While some economists point to signs that the nation’s economy is improving, others say the U.S. faces a much slower climb out of the recession–a scenario that will have a huge effect on public education in the coming years.
Though the Dow recently broke 10,000 to hit its highest level for the first time in a year, the national unemployment rate, at 10 percent, is the highest it has been since 1983.
States are still waiting to hit bottom and are not likely to do so for another year or two–and education will feel the financial impact for some time after that, said Richard Sims, the chief economist for the National Education Association (NEA), at the Software and Information Industry Association’s Ed-Tech Business Forum on Dec. 1.
At best, Sims said, current conditions will create the way for improvement, but it will be a “long stretch” of improvement until the economy has recovered fully.
If the economy’s rate of growth during recovery resembles its rate during previous economic recoveries and remains stable, the nation will not return to its pre-recession level of unemployment until December 2016, Sims predicted.
The nation is in a financial recession as opposed to an average recession, he said, and financial recessions are deeper and only recover at about half the rate of a normal recession.
Sims predicted that unemployment levels have not yet bottomed out and that the economy will see permanent effects from the recession.
“When you have a recession, you lose economic growth for a period of time, but when the recession’s over, you don’t get it back–[you have] lost incomes [and] lost investments,” Sims said.
“With education, we’ll see the same effect,” he added, pointing to per-pupil funding as one area that will continue to feel the recession’s impact.
Ed Muir, deputy director of research for the American Federation of Teachers (AFT), agreed. “There is a chance that we’re not going to get back to [the previous unemployment level of] 4.5 percent,” said Muir. “Unemployment, at this moment, is a key factor in preventing the economic recovery from taking shape.”
And slashing the unemployment rate is a key step in beating the recession.
“We’re at a critical point right now as far as whether or not we can get the recovery off the ground and sustain the momentum,” Muir said.
State deficits continue to rise
A November 2009 report from the Center on Budget and Policy Priorities indicated that states’ fiscal problems are so great that states might have to make additional deep budget cuts and tax increases in 2010.
Most states’ fiscal years begin on July 1, meaning states are already taking steps to plan their FY 2011 budgets. If states aren’t aware of additional federal fiscal relief, the report says, they will begin implementing new budget cuts and tax increases in the near future, and by the summer at the latest.
States will take steps to eliminate deficits for the 2011 fiscal year that, according to the report, “will likely take nearly a full percentage point off the Gross Domestic Product (GDP). That, in turn, could cost the economy 900,000 jobs next year.”
Mark Zandi, chief economist of Moody’s Economy.com, recently warned that this kind of state budgetary action “will be a serious drag on the economy at just the wrong time.”
Deficits are especially troubling during a recession, because the actions states must take to balance budgets in the face of falling revenues–including cutting services, laying off workers, and raising taxes–further weaken the economy.
The report estimates that financial assistance from the American Recovery and Reinvestment Act (ARRA) helped states close 30 to 40 percent of budget gaps this year.
But that funding, including ARRA’s historic $100 billion investment in education, is expected to be depleted by Dec. 31, 2010, and market analysts anticipate large state deficits to persist for another two or three years.
State budget projections “suggest that states will face total deficits for state fiscal years 2011 and 2012 of as much as $260 billion beyond what can be covered by the limited ARRA funding that will remain available,” the report said.
These projections only reflect budget cuts and tax increases at the state level, and the report notes that local governments will institute their own budget cuts and tax increases to close their own deficits on top of state actions.
“In both of the past two recessions, state budget deficits remained very large for several years after the recession officially ended,” the report said. “The current recession, in which there have been unprecedented drops in state revenue, could have an even longer recovery period.”
Typically, Sims said, public education has been more or less protected during a recession, because government leaders have been loathe to make cuts to education budgets. Now, however, most states have had to cut public education funding, and some have made very deep cuts.
Nevada has “decimated its higher-education system,” he said, and California’s education funding struggles make almost daily news headlines.
“That’s going to take a lifetime, it seems like, to get back on track, even if the recession turns around today, because we’ve cut so much in education,” Sims said. “Reductions in general investments, teacher layoffs–all the things you need to really grow the economy, we’ve cut, and that’s not going to come back any time soon.”
States have to fill a nearly $180 billion budget gap, AFT’s Muir said, citing Illinois’ $11 billion budget deficit.
“These are ridiculously large numbers,” he said.
Muir said an often-overlooked side of the equation is the recession’s impact on the child poverty rate, and how that increasing rate affects schools.
“Right now, the child poverty rate is rising dramatically, more kids are being born on the wrong side of the achievement gap, [and] we need to supply services to those kids … if we’re to have [a competitive] society and workforce,” Muir said.
That rising poverty rate puts a demand on schools, he added, with the majority of U.S. teachers reporting students coming to school hungry. At the beginning of 2007, the child poverty rate–children in families living below the federal poverty level–was 17 percent, and it rose to 19 percent in 2008.
The Economic Policy Institute predicts that with unemployment levels at 10 percent, the child poverty rate could jump to close to 30 percent.
Using federal stimulus money to avoid layoffs at schools is going to create a shortfall even more difficult for states and schools to contend with when that money runs out, according to a Government Accountability Office report. The report found that 63 percent of states in a representative sample planned to use 50 percent of their school stimulus money to retain jobs.
