The School Budget Crisis That Wasn't

There's something strange about the front-page school budget crisis story in the Washington Post this morning, titled "Housing Downturn Squeezes Schools."

All the major elements are there. "The rapid cooling of the Washington area's real estate market has hit school systems with force," we are told. There are "financial hard times." "As can be seen with jittery stock markets across the world, it is unclear whether the storm is over." "The economic instability could not have happened at a worse time" because NCLB mandates "threaten schools that fail to comply with restructuring and state takeover."

The only thing that's missing is...the budget crisis.

Seriously, I've read the article through twice, and other than a salary freeze in PG County, there's hardly anything there. The article notes that "In the District, next year's budget will probably drop from $796.2 million to $794.6 million because of declining enrollment." In other words, a 0.2% drop for reasons that have nothing to do with the housing downturn. In Fairfax County, the budget is increasing by 3.3 percent, but they may only cover the cost of AP and IB tests for low-income students, instead of everyone--which is likely to result in a 0% change in AP test-taking. Average class size may rise by 0.5 students. The Montgomery County budget is going up $110 million, but "proposals to save $546,060 by asking some teachers in the five secondary magnet programs to teach one more daily class have raised alarm." The Loudon County school budget is increasing by 14%.

It's almost like they decided to write the story first and then sent some staff writers out to do the reporting, and when the facts didn't match the framing, they just went ahead and published it anyway....

The problem here is that the Post doesn't seem to understand how school funding actually works. The article says that "school systems rely mainly on state and county government funding, and those governments draw most of their revenue from property taxes." That's only half true--county governments get their revenue from property taxes, but state governments get their revenue from income and sales taxes. And the dynamics of property vs. income and sales taxation are very different.

The basic formula for state budgeting is this: (Tax Base X Tax Rate) = Revenue = Budget. State income and sales tax rates are fixed and don't change very often. They produce a certain amount of revenue in a year, which the state legislature spends.

The basic formula for local budgeting, by contrast, works like this: Tax Rate = (Budget / Tax Base). In other words, elected officials start by deciding how much money they want to spend, and then set whatever property rate is needed to raise that much money based on the total value of taxable property.

When times are good and property values are rising rapidly--as they did in the DC area before the real estate bubble began to burst--county officials tend to enact generous budgets that increase in the range of 5% - 10% per year. Because property values increase much faster, the actual property tax rate goes down. But homeowners don't care about the rate, they care about the bill, and while they grumble about increased taxes, they also understand that--unlike with state taxes--local property values and school budgets are intimately related. Just as increased property values are good for the Fairfax school budget, a healthy Fairfax school budget is good for property values.

When property values crater, school officials ease up an the annual increases while increasing the property tax rate dramatically, because the tax base is shrinking while the budget is still growing--but again, nobody cares about the rate, only the bill. And people will still pay the increased bill, for the reasons above, and because while property taxes are based on property, they're not payed from property--they're paid from income, and local incomes are not crashing in DC in the same way that housing values are crashing. There's no "income bubble," people still have jobs--particularly when a lot of the economy is government-related--and so for the most part they can still pay their property taxes.

In other words, the Post wrote the story thinking that local budgeting works just like state budgeting--that a decline in the tax base leads to a commensurate decline in tax revenues, and thus spending. As the facts of the story itself show, this just isn't true.