Financing Schools is Becoming More Challenging
Ivan A. Shibley, D.Ed.
Director of Clinical Practices at The University of Scranton
The near collapse of the banking, mortgage, and real estate businesses has impacted public school financing. Combine the three above groups with the downturns on Wall Street and you have all groups directly, not indirectly, causing schools all over the nation to start reducing costs. Four key reasons for this decline in school revenues are real estate assessments and transfers, federal stimulus monies, healthcare and retirement funds.
Real Estate Assessment
Almost all states in the nation require public schools to utilize real estate taxes as the main source of income for the schools. Real estate taxes are based on how much the property is worth or the assessment. The higher the property is assessed, the higher the real estate revenue generated by the property. The near collapse of the banking, mortgage and real estate industry resulting in so many failed loans and foreclosures has had a major impact on collectible real estate taxes. A few years ago property values escalated 100-200% because loans were easy to attain with little or no down payment. Easy mortgage money resulted in an increased demand for properties which escalated the prices. Today, that same property that was purchased at $400,000 might be valued at $200,000. For public schools, that could mean the owner could request a re-assessment to lower the value of the property to reduce the actual annual real estate taxes. The impact has been mostly with residential properties but is even more pronounced with commercial properties. Many businesses used the decline in residential property values to request a re-assessment of the commercial property. A commercial property purchased several years ago for $20 million might have the re-assessment granted lowering the value to $12 million. Every time there is a request for a residential or commercial re-assessment, there is also the possibility the school district could lose even more real estate tax revenue.
Federal Stimulus Money
The Obama administration desired to stimulate expansion of current educational programs or add opportunities for students in the public schools. A prime example was reducing class sizes in the primary grades K-1-2-3. There was a major initiative to change kindergarten from a half-day program to a full-day program and add pre-school for students ages 3 and 4.
Many schools accepted the stimulus money thinking the money would continue to flow from the federal government. The stimulus monies were accepted but districts have demonstrated an unwillingness to continue to finance the programs once the money was no longer provided by the federal government. The overall results have been the furloughing of educators all over the country who were hired into these new programs.
Healthcare and Retirement Funding
Public school employees have historically received lower salaries than other professionals in business and industry. The lower wages were accepted because public school employees received full healthcare coverage for not only the individual but in most cases the family at no cost. An added benefit was the guaranteed funding of a state, employer, and employee retirement plan. The employee contribution rate was generally lower (about 5-6%), in comparison to the state and employer contribution rates. The actual retirement age was dependent in which state the employee resides.
Healthcare costs have risen in double-digit figures year after year impacting state and local educational budgets. Public school employees, all over the nation, are being required to contribute a portion of their salary to cover healthcare costs. That employee contribution rate appears to be rising every year. Joining the rise in healthcare costs is the funding of the various public school employees’ pension plans. The monies generated from the state, employer and employee contributions have never fully funded the retirement plans. Revenue generated from the retirement plans was heavily invested on Wall Street to make up the difference in funding needed to maintain the solvency of the pension plan. Reduced revenue from Wall Street investments has required the state and the employer to increase their contributions to the retirement plan to maintain the plan’s guaranteed payments to annuitants.
Real estate devaluation, reduction of federal stimulus monies, increased healthcare costs, and a decrease in investment income for retirement plans have all had a major impact on public school funding.
The federal and state governments have decided that if local schools want to maintain existing programs, the boards will need to increase the local revenues, in most cases, by raising local real estate taxes. Most public schools, around the nation, have responded by eliminating programs, resulting in cutting teaching and support staff positions.