Fewer tax revenues, more budget cuts
Education receives 38.5 percent of its funding from real estate property taxes, and declining property taxes mean less funding for much-needed education initiatives.
“The disturbing thing about property tax is that it grew extraordinarily fast over the past decades as property values went up 9.8 percent a year–that’s unsustainable growth,” Sims said. “Housing values started declining in the summer of 2006, and last quarter was the first quarter when property taxes started to decline.”
That suggests there is a three-year lag in the changes in housing values.
“If we just saw the first decline in property taxes, and we know property values for homes started to decline three years ago, you might conclude that we have about three years of declining real estate taxes [ahead],” Sims said. “The base is gone, it’s down by about one-third, and most of the forecasters in the real estate business are talking about a continued decline.”
Economists predict that wages and personal income will continue to grow more slowly, and consumer spending is likely to grow at lower rates in the future.
State tax revenues have fallen since the end of 2008 and dropped 16.6 percent in 2009 compared to the previous year, the Center on Budget and Policy Priorities report indicates. Income tax was down 27.5 percent and sales tax was down 9.5 percent.
Also, during the last two recessions, the unemployment rate kept rising for 15 to 19 months after the recession ended and then remained high for a period of time after that.
“To gain maximum revenue, states that plan to adopt tax increases to help address their looming fiscal year 2011 shortfalls may want to put them in place as quickly as possible,” the report says. “The same applies to spending reductions; for example, many cuts in education spending are likely to take effect next summer, at the start of the 2010-11 school year.”
The report calls the revenue decline in this recession “unprecedented; it is the largest on record in the post-World War II period.”
Michael Strauss, chief economist at asset-management company Commonfund, which serves about 1,300 college and university endowments, told administrators at the Washington Higher Education Coordinating Board that while the world economy is beginning to look up, income tax revenue is predicted to decline for the bulk of 2010 and could decline into 2011, which will cause state and local governments to make more budget cuts.
“[Next year] is going to be worse than this year for two reasons–first, states have spent down their reserves, so what’s left is bone-on-bone,” Muir said. “Second, we’re running out of federal stimulus money. ARRA was a tremendous lifeline, and you can see the work that it is doing in schools every day.”
Muir said he suspects that 5 percent of the operating funds many colleges received from states came directly from ARRA. Some states, he said, might have used ARRA funds for as much as 10 percent of public schools’ operating budgets.
“I’m very concerned about the next 18 months or so,” Muir said, when ARRA funding ceases.
Although job worries abound, retiring baby boomers are clearing the way for recent teaching graduates to find employment. And Muir said some districts are offering early retirement incentives for experienced teachers in an attempt to save money by paying lower salaries to new, inexperienced educators.
An opportunity for change
But despite economic woes, states have not taken the opportunity to revisit how they do business, Sims said.
“Almost no state is doing anything different today than they were before the downturn–they should be,” he said. “They should be restructuring systems, reorganizing priorities–they’re on track for more of the same.”
A smaller number of economists are predicting a “W” recession, in which the economy improves, but slides back into a recession.
“When you cut education–89.5 percent of education dollars go for payroll–you can only cut so many school buses, so you cut jobs, and when you cut jobs, it has a quick and devastating effect,” Sims said.
Educators and education advocacy groups should “keep pressure on policy makers at every level to ensure that when they raise money and spend it on public services, they spend it wisely,” he said.
The “additional federal fiscal relief” that the Center on Budget and Policy Priorities says is necessary to help states avoid additional deep budget cuts and layoffs might come, in part, via legislation approved Dec. 16 by the U.S. House of Representatives.
That legislation would direct $23 billion to an “education jobs fund,” which districts and states could use for both K-12 and higher education to restore cuts made in schools, for teacher compensation, and also for school modernization and repair. The $23 billion is part of $75 billion total for job relief that comes from the Jobs for Main Street Act, a bill that redirects funds already approved for the Troubled Asset Relief Program, or TARP, which originally was intended for bank relief aid.
The U.S. Senate is not expected to vote on the bill until next year.
The legislation says that the money would be distributed, over two years, similarly to the State Fiscal Stabilization Fund of the ARRA. Under that fund, states receive funding based on primary education funding formulas. States are not allowed to use the money to replenish their rainy day or reserve funds. And at this stage, states would not have to show that they are adhering to the U.S. Department of Education’s key reform areas in order to receive the funds.
Before the House vote, the NEA urged its members to voice support for the creation of an education jobs package on the basis that “additional federal money for public education will have an immediate impact on improving the employment picture, because it is one of the most labor-intensive industries. Saving an education employee from being laid off involves no wait time for grants and contracts to be drawn up or materials to be acquired.”
Such a fund also would keep schools fully staffed, preventing class sizes from increasing, which would jeopardize efforts to raise student achievement and ensure U.S. competitiveness, the NEA said.
Rep. George Miller, D-Calif., chairman of the House Committee on Education and Labor, said the jobs bill will help to ensure education security for students across the country.
“We get reports from across the country … [of] the gains that young people in America are making in terms of the proficiency in reading and mathematics and elsewhere,” he said, adding that the nation can’t afford to lose these valuable gains because of further budget cuts and layoffs in school districts.
“We need to continue the investments that we have been making in the education of America’s young children by making sure that we do not lose hundreds of thousands of teachers across the American landscape,” Miller said.
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