college tuition investment plan, specifically a 30% funding deficit that resulted from a poor return on the fund’s investments. This works out to a $560 million shortfall in meeting the program’s projected obligations.

While not related to the K-12 system directly, it illustrates perfectly one of the biggest – and most ignored – dangers in school funding today.

The issue is that many funds related to education – including teacher retirement funds – rely on a high annual rate of return, typically 8% or thereabouts, in order to be able to grow sufficiently to cover future obligations. Unfortunately, as seen in this chart from MSN, over the last ten years the Dow Jones Industrial Average has only grown around 2% annually, from 9811 on December 14, 2001 to 11954 on December 13, 2011:

So what happens if these funds can’t get the investment return they need to cover the promises made to teachers and administrators? In most cases, districts then have to step up their contributions, which will result in a dramatic outflow from district budgets. That means that all other spending, including salaries, buildings, buses, textbooks and everything else, will have to be reduced, quickly and significantly.

Barring some investment bonanza (unlikely, unless we invent a second internet), funds will not make the returns they need; if that’s the case, expect to see them requiring much more from districts in very short order.


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