Saturday, January 2, 2010

Gearin Decision an opportunity to rethink public education financial trainwreck

Yesterday, I wrote about Judge Gearin's decision that Governor Pawlenty could not unilaterally unallot funding that he had approved and signed into law to address a deficit caused by his subsequent veto of legislation which would otherwise have eliminated that deficit. As I explained, the effect of this decision, if upheld is to require democrats and republicans, the House, Senate and Governor, to work together to arrive at a common solution. I have been arguing in a number of my posts that a lasting solution that serves the public interest is going to require courageous action from all parties. By courageous, I don't just mean raising taxes. Courageous action requires that the political parties, both of them, must compromise and must offend their own respective power bases. For public education, that means that they need to provide sufficient revenues and sufficient control over costs to local school districts, so that we can get out of the vicious downward financial spiral that has characterized public education in the last decade plus.

Judge Gearin's decision addressed only one small part of the Governor's unallottments, it makes sense to look at what the Governor did, and what the decision, if carried to its logical conclusion, will unwind. Last year's legislative session presented the Governor with a series of appropriation bills, which he ultimately signed, with an occasional line item veto. But the Governor and legislative leadership were unable to arrive at an agreement on the funding these appropriation bills. The Governor refused to sign a tax bill that paid for the appropriations that he had already signed. That left the State with an expected deficit of $2.676 billion for the fiscal years 2010-11. Rather than calling a special session of the Legislature to attempt to resolve that deficit the Governor decided to resolve the deficit using the unallotment authority in law (Minnesota Statutes 16A.152, Subdivision 4). This authority had never before been used to solve a deficit that was created intentionally, by a failure of the legislature and Governor to agree to a balanced budget. You can read a House Fiscal Staff report on the unallottment actions taken by the governor by clicking on this link.

As the House staff explains, the Governor reduced expenditures he had prevously signed, but he also deferred payments into future years:

The actions taken by the Governor and Commissioner of Minnesota Management and Budget to balance the FY 2010-11 general fund budget fit into several categories. The law authorizing unallotment of appropriations also authorizes deferral or suspension of obligations so as to prevent reductions. Many of the items listed on Table 1 are reductions in payments but the single largest item, the education aid payment deferral of $1.17 billion, is a change in the payment schedule of aid payments to school districts that is effective for fiscal years 2010 and 2011 only. That requires the $1.17 billion of deferred payments to be repaid in FY 2012.

In Minnesota, like most other states, the Constitution prohibits the state from running a deficit to fund operations. The result of that Constitutional provision is to trigger massive state government cutbacks in a time of recession. State Constitutional provisions of this kind are one of largest destabilizing forces in our economy. At the very time when economic theory urges government to avoid cutting back, the Constitutional provisions force those cutbacks. (The cutbacks would not be necessary, of course, if the State maintained adequate reserves for times like this, but both parties, Republican and Democrat, pursue policies which tend to clean out the State's reserves, by either spending them down or by "giving the people their money back," instead of maintaining those reserves. ) Now the idea of shifting payments into the next year is actually a clever evasion of the Constitutional prohibition against borrowing to maintain operations. The idea of the shift is that the State defers some of this year's aid, but to make that aid deferred. On the strength of that promise, the school districts then borrow by issuing aid anticipation bonds, to cover school aid that has been promised for the following year.

The result is approximately the same as if the State of Minnesota had borrowed the money itself, except that you have individual school districts borrowing the money. It is somewhat ironic, to say the least, but what the Governor has done is the functional equivalent of the federal stimulus legislation. He has caused the State--through its school districts--to borrow money to avoid cutting back school operations. Strangely, we have the vast majority of Republicans celebrating this action, while they criticize the federal government for doing the very same thing in the stimulus legislation. Politics aside, the Gearin decision calls into question the Governor's power unilaterally to unallot over $1.17 billion of school aid in this fashion. The result should be to cause the Governor and the legislature to work together to solve the crisis.

The deferred payment scheme is a good idea, provided that the State makes provision to repay these aid anticipation obligations. It maintains school operations through a time of recession without requiring a 1.17 billion dollar increase in taxes. However the deferred payment scheme is not a good idea if school districts take that money and use them to increase compensation costs while laying off teachers. Public education is in a lifeboat on stormy seas with limited rations. The rationale for this unusual temporary measure should be to supply enough rations to keep everyone on the boat, not to throw some people overboard so that the rest can eat hearty. The upcoming session provides an opportunity for democrats and republicans to come together and fix the train-wreck that is school finance these days. As they reauthorize the revenue shifts, temporarily, they need to impose fiscal controls that assure that school districts can, and will, use these funds to maintain operations. In my view, this means:

  • Retroactively repealing the penalty on districts that fail to settle their contracts by January 15. Education Minnesota is currently forcing school districts across the State to choose between paying the penalty or laying off teachers into the recession. This is an abuse of the penalty provision, and it ought to be repealed.
  • Grant school districts the temporary authority to limit their compensation increases during the period when the shift is in force. If the shift is truly going to be a lifeline, there needs to be some measure of cost controls. Recent experience proves that school districts and Education Minnesota simply cannot achieve that objective without legislative help.
  • Clearly signal to school districts that the shifted funds will in fact be repaid and that upon conclusion of the budgetary crisis, adequate revenue will be raised to repay the obligations.
  • Repeal state funding mandates that force school districts to spend more on special education than Federal IDEA requires.
Its time for democrats and republicans to work together to take courageous action. Minnesota public education finance is in crisis. We cannot afford to continue avoiding the obvious: without fundamental restructuring of the forces that drive public education, the crisis will destroy what has been one of the nation's finest systems of public education.

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