Special Session: Budget “Cliff” and Governor’s Plan


Everyone on every side of the state budget debate is framing their remarks around a metaphoric “cliff” that the state may find itself standing at the edge of in two years. Three inter-related matters make up the primary elements of this fiscal cliff:

1) the availability of reserve accounts (surplus balances) come 2011
2) the extent that the federal American Recovery and Reinvestment Act (ARRA) of 2009 monies are used for ongoing programs or services for anything other than one-time expenditures
3) the rate at which the economy recovers and accuracy of the revenue projections/forecasts

Taking all of this into consideration, Gov. Daniels’ budget proposal is sound. The uncertainty of the economic recovery makes his line in the sand – maintaining no less than a $1 billion reserve balance – a prudent standard and an important step in avoiding a cliff. (See historic reserve balance data going back to 1976.)

The governor’s use of stimulus money only for things that would not add to the base operating budget is also essential to avoiding a freefall. His plan includes a significant amount to be directed to capital projects; although new construction adds to operating costs over time, the projects still fundamentally constitute one-time expenditures. And much is directed to immediately funding needed repair and rehabilitation of higher education facilities – a good way to apply one-time federal monies without adding costs down the road.

What the governor’s plan is being criticized for is building state K-12 education funding around the federal stimulus money specifically designated for schools with a high population of disadvantaged students (Title 1 monies). The proposed school funding formula results in a 2% overall increase. But critics point out that it is only 2% if you count the extra Title 1 – money that would flow to mostly urban schools, regardless of the level of state support.  It is suggested that this funding approach actually creates a cliff for those schools by making them dependent on that additional money.

This debate requires consideration of the big picture. First, these schools generally have declining enrollments, so their funding can’t be expected to rise steadily. By operation, the Title 1 money goes to schools that have more special needs, so the money will go to cover those needs. Even though state revenues are plummeting, the state portion of the school funding is still increasing, albeit by a very modest 0.5%. It is worth noting that most states are having to reduce education spending. So a 2% increase (0.5% state money; 1.5% federal stimulus money) is reasonable in these tough times. The final item below plays into this discussion too.

According to the projections, state revenues are expected reach a level by 2012 that will be sufficient to bridge the funding gap that will exist when the Title 1 money goes away that year. (See links to May forecast and Gov. Daniels’ budget presentation.)

Unfortunately, yes, schools are probably going to have to make do with smaller increases than anyone prefers.  Only “probably” because of another component of the governor’s budget proposal: if the economy recovers faster than the revenue forecasters projected and the revenues end up exceeding the projections, 50 cents of every unanticipated $1 will go directly to education funding; the other 50 cents goes to build back up the reserve balances.

While the governor’s plan may not be perfect, it is thoughtful and fair, and is well designed to prevent the state from heading toward – or off of – that financial cliff.

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